Sovereign International Daily Market Report
Euro and sterling collapse after dire PMI figures
This morning’s dismal business activity PMI figures have raised fresh concerns over the impact of a second Donald Trump presidency on the global economy.
Highlights:
Both of the November PMI reports out of the Euro Area and the UK were bitterly disappointing today. Activity slumped across the board this month, with both of the composite indices coming in well short estimates, and below the level of 50 that separates growth from contraction.
EUR/USD initially collapsed off the back of the data, before recovering some of its losses. The common bloc’s economy is acutely exposed to US demand, and the threat of hefty tariffs on European imports into the US is not at all good news for the bloc’s economy.
The pound has sold-off to a fairly similar extent so far today. Market participants appear concerned that the recent Autumn Budget announcement would eat into company profits, while triggering layoffs, weaker pay increases and higher consumer prices.
USD
The US Dollar Index looks set to post another weekly gain, amid a combination of the Trump trade, weakening economic news in Europe and renewed jitters surrounding the Russia-Ukraine conflict. Domestically, economic news out this week has been rather mixed (housing starts and building permits disappointed in October, while jobless claims beat estimates), but the focus for investors, at least today, has clearly been on the underwhelming news elsewhere.
Attention during the remainder of the week will undoubtedly be on this afternoon’s US PMI numbers, which take on added intrigue following the dire figures out of Europe this morning. Consensus is for a very strong print in the key services index around the 55 level, which would be consistent with strong expansion. Any number around this mark would ramp up expectations that a Trump presidency could mean a further divergence in economic performance across the Atlantic, which would only provide fresh fuel to the US dollar rally.
EUR
The Euro Area economy appears to be heading towards contraction as we approach year-end, at least according to this month’s business activity composite PMI, which slumped to its lowest levels since January. Businesses across Europe seem to be acutely concerned about the risks posed by president-elect Trump’s radical tariff proposals. This could weigh particularly heavily on the common bloc’s economy in the next few years, given that it relies on US demand for around 4% of its GDP.
Today’s data will be a major cause for concern for policymakers in Europe, and we are likely to see greater pressure on the ECB to deliver aggressive interest rate cuts in the coming months in order to support the bloc’s economy. This could easily entail a jumbo 50 basis point rate cut at the Governing Council’s December meeting. This is now roughly 60% priced in by markets, a repricing that has triggered a collapse in EUR/USD this morning.
GBP
The latest PMI figures out of the UK were underwhelming, to say the least. The composite index slumped into contraction this month, albeit only a very modest one, for the first time since October 2023, well below the estimate of economists. As mentioned, we see this as a direct consequence of the Autumn Budget announcement, with the large hikes to employer National Insurance contributions seen squeezing company profits, while triggering job losses and raising consumer prices. Concerns surrounding the economic impact of a second Trump presidency may also be partly reflected in the data, although we note that this is less of an issue given the UK’s relative isolation from global demand, which should limit any downside.
Sterling has fallen sharply off the back of the data, briefly dropping on the dollar this morning. This is partly a consequence of markets racing to price in an additional rate cut from the Bank of England, which is now seen delivering three 25 basis point cuts over the next twelve months, up from just two prior to the data.
Economic Calendar - 22/11/2024
Friday (22/11)
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