Fed serve up decision today
The dollar again remains fairly unchanged against both the euro and sterling at around $1.08 this morning and $1.25 (leaving EUR/£ also broadly unchanged at c. 86p). It was relatively quiet again yesterday as it was on Monday but later on today we see the kick off to the last set of major central bank meetings of the year, with the Fed decision due this evening though no change in policy is expected.
Sovereign bond yields in Europe had a little more movement than FX markets yesterday. German 10-year yield shed a few bps to trade now at 2.2%. US 10-year yields edged down to just under 4.2% this morning while UK 10-year yields lost about 15bps since Monday post weaker earnings and GDP data (now trading at c.3.9%). European equity markets opened positively yesterday but failed to hold on to the gains, drifting down over the day with Euro Stoxx 50 and FTSE finishing up unchanged though US equities did manage to make modest gains.
German ZEW expectations balance improved for a fifth consecutive month in December to 12.8 from 9.8 in November. The index suggests better times are ahead (the current conditions index remains very negative) and businesses appear to think that the interest rate cycle has likely peaked, inflation is coming back and the labour market remains relatively strong in Germany so a pickup in activity is likely during 2024.
UK GDP fell by more than expected in Oct, dipping 0.3% month-on-month to leave the three month average to October at 0%. Services, industry and construction were weak and all contracted in the month. The economy is struggling following the rapid increase in interest rates and this data sets the scene for Q4 to be another of stagnation or weak growth at best. However, there is little chance the BoE will cut rates in the short term to help activity – they meet on Thursday – as inflation while easing is still way above target with markets not expecting any monetary policy easing until the summer of next year.
US CPI rose by 0.1% month-on-month in November when flat was expected, leaving the year-on-year change at 3.1% (down from 3.2% in October). Annual core inflation was unchanged at 4.0%. The marginal upside surprise might quell market expectations – however small – of any near term cut in interest rates. However, the overall picture is little changed with inflation having eased substantially and the Fed set to remain on hold until it drops further towards target.
The NFIB Small Business Optimism Index in the US ticked down 0.1 in November to 90.6. Labour shortages, and the quality of labour, remain a concern for firms as does inflation, though its status as a primary concern is waning as price pressures ease. Heading into the key selling season of the year, most businesses reported lower nominal sales pointing to potentially a fairly disappointing Christmas for retailers.
The FOMC decision tonight should confirm the Fed remains on hold and Chair Powell’s recent remarks suggest they will stress the need to maintain a restrictive policy stance while inflation remains above target. However, with inflation coming back the updated dot plot should also indicate that policy will be eased during 2024, potentially a little faster and sooner than projected in the September dot plot.
Economic data due today includes EU industrial production, Irish property prices and US PPI and then the Fed decision and Powell’s press conference later on this evening.