Overview: A new record high in the S&P 500 yesterday and news that Evergrande had made an interest rate payment failed to lift most Asia Pacific bourses, though Japan and Hong Kong, among the large markets, posted modest gains. The Dow Jones Stoxx 600 is pushing higher in the European morning to put its finishing touches on its third consecutive weekly gain. US tech is trading off, and this is weighing on the NASDAQ futures while the S&P 500 is little changed. The US 10-year yield had probed 1.70% yesterday and is coming back a basis point or two lower. European benchmark yields are mostly a little higher, but soft UK data are helping the Gilts outperform. The Antipodeans are recovering from yesterday's fall and leading the major currencies higher against the dollar. Sterling is struggling. Emerging market currencies are mixed, but the JP Morgan EM FX index has stabilized after yesterday's decline. After dropping 3.25% yesterday on the back of an unexpectedly large 200 bp rate cut, the Turkish lira has extended its losses by more than 1% today (for a 3.7% loss on the week). Political and economic turmoil in Brazil led to the resignation of four members of the economic team that saw the real sell-off for the fourth consecutive session yesterday and is off 3.6% for the week coming into today. Gold is rising for the fourth consecutive session, and its 1.5% gain this week is the best in two months. Crude oil is stabilizing after yesterday's 1% decline. December WTI is still up about 1% on the week, which is the ninth consecutive weekly advance (during which time it has risen from around $61.50 to trade around $82.80 now). After plunging 3.75% yesterday, its biggest decline in four months, copper prices have risen around 1%.
Asia Pacific
Rising fresh food and energy prices helped lift Japan's September CPI. The headline rate now stands at 0.2% (up from -0.4%). It is the first reading above zero since August 2020. The core rate, which excludes fresh food, rose to 0.1% from zero. It is the highest reading since March 2020. However, when fresh food and energy are excluded, Japan disappointed, with an unchanged rate of -0.5%. On the other hand, the preliminary October PMI suggests the world's third-largest economy has turned the corner as the formal emergency is lifted. The manufacturing PMI rose to 53.0 from 51.5, and the service PMI rose to 50.7 from 47.8. These helped lift the composite to 50.7 from 47.9, the highest since April. The BOJ meets next week. No new initiatives are expected but will provide updated forecasts.
Australia's October PMI also improved, and it too looks to have turned the corner. The manufacturing PMI rose to 57.3 from 56.8, and the service reading rose to 52.0 from 45.5. As a result, the composite stands at 52.2, its highest reading since June, after September's 46.0. Separately, the central bank defended its yield curve control strategy by buying April 2024 bonds (A$1 bln) for the first time since February. The market was sufficiently impressed to knock as much as five basis points off the yield. Australia reports Q3 CPI next week, and the year-over-year rate is expected to moderate to 3.1% from 3.8%.
The dollar reached JPY114.70 on Wednesday and fell to JPY113.65 yesterday. Today it is consolidating in about a 20-pip range on either side of JPY114.00. Its four-week rally will be snapped if the dollar cannot close near or above the current session highs. The Australian and New Zealand dollars reversed lower yesterday after making new highs for the move. The pullback was seen as a buying opportunity, and both have snapped back today. The Aussie is pushing above $0.7500 in Europe (yesterday's high was ~$0.7545) and is closing in on its third weekly advance, during which time it has risen by a little more than 2.5 cents. The Kiwi is up for its second consecutive week, also gaining about 2.5 cents over the run. The PBOC set the dollar's reference rate tight against expectations (CNY6.4032 vs. CNY6.4031), which suggests it is not protesting the exchange rate developments and the yuan's appreciation. In spot trading, the greenback has spent very little time above CNY6.40 for the past three sessions. It is the fourth consecutive week that the yuan has appreciated, and this week's 0.75% gain is the largest in five months.
