The Euro and the Dollar are in a powerful downward spiral on this weekend eve, following Jerome Powell’s late afternoon remarks, which are interpreted as proof that the FED has already begun to think about the timing of its monetary “pivot” (which the markets now put at mid-March or early May at the latest).
The Dollar Index fell by -0.35% to 103.15 (it had been stable on a weekly basis the previous day) and did not fall back below 103 because the Euro fell even more heavily against all currencies.
And why is the euro being dragged down in almost identical fashion (losing 0.5% against the greenback this week)?
Because since the OECD cut its growth forecasts for Europe (to 0.8% vs. 1.2% in France, and 0% in Germany, both of which are in recession), the idea is growing that the ECB might – faced with the urgent need to prevent stagflation – cut rates before the FED.
The dollar and the euro are also down, due to a fall in their yield against the yen (+0.9% against the dollar and +0.95% against the euro).
The US 10-year is down 8 basis points to 4.25% (-22 basis points over the week), and European sovereign debt is down as much as 10 basis points this Friday: the Bund is down 10% to 2.35%, or -29 basis points over the past week… which remains ‘in line’ with the fall in inflation and the forecast of a recession on the other side of the Rhine in the 2nd half of 2023 and at least during the 1st half of 2024.
Our OATs also shed -10.5Pts to 2.925% (i.e. -28Pts weekly and -64Pts since October 26, the start of the historic stock market rally) while France beats a record for debt and deficit (-177.7bn at the end of October) and could see its debt downgraded by S&P (obviously, nobody believes in this).
Italian BTPs are doing even better, with -13pts to 4.10% on December 1 and -30pts weekly, and above all -75pts since October 26, as if the ECB were going to reduce the cost of money threefold in the next 9 or 12 months.
This is in stark contrast to the UK’s Gilts, which have eased by just -3pts to 4.184%… and whose yield is still higher than that of BTPs or the Greek 10-year.
The pound took advantage of the situation to recover +0.7% against the dollar and the euro.
In the United States, Goldman Sachs estimates the probability of the Fed cutting rates as early as March 2024 at over 50%, to which Jerome Powell replied on Friday that it was “premature to talk about a rate cut (we’ll have to line up favorable figures for several months) and confirms that a rate hike remains on the table…. but he’s clearly not being believed, and his comments are pure rhetoric.
Note that Goldman Sachs sees oil moving between $80 and $100 in 2024, which means that lower energy prices will no longer be the driving force behind lower inflation next year.
In terms of figures, the contraction in US manufacturing slowed in November, according to the monthly ISM (Institute for Supply Management) survey published this Friday.
The index was perfectly unchanged last month at 46.7, the same level as in October, whereas economists were expecting it to rise to 47.8.
The new orders sub-index rose to 48.3 from 45.5 the previous month, still in the contraction zone (below the 50-point threshold), while the employment sub-index fell to 45.8 from 46.8 in October.
Earlier, the manufacturing PMI published by S&P Global came in at 49.4 for the month, in line with its flash estimate and after 50 for October.
In the same vein of precursors to industrial activity, investors this morning took note of the HCOB PMI index for manufacturing industry in the eurozone, produced by S&P Global
. This recovered from 43.1 in October to 44.2 in November, its highest level since last May, but still pointing to a sharp contraction in the sector.
The data once again highlight declines in activity, new orders, purchasing volumes and inventories, but the outlook for activity has recovered.
At the same time, purchasing prices have once again fallen sharply… which should lead to a rethink of companies’ ‘margins’ and ‘pricing power’ in 2024, after the ‘opportunistic’ price rises seen in 2021, 2022 and early 2023.
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