Dollar gives up some of its recent gains
The ECB left the deposit rate on hold at 2.5% following yesterday’s meeting, as expected. The accompanying policy statement noted that the “increased magnitude and duration of the energy shock, as well as the implications for indirect and second-round effects, are likely to drive up inflation,” and while it also said that the recent tightening of financing conditions is likely to “weigh on inflation and economic growth,” Christine Lagarde subsequently stated that the direction of travel for interest rates is “clear”, suggesting the ECB will probably raise the deposit rate again at its next meeting in December. The euro has gained ground against the dollar post-meeting to trade at around $1.12 this morning, though the latter has weakened more broadly, perhaps related to yesterday’s fall in US stocks (notably the Nasdaq). Sterling has also risen against the US currency to just north of $1.34, while it continues to edge higher versus the euro, trading at a new year-to-date high of a little under £0.8350.
US government bond yields fell quite sharply as US equity markets weakened, with 2- and 10-year yields declining by the best part of 10bps (leaving the latter below 4.95%, down almost 40bps from early October’s highs). Equivalent German and UK yields were also lower on the day, with 2-year yields posting the largest declines (of the order of 4-6bps). The Nasdaq very much led the fall in US stocks, shedding almost 1.5%. European stocks gained for a fourth day running, adding more than half a percent, though with most Asian markets in the red overnight, they have opened lower this morning (down almost 1%).
The Bank of Japan left its key policy rate unchanged at 1.25% overnight, as expected. It noted though that underlying CPI inflation is now “at a level that is generally consistent with the price stability target of 2 percent,” suggesting it is only a matter of time before it hikes rates again. The market is currently pricing in a circa 80% chance of a 25bps increase at the next policy meeting in December.
Yesterday’s PCE inflation report in the US was in line with expectations, though that didn’t mean it was good! Headline PCE prices rose by 0.5% in September (versus August), partly because of higher energy prices, which pushed the year-on-year rate of headline inflation up to 3.6% (from 3.4% in August), way above the Fed’s 2% target, while core PCE prices rose by 0.3% on the month and by 3.1% on the year (the latter up from a 3% increase over the year to August). Separately, the economy grew at an annualised rate of 3.4% in the third quarter, or a non-annualised increase of 0.8% (versus Q2), driven by solid consumer spending and robust AI-related investment.
For the day ahead, economic data due include a flash estimate of Q3 GDP and September unemployment in the Euro area and a flash CPI inflation reading for October in Germany, while the Employment Cost Index for Q3 is due in the US. The ECB publishes its latest Survey of Professional Forecasters, while a few ECB and Fed members are due on the wires over the course of the day.