US dollar focus is on equities ahead of Nvidia earnings

USD: Tech/AI concerns fuelling FX direction

The US dollar has become increasingly sensitive to the intra-day moves in US equity markets underlining the increased investor concerns over tech/AI valuations and the potential for a year-end sell-off as risk is reduced. It remains another strong year for the Nasdaq Composite and is 16.2% higher on a year-to-date basis. Since the low-point following the Liberation Day tariff announcements, the Nasdaq is 47% higher. The correction lower now from the closing high is 6.4%, which is the largest correction since the Liberation Day sell-off. Nvidia will announce its Q3 earnings results later as we draw near the completion of the Q3 earnings season. Q3 results have been solid. As of last Friday, according to Factset, 92% of S&P 500 companies have reported with 82% of those reporting a positive EPS surprise and 76% a positive revenue surprise. Blended earnings growth is running at an annual 13.1%, which if maintained would mark the fourth consecutive double-digit annual earnings growth. The consensus at the end of September was growth of 7.9%. Still, valuations are elevated with the 12-month forward p/e at a lofty 22.4 which is above the 5-year average of 20.0 and the 10-year average of 18.7. The financial sector reported the largest upside surprise relative to the end-September consensus. Nine other sectors also reported better than expected earnings growth. One interesting take-away so far is that the markets are rewarding positive earnings surprises less and punishing negative earnings surprises more which could be indicative of stretched valuations and deteriorating market sentiment. Nvidia remains the beacon for the AI/Tech sector and with investor concerns more elevated over valuation, any element of disappointment this evening could spark a further correction lower. Yesterday, Nvidia closed 12.4% below the record high on 29^th October (after a 2.8% drop yesterday), again the biggest correction since the post-Liberation Day sell-off.

The focus once Nvidia’s earnings are released later will quickly shift to the delayed September non-farm payrolls data tomorrow. The ADP Weekly data revealed another drop in the 4-week average that is certainly consistent with other data indicating continued weak labour market conditions. But with two further NFP reports likely before the FOMC meeting in December the market reaction will be contained to some degree. But if equities decline further it will certainly raise the prospects of the FOMC agreeing an insurance cut in December, as suggested by Christopher Waller.

Given the current positive correlation between equities and the dollar (which reflects perhaps the renewed concerns over a tech/AI-specific correction hitting the broader US economy) a bad earnings report this evening could drive the dollar weaker. But the focus will then quickly shift back to the economy and it is the jobs market that will ultimately determine dollar direction into year-end.

US DOLLAR / US EQUITIES CORRELATION BACK IN POSITIVE TERRITORY

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Another hurdle jumped for December rate cut

The October inflation data has just been released in the UK and the data is largely in line with market consensus – that means no nasty surprises that could have raised doubts over the ability of the MPC to cut the key policy rate in December. There were five key events between the November and December MPC meetings that would be key to determine the decision in December. Two CPI and employment reports and the budget, next Wednesday. We’ve had two of the four reports with wage growth also decelerating, consistent with scope to cut in December.

The headline CPI YoY rate slowed from 3.8% to 3.6% in October, slightly higher than the 3.5% expected. The core rate was in line at 4.5% (vs 4.6% prev) while the services YoY inflation rate fell 0.2ppt to 4.5%, weaker than the 4.6% expected. The largest contribution to the slowdown in inflation in October came from housing and household services which includes utility bills for gas and electricity. The annual inflation rate for gas fell from 13.0% last month to 2.1% in today’s data, reflecting the base effect with the MoM increase in October 0.9% compared to 11.7% in October 2024. There was a similar favourable base-effect for electricity prices. Rents also continue to slow with actual rents showing a drop in the YoY rate from 4.3% to 4.1%. The rate stood at 5.8% in June.

The BoE’s measure for underlying services (excluding volatile components, rents and travel) increased slightly based on our calculations from 3.9% to 4.0%. However, given the broader data was clear in showing further disinflation, we doubt this slight tick higher would have much impact on an MPC decision to likely cut in December. The chart on UK inflation highlights the sharp drop in the 6mth annualise core rate, which tends to lead the annual core rate lower. The 6mth annualised core CPI rate fell to 2.6% in October, the weakest print since August 2021. Of course we still have another jobs report and CPI report and in that regard no strong conclusions on a definite rate cut in December can be made. Still, the OIS market implies an 80% probability of a 25bp rate cut in December which also reflects an expectation of a budget next week that contains tax hikes and measures to reduce household inflation pressures further.

The data today leaves us comfortable with our view of a December rate cut and this report provides important reassurance of the BoE projection that the inflation rate likely peaked in September at 3.8%, 0.2ppt lower than expected. Front-end yields in the UK can fall further but not be much ahead of the budget and two more key data releases in December. That will limit GBP reaction ahead of the budget next Wednesday.

UK 6MTH ANNUALISED CORE CPI FALLS SHARPLY SIGNALLING FURTHER DECLINES IN ANNUAL RATE AHEAD 

Source: Macrobond, Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com