UK gilts and sterling catch the eye today. Yields in the country tank between 9.8 (30-y) and 13.3 bps (2-y). Sterling dropped with EUR/GBP, after testing the 0.86 yesterday, now moving past that level more convincingly (0.8612). Reason for the move s this morning’s batch of October eco data. Whether it was industrial production, construction manufacturing, a services activity gauge or a monthly GDP estimator; they all surprised to the downside. It only adds fuel to speculation that not only the Fed and ECB are close to a turning point, but the Bank of England as well. Bets for a first full rate cut in recent weeks moved from August to June. Yesterday chances were 50-50 of one happening in May already and today that balance tilted to 80-20. The sharp British moves come with some knock-on effects on core markets. US and German yields drop, with moves extending as American investors join the market. Current declines for the former range between 3.4-5.7 bps and -2.7-4.3 bps for the latter. The US dollar swapped earlier tentative strengthening for weakening, with EUR/USD surpassing 1.08 in the run-up to the Fed. DXY eases to 103.74 while USD/JPY hits 145.1.• As tonight’s Fed meeting comes closer, we end this report with a preview. The Fed is almost certain to keep the policy rate unchanged at 5.25%-5.50%. The final rate hike flagged by the Fed’s Summary of Economic Projections (SEP) back in September served its purpose as a signal the central bank remained open to tighten further if needed and become redundant in the meantime. The key question for today is how much easing the December SEP puts forward for 2024. We assume that sticking to 50 bps conveys a neutral message to markets. That’s equal the amount of the September SEP but with the sidenote that the cutting cycle would start off from a lower terminal rate. This compares to money market pricing of >100bps of cuts by end next year. Rate projections further out are also worth taking a look at with the lifting of the neutral rate (current median at 2.5%) only requiring three more governors to adjust their view upwards. It would be an important signal of the higher for longer era – something which markets currently (gladly) dismiss. Turning to the press conference. Just as the summer-through-October (real) yield rally called off the need for the final rate hike, the recent opposite move brings about a premature easing of financial conditions. Stressing the economic resilience today instead of the inflation cooldown would be a shift in tactics compared to November and could be a sign of unease among Powell and his colleagues. Doing so may create a bottom for US yields. Drawing conclusion from the Fed for EUR/USD is tricky since tomorrow’s ECB meeting is equally important for its short term fate.
News & Views
At the COP 28 meeting in Dubai, the representatives of the participating countries agreed on a text that includes to start a transition in energy consumption away from fossil fuels. It is the first time that this approach was retained in the final text. The text urges countries to quickly concert energy systems from fossil fuels in a ‘just and orderly and equitable manner’ to reach net zero by 2050. A big group of countries wanted a stronger language. However, this phrasing met strong opposition from Saudi-Arabia and other oil producing countries. Saudi Arabia still maintains the view that the focus should be on reducing of emissions regardless of the source. The text also includes an agreement to triple production capacity of renewable power and double the rate of efficacity gains. Aside from moving away from fossil fuels, the text also supports speeding up efforts to capture and storage carbon. The views on this topic remain divided as several participants see this as justification to further explore and use carbon fuels.
In its Winter economic forecast, the KOF Swiss economic institute sees economic growth in Switzerland (ex major sporting events) in 2023 at 1.2%. In the period until 2025 KOF expects that economic activity in the country will mainly be supported by domestic activity as it expects foreign trade to be curbed by a weak global economy. It expects GDP to increase by 1.3% in 2024 (was 1.5% previously) and the rising trend is seen continuing in 2025 (1.8%). KOF downwardly revised its inflation forecasts for the country to 1.7% next year (from 2.2%) and 1.0%. In 2025 (from 1.5% in the autumn forecast). KOF expects the Swiss National Bank to lower its key interest rate at the beginning of 2025. The Swiss franc recently held within reach of the strongest levels this year against the euro, currently changing hands at EUR/CHF 0.9455 (YTD strongest at 0.9403 earlier this month).