World Markets

It’s set to be a much quieter week on the economic calendar, but there’s still plenty for markets to mull over after last week’s slew of Central Bank hikes and Friday’s unexpectedly strong U.S. nonfarm payrolls report. In fact, data in the Eurozone and the U.K. will be closely watched.

GBP: The British Pound stumbled out of the gates last week as a lack of UK economic data and a downbeat market mood left Sterling vulnerable to losses against the US Dollar and the Euro. In fact, stronger headwinds hit the Pound as the week went on. Public-sector strike action continued to intensify and company insolvencies hit their highest level since 2009. Furthermore, markets expected the Bank of England to hint at an end to its tightening cycle at its Thursday meeting, and they were proved right. The BoE hiked rates by 50-basis points but signalled it may raise rates in smaller increments, if at all, in future meetings. Looking forward, UK economic data is in short supply through much of the week. As a result, the increasingly risk-sensitive Sterling could be primarily influenced by market mood through much of this week’s trade. Domestic news could also impact GBP. More downbeat headlines about the UK economy, worries about intensifying strike action, or political scandal and instability could add to a general sense that the UK is in a challenging situation, which may make Sterling a less attractive investment.

EUR: The Euro found some support this morning as Eurozone’s largest economy recorded monthly growth in its factory orders of 3.2% in December, a rebound from the revised slump of 4.4% the previous month. However, looking at the week ahead, the Euro could face selling pressure early on. Economists expect Eurozone retail sales to have slumped in December, with a forecast decline of 2%. This could raise concerns about a potential Eurozone recession, thereby denting EUR exchange rates. Moreover, a forecasted contraction in German industrial production on Tuesday could add to EUR’s woes. Ultimately, Germany is the largest economy in Europe, and manufacturing is a key part of the country’s economy. Signs of declining activity could add to Eurozone recession fears.

USD: The dollar held firm this morning after Friday’s strong U.S. jobs report suggested the Federal Reserve could stay hawkish for longer. In fact, the U.S. Labour Department’s closely watched employment report showed that nonfarm payrolls surged by 517,000 jobs last month; economists in a Reuters poll had expected a gain of 185,000. Consequently, the Dollar Index strengthened 1.1% against a basket of currencies, touching a 4 week high of 103.22. The Fed on Wednesday raised rates by 25-basis points and said it had turned a corner in the fight against inflation, leading investors to price in a more dovish path going forward. However, the eye-popping payrolls number along with U.S. services industry rebound in January have investors questioning whether the Fed is almost done with its monetary tightening policy.

It’s set to be an action-packed week as three of the world’s largest central banks hold policy meetings. While the Federal Reserve is expected to slow the pace of interest rate hikes, the European Central Bank and the Bank of England are both expected to hike rates by 50-basis points.

GBP: The BOE, the first of the major central banks to begin hiking rates, is expected to deliver its tenth rate hike since December 2021 on Thursday. Officials are widely expected to raise rates by 50-basis points to 4%. Headline inflation moderated in December to 10.5%, but it’s still over five times the Bank’s official target and wage growth remains persistently high. Ultimately, market watchers will be looking out for indications of whether policymakers think they are near the end of their tightening cycle. Moreover, money markets are currently expecting one final 25-basis point hike in March, which would take the Bank Rate to a peak of 4.25%.

EUR: A rate hike of 50-basis points to 3% from the ECB when it meets on Thursday looks like a done deal – but what happens next remains unclear. Market watchers will be on the lookout for indications of how much further and how fast officials intend to go. ECB President Christine Lagarde will likely remain hawkish as core inflation remains stubbornly high, despite growing dissent among policymakers, with more dovish voices arguing that inflation has retreated from record highs. Policy hawks are pushing for more of the same in March, with inflation still well above the ECB’s 2% target.

