October 31, 2024

“The combination of a complex UK budget, strong eurozone growth, and a big rise in US consumer spending generated a lot of volatility yesterday. Today brings more key data, and unpredictability is beginning to increase as we head into the US election.”

Sam Cornford – Head of Trading

USD

The US macro data continued to print strongly, but the dollar’s October rally was tempered a bit further yesterday by some upside surprises in the eurozone. Meanwhile, USD/JPY is down 0.9% this morning as the Bank of Japan kept its eye on further rate hikes, provided that the global economy evolves as expected. US exceptionalism was alive and well in Q3, and while the 2.8% annualised growth was marginally lower than expected, naturally few were too worried about that forecast miss given the huge 3.7% rise in personal consumption. American growth continues to be in a league of its own, but as the BoJ warned at its press conference this morning, considerable uncertainty remains about the future. There are still several leading indicators pointing to more pain in the labour market, and while personal savings rates have been revised up recently, consumption growth continues to outpace income gains, which leaves question marks over sustainability.

This afternoon, we have a triple header of core PCE inflation, jobless claims, and the employment cost index. The 0.3% consensus for core PCE means some extra room on the downside for the dollar if we get a lower figure, although the bigger moves are naturally going to come from tomorrow’s payrolls report and next week’s election.

GBP

With several conflicting implications from yesterday’s tax-and-spend budget, the market isn’t quite sure where it wants to take sterling. It ultimately ended lower overnight after some elevated intraday volatility but appears to be regaining some positive momentum this morning. The move in gilt yields is much less ambiguous, as both the two-year and the ten-year are up around 20bps as a result of the higher-than-expected £293bn issuance for this fiscal year.

At the very least, Reeves avoided a currency crisis. Both the amount of borrowing and the £40bn in tax rises were somewhat above expectations, but markets are comfortable that the government is not overextending itself. The OBR sees the budget as ‘one of the largest fiscal loosenings of any fiscal event in recent decades’, and the view that it is stimulative gave sterling a brief boost, before the higher bond supply appeared to drag it back down. With the budget uncertainty over, the market can switch the focus back on monetary policy, and the inflationary impulse from the extra fiscal spending seems to have convinced markets that only one more rate cut is coming this year.

EUR

As it turns out, the eurozone economy performed much better than expected last quarter and pointed to diminishing prospects for a 50bp rate cut in December. Germany was set for a recession with a -0.1% contraction and instead grew by 0.2%, helping to bring the eurozone-wide print to 0.4%. For comparison, an approximate annualisation of 1.6% still shows a big gap to the US’s 2.8%, but given that economists were expecting half that pace, it is clear that the growth differential was narrower than most had thought. German CPI inflation also printed higher than expected at 2.4%. The ECB’s Schnabel duly became more hawkish later on in the day, arguing that the fight against inflation is ‘not yet won’ and playing down the risks that inflation may persistently undershoot the target. The eurozone-wide CPI figure this morning is still expected to land below 2%, however. The unemployment rate today is also worth a watch, as some policymakers have flagged concerns about a labour market tipping point that could see the rate finally relent and move higher.

Markets

Equities ended in the red across the board yesterday as AI fever appeared to get a reality check. AMD’s less upbeat forecasts dragged chipmakers yesterday and concerns at Meta and Microsoft about huge AI investment costs last night have futures looking toward a sour risk appetite this morning. Heavy hitters Apple and Amazon report today, which makes six of the Magnificent Seven ahead of Nvidia’s release in three weeks’ time.

Main Economic Events (All Times CET)

2:30am: China PMIs
8:45am: French CPI
10:00am: Eurozone CPI & Unemployment Rate
1:30pm: US Employment Cost Index, Jobless Claims & Core PCE
1:30pm: Canadian GDP

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