So, what do we know?
(A forex, index, and commodity market review)
With headline inflation of 1.7% below target and weak data the ECB last week bowed to the inevitable and cut interest rates by another 0.25%, the second cut in the last two meetings. The S&P500 pushed higher into record territory as recent data continues to support a pick-up in economic activity.
Weekly change (amount change and percentage change on the week)
FTSE +108 +1.31%
DAX +255 +1.31%
DOW +469 +1.09%
S&P +58 +1.00%
NASDQ +92 +0.45%
NIKKEI -615 -1.54%
Hang Seng -478 -2.25%
Despite the ECB giving little guidance about last week’s cut in interest rates, it was clear to analysts and investors that headline inflation and weak economic data would allow the ECB to cut rates for the second time in two meetings – the last time the ECB cut rates in back to back meetings was in 2011. Despite the ECB reiterating its “data-dependent and meeting-by-meeting approach,” swaps markets are anticipating 0.25% cuts in interest rates in the next four governing council meetings which would take the deposit rate down to 2.25% by April 2025.
The change in economic outlook in both the eurozone and the US has highlighted the significant difference in economic growth outlooks for these two trading blocs. The Eurozone manufacturing and services data reported on 23rd September was far worse than the consensus and was particularly worrying for the German economy, with the manufacturing PMI at 40.3, its lowest level in a year. The German economy is expected to contract this year as its manufacturing sector continues to reel from the surge in energy costs and the slowdown in growth in China, one of its biggest export markets.
At the beginning of August investors were fretting that the US could slide into a mild recession as the labour market cooled. Interest rate expectations at that time were pricing in two half-point cuts in interest rates by the Federal Reserve. Since then, US economic data has rebounded whilst inflation has moderated, providing investors with a goldilocks scenario that implies continuing economic growth with moderating price pressures. Forward interests still imply two further rate cuts in the US by the end of the year.
Price pressures continue to moderate across the developed world with UK headline inflation falling more than expected to 1.7% (last 2.2%). Interest rate sensitive sectors were given a boost as forward swaps markets have priced in a cut of 0.25% in each of the two remaining MPC meetings this year.
EURUSD -0.71 -0.65%
GBPUSD -0.12 -0.09%
USDJPY +0.37 +0.25%
The recovery in the US Dollar continues as forward interest rate expectations continue to imply further cuts in interest rates in the Eurozone and the UK, whilst the outlook for cuts in the US has reduced. The shift in interest rate expectations has been the main driver in the recovery in the US Dollar versus the Euro, Sterling, and the Japanese Yen. The EUR/USD rate touched 108.30 last week, the lowest level since early August. The USA presidential election has negligible effect for now, with some commentators suggesting a Trump victory could strengthen the US Dollar, the opposite that trump is calling for.
Sterling fell to a six-week low versus the US Dollar following the below consensus inflation reading in the expectation for further rate cuts by the BoE.
Gold +64 +2.41%
UK OIL -5.92 -7.51%
US OIL -6.23 -8.20%
The markets have waiting and waited for Israel’s retaliation against Iran but, to date, there has been nothing. What is clear is that Israel has heeded Biden’s advice and will not be targeting Iran’s atomic or energy infrastructure. The straw that broke the camel’s back, however, was the lack of any further clarity from Beijing on the economic stimulus measures announced over two weeks ago. To compound Beijing’s problems, the recent CPI and PPI data suggests the deflationary risks in the economy persists with CPI coming in at 0.4% (last at 0.6%) and PPI at -2.8% (last -2.5%). China is the largest oil importing in the world and its mis-firing economy implies lower oil consumption.
This week’s data and events to watch out for.
Bank of Canada interest rate decision and manufacturing and service PMI data out from US, EU and Uk are the highlights in this quieter week for key data.
Monday
China 1-Year and 5-Year Loan rate announcements. Announced over Sunday night / Monday morning. Both 1-Yr and 5-yr rates reduced by 0.25%. Will this help the Chinese economy grow? Last week’s GDP was less than Beijing hoped for three months ago – the lowest growth number in 18 months. A muted reaction in Chinese equity markets so far on the rate cuts….
Tuesday
BRICS BRICS summit in Kazan, Russia. Leaders from Brazil, Russia, India, China, and south Africa attending along with some other invited nations.
UK Andrew Bailey, governor of the Bank of England, speaking at the Bloomberg Global Regulatory Forum, in New York. Clues about interest rate cuts? GBP sensitive.
Wednesday
Canada Bank of Canada interest rate decision. Expect a cut of 0.5% to 3.75%. CAD sensitive.
UK Andrew Bailey speaking at the annual Meetings of the International Monetary Fund and the World Bank Group. GBP sensitive.
Thursday
Eurozone, UK & US Manufacturing and Services PMI data. Following last month’s poor Eurozone data, investors will be hoping for a recovery in the reports. USD, EURO, and GBP sensitive to these releases.
Friday
Germany German IFO Business Climate. Large survey of manufacturers, builders, wholesalers, services, and retailers. The Eurozone needs Germany back on its feet. Expectations for a slight improvement to 85.6 – very different from the levels this survey achieved pre-pandemic.
US Core Durable goods. Excluding transportation items which can distort the data. Expecting small decline of -0.1%.
US Revised University of Michigan Consumer Sentiment. Expected 69.6 from 68.9. Happier consumers – may help Harris in the run up to the election on November 5th.
