Dismal PMI numbers sink sterling and the euro

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26 November 2024

scris de
Roman Ziruk

Senior Market Analyst

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.

T
rump’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.

Figure 1: G10 FX Performance Tracker [vs. USD] (1 week)

Source: LSEG Datastream Date: 25/11/2024

 

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 below the 1.04 level. 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.

Figure 2: Euro Area PMIs (2021 – 2024)

Source: LSEG Datastream Date: 25/11/2024

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 skeptical 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.

Figure 3: UK PMIs (2021 – 2024)

Source: LSEG Datastream Date: 25/11/2024

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.

 

RON

Sunday brought by far the biggest political surprise in the modern history of Romania – as many call it. Calin Georgescu, an independent candidate, secured over 22% of the votes, nearly 4 times more than indicated by the surveys. The results have been widely commented on by the world’s largest media outlets, with plenty of coverage concerning his anti-NATO and pro-Russian sentiments. In the past, he has repeatedly suggested that the country could benefit from the ‘Russian wisdom’, criticised Romania’s support towards Ukraine and praised controversial historical figures, such as Ion Antonescu, a WWII dictator, which has been met with criticism in the Union of Romanians (AUR) – a right-wing, nationalist party – where he served as an honorary president.

His manifesto is largely oriented around mercantilism and increased agricultural production, with the lion’s share of his popularity stemming from social media platforms, particularly TikTok, where he amassed millions of followers.

It is still uncertain who he will face in the second round, as the difference between Elena-Valerica Lasconi and Ion-Marcel Ciolacu – the current incumbent Prime Minister – is around 2,000 votes at the time of writing. This is a key issue, as it seems that Georgescu’s good result is largely based on his anti-establishment sentiments rather than the acceptance of his foreign policy views.

There are less than two very hectic weeks until the second round, which will take place on the 8th December.

 

PLN

The zloty seems to be quite resilient, but the environment has shifted towards more challenging conditions for the Polish currency. Domestic news has also been rather negative, raising the prospect of significant monetary policy easing in 2025. Last week saw disappointments in tier-2 data (consumer confidence and construction output), although this week started off much better with strong growth in industrial production.

Figure 4: Poland Real Industrial Production & Construction Output (2021 – 2024)

Source: Bloomberg 25/11/2024

Ahead of us is still the all-important retail sales reading and preliminary inflation print for November. We expect it to show a decline, and news of further freezing of energy prices for households for 9 months in 2025 indicates that in the medium term, the inflation profile should be flatter. It would be interesting to see how the NBP reacts to that, as this will be one of the most important aspects of communications after next week’s meeting.

 

HUF

Unsurprisingly, the MNB kept its base rate unchanged at 6.5% last week. The hawkish communications which accompanied the decision did not give forint much support, as the currency ended the week at the bare bottom of the CEE dashboard, due to poor risk sentiment. ‘Disciplined, restrictive and patient’ is how Governor Virag described the bank’s current approach. Crucially, ‘(…) the base rate could remain at the current level for an extended period of time’, and a cut was not even put under discussion last Monday.

Figure 5: MNB Reference Rate (2021 – 2024)

Source: Bloomberg 25/11/2024

Such hawkish communications may seem rather puzzling in the face of recent declines in inflation, but the bank is concerned about the external environment and overall risk aversion that have heavily weighted on forint. Internal pro-inflationary factors also remain abundant, particularly the wage growth, which, as last week proved, continued to decline but remains in double digits. With no tier-1 readings out in the coming days, we expect external factors to remain key for the currency.

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