Dollar still on the front foot
There was a more positive mood in markets yesterday, evidenced by a rebound in equities, partly fuelled by suggestions from France’s outgoing PM that a breakthrough in the current political impasse may be found that would allow a budget for 2026 to be passed in parliament. The euro struggled to advance though, notwithstanding the more favourable backdrop. Indeed, the single currency dipped to lows for the day of just under $1.16 heading into the European close of business and is only marginally firmer this morning at $1.1615. Sterling is also under pressure against the US currency, trading at a low for the week of about $1.3360, and is a touch softer against the euro as well at just under £0.87.
In government bond markets, French bonds outperformed with 10-year yields falling by 6bps and spreads over equivalent German bonds narrowing by 3bps. Elsewhere, US yields were flat to marginally higher, while UK yields ended marginally lower. In equity markets, European stocks added just over half a percent, with the CAC in Paris outperforming (gaining more than 1%), while the Nasdaq led US indices higher, shrugging off warnings about (AI-related) stretched valuations from both the IMF and Bank of England to close more than 1% higher on the day.
The minutes of the Fed’s September meeting, at which interest rates were cut by 25bps, note that most participants believed it was appropriate to lower rates “toward a more neutral setting because they judged that downside risks to employment had increased…and that upside risks to inflation had either diminished or not increased.” Moreover, while there were a “range of views about the degree to which the current stance of monetary policy was restrictive and about the likely future path of policy…most judged that it likely would be appropriate” to lower rates further over the remainder of this year. The market, for its part, is pricing in about 40bps of cuts by year-end (and 50bps by end-January next year).
The head of the IMF says the world economy is performing “better than feared.” She notes that, back in April, many were predicting “a U.S. recession in the near term, with negative spillovers to the rest of the world…instead, the US economy as well as many other advanced and emerging markets have held up,” with all signs pointing to a world economy that has “generally withstood acute strains from multiple shocks.”
It is another very quiet day ahead in terms of economic data, with the weekly jobless claims report in the US delayed because of the government shutdown. There are a quite a number of the Fed and ECB members scheduled to speak over the course of the day