USD: The dollar distanced itself from an eight-month through, ahead of a slew of central bank meetings this week, though gains were capped by dovish repricing of the U.S. Federal Reserve’s rate-hike expectations as compared to more hawkish counterparts. Market watchers are widely expecting a 25-basis point rate increase on Wednesday to a range of 4.5% to 4.75%, slowing the size of the increase for a second consecutive meeting. Furthermore, investors will be closely watching Fed Chair Jerome Powell’s post policy meeting press conference for any indications of how much higher rates will rise and when officials might consider a pause.

GBP: The British pound gained 1.11% against the US dollar last week, causing cable to close at its highest level since mid-December. This comes despite some disappointing local economic data: UK Industrial production and manufacturing production both surprised lower for the month of November. Looking forward, investors focus will shift to UK employment data on Tuesday and UK CPI data on Wednesday. Headline inflation is seen softening to 10.5% y/y in December from 10.7% prior. The core gauge is estimated at 6.2% y/y, down from 6.3% prior. Today’s focus now shifts toward the Bank of England Governor Andrew Bailey’s testimony before the UK Parliament’s Treasury Select Committee, due at 15:00 GMT. The bias here would be that upside data surprises would help the Bank of England maintain a hawkish stance relative to the Fed, thus, further supporting the British Pound.

EUR: European stock markets are expected to trade in a mixed fashion this morning, at the start of a week that includes important inflation data as well as the return of the World Economic Forum to Davos. In fact, the World Economic Forum returns to the Swiss ski resort of Davos this week, with European Central Bank President Christine Lagarde and German Chancellor Olaf Scholz among the dignitaries expected to attend the glitzy affair after a pandemic-influenced three year absence. Looking into today’s economic calendar, this morning’s data showed German wholesale prices fell 1.6% on the month in December, a welcome retreat. That said, the early focus this week is likely to be on the tomorrow’s release of Germany’s ZEW survey of economic sentiment for January. This is expected to show an improvement to -15.5 from -23.3 in December. Ultimately, both the Euro as well as European equities have benefited from this boosted sentiment.

USD: The U.S. dollar stabilized in this morning, trading just above a seven-month low on rising expectations that the Federal Reserve will slow the pace of its interest-rate hikes. In fact, the Dollar Index edged up to 101.98, just above levels not seen since early June last year, although volumes are limited with U.S. markets closed for the Martin Luther King Jr. holiday. The dollar is down well over 1% so far this year, with last week’s U.S. CPI data showing inflation fell for the first time in more than 2-1/2 years in December. This seemingly confirmed earlier impressions that inflation is on the retreat, which has led to expectations that the U.S. Federal Reserve is nearing the end of its rate-hike cycle, and that rates will not go as high as previously feared. Looking forward, the main U.S. economic release this week will be Wednesday’s U.S. retail sales. They posted their largest decline in 11 months in November and a similar drop in December would further add to expectations that the Fed will cool its aggressive rate hikes to avoid more damage to the economy.

GBP: The risk of a two-year recession in Britain, flagged last week by the Bank of England, underscores the high stakes for Prime Minister Rishi Sunak and his finance minister Jeremy Hunt as they prepare to announce major tax increases and spending cuts. The BoE said on Thursday that Britain’s economy would shrink for eight three-month quarters in a row – the longest such run in at least a century – if interest rates go up by as much as financial markets have been expecting recently. That would be a longer and shallower economic contraction than the ones that followed the COVID-19 lockdowns and the global financial crisis of 2007-09. Ultimately, the backdrop of high inflation this time is limiting the policy options available to the government. In fact, even if borrowing costs do not rise any further at all, the BoE’s forecasts still paint a grim picture of an economy contracting in five of the next six quarters under the strain of a tight cost-of-living squeeze.

EUR: The Euro fell in early European trade this morning as market participants closed their positions after the Euro marked its biggest weekly gain since late 2015 against dollar; however, risks continue to surround the common currency. In fact, despite German industrial production surprising to the upside – where industrial output in the Eurozone’s largest economy grew by 0.6% on the month in September – these increases were offset by a 0.9% month-on-month fall in output in energy-intensive branches of industry. Ultimately, supply chain bottlenecks stemming from the war in Ukraine continued to hamper the country’s wider industrial sector, particularly in processing orders where last week’s data showed a 4% slump.

