Dismal PMI numbers sink sterling and the euro
The ‘Trump trade’ took a bit of a breather last week as bargain hunters emerged to shop for its victims, including Treasury bonds and selected EM currencies that had been cheapened by the post-election selloff.
Highlights:
Euro sinks as Euro Area PMIs point to contraction.
Trump cabinet pick brings uncertainty over US policy.
Autumn Budget weighs on UK business activity.
JPY rebounds as investors eye December BoJ hike.
RBA minutes strike a hawkish note.
RBNZ seen delivering at least 50bp cut this week.
Traders pair back bets for BoC jumbo rate cut.
Trump’s nomination of Scott Bessent as Treasury secretary, a known “fiscal hawk” who dislikes deficits and is on record criticising Fed policy as too lenient, brings into question exactly how inflationary will be Trump’s second term. However, the spotlight moved from the dollar to the euro, which was brought down by dismal November PMI numbers and finished the week dead last of any major world currency.
If nothing else, Bessent´s nomination brings into focus the huge uncertainty over the economic policies that will result from the Republican sweep, from tariffs to fiscal and monetary policy. This uncertainty seems to have put a temporary cap on the dollar´s scorching rally. We go now into the Thanksgiving week, with limited news out of the main economies, save for the important November flash inflation report out of the Eurozone on Friday. An upward surprise there would renew stagflation worries in the Eurozone and would be quite awkward for the ECB. Aside from that, expect more focus on Trump’s Treasury appointee views and potential for tariff or fiscal policies.
USD
The greenback rallied against most major currencies last week amid market jitters surrounding the signing of Putin’s revised nuclear doctrine and another divergence in economic news across the Atlantic, as Friday’s US PMI numbers were consistent with another strong month of growth in November. The rally in the dollar slowed down meaningfully last week, however, in spite of the temporary dip of the euro. Rates seemed to have topped out for now on news of the hawkish Trump pick for Treasury secretary and the fact that the 10-year rate has risen from 3.6% to almost 4.5% in just two months.
With the December cut now being priced in as a toss up, and the Fed terminal rate approaching 4%, we think it will be difficult for the Trump trade to make much more progress in the near term without additional news about tariff or fiscal policy, which we do not expect until well into 2025.
EUR
The dismal PMI numbers published last week renewed speculation that the ECB will respond with a jumbo 50 basis point cut at its December meeting. Such an outcome is already priced in as a 50% likelihood in interest rate markets, which actually see the equivalent of five 25 basis point cuts distributed in the next four meetings. The news brought the euro down to lows it had not seen since the run to parity in 2022, although it has since rebounded somewhat on the news of Trump’s orthodox pick for the key position of secretary of the Treasury.
This week inflation number is the only timely real data we will get for a while. Eurozone wages in the third quarter have been growing faster than anticipated, so there is room for an upward surprise in inflation, which is the last thing that the ECB needs to see amidst the economic weakness.
GBP
The business activity PMIs out of Britain last week were weaker than expected, and consistent with a near-stagnant UK economy in November. They confirmed that businesses are taking a sceptical view of the Labour budget, particularly the sharp increase in employer National Insurance contributions, which are seen leading to weaker hiring activity and higher consumer prices. It is possible that, as in Europe, Trump’s sweep in the US election had some, hopefully temporary, effect in business confidence, although the UK’s self reliance suggests that any impact was likely be minimal.
We maintain a relatively optimistic outlook on sterling, particularly relative to other European currencies. The fact that the UK actually runs a goods deficit with the US means that it should remain relatively shielded from the effect of the incoming tariffs. The recent disappointing economic news needs watching, however, and we are increasingly less optimistic about Britain’s economy post-Budget.