Dollar on the back foot
Speculation that a Russia-Ukraine peace deal was advancing saw the euro gain sharply yesterday. The single currency rose 0.5% back towards $1.1580, having touched off $1.15 at the end of last week. Also not helping the dollar were rumours that close Trump ally and National Economic Council Director Kevin Hassett was now the frontrunner for the Fed chair position. Hassett, unsurprisingly, is an advocate of lower interest rates and has said that if he were Fed chair he would ‘cutting rates right now’. The dollar slid against sterling too, with the UK currency getting up above $1.32 for a time, although it is a touch lower this morning. Sterling also gained a little on the euro for a short time, but is once again trading close to 88p this morning.
Government bond yields continued to tick down yesterday. The probability of a Fed cut in December is rising – which added to the likelihood the next Fed chair will be very pro rate cuts next year – is putting downward pressure on US yields with US 10-years down another 4bps yesterday to 4% from over 4.15% a little over a week ago. While in the Euro Area, with the ECB very much on hold at the moment, German 10-year yields did tick down a couple of bps yesterday but are still hovering around 2.7% where they have been for much of past two weeks. In the UK, 10-year yields fell 4bps to 4.5%. A key event is today’s UK budget which will be closely watched. An austere budget could put downward pressure on UK yields – if the Budget is judged as sound and a step toward fixing the UK’s fiscal position – as a weaker growth outlook for the UK might spur the Bank of England to cut rates faster, though a poorly received Budget might have the opposite effect on yields. Another strong day for equities yesterday, with investors getting back on board after a somewhat rough week last week. The S&P 500 rose 0.9%% and while it’s not back up to the record highs of last month it has taken back all of last week’s loses. European indices also benefited with the Eurostoxx and FTSE both up 0.8% for the day.
US retail sales rose by just 0.2% month-on-month in September but that followed a strong 0.6% gain in August. The gain in September was weaker than expected but a slowdown was likely after strong back to school spending in August. Core spending – excluding cars and gasoline- was even weaker at just 0.1%. The strong August means that household spending in the third quarter is likely to have held up, and the consensus forecast has it growing at an annualised rate of about 3% with a stronger contribution from services consumption, which is not included in this retail sales data. There will, however, be some concerns about consumers as we head into the key holiday spending season, starting with the Black Friday sales coming up at the end of the week. The conference board measure of consumer confidence fell to 88.7 in November from 94.6 in October, while the expectation index fell to 63.2 from 71.5. The recent Government shutdown likely weighted on consumers – so we might see a small improvement next month now that the shutdown has ended – but consumer’s assessments of current and expected household finances deteriorated as did expectations for the economy and labour market sentiment and respondents continue to mention inflation and tariffs impact as concerns. Historically, a consistent conference board expectations reading of below 80 is a recession signal, and while a recession is not expected in the US – with growth next year to be driven by AI investment and tax cuts – the expectations index has now been sub 80 for 10 consecutive months.
Chancellor Rachel Reeves’ much anticipated UK budget will be announced today. While the headroom in the March forecast has already been more than eroded by changes in policy, changes in the OBR forecast and changes in interest rates, the situation is not as dire as feared just a few weeks ago. Income tax increases, which until lately had been expected – and would have broke a key Labour manifesto pledge – appear now to be off the table. Still Chancellor Reeves will have to raise taxes and cut spending by approximately £20-£30 billion in order to create headroom for a balanced budget by 2030. Today’s budget will tighten the UK purse strings but it remains to be seen if enough will be done today to please the bond market over the longer term.
On the slate today, the main event will be the UK budget at lunchtime but we’ll also get US durable good orders, jobless claims and the latest edition of the Fed’s beige book. Both ECB President LaGarde and Chief Economist Lane are due to speak today.