Dollar making ground
The euro remained under pressure against the dollar yesterday but held up above $1.08 for much of the day. However, it has broken below that level overnight and starts off this morning at around $1.0790. Markets are mulling over if the Fed will slow the pace of their easing cycle compared to the ECB and others and that is giving the dollar some support. The single currency is holding its own against sterling and remains trading in a tight range around 83.3p. Sterling is also under a little pressure against the dollar which has broken through the $1.30 level and starts off today at around $1.2970.
In equities markets, the S&P 500 was down 0.1% for the day. This is the first time since early September the index has posted two down days in a row and, in that time, the index has gained almost 8%. While the market has gained on signs the US economy is proving more robust than previously thought and on strong corporate profits, there is also plenty of risks not lest the tight US election, wars in the mid-East and Ukraine and uncertainty about the future pace of any monetary policy easing. Any of these could cause equity market volatility from day to day. In Government bond markets, yields jumped on Monday with 10-year yields in the US, UK and German all up around 10bps for the day. It was quieter yesterday with yields stabilising. US 10-years were largely unchanged at 4.2% while equivalent UK and German yields rose about 3bps each for the day.
The IMF published new forecasts yesterday and lowered the outlook for global growth. The agency cut world growth to 3.2% next year, down 0.1 percentage points from its July estimate. The growth forecast for this year was unchanged at 3.2%. The IMF lowered its forecast for the Euro Area t0 1.2% next year, from 1.5% in July, partly on foot of concerns about weakness in the manufacturing sector particularly in Germany. China’s growth outlook was also reduced for 2025 while the US growth outlook was revised up to 2.8% this year and 2.2% next year, up 0.2 and 0.3 percentage points respectively. The IMF praised the world’s Central Banks for taming inflation without inducing recessions which was a called out as a major accomplishment. Nonetheless, the report said that risks are building to the downside and there is growing uncertainty in the global economy. The threat of escalation of regional conflicts threated commodities market while the rise of protectionism and protectionist policies could disrupt trade and hamper global activity.
ECB President Lagarde said that it’s clear the ECB should cut rates but the timing and pace is not certain. She said that disinflation is proceeding and recent data is ‘relatively reassuring’. She said the ‘direction of travel (for rates) is clear, pace to be determined’. What the ECB has done since June, she said, has been a sensible approach and one that should be continued but with a ‘caution element’ about it. Governing Council member Patsalides said yesterday that if there were no upside suprises to inflation then the ECB ‘could and should’ continue to lower interest rates. December was an ‘important’ meeting as there would be a lot more data available including new forecasts, and the ECB would be in a ‘better position to assess our stance’. He said that the Euro Area economy is ‘slowing but still heading for a soft landing ‘ and that while risks to growth were clearly to the downside the inflation path is less clear as risks to inflation were more or less balanced because of ‘potential supply shocks, oil prices and trade wars’. He said he said he favoured gradual cuts to rates and ‘serious cuts’ such as a 50bps move only if the situation deteriorates significantly.
On the agenda today, we get Euro Area consumer confidence, US existing home sales and the Fed Beige Book. There is also numerous central bank speakers at the IMF spring meeting in Washington.