Sterling’s post-budget blues

Sterling’s post-budget decline accelerated yesterday, notwithstanding rising UK bond yields relative to elsewhere (which would normally be a support for the currency), falling to lows of around $1.2845 against the dollar and close to £0.8450 versus the euro. It is not far off these levels this morning, trading at around $1.2890 and £0.8425 respectively. The euro got up to a high of $1.0890 against the dollar yesterday, helped along by slightly stronger than expected Euro area inflation data, and is currently trading at about $1.0860 ahead of the key jobs report in the US due later today.

The post-budget rise in UK yields accelerated as well yesterday, and though they retreated from their highs, 2-and 10-year yields still closed up 10-12bps on the day. Equivalent US and German yields also closed off their highs, the former ending slightly lower on the day, the latter finishing marginally higher. In equity markets, US stocks closed in the red led by another decline in the Nasdaq, which lost almost 3%,  while European stocks fell for a third consecutive session, shedding more than 1% (though they have opened in positive territory this morning).

Euro area inflation in October came in a little stronger than expected, with the headline rate nudging up to 2% (in line with the ECB’s target) from 1.7% in September and the core rate – which excludes energy and food prices – remaining at 2.7%. Within the latter, services inflation held steady at 3.9% but goods inflation nudged up a touch to 0.5%.

In the US, the headline rate of PCE inflation – the Fed’s target measure of inflation – dipped to 2.1% in September from 2.2% the previous month while the core rate remained at 2.7%. More importantly perhaps, from the Fed’s point of view , the latest Employment Cost Index showed a further moderation in the pace of wage growth in Q3, taking it back to the levels that prevailed pre-pandemic.

According to the consensus forecast, today’s jobs report in the US is expected to show the economy added just 100k jobs in October, well down from September’s gain of 254k, with hurricane-related effects expected to have dampened employment growth last month. The unemployment rate and y-o-y hourly earnings growth are both expected to be unchanged from September at 4.1% and 4% respectively.

Other data due today include the ISM manufacturing index for October in the US, and final PMI manufacturing readings (October) in the main economies.