Markets Weekly podcast – 6 November 2023

Julien Lafargue (JL): Welcome to a new edition of Barclays Weekly Podcast. My name is Julien Lafargue, Chief Market Strategist at Barclays Private Bank, and I will be your host today. As usual, we will go through a recap of last week and the main events from last week, before moving on to our guest segments. 

And this week, I'm very pleased to be joined by Bhaskar Gupta, Head of Distribution for FX, here at the Private Bank, covering the UK. But first, let's look at last week, which for once was a very positive week across asset classes. Stocks were up, yields were down, so bonds were up. 

And really, we see three main reasons for these moves. One is oversold conditions going into this week. And we discussed that previously, the sentiment was pretty grim. Many investors were very worried about the outlook. 

We had seen a lot of outflows out of stocks, and stocks were actually in the US in contraction territory. The second main reason for the rebound that we saw last week was mixed macroeconomic data, and I'll cover that a bit more in a second. 

And finally, we had somewhat dovish central banks with the Fed and the BOE, which I'm sure is something that we're going to discuss with Bhaskar in a minute. But first, let's take a look at the mixed data that we received last week. 

And it started really with the eurozone inflation, which came in at 2.9%. The consensus was looking for 3.1. And that is a significant drop from the previous reading, around 4%. So, it looks like the eurozone inflation is on the right track to get back to the central banks' targets, maybe what the ECB has done so far in terms of hiking has helped. 

But it's also a reflection of an economy that is not doing very well. In fact, we also had the GDP figure alongside the inflation figure. And whether you look at it on the month-over-month or year-over-year basis, basically the block didn't grow, plus or minus 0.1%. 

So yes, inflation is coming down, but so is the growth outlook. The second main data point we got last week in the US this time was the ISM survey. We got both the manufacturing and the services survey. 

And both came lower-than-expected, again, indicating that the macroeconomic momentum in the months ahead could be slowing down. And we finished the week with the all-important US job report, which again was quite underwhelming. 

At the headline level, the US economy is said to have created 150,000 jobs last month. That's below expectation. The market was looking for 180,000. But the real issue is not so much that headline number. 

As you may know, and I think we discussed that in the past, this survey is running two parts. One is the establishment survey, where this 150k number is coming from, where basically we're asking companies, have you hired people and how many have you hired? 

And then there is the household survey, where we ask households, are you employed, do you have a job? How many jobs do you have? And on that side, it was a pretty grim number. In fact, the household survey shows that the US economy has destroyed 348,000 jobs in October. 

So, something completely different from what the 150,000-job creation that we saw in the establishment survey. And again, a sign that the US economic momentum is not on the right track. Now finally, the last data point we got came from companies. 

We are at the tail end of the Q3 earnings season. And we did get two very important reports. One came from Maersk. This is the largest ocean shipping firm. And the company actually slashed guidance quite dramatically. 

And it's relevant because Maersk is very involved, obviously, in global trade. And if a company like that warns that revenues and profit ahead will be lower than expected, it says something about the global economy. 

And, in fact, in its press release, the company mentioned that global economic growth dropped down in Q3 relative to Q2. The other bellwether that reported last week obviously is Apple. And this is relevant probably also because this is the largest stock in the world, but it has also some implication around consumption, whether it's in the US or in Asia even. 

And their numbers were pretty okay for the quarter just finished, but the guidance again disappointed somewhat. Apple is seeing revenue being flat in the December quarter versus analysts' expectation of a 5% growth. 

So again, more sign that even for the big company, things are not as good as we may have thought initially. So that leaves us central banks. And we got an update from both the Fed and the BoE. Both, as expected stayed on hold, keeping interest rates where they are. 

And of course, they had to leave the door open for potential further hikes. What's very interesting, I think when it comes to the Fed in particular, is the fact that if you look at the market's projection for where the Fed's fund rate is going to be at the end of next year, end of 2024, we are now around 4.35%. 

That on Friday alone, after this disappointing job report dropped by 20 basis point. And if you look at the last couple of weeks, that figure has dropped by an incredible 45 basis point. 

