BoE and ECB more hawkish than Fed, GBP and EUR

Good morning

In stark contrast to the Fed, the Bank of England made it clear they see risks to inflation are still to the upside and they are ready to tighten further if necessary. To support his hawkish view, three of the members, Mann, Haskel and Greene, voted for a rate rise. BoEs Bailey said it was far too early to be talking of rate cuts, even though the market is pricing in a full 1% of cuts through 2024, beginning as soon as May.

The ECB also tried to push back on rate cut speculation, Lagarde noting that ECB did not discuss rate cuts at all at their meeting. I find that very difficult to believe given the market pricing of a cut as soon as March 2024 and given ECB lowered their 2024 inflation forecast from 3.2% to 2.7%.

Following the BoE and ECB announcements, both GBP and EUR made further gains against USD through the afternoon, with GBPUSD rising as high as 1.2790 and EURUSD to 1.1000. They held most of those gains overnight but as I started writing they have both dropped, GBPUSD now 1.2750, EURUSD 1.0960, perhaps the disappointing German and EU PMI numbers released this morning have reminded people that despite the talk being more hawkish than the Fed, the economy both here and in EU is on pretty rocky ground. Or maybe the market to decide they have perhaps overdone this dollar selling and that a 400+ point move in GBPUSD and a 300+ point move in EURUSD since mid-Nov is a little rich.

GBPEUR is up to 1.1635 as EUR sell-off is marginally heavier than that of GBP for the time being, maybe due to EU PMIs already released but still waiting on the UK versions.

So, it is now very clear that 2024 will bring a lot of rate cut talk, the threat is that cuts come later and slower than the market is pricing in although the market does have a knack of being more accurate than central banks. Remember when we were all being told inflation was transitory and that higher rates were unlikely to be needed! I find it mildly impossible that US will cut rates while UK and EU keep theirs elevated for any great length of time, while the longer UK and ECB rates are kept high, the sharper they are likely to fall.

I tried hard to get to grips with the GCHQ Chistmas puzzles yesterday but have to confess I struggled immensely. After I’d pretty much nailed it last year I was hoping for better, but the old ‘past performance is not indicative of future results’ came to haunt me. What made things worse is that my daughter, who I have to confess is vastly more academic than me, was pretty quick to answer some of the questions although I do think she had some help. Anyway so far I’ve not looked at the answers and still have plenty to struggle through.

We’ve had a lot of dismal news this year and certainly plenty over the past couple of months, so it is with pleasure I can say the news item that got my attention this morning was that of the 17 year old lad who went missing in 2017 but has now been found in southern France after having walked for four days through mountainous terrain from some sort of commune in an attempt to get back to his Grandmother in the UK.

Have a great weekend, get the final bits of shopping done so we can all begin to slow down towards the end of next week. Well that’s the plan anyway, whether it works or not is another matter.

- 09.00 EU HCOB manufacturing, services PMI

- 09.30 UK S&P manufacturing, services PMI

- 10.00 BoEs Ramsden speaks

- 13.30 US empire state manufacturing index

- 14.15 US industrial production

- 14.45 US S&P manufacturing, services PMI

- 17.25 BoCs Macklem speaks

Dovish Fed sends USD lower, will BoE and ECB follow suit?

Good morning

Well there was me thinking that Powell would err on the less dovish side. Fed did leave rates unchanged but we got a pretty dovish message from the Fed and USD has weakened as a result. The ‘dot-plot’ showed two additional rate cuts expected through 2024 which would leave rates at 4.6% by the end of next year, this is down from 5.1% last time. This is still behind market thinking which suggests a rate of 4% by end of next year, but the message is rate cuts are on the horizon and could be seen as early as March 2024.

Powell is pleased with lower inflation coming without higher unemployment, the possibility of a further rise in rates was not taken fully off the table, however the talk at the meeting was of rate cuts rather than rate rises and Powell has expressed willingness to ensure Fed do not wait any longer than necessary before they begin to lower rates.

