Sentiment Steady as Powell Takes Centre Stage

Risk sentiment stable after Trump’s speech; Sterling gains despite jobs disappointment; RBNZ surprise, leaving rates unchanged; Powell in focus today

Previous Day's Market Highlights

All eyes were on the Economic Club of New York yesterday, for a highly anticipated address from President Trump. 

After a long, rambling love letter to his own administration - including boasts about economic performance and the stock markets, and yet another attack on the Fed - President Trump eventually moved onto the subject we'd been waiting for; trade.

The Donald stated that a deal with China could happen 'soon', but that any deal would only be acceptable if it is a good deal for the United States and for US workers. These comments are, however, nothing new, with the Trump Administration having been touting the prospects of a Sino-US agreement for some time now. Also old news was Trump's threat to "substantially raise tariffs" if no deal is agreed. Of more importance at present is the rollback of existing tariffs to clear a path to a deal, rather than threats of fresh tariffs. Trump briefly touched on US trade with other areas, stating, in a typically hawkish manner, that Europe has set up 'terrible' trade barriers, while 'strong, substantial' negotiations are ongoing with Japan. 

On the whole, however, the speech gave investors little in the way of fresh information, hence a relatively muted market reaction. The dollar did, however, grind steadily higher throughout the day, settling with a gain of around 0.15% against a basket of peers, just shy of a 3-week high. Risk appetite was also little changed by Trump's remarks, resulting in both antipodeans, as well as the safe-havens of the Japanese yen and Swiss franc, treading water.

Turning to the UK, investors' health check on the economy continued with the release of September's labour market data - which painted a mixed picture. Unemployment unexpectedly fell to 3.8%, despite the economy shedding 58,000 jobs in the 3 months to September. Wages, however, were softer than expected, with gauges including and excluding bonuses increasing at just 3.6% YoY, signifying that the labour market, while tight, is not becoming any tighter. The downside surprises to earnings and employment do signify that the labour market may be beginning to turn, a fact which may result in an increasingly dovish Bank of England in the coming months, especially with a further deterioration in wages likely if uncertainties persist.

The pound, however, was largely unfazed by the jobs data, instead focusing on the latest election polling. Data from YouGov showed the Conservatives 14 points ahead of Labour, with the poll conducted to remove the Brexit Party where they will not be standing candidates. The polling gave markets further confidence that a Tory majority would be achieved, though all opinion polling should be read with caution. Sterling ended the day 0.2% higher against both the dollar and euro, briefly printing a 6-month high against the latter.

Speaking of the common currency, the euro struggled to gain ground on Tuesday, dipping 0.2%, despite a couple of better than expected sentiment surveys from the well-respected ZEW institute. Data showed the eurozone sentiment index at -1, still in pessimistic territory, but perhaps offering a glimmer of hope for the economic outlook with businesses seeing signs of the international environment improving.

Overnight, the RBNZ surprised markets by keeping interest rates on hold at 1%, despite a rate cut having been around 76% priced in before the meeting. Policymakers voted unanimously for the surprise hold, stating that policy is already 'very stimulating' at present; while maintaining an easing bias, pledging to add stimulus 'if needed'. In reaction to the decision, the Kiwi dollar marched higher, currently standing up more than 1%, on track for its biggest daily gain against the greenback in over a year (hopefully I haven't jinxed it!).

Away from FX, trade jitters did little to depress equity markets. In Europe, the pan-continental Stoxx 600 gained 0.5% on hopes that the US may delay a decision on EU auto tariffs. In the US, the benchmark S&P 500 added 0.1%, grinding out a fresh record close. Finally, oil prices were pressured by ongoing trade and demand concerns, with both Brent and WTI crude settling around 0.2% lower. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1675 1.1684 1.1525 1.36%
GBP/USD 1.2855 1.3012 1.2761 1.93%
EUR/USD 1.1015 1.1179 1.1002 1.58%
GBP/AUD 1.8775 1.9094 1.8546 2.87%
GBP/NZD 2.0080 2.0559 2.0003 2.70%
GBP/CAD 1.7030 1.7095 1.6724 2.17%

Today's Market Highlights

After Trump's turn in the spotlight yesterday, the second most powerful man in the US comes to the fore today. Fed Chair Powell is due on Capitol Hill this afternoon, testifying before the Joint Economic Committee of Congress. Powell's remarks will likely be in a similar vein to comments made at the October FOMC meeting, namely that the US economy continues to perform well, and that the Fed are firmly on hold, barring a 'material reassessment' of the economic outlook. Powell is also likely to repeat that economic activity is rising at a 'moderate rate', while further emphasising the independence of the Fed despite repeated attacks from the President. As such, barring any surprises, the speech may turn out to be a bit of a non-event for markets, with any chances of policy easing this year having been priced out after the October FOMC. Furthermore, it is highly improbable that Powell will strike a significantly more hawkish, or more dovish, message than he did a fortnight ago, with the economic situation having changed little since then.

Turning to today's releases, October's inflation data is due from both the UK and US. From the UK, CPI is expected to remain benign, slowing to 1.6% YoY last month, which would represent the slowest pace of price increases in almost 3 years; further raising the prospects of the BoE leaning increasingly towards the dovish end of the spectrum, thus pressuring the pound. Of course, election developments will also remain in focus, particularly if any further party alliances are formed before Thursday's deadline for submitting candidates.

Across the pond October's CPI is expected to remain unchanged from September. Headline inflation is set to increase at 1.7% YoY, with core inflation set to remain at 2.4% YoY - the fastest pace in over a year. Barring any surprises, the inflation prints give the Fed little cause for concern, and are unlikely to alter the narrative of policy being on hold for the foreseeable future.

Overnight, a couple of tier 1 releases are due. From Japan, the first estimate of third quarter GDP is set to show the slowest pace of economic expansion in a year, with growth expected at 0.2% QoQ. The release won't, however, incorporate the impact of the recent sales tax hike, which, when last increased, tipped Japan into a brief recession. Meanwhile, from Australia, October's labour market data is set to show the economy adding around 15,000 jobs, and unemployment increasing to 5.3%.

Finally, today sees a few central bank speakers, other than Powell. Of particular interest will be RBNZ Governor Orr's Parliamentary testimony this evening, which may provide further clarity on the recent policy decision. Also in focus will be remarks from non-voting FOMC members Barkin and Kashkari, along with RBA Assistant Governor Bullock.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP CPI (YoY - Oct) 1.6% 1.7%
9.30am GBP Core CPI (YoY - Oct) 1.7% 1.7%
10.00am EUR Industrial Production (MoM - Sep) -0.3% -0.4%
13.30pm USD CPI (YoY - Oct) 1.7% 1.7%
13.30pm USD Core CPI (YoY - Oct) 2.4% 2.4%
16.00pm USD Fed Chair Powell Testimony
23.50pm JPY GDP (QoQ - Q3 1st Est.) 0.2% 0.3%
00.30pm (Thurs) AUD Unemployment Rate (Oct) 5.3% 5.2%
00.30pm (Thurs) AUD Employment Change (Oct) 15k 14.7k