And let's keep in mind that the dot plot, the FOMC projection as to where rates should be over the medium term. Well, last time the dot plot was updated, the FOMC told us that they were seeing the Fed's fund rate at the end of 2024, around 5.1%, at least that was the median estimate. So, we're almost a full percentage point below that in terms of what the market expect now. 

So, a very, very strong repricing. Now maybe that's actually a good time to bring you in, Bhaskar, since we’re talking about central banks, rates, and expectations for rates. I think that the immediate asset class that will be impacted is FX. 

So, first welcome back to the podcast, great to have you. FX markets have been quite interesting really over the last couple of months. It was a bit quiet in the summer. So maybe we can start from the beginning, and can you tell us what's been happening recently in your space and what have you seen in terms of currency moves? 

Bhaskar Gupta (BG): Yes, sure. Thanks, Julien. And it's always a pleasure to be on this podcast. Well, after a very quiet summer indeed, as you say, we did see some good directional moves in FX markets. These were predominantly driven by a stronger dollar across the board, which was a direct result of the bond markets recalibrating to higher yields. 

This is I'm talking two months back. The entire yield curve from the two-year to 30-year maturity moved up significantly and that strengthened the dollar. As a result, sterling moved from 127 in early September to below 1.21 in October. 

And correspondingly, the euro also depreciated from 109 to below 105 in the same time period. And this is only over the last two months. So, if we go back to recent highs we saw in summer, it was around 1.31 for sterling, around 1.12 for the euro. 

So, the lows we saw in October were quite a move from the summer highs. However, now, as you said, last week, central bank meetings, they seem to have changed things a bit. And the momentum seems to have reversed. 

As you mentioned, it started with the Fed Reserve on Wednesday, and the Bank went in on Thursday, wherein both of them kept rates unchanged. And while keeping rates steady, the Fed kind of hinted that they might be near the end of their hiking cycle. 

That helped to drive the risk on sentiment. So that, plus a soft unemployed US employment number on Friday, led to a sharp sell-off in the dollar resource sterling appreciate back to 123.5 and 124 this morning, and the euro back above 107. 

JL: Yeah, so staying on the central banks, obviously, they are a key driver of FX moves. So, we discussed a bit before how market expectations have evolved in recent days and weeks. What are your own expectations when it comes to central banks? 

I guess we can say that we are at the inflection point and now the next 12 months are going to look very different from the last 12 months. 

BG: Yes indeed, very rightly said, you know, it does feel like we are moving into a new regime. Well, the central banks so far have managed to raise rates sharply and bring inflation lower without really breaking the economy. 

And while they were perpetually playing catch up with inflation for the whole of last year, they seem to be more in control now as the inflation numbers are easing off globally. Though mind you, you know, the inflation is easing off not only because of the interest rate hikes from the central banks but also because of the base effect. 

So, meaning that we are now comparing prices against the already high prices from a year ago. So, the percentage increases slightly smaller. It's a smaller number. As regards, you know, key takeaways from both the Fed and the Bank of England meetings last week, the only message that stands out is higher-for-longer. 

While the FOMC committee offered substantial near-term relief to risk assets as the Fed declared an intention to bide its time before deciding whether to tighten policy further. They also said they are quote unquote, not even thinking about any rate cuts. 

And in a similar vein, the Bank of England governor said that policy would need to be restrictive for an extended period of time. So, higher-for-longer stands out. While the higher rates are here to stay, the threat of further higher rates is now diminished. 

And we could indeed be at a macro inflection point here with a significant probability, I would say, of the dollar giving up some more of its recent gains. 

JL: It's been an interesting press conference from the Fed, and I think they had no choice but to say that they would keep rates higher-for-longer, and we saw that, to some degree. As soon as they are telling us that they might be done with interest rate hikes, you can see the financial condition easing, you can see yields coming down, and they want to avoid that. 

In fact, they are pleased that financial conditions have tightened and that the market has done some of the jobs for them. Immediately as they sound a bit dovish, it looks like the market is undoing some of the work that it's done. 

