Euro under pressure
Having broken through the $1.08 level late on Tuesday, the euro has drifted down a little further versus the dollar over the course of yesterday. There has been little significant data or news to push the currency one way or the other in recent days so it has inched down to around $1.0780 by this morning. The mood around the US economy is certainly more dollar supportive such as the IMF upgrading the US outlook on Tuesday versus a downward revision for the Euro Area. There has been little movement for the euro against sterling and continues to trade close to 83.3p. Sterling is also losing ground to the dollar and having broken through $1.30, is now down to $1.2950.
In equities markets, the S&P 500 posted a third day of losses with the FTSE in the UK and the Eurostoxx also down for the day. The S&P finished down 0.9% yesterday on foot of falls in a number of tech stocks. The FTSE fell 0.6% for the day and the Eurostoxx lost 0.3%. In Government bond markets, US 10-year yields ticking up another 4bps to 4.25% while equivalent UK yields were up another 3bps to 4.2% but Euro yields pushed against the trend and German 10-years were unchanged to down a single bps, remaining around 2.3%.
The uncertainty about the pace of monetary easing in the US is impacting housing market activity. Sales of existing homes fell to a 14-year low annualised rate of 3.84mn in September, down 1% from August. Both buyers and sellers appear to be holding back expecting mortgage rates to fall. US mortgage rates had fallen to a two year lows during September, but have picked up of late as markets – and some Fed members – speculate that the US economy may be in a more robust state than previously thought and that the Fed’s rate cutting may be more gradual.
The Fed’s latest Beige Book reports that ‘on balance, economic activity was little changed in nearly all districts since early September’. The Beige book shows a relatively softer US economy that recent positive surprises in employment, inflation and consumer spending data imply. More then half of districts said that both employment and prices were rising at a ‘slight or modest’ pace along mixed reports on the strength of household spending. The book also said the upcoming election was a source of uncertainty that was causing consumers and business to delay spending, investment and employment decisions.
ECB hawk Holzman was out yesterday to say that he felt market pricing of ECB cuts is ‘likely too aggressive’. He said that current data did not suggest much had changed and while ‘some’ colleagues would argue for a big December cut he felt ‘data didn’t justify’ a 50bps reduction. On the economy, he sees a ‘soft landing as guaranteed’. In contrast, his Governing Council colleague Centeno was more concerned saying that ‘downside risks to growth are accumulating’ and that 50bps is on the table, but that data would determine the cut size in December. Chief Economist Lane also said that recent data ‘raised questions on growth rates’ but that he didn’t see a dramatic weakening of the economy. While disinflation is ‘so far on track’, the ECB will take a very data dependent approach on easing policy.
On the agenda today, we get flash October PMI data in a number of countries and, for the euro area in particular, will be closely watched as the soft September readings appeared to be amongst the data that spurred the ECB in cutting rates at their October meeting.