Market notice: Market analysis will be halted from today until Tuesday 11th April. Our offices will remain open should a trading requirement arise over this period.
With recession fears capturing the attention of global markets, the UK looked like something of an outlier in yesterday’s session. Gilts were relatively unmoved and the FTSE closed up 0.37%, despite a rally in yields and falling stock prices elsewhere. This British exceptionalism did not quite extend to the pound, however, which finished the session down around 0.3pp against the dollar having breached several key technical levels in recent days, whilst nudging up only slightly on the euro. The penultimate day before the Easter break certainly did not see much on the UK side to drive markets one way or another, with a speech by BoE member Silvana Tenreyro, the only event of any note for FX markets. Given Tenreyro’s this is her second speech in two days, her well-known dovish bias, and that her term on the MPC is almost up, markets were disinclined to pay too much heed to her warnings of policy overtightening. This theme of minimal market news looks set to continue over the course of today, with only Construction PMIs due to be released. Not normally a market moving data point, unless there is a big miss on the mild expansion that the print is expected to show, then another quiet day looks to be on the cards.
In Europe, yesterday saw little to move markets, with EURUSD falling almost half a percent on the release of US ISM numbers, but little action beyond that. What new data markets did receive, provided they were paying attention, largely confirmed what they already knew. Whilst French industrial production showed moderate growth and Spanish PMI data showed a robust expansion in activity, this was not enough however to offset the weaker than anticipated final PMI releases from France and Germany. The French PMIs in particular saw a modest downward revision in their final release, meaning that aggregate eurozone figures ultimately pointed towards a slower growth profile for the eurozone economy. The state of the domestic economic conditions was unsurprisingly touched upon by ECB Chief Economist Phillip Lane who also gave a lecture at the University of Cyprus yesterday. Whilst much focus in recent weeks has been on core inflationary pressures, Lane’s comments highlighted that food inflation also remains a concern across the bloc, and one that may be growing. With the failure so far to tame inflation with rate rises, the speech simply re-emphasised the need for further monetary tightening from the ECB. In this context, the market anticipated two further rate hikes look excessively dovish to us. Whilst US growth conditions are currently weighing on market expectations, ultimately we think more tightening than this will be needed to bring eurozone inflation under control.
Recession fears dominated yesterday’s session as the string of negative data was extended further with the release of the ISM services PMI for March. With the service sector the strong point of the US economy for over a year now, analysts were paying close attention to the reading after the manufacturing measure earlier in the week painted a bleak economic outlook. Although the composition of the report was somewhat mixed, the sharp decline in the breadth of growth in services activity from 55.1 to 51.2 caused markets to price in higher odds of a US recession. Front-end Treasury yields fell a further 6 basis points, while pricing of rate cuts in the second half of the year extended to 90bps. Both interest rate measures now trade at levels not seen without substantial fears within the banking system, underscoring just how precarious the economic outlook is right now in the US.
Unlike in previous sessions, the negative headline reading actually spurred the dollar higher yesterday with the DXY index bounding off its lows to close 0.33% higher on the day. While initially the deteriorating data weighed on Fed pricing and thus supported risk, the dial has now been tipped firmly towards a recessionary outcome, which historically has supported the greenback. Today, the economic roster is a bit quieter with just Challenger job cuts data due out at 12:30 BST and initial jobless claims data for the week through April 1st released at 13:30 BST. However, the big one for markets will be tomorrow’s Nonfarm payrolls report, especially as it is published into a market that will be subject to much lighter liquidity given many European markets and Canada are closed for Easter. While initially we had struck off Friday’s payrolls report in terms of market importance, the resurrection of recession concerns means that it will now be significant, especially as the NBER previously pointed to strength in the labour market back in early 2022 to reject calls of a recession following successive negative GDP prints. Like recent data, the payrolls report is unlikely to show any of the impact from the recent turmoil in the banking sector. While traditionally this would see markets completely discount the data, concerns that the US economy is cooling considerably into the banking stress means that traders will be keeping a close eye on any prior weakness. In a similar fashion to yesterday, signs of a softening in the US data is likely to spur the dollar higher on risk aversion. On the contrary, a twelfth successive positive surprise in the net employment increase and a renewed uptick in wage growth could see markets trim some of their USD exposure. Nonetheless, the payrolls data is likely to provide an explosive end to the week, especially as thinner liquidity conditions could prompt slippage in FX markets.
The loonie weakened against the greenback again in a risk-off trading session. The losses were small, at 0.2%, and the currency is still close to its strongest level in over a month. Two key reasons explain today’s bearish trading. For one, US data is quickly starting to sour, and recession risks have once again become topic du jour. Second, traders are starting to bet against Canadian banks, despite their strong capital ratios. One of Canada’s largest financial institutions, TD Bank, is now the most heavily shorted financial stock globally, with $3.7bn in short interest. Scotiabank, another Big Five, ranked ninth. These banks have a fair bit of exposure to the US and Canadian housing, two key reasons underpinning the short plays. Now that the pressure is heating up on domestic banks, the Bank of Canada will probably respond by dialling back some of its hawkish rhetoric, and remaining on pause at next Wednesday’s meeting. Today, we’ll be getting Canadian jobs data for March. We noted in our recent preview that this release would have less impact than usual, but more impact for the Bank of Canada than the Fed. With banking risks shifting quickly from global to local this week, jobs may be even less impactful than we previously thought. Markets can change on a dime, unfortunately.