Thanksgiving round up: better PMIs, Dutch elections, and higher US bond yields

This is always a week where it’s worth 1, discounting price action, since volume is low across all developed markets during Thanksgiving week, and 2, looking out for economic and political news since it’s easy to miss key stories at this time of year. Perhaps the biggest stories so far this week are political. The far right Freedom Party have won the most seats in the Dutch parliamentary elections, which could push the EU further to the right. Elsewhere, the uneasy truce between Israel and Hamas and the prisoner/ hostage swap that is set to take place on Friday, could be the first step towards finding a lasting resolution to this devastating conflict. However, Hamas’s decision to release woman and children first, will still mean that more than 200 Israeli’s are being held hostage in Gaza, which is a lower bar than a comprehensive exchange. Thus, this conflict could continue well into 2024, even if it has deescalated significantly in recent weeks.

The Dutch election result and (another) existential crisis for the EU

The Dutch election results present another existential crisis for the European Union. The far-right Freedom Party won the most votes in the Dutch parliamentary election. While they don’t have enough seats to form a government on their own, they doubled their number of seats and the Freedom Party’s leader, Geert Wilders, could become the next Dutch prime minister. He is a major threat to Brussels, not only because of his anti-immigration stance, but also because he is anti-EU and plans to hold a referendum on The Netherlands’ membership of the EU during his time in office. The euro has been fairly stable on Thursday, largely because the US is out on holiday, but also because even if Wilders’ does become Prime Minister, he will have to enter into a power sharing agreement, which could constrain his worst political excesses. Also, before Wilders’ gets too excited about Nexit and what it could mean for the future of Dutch immigration, he may want to look at the UK. Brexit has not weakened immigration to the UK, which is a good thing as we need immigrants to fill job vacancies and enrich our nation with their skills and culture. However, if anyone thinks that leaving the EU means reducing immigration, they should think again. Net immigration to the UK hit a record high of 745,000 in 2022, which was 139,000 more than estimated. The ONS said that there were some signs that net migration was starting to fall post Brexit, with 672,000 immigrants coming to the UK in the 12 months to June 2023, compared to the 745,000 in 2022 overall. But there is pressure on Rishi Sunak to take a stance, as the UK population expands at its fastest pace in 60 years. The ONS noted that more work visas were issued, particularly for the health and care sectors, where there have been massive staff shortages. Thus, this news is encouraging, as it could reduce pressure on wage growth and help to boost productivity, however, there is no denying that immigration remains a political hot potato across Europe.

The UK has had 7 years of tearing its hair out over immigration, could the Dutch be the next country to try and take a stance by leaving the EU? This existential threat may be a clear and present danger to the EU, however, don’t expect the markets to be able to price the threat of Nexit. The euro barely budged on Thursday and while European bond yields were higher, so were bond yields in the US. Right now, this political threat is not triggering financial market volatility. But if Geert Wilders does become the next Dutch PM, and if he manages to secure a referendum on EU membership, then expect financial markets to go wild. 2024 could be an interesting year for Europe.

UK election fever runs wild

On the topic of elections, the UK’s Autumn Statement may not have set financial markets alight, largely because there is not enough fiscal wiggle room to play with. However, in the 24 hours since the Chancellor’s statement, expectations are rising that the Sunak government is planning on calling a general election early next year. According to reports in the Times, Tory strategists are stepping up general election preparations, for a potential election that comes off the back of a Spring Budget. John Major pursued the same strategy in 1992, and it paid off for him. The disadvantage of calling an early election is that inflation could rear up again, and the BOE is not expected to start cutting interest rates until May at the earliest. UK asset prices are likely to ignore the election news until something concrete is on the cards.

US sees psychological scars of inflation persist

Economic data is back in focus this week. The University of Michigan US consumer sentiment survey showed that year ahead consumer inflation expectations had jumped again in November to 4.5% from 4.2% in October, which is the highest reading since April. Although inflation has eased significantly in recent months, consumers are wary that inflation may rise in the coming months and years. Rising inflation expectations is likely to keep the Federal Reserve on alert for strengthening consumer prices in the coming months. Thus, the psychological stage of the fight against inflation has begun. US 2-year Treasury yields have risen by 10 basis points this week, after the shock rise in inflation expectations. A drop in jobless claims may also add to fears that the labour market could remain strong into 2024. Financial markets are stable this week, but if we see further signs that the US economy is picking up steam then we would expect bond yields to rise, interest rate expectations to rise further, the dollar to rally and risk sentiment to take a back seat. We may need to wait until next week, once the US is back from the Thanksgiving holiday before we get market direction.

A stronger economic boost for the UK

Elsewhere, Eurozone PMIs for November came in roughly in line with expectations, while the UK’s PMI reports were stronger than expected. The UK’s global composite PMI rose back into expansionary territory at 50.1, up from 48.7 in October, with the service sector rising to 50.5 up from 49.5, there was also better news for the manufacturing sector. This is why some Bank of England officials have said that it is too early to say that the Bank has finished hiking interest rates, including the Governor Andrew Bailey. UK bond yields were higher this week after the UK Treasury made a smaller than expected reduction to its target for bond sales this year, and debt issuance will only be cut by £500mn, much lower than the £15bn reduction expected by some banks. It has also scheduled two more Gilt auctions for medium and long-dated debt before the end of the year, and a further index-linked auction for January. 10-year and 30-year UK Gilt yields were both up by 9 basis points on Thursday. Bond markets remain sensitive to government spending, and this week’s price action in the UK bond market suggests that the bond market rout may not be over.

Black and yellow gold

Elsewhere, Brent crude oil has traded lower on Thursday after Opec announced that it was delaying its meeting for this month. This is thought to be because of dissent from the UAE and some African producers around the Opec production cut. The Brent crude oil price is down $10 per barrel in the past month, and there could be further downside if Opec bows to member pressure and removes the production cut. The de-escalation of the Israel/ Hamas war is also helping to ease upward pressure on the oil price, which is good news for global inflation. Thus, it is no surprise that the price of gold has traded sideways this week.