Dollar firms up
While there was little movement in FX markets yesterday the dollar is making up some ground this morning versus the euro and sterling. The euro had gained a little on Monday versus the dollar but yesterday traded flat at $1.0850 for much of the day but overnight the dollar has taken back Monday’s loses and is trading at $1.0820 currently to the single currency. The US currency also made ground on sterling last night, and is now back to $1.2640, having touched off close to $1.27 in the past two days. As a result, the euro/sterling cross is little changed at 85.5p. In other markets, yesterday was quiet if slightly risk on with equities making small gains and fixed income losing out a touch.
In government bond markets, there was little change but rates did tick up marginally. In the US, shorter term 2-year yields were flat but 5-year and 10-year yields were up by 1 to 2bps apiece with both at around 4.3% this morning. In Europe, there were similar moves with German 5- and 10- year yields up 2/3bps but in the UK 2- and 5-year yields were up 4bps while 10-year gilts were up 3bps to c.4.2%.
After a weak start to the week, equities in Europe regained some momentum with the Eurostoxx up 0.4% for the day. The FTSE underperformed its peers and ended the day flat to just marginally down. US markets had a poor start to the session but made the ground back during the day and the S&P ended up with a daily gain of 0.2%.
US durable goods orders fell 6.1% month-on-month in January, the biggest decline in month since the height of COVID-19 in April 2020 and a sharper fall than expected. However, this decline was almost fully down to the woes of a single company – Boeing – whos orders have collapsed due to recent safety concerns. Capital goods orders excluding aircraft and military equipment actually rose in the month, albeit modestly, by just 0.1% following a 0.6% dip in December. The data points to fairly weak investment demand in the US at the current time, not surprising given the much higher cost of credit now compared to a year ago. In better news however, capital goods shipments (ex aircraft and military) in January were up 0.8% month-on-month, which is a positive for Q1 GDP.
While inflation is coming back and the labour market is healthy in the US, consumers still appear nervous. The conference board’s measure of consumer confidence fell to 106.7 in February from 110.9 in January, when a rise was expected. This is the first fall in the measure in 4 months, interrupting a run supporting by weakening inflation and solid increases in jobs. The expectations index fell to a three month low as consumers appeared to be getting less concerned about cost of living increases but more concerned about the outlook for the labour market and, in an acrimonious election cycle, the US political environment. Consumers were also downbeat about their own current and future financial position and the number expecting their incomes to rise fell to a 4-month low, which is bad new for personal consumption.
BoE Deputy Governor Ramsden was out yesterday and his comments contained little sign that he was moving towards voting for an interest rate cut. He said yesterday that key indicators suggest that, while services inflation and wage growth in the UK have fallen somewhat, persistent inflation in the UK remained ‘elevated’. He said he supports the more balanced outlook on risks to inflation set out by the last MPC forecast but he is ‘looking for more evidence’ about how entrenched persistent inflation is before he could consider for how long the current Bank Rate will need to be maintained.
Also out was Fed Governor Michelle Bowman who repeated her view that she expected inflation to fall further while maintaining interest rates at the current level but that it was too soon to begin rate cuts. In carefully worded remarks, Bowman said that should data continue to indicate inflation is moving sustainably towards 2% it will ‘eventually’ become appropriate to ‘gradually lower’ rates to prevent monetary policy becoming overly restrictive but in her view, the Fed is ‘not yet at that point’. She warned that cutting rates too soon could necessitate rate hikes in the future and that she ‘remained willing’ to raise rates if data indicated progress on inflation was stalling.
Wage growth in Ireland was quite modest in the final quarter of last year, with hourly earnings increasing by just 2.1% year-on-year, well below the rate of CPI inflation. The data was somewhat impacted by timing issues related to public sector pay agreements which saw public sector earning fall by 1.6% in the year to Q4 (countering public sector pay increasing by 11.6% year-on-year in Q4 ’22) but nonetheless private sector pay was only up at an annual rate of 3.4%, still below inflation in Q4 ’23. Despite low unemployment, virtually full employment and high inflation, Irish wage growth has been surprisingly restrained in 2023, which might please central bankers but means household’s real incomes continued to be squeezed right into the end of last year.
On the agenda today we get Euro area confidence data and in the US the 2nd estimate of Q4 GDP and the trade balance. On the speaker front, we have Bostic, Collins and Williams from the Fed and Mann from the BoE and this morning the ECB’s Muller will be one of the last council members speaking ahead of the Bank going silent before next week’s meeting.