Goldmans have brought forward their forecast of the first US rate cut from Q3 2024 to Q1 2024 and see cuts in March, May and June, each of 25bps. Barclays and JPMorgan don’t see a cut until June 2024 but, unless we see a huge change in incoming data, an earlier cut is looking far more likely, as is the chance of cuts of 1% or more next year.

USD weakness has been seen across the board. GBPUSD rallied from 1.2510 to hit 1.2650 overnight, EURUSD pushed up from 1.0785 to 1.0915, while USDJPY saw a dramatic shift lower from 145.20 to 141.00, breaking below the recent lows. The USD has regained a part of these losses, GBPUSD, EURUSD and USDJPY now 1.2635, 1.0900 and 141.85 as I type.

The key question now of course is whether BoE and ECB follow a similar dovish path at their rate meetings today. Of the two, BoE is least likely to be in a position to cut rates although the recent disappointing GDP number will no doubt have set alarm bells ringing. We’re still likely to see a couple of members voting for further rate rises, indeed the vote split could be crucial for GBP. Last time, three members voted for a rate rise. If those members were to vote for no change this time, it could signal more chance of an earlier cut. We’d surely need to see inflation lower before BoE talk of rate cuts although I did see James Cleverly interviewed the other day where he said ‘this is why we are bringing down interest rates’, I’m not sure if this was a slip or just inaccurate.

I’m not sure if this is a reflection of poor sales, but it would seem the boxing day sales are being brought forward now. I was looking at presents for my kids (yes I’m aware I should have done this already), and see sales have already started at shops like Ralph Lauren and Gant. Unfortunately not on the stuff I was thinking about buying, but with black friday sales only just out of the way, shops seem to be going the way of the furniture stores with never-ending sales. They wouldn’t be doing this if sales were strong. While I’m looking more at UK sales, we do have US retail sales numbers out this afternoon which I’ll watch with interest.

For the ECB, they have already erred on the more dovish side, not yet ready to cut rates but with inflation in the Eurozone falling Lagarde will have a job on her hands to convince markets a rate cut in early 2024 isn’t likely. ECB likely to lower their inflation and GDP forecasts today and there must be a chance Lagarde talks of earlier cuts, although she will have to be careful that she doesn’t come across as too dovish or EUR could really suffer. For now though, EUR is looking OK, with EURUSD at around 1.0900 and GBPEUR back below 1.1600.

BoJ also have a rate meeting early next week. There had been a lot of talk about Japan moving away from negative rates but I do wonder whether, with Fed looking like cutting next year, Japan may be reluctant to begin pushing their rates higher. I can imagine them getting them wanting to got out of zero territory to zero, but if Fed, BoE and ECB are all cutting rates, it would be odd for Japan to choose this time to start raising rates.

So, it’s all about interest rates for now and as we move into 2024 we should be talking about when and by how much rates could fall. Sounds like good news although one hopes this doesn’t come with slower economies and the dreaded recessions that we seem to have staved off in 2023.

Could be a busy day ahead but I’ve noticed that the annual GCHQ Christmas challenge has been released. They say it is their hardest yet, which doesn’t bode well, but I’ll give it a go. I think its aimed for kids, but more importantly it is best attempted with a group of people rather than one. Still, I’ll give it a go. You can download it at the GCHQ website. They’re probably watching to see how we get on!

- 08.30 SNB rate announcement

- 09.00 Norges Bank rate announcement

- 09.00 SNB press conference

- 09.30 Norgs Bank press conference

- 12.00 BoE rate announcement

- 13.15 ECB rate announcement

- 13.30 US retail sales, initial jobless claims

- 13.45 ECB press conference

- 21.30 NZ business PMI

- 00.01 UK GfK consumer confidence

- 02.00 China retail sales, industrial production

Will Powell be as dovish as the market hopes?

Good morning

Well the long-awaited US inflation number turned out to be something of a non-event yesterday, possibly because it came out exactly in line with expectations at 3.1% (core 4%). We did get a little bit of USD movement, GBPUSD traded from 1.2580 up to 1.2615, back down to 1.2520, before settling at 1.2555 which is just a handful of pips away from the rate when I was writing this report yesterday morning.

