Big Week of Data for the BoE

CURRENCY FUTURES

US DOLLAR: The USD index slipped to 99.52 after the Senate passed an initial stage of a deal to end the government shutdown.  The agreement provides funding for the Departments of Agriculture, Veterans Affairs, and Congress, along with funding for other agencies through January 30. However, it does not include a key demand from Democrats to extend enhanced Affordable Care Act tax credits. The dollar has fallen for three straight sessions, with recent pressure coming from a sharp drop in consumer sentiment, with the University of Michigan’s consumer sentiment index falling to its lowest level in nearly three and a half years. Survey respondents pointed to the shutdown, inflation, and declining personal finances as reasons for the souring mood. Fed Funds futures are currently pricing a 64.6% chance of a December rate cut from the Fed.

EURO: The euro was little changed against the dollar, with the spot price last at $1.1570 as markets await developments regarding the US shutdown and policy signals from the Fed and European Central Bank. The ECB is enjoying a period of low unemployment and inflation, making it unlikely that it will move interest rates anytime soon, leaving it exposed to policy signals out of the Fed. On the data front, Germany’s ZEW economic sentiment indicator for November will be released on Tuesday, followed by final CPI figures for Germany and Italian industrial production for September on Wednesday. Then on Friday, the second estimate of eurozone GDP for Q3, flash estimate employment data, and final October CPI figures for France and Spain.

BRITISH POUND: The pound moved higher to start the week, with spot prices up 0.17% to $1.3180 as markets await a host of economic data that will be critical for the Bank of England in determining monetary policy direction. The BoE held rates steady last week in a tight 5-4 vote, while comments from Governor Andrew Bailey signaled that December’s policy decision will be dependent upon upcoming inflation and employment data. Bailey said that if inflation continues to edge lower, the bank should be able to gradually cut rates further. Jobs data on Tuesday and third-quarter GDP figures on Thursday should give markets reasonable clues to determine the BoE’s policy direction. If Tuesday’s jobs data show easing wage pressures while unemployment ticks up, prospects of a rate cut in December could mount.

JAPANESE YEN: The yen fell as hopes that the US government shutdown will end weighed on the safe-haven currency despite the Bank of Japan’s meeting summary showing a growing chance for a near-term rate hike. Eight of the thirteen opinions on monetary policy called for the need to raise interest rates soon or laid out specific conditions to raise interest rates in the near term per the bank’s October meeting summary released Sunday evening. The central bank is likely to raise rates if there is “no negative news” regarding the global economy or markets, as well as if wages keep growing despite pressure from higher US tariffs. The summary showed several opinions pointing to the fallout from higher tariffs and Japanese companies’ wage momentum as key factors in deciding the timing of the next rate hike. Elsewhere, the yen felt pressure from Prime Minister Sanae Takaichi’s announcement that she would work to allow more flexible spending from the government, pushing for more fiscal stimulus. A fiscal stimulus package is expected to be finalized on November 21, which would include tax cuts and investment incentives.

AUSTRALIAN DOLLAR: The Australian dollar was higher as a risk-on mood lifted markets and the currency following the passing of a procedural vote in the US Senate to end the government shutdown. Additionally, there were hawkish comments from Reserve Bank of Australia Deputy Governor Andrew Hauser. Hauser said financial conditions are closer to neutral and that policy conditions during last year’s economic recovery were the tightest in over 40 years, which markets took as a signal that the bank has little urgency to move on interest rates. Third-quarter inflation data surprised to the upside, which reshaped market opinions over the RBA’s outlook on interest rates, with many speculating that the RBA’s easing cycle could be over. The central bank noted that inflation is likely to continue to move upwards well into next year.

STOCK INDEX FUTURES

The indexes are higher as optimism that the US government shutdown could end following the passing of a procedural vote lifted risk sentiment and led to a rise in global equities. In a procedural vote, senators advanced a House-passed bill that will be amended to fund the government until January 30. If the Senate passes the measure, it will still need to be approved by the House of Representatives and sent to President Trump, a process that could take several days. US markets logged their worst week since April last week, as worries of a growing AI bubble and high valuations triggered a selloff in tech that dragged on other sectors. Corporate earnings have been solid, although many investors viewed results as sub-par in relation to record-high valuations. Among major names in earnings this week, releases from CoreWeave, Oklo, and Rocket Lab will drive the tech space, while the entertainment sector will get results from Disney and Paramount.

INTEREST RATE MARKET FUTURES

Yields are higher across the curve as hopes that the US government shutdown could end fueled a risk-on rally, leading demand away from Treasurys. More importantly, the ending of a shutdown will allow for the release of US government data, including September’s nonfarm payroll report, which could shape expectations of how the Fed will move in December. Recent private data has been mixed; ISM Services PMI survey and ADP private payrolls figures for October were better than expected, while the PMI data continued to show persistent inflationary pressures. Data from Challenger, Gray, and Christmas, however, showed companies cut more than 150,000 jobs in October, the most for the month since 2003.

On the supply front, the Treasury will auction $58 billion in three-year notes on Monday, $42 billion in 10-year notes on Wednesday, and $25 billion in 30-year bonds on Thursday, marking a test of demand for long-dated bonds. It should also be noted that Treasury markets will be closed on Tuesday for Veterans Day.

The spread between the two- and 10-year yields is 52.90 bps, while the 2-year yield, which reflects interest rate expectations, rose to 3.589%.

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