I need a dollar, the dollar is what I need

This week, momentum behind the US equity market, which had carried it to five days of gains in a row, finally began to slow. The real momentum remained in the dollar. The U.S. Dollar Index, a measure of the dollar relative to a basket of international currencies, climbed significantly to levels last seen in October 2023. The message has been clear: markets don’t expect as many interest rate cuts in 2025 from the Federal Reserve. Why? Well, economic growth is strong – you may get bored of us saying this, but that means inflationary pressures remain in the system. Small business optimism this week proved this point, as US companies are optimistic on the outlook. The inflation readings out of the US also provided caution, as they came in at 3.3% year on year, with services and shelter boosting the monthly figure. The Republicans’ control of both chambers of congress was confirmed. Trump’s attempted hires this week have raised eyebrows – they still have to be voted in. He may be pushing the extreme candidates just to get his middle of the road choices.

If there is one thing the UK government could learn from Trump, it is his how to feed optimism into an economy. Labour’s Budget was widely considered anti-business and corporates and consumers were more cautious during the third quarter, with GDP up only 0.1%. The tone at Mansion House from the Governor of the Bank of England was along these lines, while the Chancellor made it clear her alignment with the US is crucial and that reform (19x mentioned) was her priority. While proposed pension mega funds merging defined contribution pensions and local government schemes may work to unlock investment, these will take time to implement. We admire the long-term approach, as we are always quick to criticise short-term thinking. However, if business leaders in Europe were listening they might be prone to thinking this government doesn’t know whether to stick or twist when it comes to building relationships.

In Europe, whilst sentiment remains weak, the minutes of the ECBs meeting showed a differing view. A rate cut was priced in at the last meeting – but with a positive 0.4% GDP growth, ahead of the 0.2% expected, there is caution over committing to further cuts. Clearly the committee is concerned about trade tariffs.

The snap German elections, called for February 2025, have also raised eyebrows. The rise of the far right in two states shouldn’t be underestimated. We watch this with caution.

Government bond yields have bounced around this week, and we believe they have priced in the higher for longer rhetoric over the last two months. Equity markets outside the US continue to react to what we’re calling the Tariff Effect whilst US equities rise higher. There were, however, some positives out of the UK when it came to results. Burberry announced its turnaround strategy, leading to a 19% bounce – it’s biggest one day gain in history – and United Utilities rallied on its supply chain success.

Once again, another week of political noise while earnings continue to grow in the developed world.

Looking ahead

The biggest week in last quarter’s calendar was the week that Nvidia reported, and next week won’t be any different. If it follows the trend for the Magnificent 7 we should expect positivity. Inflation readings for Japan and the UK may set the tone for yields for year-end, whilst company surveys will be watched closely for the outlooks!