December 2, 2022

“The dollar has been on the back foot across the board after US core-PCE inflation edged lower to 5% in October and ISM manufacturing PMI dropped to 49 in November from 50.2 in October, below the forecast of 49.8. Markets are now anticipating the Fed to raise interest rates at a slower rate, with the peak now estimated to be below 5% in 2023. Later today, the US labour marker report for November is due.”

Sam Cornford, Partner – Head of Trading

Main Headlines

President Biden and President Emmanuel Macron of France affirmed their support for Ukraine ahead of a cold winter that will test the alliance. President Biden said yesterday that he would talk to President Vladimir Putin, but only in consultation with NATO allies and only if the Russian leader indicated he was “looking for a way to end the war.” Mr. Biden’s public expression of conditioned willingness to reach out to Mr. Putin gratified French officials and provided unexpected support for President Emmanuel Macron’s outreach. Mr. Biden noted that Mr. Putin had shown no interest yet in ending his invasion, but said that if that changed, “I’ll be happy to sit down with Putin to see what he has in mind.”

Britain’s opposition Labour Party retained a parliamentary seat in the northwest of England today, comfortably winning the vote in the first electoral test for Rishi Sunak as prime minister. Labour candidate Samantha Dixon won the City of Chester constituency, securing 61% of the vote, compared to 22% for the candidate from Sunak’s Conservatives. Labour’s outright majority rose to 10,974 from 6,194. The scale of the defeat offers the first electoral judgment on the Conservatives after a chaotic few months where Boris Johnson and Liz Truss were both ousted as prime minister, the latter after markets were spooked by her fiscal plans.

GBP

Sterling is well bid against most major currencies overnight. The pound has climbed to its highest level against the US dollar since early August driven by investors betting on slower interest rate rises across the pond. Sterling’s upward move comes after its biggest monthly gain against the greenback in November since July 2020, up around five per cent, building on October’s 2.7 per cent fuelled by Rishi Sunak wiping away the legacy of Liz Truss’s disastrous premiership. Sterling has defied analysts’ bets on it sliding below parity with the dollar. Those predictions were made in the immediate aftermath of Truss and Kwasi Kwarteng’s mini budget which rocked financial markets by launching £45bn of unfunded tax cuts amid soaring inflation.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. European Union countries are nearing a deal to cap the maritime trade of Russian crude oil at $60 per barrel, building upon an initiative by the Group of Seven (G7) to further weaken the Kremlin’s ability to wage war on Ukraine. Ambassadors have spent several days engaged in an intense debate over how high or how low the price cap should be, trying to strike a balancing act between the need to impair Russian revenues and avoid any abrupt disruption in global markets.

USD

The dollar is weaker than most major currencies in the early morning trade. US consumer spending increased solidly in October, while inflation moderated, giving the economy a powerful boost at the start of the fourth quarter as it faces rising headwinds from the Federal Reserve’s aggressive monetary policy tightening. The labour market, the economy’s other pillar of support, continues to show resilience. The number of Americans filing new claims for unemployment benefits declined last week, almost unwinding the prior week’s jump, which had lifted claims to a three-month high, other data showed yesterday. The outlook was, however, darkened by news that manufacturing activity contracted in November for the first time in 2.5 years, with factories reporting weakening demand.

Markets

European shares looked set to notch their seventh straight week of gains, despite a dip this morning ahead of US jobs data, amid easing worries about global monetary policy tightening. The pan-European STOXX 600 index fell 0.3% after two days of strong gains. Energy and financial stocks were among the biggest drags on the broader index, pulling it further away from the June highs hit yesterday. US stocks lagged yesterday ahead of monthly employment data as traders failed to continue momentum from a rally fuelled by Fed Chair Jerome Powell’s indication of a slowdown in rate increases. The S&P 500 (^GSPC) slipped 0.1%, while the Dow Jones Industrial Average shed 200 points, or 0.6%. The technology-heavy Nasdaq Composite was an outlier, closing up 0.1%.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Germany Oct. Exports
8:45 a.m.: France Oct. Industrial Production
9:00 a.m.: Spain Nov. Unemployment
9:00 a.m.: Czech 3Q GDP
10:00 a.m.: Norway Nov. Unemployment
11:00 a.m.: Euro-area Oct. PPI
12:00 p.m.: Portugal Oct. Industrial Production
12:00 p.m.: UK to sell bonds
1:00 p.m.: ECB’s Guindos speaks
2:30 p.m.: ECB’s Nagel speaks
2:30 p.m.: US Nov. Nonfarm Payrolls
Hungarian and Slovenian Premiers meet

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