Subdued Start To A Bumper Week

WHERE WE STAND – As is so often the way when a bumper week of event risk lies ahead, it proved to be a quiet start to proceedings yesterday. Whether the remainder of the last ‘proper’ trading week of the year continues in the same vein remains to be seen, though I certainly wouldn’t expect it to do so.

Despite the quiet-ish conditions, participants still had plenty to digest, with yesterday being the final ‘PMI Day’ of 2024.

The surveys pointed to some modest optimism both here in the UK, and in the eurozone, where the services sector rose back above 50, into expansionary territory, while the composite output gauge rose to a 2-month high 49.5. Subsequently, money markets, per the EUR OIS curve, pared bets on a potential 50bp January ECB cut, now seeing around a 15% chance of said action, down from pricing such a move as a coin-flip on Friday.

Comments from ECB President Lagarde may have also helped with this hawkish repricing, with the ‘perma-tanned one’ noting how inflation risks within the eurozone are “two-sided”, pouring further cold water on the idea of such an aggressive move.

What was more interesting was how, despite this paring of rate cut bets, the EUR did little more than tread water on the day, seemingly immune to developments elsewhere. It would appear that, logically, most FX participants are awaiting clarity from this year’s final FOMC decision, on Wednesday, before placing any trades with high conviction.

That said, there were a couple of notable movers on the day. The JPY continued to soften, with USD/JPY trading north of the 154 figure, as participants increasingly price no change from the BoJ on Thursday, after an inordinate number of ‘sources’ stories indicated as such towards the tail end of last week. The JPY could be in for a torrid time over the next few days, with a ‘hawkish cut’ from the FOMC, and ‘status quo’ from the BoJ combining to pose stiff headwinds. In thin liquidity, a move back towards 160, and the renewed spectre of MoF intervention, can’t be ruled out in the short-term.

The CAD was also notably softer yesterday, as USD/CAD briefly printed fresh four-and-a-half year highs upon the resignation of Finance Minister Chrystia Freeland, hours before she was supposed to be delivering the fall fiscal update. I’ve little further to add here, though PM Trudeau losing two finance ministers in four years is rather careless, and I’m sure that a certain Mark Carney – of ‘unreliable boyfriend’ fame – will be eagerly waiting in the wings watching these developments pan out.

Away from the FX space, it was a day of gains on Wall Street, as the S&P rebounded well from its first losing week in four last week, while the tech sector continued to outperform, with gains led by the Nasdaq 100. I still see the path of least resistance as leading higher, though with the market trading around 30% higher YTD, and with a mere handful of trading days left to go, do question whether the conviction will be there to continue buying dips, as year-end looms. Still, seasonality is positive, and perhaps that shouldn’t be fought too hard, as the bulls try and eke out further gains into year-end.

LOOK AHEAD – A busy day lies ahead.

The latest UK labour market report kicks things off this morning, though with the ONS continuing to grapple with data collection issues and low survey response rates, the policy implications of the figures are likely to be limited. In any case, unemployment is expected to have held steady at 4.3% in the three months to October, while regular earnings growth is set to have risen by 5.0% YoY over the same period, a pace that is clearly incompatible with a sustainable return to the BoE’s 2% inflation aim.

Meanwhile, both the IFO and ZEW sentiment surveys are due from Germany this morning, with both figures set to increased pessimism in December, hardly surprising given the dire state of the nation’s manufacturing sector, and the ongoing political uncertainty ahead of elections next February.

Across the pond, the latest US retail sales report highlights proceedings, with sales set to have risen by 0.6% MoM last month, over the key Thanksgiving/Black Friday spending period. As the old adage goes, ‘never bet against the US consumer’. The latest US industrial production figures, along with a 20-year Treasury auction, and November’s Canadian CPI print, are also all on the docket this afternoon.