Sovereign International Daily Market Report
Sterling edges higher as UK PMIs rebound in November
Highlights:
Both the pound and the euro outperformed their major counterparts on Thursday, as relatively more optimistic PMI figures out of Europe somewhat eased concerns over possible recessions.
Trading in FX was fairly choppy yesterday, amid thin liquidity caused by the closure of US markets due to the Thanksgiving holiday. EUR/USD was able to eke out modest advances following yesterday’s moderately better than expected business activity data, although some dovish comments in the latest ECB meeting accounts held the common currency back somewhat. Sterling performed even better, rising back up as the latest UK composite PMI rose back into expansionary territory for the first time in four months. Looking ahead, activity in markets today will largely be centred around this morning’s speech from ECB President Lagarde, and this afternoon’s PMI numbers out of the US.
UK business activity growing again, as budget delivers few fireworks
We received some rare positive news on the state of Britain’s economy yesterday, as the preliminary November composite PMI unexpectedly edged back into expansion. The rebound in services activity, in particular, should allay concerns over the possibility of a UK recession, and we remain quietly hopeful that a contraction in GDP will be avoided in the final quarter of the year. That said, the outlook for Britain’s economy remains far from rosy. According to the data, total new orders declined for the fifth straight month in November, and exports fell amid weak demand from abroad. GBP was able to outperform on the news, although investors are far from getting carried away, and the move upwards was rather modest in nature.
On Wednesday, we saw relatively limited reaction in markets to the latest budget announcement. The 2 p.p cut in National Insurance, effective from January, will be welcome news to households, as this should alleviate pressure on consumer purchasing power during what bodes to be a rather challenging period for the UK economy. The OBR raised its 2023 GDP growth forecast to +0.6% from -0.2%, although the forecasts for the next two years were revised rather markedly lower to +0.7% and +1.4% respectively. In totality, most of the policy tweaks announced, including the increases in the state pension and UC and disability benefits, were either fully expected or seen as having minimal impact on the economic outlook.
ECB minutes flag heightened uncertainty over growth outlook
News out of the common bloc on Thursday was somewhat mixed. The November PMIs came in moderately above consensus. The composite index edged up, albeit this was only just above its 3-year lows and the sixth straight month below 50. While slightly more upbeat than anticipated, the news will do little to dispel concerns surrounding the possibility of a technical recession in Q4, following the modest contraction in GDP in the third quarter. Yesterday’s ECB meeting accounts, meanwhile, were rather dovish. Members noted that uncertainty surrounding the outlook had increased relative to September, and that the bank needed to be careful to ensure that its efforts to rein in inflation did not lead to an undershooting of the inflation target. As tends to be the case, however, markets largely overlooked the information in the minutes, and the euro was able to end London trading moderately higher against most of its major counterparts.
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Soft durable goods orders point to US growth slowdown
As mentioned, US markets were closed on Thursday due to Thanksgiving, hence the lack of data or news out of the world’s largest economy. Macroeconomic data out of the US on Wednesday was rather mixed. Durable goods orders fell by 5.4% in October (a larger downturn than the 3.1% contraction priced in), while the less volatile measure that excludes transportation dropped to a six-month low 0% (versus the +0.1% consensus). On the other hand, initial jobless claims bucked its recent trend, unexpectedly easing to 209k last week (from 233k), lowering the 4-week moving average off its highest level in nine weeks.
All in all, recent data remains consistent with the notion that US growth is likely to slow rather sharply from the near 5% annualised print in Q3, although expansion remains solid and a recession appears off the table, at least for the time being. Indeed, the Atlanta Fed’s GDPNow tracker, one of our favoured gauges of overall US economic activity, has risen back above 2% this week, which would still be a rather impressive performance under the circumstances.
Could Lagarde push back against ECB rate cuts today?
Today’s looks set to be a relatively quieter day in the FX market. The preliminary November PMIs out of the US are expected to post a modest decline relatively to October, which would likely confirm suspicions that growth is set to ease rather markedly in the fourth quarter of the year. In the meantime, we will be paying close attention to communications from ECB members Lagarde and De Guindos this morning. Investors see no possibility of additional ECB rate hikes, although recent soft macroeconomic news has brought forward the expected timing for the first cuts to April next year. Should Governing Council members push back against these rather aggressive bets, then we could see some additional strength in the common currency in the near-term.
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