USD: The dollar tumbled on Friday after the U.S. nonfarm payrolls report for October showed the world’s largest economy created more new jobs than expected, but also flashed signs of a slowdown with a higher unemployment rate and lower wage inflation. The greenback initially rose immediately after the data, but fell as market participants digested the jobs report, noting the data was not all positive and supports the view the Federal Reserve could slow the pace of future rate hikes. However, the U.S. dollar retraced some of its losses in early European trade this morning as risk sentiment was on the wane following China’s affirmation on its commitment to a zero-COVID policy. Nonetheless, gains are limited as traders cautiously await the release of key U.S. inflation data on Thursday, which could provide more clues as to the Federal Reserve’s hiking intentions in December, as well as the political ramifications from the midterm elections on Tuesday where control of Congress and President Joe Biden’s agenda for the remaining two years of his term are at stake.

The Federal Reserve and the Bank of England are all but certain to deliver jumbo 75-basis point rate hikes on Wednesday and Thursday, respectively, as the battle against sky-high inflation continues. However, with investors now on the lookout for signs that aggressive monetary tightening could start to slow, today’s Eurozone inflation report and Friday’s U.S. jobs report for October will be in the spotlight.

GBP: The Bank of England looks set to raise interest rates by 75-basis points on Thursday; its eighth consecutive rate increase as it battles inflation currently running above 10%. Expectations for a full percentage-point rate hike were trimmed back last week after new Chancellor of the Exchequer Jeremy Hunt reversed almost all of former Prime Minister Liz Truss’s planned tax cuts and shortened her energy cap program to six months from two years. However, the delay of the first budget plan of the new government until Nov. 17^th will make it harder for the BoE to spell out its economic forecasts. Furthermore, after delays caused by recent financial market turmoil, the BoE is also due to start selling bonds from its stimulus stockpile on Tuesday.

EUR: The Eurozone is set to release its flash inflation estimate for October today which is expected to come in at a record high of 10.2%. In fact, in a move to anticipate the extremely high reading, last Thursday the European Central Bank delivered its second 75-basis point rate hike in a row. Furthermore, subsequent remarks by policymakers indicated that it would continue tightening in the coming months in order to prevent inflation from becoming entrenched, despite fears over a looming recession. The euro area is also to release preliminary GDP figures for the third quarter, which are expected to show a small expansion, but most economists anticipate the bloc’s economy to enter contraction territory in the fourth quarter.

USD: The Fed is widely expected to raise interest rates by 75-basis points for a fourth straight time at the conclusion of its two-day policy meeting on Wednesday. Investors instead will be looking to Fed Chairman Jerome Powell for any hints that the future pace of hikes could slow after recent softer economic data. Financial markets are currently pricing in a smaller 50-basis point rate hike at the Fed’s December meeting and another 50-basis points over the first two meetings of next year. However, betting on a less hawkish Fed has been a risky strategy so far this year. Stocks have repeatedly rebounded from lows amid hopes for a so-called “Fed pivot”, only to be pressured lower again by persistently high inflation and aggressive monetary tightening. For now, the tone of Wednesday’s Fed press-conference and Friday’s October U.S. nonfarm payrolls report will likely be key in helping investors set expectations ahead of the central bank’s December meeting.

GBP: Last week’s reports that the British government is preparing to do a major U-turn on planned tax cuts have helped ease fears over public finances. In fact, Kwarteng was dismissed by Truss on Friday as she tried to salvage a premiership that is less than two months old by reinstating a planned increase in corporate income tax that Kwarteng had scrapped. However, the Gilt market had continued to sell off, after Truss stood by most of Kwarteng’s other measures. Nonetheless, new British finance minister Jeremy Hunt will announce tax and spending measures later today – two weeks earlier than previously scheduled – after the original economic plan put forward by Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng roiled financial markets. Additionally, British government bonds will resume trading without the support of the Bank of England’s emergency bond-buying program, which ended last Friday. That said, any stock market gains are likely to be limited as investors continue to survey the deteriorating economic outlook, as well as a continuation of tightening monetary policies around the world. Furthermore, investors will also be looking at Wednesday’s U.K. inflation data for September, which is expected to hit double digits amid a cost-of-living squeeze while retail sales figures on Friday are expected to point to a decline in consumer spending.

