Dollar rebounds
Yesterday’s jobs report in the US was, on balance, slightly softer than forecast but didn’t alter market expectations for near-term Fed monetary policy, with another rate cut still not fully priced in until well into next year. The dollar fell to its lowest levels of the day immediately following the release of the data but has rebounded quite strongly since. This sees EURUSD and GBPUSD trading at around $1.1715 and $1.3325 respectively this morning, well down from yesterday’s highs of circa $1.18 and $1.3450. Softer than expected UK inflation data for November released a short while ago – which seal a Bank of England rate cut tomorrow – is weighing on the pound, which has given back all of the gains it had made against the euro over the past 24 hours to trade at almost £0.88 this morning (from a high of just under £0.8750 yesterday).
In government bond markets, US and German yields both nudged down a little yesterday while UK yields ended only slightly higher on the day having been up around 5-6bps at one stage. The latter are a good bit lower this morning though – down around 6bps – on the back of the weaker than forecast UK inflation data. In equity markets, US stocks lost more ground, with the S&P 500 off around 0.3%, while European stocks gave up Monday’s gains, shedding about 0.6%.
Headline CPI inflation in the UK fell for second month in a row in November according to this morning’s data, declining to 3.2% from 3.6% in October, while core inflation fell for a furth consecutive month to 3.2% also. Regarding the latter, core goods inflation dropped to 1.1% from 1.5% in October, while core services inflation edged down to 4.4% from 4.5%. The inflation data paves the way for the Bank of England to lower interest rates tomorrow, with the market expecting a 25bps cut to 3.75%.
Non-farm payrolls in the US rose by 64k in November according to the jobs report, following a fall of 105k in October. Payrolls growth averaged 22k a month over the three months to November, up slightly from +11k a month in the June-August period but considerably less than the pace of job gains over the opening months of this year. The unemployment rate stood at 4.6% in November, half a percentage point higher than in June this year, and hourly earnings growth eased further, to 3.5% year-on-year, indicating that labour demand has slowed more than labour supply recently.
Looking to the day ahead, economic data due include November CPI inflation (final reading) and Q3 labour costs in the Euro area; the Ifo Business Climate Index for December in Germany; and new home sales, housing starts/building permits, and construction spending (all for September) in the US. We will also hear from a number of Fed members, including Governor Waller who is one of the most ‘dovish’ members of the central bank.