Dollar makes small gains
The euro gave up some ground yesterday, dipping back toward $1.0810 at times to the dollar. The single currency is under a little pressure against the dollar as the ECB guides for further rate cuts and while it made up a little ground to the dollar on Friday, it lost it all again yesterday. It starts off this morning at around $1.0820. The euro did a little better against sterling where it remains trading around 83.3p. As a result, sterling is down a touch on the dollar, back to below $1.30 for a time yesterday, and remaining around that level this morning.
Equities lost out in the US and Europe yesterday. The S&P 500 was down 0.2% for the day while the Eurostoxx was down 0.9% and the FTSE fell 0.5%. That still leaves the S&P close to an all time high, and, with political risks to the forefront ahead of the US election in two weeks, some volatility is bound to be expected as investors take profit. In Government bond markets, US 10-year yields rose 10bps for the day taking them back to 4.2%, while equivalent UK and German yields were up 8bps and 10bps respectively to around 4.15% and 2.3%.
It was quiet day on the data front yesterday to kick off the week. The US Conference Board Lending Economic Index fell 0.5% in September, a sharper dip than expected. The mixed US data of late has pulled down the index and the biggest negative contributor was ISM new orders, which does not bode well for the future. The biggest positive contributor was rising stock prices, which have been on a upward trend for some time, notwithstanding the small dip on the day yesterday.
Also in the US, Kanas City Fed President Schmid said that he wants a slower pace of rate cuts as there is uncertainty about how much ultimately policy should be eased. He said he hoped the Fed was entering a ‘more normalised’ policy cycle where modest adjustments to the interest rate environment by the Fed would keep the economy on track. To achieve this ‘normalisation’ a ‘cautious and gradual’ policy approach was needed. He added that he supported ‘dialing back restrictiveness of policy’ but ‘outsized moves’ – presumably such as the recent 50bps cut – should be avoided due to uncertainty of the rate path and so as to not contribute to financial market volatility. This view was backed by Dallas Fed President Logan who said yesterday she favours ‘a strategy of gradually lowering the policy rate’ and Minneapolis Fed President Kashkari who said he is ‘forecasting some more modest cute over the next several quarters’.
ECB Governing Council Member Kazimir said the decision to lower rates this month leaves the December meeting ‘wide open’ with ‘all options on the table’. Kazimir would normally be seen as a more hawkish member of the Council but he argued that if data and the outlook confirmed the path of disinflation then the ECB was in ‘strong and comfortable’ position to continue to ease. He said he was confident that the ‘disinflation path is on solid footing’ and while he would still like to see some further proof of a sustainable return to target, the ECB should be ‘flexible and ready to act appropriately’. Fellow Council members Simkus and Kazaks – usually seen as more centrist voices – were also out to say interest rates should be reduced further should the downward trend in inflation persist.
On the agenda today, we get the Philly Fed Non-Manufacturing Index as well as the Richmond Fed Manufacturing Index. There are a good number of central bank speakers due including, amongst others, President Lagarde from the ECB and her colleagues Villeroy and Rehn, Governor Bailey from the BoE and Philadelphia Fed President Barker.