EUR: European stock markets are expected to open marginally higher, helped by plans from the U.K. government to shore up confidence in its fiscal policies after weeks of turmoil. Looking forward, the economic data slate is largely empty, but Italian consumer prices are expected to remain elevated in September, climbing 8.9% on the year. Many analysts expect this to add further pressure on the European Central Bank to continue hiking interest rates. Ultimately, ECB policymakers Luis de Guindos and Philip Lane are set to speak at different events later today, and their comments will be studied for clues of future moves.

USD: In the wake of last week’s hotter-than-expected U.S. inflation data, focus will turn to the housing market with reports due on building permits, housing starts and existing home sales. The economic calendar also includes reports on industrial production, manufacturing index, and initial jobless claims. Regional Fed presidents Neel Kashkari, Charles Evans and James Bullard are also due to make what will be closely watched appearances. Ultimately, Bullard said last week’s CPI figures showed that inflation had become “pernicious” and left the door open to 75-basis point rate hikes at the Fed’s upcoming meetings in November and December but added that it was too early to make that call.

As global investors have repeatedly had their hopes dashed by the Federal Reserve for a pivot away from an aggressive rate hike campaign, many market participants will be keenly awaiting the latest U.S. inflation numbers this Thursday for further guidance on upcoming rate hikes.

Wednesday’s minutes of the latest Fed meeting should offer some insights into how officials view the economy and the inflation outlook. Comments during the week by several Fed policymakers will also be closely watched. Elsewhere, big bank earnings on Friday are expected to show the impact of rising interest rates and market volatility, whereas oil prices remain in the spotlight after OPEC+ announced its largest supply cut since 2020 and in the U.K. a barrage of economic data seems set to test the recovery in sterling.

GBP: The Bank of England’s Financial Policy Committee is set to publish meeting minutes on Wednesday. The committee oversaw last month’s emergency intervention to stabilize bond markets after the government’s “mini-budget”, and the minutes may give some insight into the risks facing pension funds and the implications of sharply higher mortgage rates. The U.K. is also set to publish employment data for August on Tuesday, followed a day later by GDP figures for August along with data on industrial output and the trade balance. Weak economic data could add to pressure on the government to deliver longer-term growth plans. Ultimately, investors are betting on the BoE hiking interest rates by a full percentage point at its next meeting in November to tackle an inflation rate currently touching 10%.

EUR: ECB member and Bank of France head Francois Villeroy de Galhau announced this morning that the European Central Bank is engaged in bringing down inflation to 2% percent in “two to three years” from now. He reiterated that “close to 2%” was still the right target monetary policymakers at the ECB and elsewhere should pursue, adding that the eurozone was still far from it. In fact, Eurozone inflation accelerated to 10% last month. Ultimately, this morning’s comments sent a very strong signal to all economic players that the ECB is set to bring down inflation to the aforementioned target within the next couple of years.

USD: The dollar held its ground on Monday as investors set their sights on data later in the week that is expected to show red-hot inflation after a strong U.S. labour market reinforced bets on higher interest rates. Another elevated inflation reading on Thursday would underline the case for even more hawkishness from the Fed after last Friday’s jobs report indicated that the labour market remains robust despite the Fed’s efforts to bring down high inflation by weakening growth. While economists expect the headline rate of inflation to moderate, core inflation, which strips out food and fuel costs, is expected to accelerate in September, keeping the Fed on track for a fourth consecutive 75-basis point rate hike in November. The economic calendar also features data on consumer sentiment which should show how U.S. consumers are faring after months of tighter monetary policy, along with data on initial jobless claims and wholesale price inflation.

