Bonds and stocks rose together globally last week on relief over the Federal Reserve’s caution about future hikes and a general sense that the fastest rate hike cycle in history is now over.
A modestly lower US payroll report on Friday added fuel to these hopes. Nearly all major global currencies rose sharply against the US dollar as investors celebrated and piled into risky assets.
Commodity exporting countries and Latin American countries in particular were among the notable winners, while traditional safe havens such as the Japanese yen and the Swiss franc lagged badly.
The main central bank meetings are over and it is clear that most of the hike cycle is now over. Attention is now shifting to how quickly and how far interest rates will be cut, although none of the central banks appear to be in a hurry to do so.
This week will be unusually light on data in the major economic areas, so currency markets will be driven mainly by the Fed’s aftershocksdeaf wish last week and the tentative evidence of a labor market slowdown in the US.
The British Pound
Although the Bank of England left interest rates unchanged last week, as widely expected, the MPC failed to… dovish confirm market expectations. The Bank of England expressed concern about high wage growth and the persistence of inflation, leading the British pound to outperform the euro amid the broad rally in European currencies.
This week the focus is on the preliminary third quarter GDP report, which will be released on Friday.
The single currency rebounded strongly last week amid the general flight from the dollar. However, the move lacked a eurozone-specific catalyst. The PMI business activity indexes remain consistent with a stagnant or even contracting economy, and the more lagging indicators such as retail sales or industrial production do not seem to disagree.
On the positive side, inflation has fallen faster than expected and the ECB has managed to stop the rate hike cycle at a relatively modest 4%. We believe there is room for the euro to appreciate in the medium term, given the currency’s cheapness and low economic growth expectations that are currently priced in.
The Federal Reserve suggested last week that the threshold for further hikes in the US is higher than markets expected and that there is a good chance this hike cycle is over. A worse-than-expected jobs report on Friday certainly helped sentiment and markets moved sharply higher.
Markets are anticipating rate cuts from April 2024, which seems somewhat aggressive to us: we would probably need to see both a much sharper slowdown in the US economy than we have seen so far, and a few downward surprises in inflation to support such a timetable to realise.