September 28, 2023

“A blend of market shocks has sent world equities and US bonds tumbling, and channelled capital flows to the US this week, keeping the safe, high-yielding dollar well bid. Sterling and the euro have been passive victims to this dominant trend, and the yen’s push towards the intervention zone will be closely watched by markets.”

Tim Hallinan – Trading Director

Main Headlines

Washington is getting ever closer to its fourth partial government shutdown in a decade with only four days remaining, as Republican US House Speaker Kevin McCarthy has rejected a stopgap funding bill that was making progress in the Senate. A government shutdown would result in the furlough of hundreds of thousands of federal workers and the suspension of various government services, including economic data releases and nutrition benefits, until Congress successfully passes a funding bill that President Joe Biden, a Democrat, would sign into law.

The Bank of England announced on Wednesday that it would postpone the implementation of the final phase of international bank capital rules by six months, moving it to July 2025. These rules, initiated after the global financial crisis more than a decade ago, were set out by the global Basel Committee of banking regulators. The Bank of England’s Prudential Regulation Authority (PRA) arm, in alignment with the European Union, had previously indicated that it would begin implementing these rules from January 2025.

GBP

Sterling notched further losses against the dollar yesterday as an empty economic calendar leaves it caught in the crossfire. The pound’s slide this week has mirrored its G10 peers, trading virtually flat with the euro as the bullish dollar trend dominates the currency markets. Investors will have to stay patient until tomorrow morning for British data to get their teeth stuck into, with current account, final GDP, and mortgage approvals data among this week’s only notable releases.

EUR

The euro is struggling to pick itself up after another sharp fall yesterday afternoon. In terms of data, eurozone private loans expanded by 1% year-on-year, lower than the 1.2% forecast, but euro losses were really just dollar gains. The CPIs are the key risk event today, with Spain’s printing as forecast at 3.5%, whilst the first of Germany’s regions to release data, North Rhine Westphalia, softened significantly to 4.2% despite an expectation of 5.9%. The rest will be released throughout the morning, with the final figure this afternoon. Significantly more euro weakness could result if evidence of sustained disinflation in Germany persists today, and earlier rate cuts are priced in for the ECB. ECB officials Holzmann and de Cos are both due to speak this afternoon, so markets will keep a keen eye on how they respond to today’s data.

USD

The stars are aligning for the dollar this week, as a cocktail of shocks keeps the greenback in high demand. Rising oil prices, higher-for-longer borrowing costs, autoworker strikes, a possible government shutdown, and poor economic outlooks in China and Europe, among other factors, have channelled investor flows to the safe, high-yielding dollar. Market uncertainty is driving up the risk premiums investors expect to compensate them for holding anything but the US dollar this week. USD/JPY is quickly nearing the intervention zone, with many analysts expecting Japanese intervention in the near-term. The reacceleration in durable goods orders yesterday, up 0.2% m/m versus a -0.5% fall last month, further supports the US economic resilience narrative that will be tested by final GDP and unemployment figures this afternoon. A Fed Chair Powell speech this evening poses a downside risk, however, as he may look to tone down the extremely hawkish rhetoric, given the severe bond and FX market reaction to the Fed’s pause last week.

Markets

World stocks are currently enduring their longest losing streak in two years. Shares in Asia have declined, but there are signs of stability in US equity futures and Treasuries. Higher oil prices have reinforced the narrative of “higher-for-longer” interest rates, further adding to the pressure on global markets. The US benchmark oil price reached $95 a barrel for the first time in over a year, primarily due to a decrease in stockpiles at a major storage hub. This increase in oil prices has raised concerns that inflation will continue to be elevated. Consequently, the 10-year Treasury yield remains near the 4.6% mark it reached in the previous session, which was the highest level since 2007.

Main Economic Data/Central Banks/Government (All Times CET)

9:00 a.m.: Spain Sept. CPI
9:00 a.m.: Spain Aug. Retail Sales
10:00 a.m.: Italy Sept. Consumer, Manufacturing Confidence
10:00 a.m.: ECB publishes economic bulletin
10:00 a.m.: SARB Quarterly Bulletin
10:50 a.m.: Riksbank’s Floden speaks
11:00 a.m.: Euro-area Sept. Consumer Confidence
11:30 a.m.: BOE’s Hauser speaks
2:00 p.m.: Germany Sept. CPI
2:30 p.m.: US 2Q GDP T Annualised, Personal Consumption, Core PCE Price Index
2:30 p.m.: US Initial Jobless Claims
3:00 p.m.: Fed’s Goolsbee speaks
4:00 p.m.: ECB’s Holzmann speaks
4:45 p.m.: Riksbank’s Breman speaks
4:45 p.m.: BOE’s Greene speaks
6:30 p.m.: ECB’s de Cos speaks
7:00 p.m.: Fed’s Cook speaks
Markets closed in South Korea, Indonesia, Malaysia, India, Sri Lanka

Corporate Events

Earnings include Brickworks, Accenture

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