A tumultuous year for financial markets is entering the final stretch, with the ongoing Russian-Ukraine war, Britain battling a self-inflicted crisis and markets pouring over U.S. jobs data to determine how much of an impact Fed hike are having on the U.S. economy.

GBP: Following some of the most turbulent weeks for the UK and the British pound, newly elected Prime Minister Liz Truss was forced into a humiliating U-turn this morning, reversing plans to cut the highest rate of income tax that helped spark a rebellion in her party and turmoil in financial markets. Truss and finance minister Kwasi Kwarteng announced a new “growth plan” on Sept. 23^rd that would cut taxes and regulation, funded by vast government borrowing to snap the economy out of years of stagnant growth. But the plan triggered a crisis of investor confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to such an extent that the Bank of England had to intervene with a £65 billion ($73 billion) programme to shore up the markets. While the removal of the top rate of tax only made up around £2 billion out of a £45 billion pound tax-cutting plan, it was the most eye-catching element of an unfunded fiscal plan. The decision to reverse course is likely to put Truss and Kwarteng under huge pressure, less than four weeks after they came to power. Ultimately, from a market’s perspective, it is a good step in the right direction: although it will take time for markets to buy the message, it should ease some of the pressure off the British pound.

EUR: European stock markets are expected to open in a mixed fashion this morning as investors digest renewed regional energy concerns and political turmoil in the U.K.. The European Union energy ministers announced plans on Friday to introduce windfall profit taxes on energy firms, and EU leaders are set to meet at the end of the week to discuss how to step up support for Ukraine and their joint next steps to tame soaring energy prices. In the meantime, market participants are now expecting the European Central Bank to announce another hefty interest rate rise later this month after data on Friday showed that Eurozone inflation beat forecasts, climbing to a record high of 10% in September. Ultimately, Germany’s €200 billion plan to protect companies and households, which includes a gas price brake and a cut in sales tax for fuel, came as gas and electricity costs jumped, caused largely by a collapse in Russian gas supplies to Europe, and followed the continuously increasing inflation results.

USD: As the dollar consolidates near all-time highs, investors will be looking closely at this Friday’s U.S. jobs report to assess how much impact the Federal Reserve’s rate hikes are having on the economy. Several Fed officials are also due to speak during the week, as markets try to gauge their appetite for another 75-basis point rate hike at the bank’s November meeting. Economists are expecting the U.S. economy to have created 250,000 jobs last month, with the unemployment rate holding steady at 3.7% and wage growth staying elevated. Recent jobs data have indicated that the labour market remains robust despite a series of jumbo-sized rate hikes. In fact, another strong jobs report could underline the case for even more hawkishness from the Fed, potentially roiling markets already hard hit by worries over how high rates may have to rise as the central bank battles the worst inflation in forty years. On the other hand, indications that the labour market is slowing could add to fears that aggressive Fed tightening risks tipping the economy into a recession. In the meantime, U.S. equity markets look set to remain volatile after closing the books on their third straight quarterly decline last Friday. Attention later in the day will be on September data for the U.S. ISM manufacturing index. Nonetheless, it is unlikely to dent optimism around the US economy that has been building up further with positive economic indicators released over the last few weeks.

GBP
The Pound experienced extreme volatility on Friday after the release of Kwarteng’s ‘Mini-Budget’. The market reacted negatively to the Tax-Cuts, meant to incentivise growth in the UK. Unfortunately, the bad news doesn’t stop there, as Sterling hit an all-time low against the USD as trading began this morning dropping a total of 75 since the markets opened on Thursday. A similar trend can be seen with GBP/EUR, as the Pound continues to weaken against the Euro this morning. The reduced confidence in Sterling is backed by Kwarteng’s statement on Sunday informing the UK that he would be pursuing more Tax Cuts.

