Dollar edging down
The euro advanced against the dollar last week and is back around $1.16, up about 1c from $1.15 at the start of last week. Helping the single currency is speculation that a peace deal for the Ukraine and Russia might be inching closer and not helping the dollar is news from President Trump that he ‘knows who he is going to pick’ for Fed chair with most speculation centring on National Economic Council Director Kevin Hassett, who is a close Trump ally, and has made clear he will pursue a more aggressive rate cut agenda. If Hassett is the pick, he may be announced this side of Christmas and most likely would join as a Fed Governor in February but not take over as chair until May when Powell’s term ends. The dollar also lost ground to sterling, trading at $1.3220 now from $1.31 at the start of last week. Sterling managed to gain a touch on the euro, helped by a relatively subdued market reaction to last week’s UK budget, and now trades at 87.7p to the single currency from a little over 88p at times last week.
Government bond yields were little changed on Friday, the Thanksgiving holiday at the end of last week shortened trading hours and US 10-year yields remain around 4% and there was little change in the yield all of last week although the yield is down about 15bps over the past two weeks. The market is upping expectations for a Fed rate cut at the meeting in December which has gone from a 25bps cut being about 40% priced in two weeks ago, to 60-70% last week to 100% today. There was little change in European 10-year yields on Friday.
Having had a volatile week two weeks ago, equities had a strong rebound last week. The S&P 500 gained nearly 4% for the week – with the Dow Jones and NASDAQ making similar gains – to take the index back to 6,850 just a half a percent off its all time high reached in October. European stocks also benefited from the return to a risk-on environment for equities, with the Eurostoxx up 2.8% for the week.
Germanys’ HICP annual rate of inflation rose to 2.6% in November, that’s up from 2.3% in October and the highest level in 9 months. The preliminary November inflation prints from Germany, France, Italy and Spain – the big beasts of the Euro Area economy – were a mixed bag coming in weaker than expectations in France (0.8%) and Italy (1.1%) but stronger in Germany and Spain (3.1%). The net result is that the average Euro Area HICP rate – with the flash estimate released this week – is likely to be little changed from October, remaining around 2%. ECB members have indicated that they are comfortable with monetary policy as it stands and this pick-up in inflation in Germany is not likely to shift the dial for them as this increase in price pressures is likely to be temporary.
Looking to the week ahead, in the US we get ISM manufacturing and services, personal income and spending for September and University of Michigan sentiment and ADP employment change for November (but no payrolls yet) while in the Euro Area we get flash inflation and retail sales. Finally, in the UK, after the excitement of the Budget last week, it’s quiet this week but we do get Nationwide house prices.