Maybe a question for you in terms of what you think on your side that could change this higher-for-longer narrative, and then do you see maybe any risk that investors should be aware of? 

BG: Yes, I mean, well, the central banks have reached, if I may use the term, in a way, they are in a cruising altitude. This pause from both the central banks last week and even the ECB from the week before allows them more time to assess the incoming data in the face of the recent sharp increase in long-term yields, which they view as having tightened financial conditions significantly, as you mentioned. 

And through their statements, the central banks have retained their upside optionality as well to conduct further tightening if there was more evidence of a persistent inflationary pressure. So, this high rate regime does look like it's here to stay for some time. 

And if you look at what's being priced in by the rates market, then they aren't pricing in any rate cuts for the next eight months, at least until the middle of summer next year. As long as the economic data is coming in fine, I don't think any central bank will even be contemplating a rate cut. 

They might want to do it only if they need to stimulate a slowing economy, and we are rather far from that discussion right now. As to some of the other risks, obviously, concerns about growth, inflation, geopolitics, they do persist. 

But we also need to keep a sharp eye on how these higher rates are going to translate into the economy. For example, how do they impact corporate borrowings? How do they impact mortgages, which were so cheap for the last 15 years? 

And how much of a detrimental impact they will have on financial conditions overall? So, as regards impact on FX, while the relative rate appeal of one currency against other is limited, the overall risk sentiment should drive the US dollar for now. 

JL: Alright, so let's bring it back to investment and views on specific currencies, if we may. So, how do you think investors in the context that we just described, how do you think investors should be positioned, any particular opportunity you see at the moment? 

BG: We are sure there are quite a few things investors can look at. We are indeed at a very interesting juncture at this point of time. So, the high interest rates coupled with a good volatility in FX, it does make dual currency investments a very compelling proposition, if I may say. 

We have seen investors take good advantage of them, you know, one-month deposits, two-month deposits are being a good yield. Secondly, with the rates in major currencies being so high, euro, sterling, US dollars, 5.5%, 5%, the carry trade is making a comeback now. 

With the Swiss franc and Japanese yen still holding rates at lower levels, investors are using them for cheap funding. So, sterling Swiss, dollar Swiss are the pairs of choice as the Swiss franc comes across as a more stable currency than the yen. 

But of course, investors do need to be aware of the risks involved before engaging in them. And lastly, while the recent central bank meetings have stirred up some volatility in the markets and the slight change in this stance, any dollar rallies can be sold into more as a tactical play for an eventually weaker dollar going forward. 

JL: Well, you know, for once, if I may say, there's a lot to think about and consider in FX. And it looks like we may be facing some, at least from an asset class perspective, attractive moves. And as you said, of course, you know, every single investor should check whether a specific trade is suitable. 

But thanks a lot, Bhaskar. That was great. We are actually going to publish our own private bank Outlook for 2024, a week from today, on the 13th of November. So, keep your eyes on that. And I'm sure we're going to have you back to discuss in that context, the FX news going into next year at some point in the coming weeks. 

So, thanks again very much. Now, to conclude and what to look for in the week ahead. Our earnings are nearly over and the macro calendar for once is relatively quiet this week. So maybe a bit of a respite, but it also means that market may be struggling for direction. 

In terms of what to look for, we're going to have the RBA rate decision and some data around Chinese import and exports for October that will come out Tuesday morning UK time. Then further in the week, we're going to get the ECB inflation survey that's on Wednesday. 

Some more Chinese data on Thursday with the CPI and PPI data for October. I'm going to finish the week on Friday with the UK GDP for September, as well as the Michigan Confidence Survey for this time, the months of November. 

So, still a few things for us to look for. But the main, main catalyst is likely to be the CPI report out of the US coming next week, I think on the 14th. We will be back, of course, next week to discuss all that and discuss the Outlook that we will have released in more detail. 

So, please stay tuned for that. And in the meantime, as always, we wish you all the very best in the trading week ahead.