EUR
The Euro has fallen against the strength of the US Dollar Since trading began on Friday. The gain against Pound Sterling can be tied to investors pulling funds out of the UK and reinvesting them abroad. ECB President Lagarde is expected to speak for the next three days – along with other ECB members – bringing added volatility to the Euro. German retail sales are released on Friday morning, before Eurozone HICP (a measure of changes in the price of goods and services) in the afternoon, both of which could stimulate end-of-week volatility.

USD: The Dollar has seen a huge increase in strength against both GBP & EUR. As the US continues to increase Interest rates and tow the line between Recession & inflation, the dollar remains King. US Treasury Bonds have continued to soar with the prospect of additional interest rate hikes from the FED. The added confidence in the greenback has seen the Safe-haven currency climb to a new two-decade high against a basket of major currencies – and an all-time high vs GBP.

Markets started September on a strong note, with major global indices closing the first week in the green. An additional push in positive market sentiment has been the most recent development in Eastern Europe: in fact, this weekend served as a reminder of the ongoing and changing nature of the Russia-Ukraine war.

Nonetheless, whether the strong start to the month was just a market positioning adjustment or the sign of anything more sustained will be on watch this week, especially as a new set of inflation reports comes out. In fact, a bevvy of consumer price index (CPI) reports for August come out this week: Germany, Spain, and the U.S. all release on Tuesday, the U.K. releases its report on Wednesday, France releases its report on Thursday, and Italy and the Eurozone as a whole release theirs on Friday.

GBP
The Bank of England, whose meeting was due this week, postponed its interest rate decision last Friday in the wake of Queen Elizabeth II’s passing. It’s the first delay to a monetary policy meeting since the central bank became operationally independent 25 years ago. Moreover, the central bank faces a more fluctuating environment with new Prime Minister Liz Truss in charge and already having issued a major energy plan. Its effect on the market is among the things the BOE will have to weigh. Nonetheless, postponing their interest rate decision would allow policy setters to gather more economic data. In fact, having witnessed a contraction of 0.6% in economic activities during June 2022, market players will be interested in July’s monthly GDP figures to confirm the recently hawkish hopes from the Bank of England. Forecasts suggest that the UK GDP will reverse the previous drop with 0.5% MoM in July. Meanwhile, Manufacturing Production, which makes up around 80% of total industrial production, is expected to improve to 0.6% MoM in July.

EUR
European stock markets are expected to open with modest gains today, continuing the positive trend seen at the end of last week, helped by the substantial territorial gains made by Ukrainian troops over the weekend. Ukraine has retaken more than 3,000 sq. km this month, with most of this ground being taken thanks to a rapid weekend offensive that forced Russia to abandon its main logistics hub in the Kharkiv region. After months of stalemate, these swift manoeuvres will give the markets room to reconsider the range of outcomes. Prolonged attrition remains one option, but an earlier-than-expected end to the conflict has entered the equation. Ultimately, European markets closed last week with healthy gains as September started on a positive note, and this tone is expected to continue.

USD
The main point of focus this week is U.S. consumer price inflation data due on Tuesday, which is largely expected to dictate the path of the dollar in the near term. Markets are expecting inflation to retreat further from highs hit earlier this year, helped largely by easing fuel prices. Nonetheless, the reading is still expected to be well above the Federal Reserve’s annual target of 2%. Ultimately, this could give the Federal Reserve food for thought ahead of next week’s policy-setting meeting, with the U.S. central bank expected to deliver its third consecutive rate increase of 75 basis points in an attempt to curb this high inflation.

Queen Elizabeth II, the longest reigning monarch in British history who had recently celebrated her platinum Jubilee this year, marking 70 years on the throne, has peacefully died aged 96, Buckingham Palace announced on Thursday. Following her death, the Queen’s eldest son Charles, the former Prince of Wales, will become King in a formal ceremony in London and lead mourning services across the United Kingdom.

‘Her legacy will loom large in the pages of British history, and in the story of our world’ – Joe Biden