Similarly, EURUSD had a quick spike higher to 1.0825 followed by a drop to 1.0770, before settling at 1.0780. A better than expected German and EU ZEW economic sentiment number yesterday morning had given EUR a bit of a push over GBP, indeed GBPEUR traded as low as 1.1620 through the afternoon, before regaining the 1.1650 area.

This morning’s UK GDP and industrial production numbers were both disappointing, coming in lower than expected, GDP at -0.3% (exp -0.1%) and industrial production -0.8%. As you’d expect GBP was hit, GBPUSD traded back down to the 1.2520 area and GBPEUR slipped to within a few points of 1.1600. As I type we are currently 10 pips or so off those lows. A fairly gloomy set of numbers.

In other UK news, Sunak lives to fight another day as the government’s Rwanda bill passed its first vote in the Commons. The majority was 44, some Tory MP’s abstained in defiance of party orders. This is the first of many votes so we are some way off. Its only a small win for Sunak. A real problem is that after many years in power, the government seems so disjointed.

Sunaks power is often undermined, most recently the Scottish leader Humza Yousaf was berated by David Cameron for meeting Turkey’s Erdogan at the COP28 summit without any member of the Foreign Office being present, a huge breach of protocol. He should probably resign for such a breach. When Pritti Patel met Israel’s Netanyahu with no UK officials present she was forced to resign. Something tells me Yousaf won’t face the same pressue.

New Zealand have passed a law to allow RBNZ to focus solely on inflation when setting policy, rather than also taking employment into account. Overall this is a hawkish move, allowing RBNZ to raise rates to control inflation without having to consider other economic aspects. This kicks off in February, although the reality is that short term policy decisions won’t be affected. NZD did try to push higher but the excitement didn’t last long and it actually trades a bit lower now. GDP numbers due out tonight are not expected to offer any great support.

Argentina has devalued its own currency over 50% to 800 to US$1.00. USDARS had previously been artificially held around 350, although I recall trading USDARS back in the early 2000’s when it was around 4.00. That’s a horrific move, eclipsing the depreciation of TRY many times over. Argentina’s new government is trying to fix their horrendous economic problem by slashing public spending. A weaker currency won’t help their battle with inflation which is currently running at around 140% but incoming President Milei says only a sharp shock would enable Argentina to recover. With US$44bn owed by Argentina to IMF, it is difficult to see a way out without some sort of debt write-down.

Oil prices have fallen to lowest levels since June, with WTI at around $68.00 and Brent around $72.50. We are close to support levels that have held several times through 2023, the same levels pretty much capped the upside in 2019. Beyond these lows we go back to December 2021 for lower levels. I’m certain we’ll see that reflected in fuel prices at the pumps!

In other news, two votes have taken place with are likely to have little lasting impact. The first is from COP28 who pledge to move away from fossil fuels for the first time, the second is the UN vote demanding an immediate ceasefire in Gaza. Both votes made with the best of intentions, both very difficult to actually follow through with. In the latter, it is clear Israel are losing support for their action against Hamas but their resolve to eliminate Hamas remains just as strong.

So, FOMC rate announcement this evening where rates are expected to remain unchanged. Powells statement will be key as the market looks for some reassurance that rates may have peaked. I’m not sure Powell will say that, in fact he may still leave the door open for rate rises just in case they are required. However the latest US inflation number will help Fed to some extent although the market still looks for more rate cuts in 2024 than Fed seem to be pricing in. The new ‘dot-plot’ will give a decent insight into current Fed thinking.

Fed are in a difficult position here. If Powell doesn’t talk of a peak in rates and rate cuts through 2024, Fed can be accused of being too far behind the curve. If Powell were to talk of rate cuts through 2024, the market will no doubt price further rate cuts over and above Powell. The market thinks the Fed and Powell will be dovish, I have a sneaky feeling Powell will be less dovish than the market is looking for.

- 10.00 EU industrial production

- 13.30 US PPI

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 21.45 NZ GDP

- 00.00 AUS consumer inflation expectations

- 00.30 AUS unemployment