Europe
The preliminary PMI provided an inconsistent snapshot of European developments, but the aggregate composite was softer than expected at 54.3 (vs. 56.2 in September). The decline was the third in a row, and the composite now stands at its lowest level since April. Germany seemed more problematic than France, but it does not appear to be simply a function of the auto sector. Consider that the German manufacturing PMI was stronger than expected at 58.2. The Bloomberg survey found a median forecast of 56.6 after September's 58.4. The weakness was in German services, where the PMI fell to 52.4 from 56.2 and well below the 55.2 forecast. On the other hand, French manufacturing eased to 53.5 from 55.0, while the services PMI rose to 56.6 from 56.2. The highlight for next week includes the preliminary October CPI, the first look at Q3 GDP, and the ECB meeting.
For the UK, it was a bad news/good news day. September retail sales were poor, but the October PMI was strong. Economists had expected a recovery in UK retail sales after a 0.9% decline in August. Instead, September retail sales fell by 0.2% (and -0.6% excluding gasoline). The August series was revised to show a 0.6% decline (ex-gasoline, retail sales fall by 0.7%, not -1.2% as initially estimated). The October PMI, however, suggests the economy is emerging from a soft patch. The manufacturing PMI rose to 57.7 from 57.1, and the services PMI rose to 58.0 from 55.4. Both were above expectations. The composite rose to 56.8, its best level since July, from 54.9 in September. Lastly, we note that although the BOE's chief economist warned that a hike at next month's meeting is "finely balanced," the market continues to retreat from its aggressive stance. The implied yield of the December 2021 short-sterling futures contract has fallen 8 bp since surging on Monday.
The euro remains in the range set on Tuesday (~$1.1610-$1.1670). It is in about a quarter-cent range today above $1.1620. Maybe it is stuck between two expiring options: There is an 800 mln euro option at $1.16 and a 700 mln euro option at $1.1650. The euro settled last week slightly above $1.1600. Sterling is in a slightly wider range today, but it too remains within Tuesday's range (~$1.3725-$1.3835). It is straddling the $1.38 area in late morning activity in London. Sterling settled last week near $1.3750. Barring a sell-off, this will be the third consecutive weekly advance for sterling, its longest in five months.
America
President Biden seemed to make two announcements yesterday that could have far-reaching implications. First, he seemed to acknowledge that there were not the votes to raise the corporate tax rate. While this says something about the domestic political climate, we wonder if this is not sending a signal about the international corporate tax reform. There is a debate about whether the revenue-sharing element of the international tax reform needs Senate approval. Of course, many Republicans seem to think so. The lack of sufficient support to raise corporate taxes could imply that the international tax reform may be stymied in the US. Second, Biden seemed to lift the "strategic ambiguity" policy over Taiwan. Biden appeared to say that the US is committed to protecting Taiwan and would come to its defense if attacked. Note that the "strategic ambiguity" was not aimed so much at China, where its military must assume that the US would defend Taiwan. Rather it was meant to discourage Taipei from declaring unilateral independence. We will have to see if the administration walks back or tempers Biden's remarks.
The US reports the preliminary October PMI. Manufacturing is expected to soften a little, while the service activity is expected to firm. The composite PMI has fallen for four months through September. Next week, the US publishes its first estimate of Q3 GDP. The Atlanta Fed's GDP tracker is pessimistic. It sees the economy expanding at a 0.5% annualized rate. Market estimates have also fallen, though not as much. The Bloomberg survey now shows a median forecast of 2.5%. Finally, we note that the August 2022 Fed funds futures, which offer insight into July 2022 meeting, are consolidating at a new low (high yield) of around 30 bp. If the Fed did nothing after completing its bond purchases, fair value would be around 8 bp. If the market was 100% convinced that the Fed would hike rates shortly following the end of tapering, fair value would be about 33 bp.
Canada reports August retail sales. The Canadian economy also appears to be emerging from its soft spell. Retail sales are expected to rise 2% after slipping 0.6% in July. Excluding auto, retail sales may have risen 2.5% (median forecast in Bloomberg's survey). The Bank of Canada meets next week, and the market is pricing in a more aggressive posture than the central bank has shown. The June 2022 BA futures are unchanged since the implied yield jumped 11 bp at the start of the week. Even though the central bank estimates that the output gap will not be closed until around the middle of next year, the market is pricing in an earlier hike. The implied yield of the March 2022 BA futures also rose 11 bp this week. At 79 bp, it is about 25 bp above the implied yield of the December 2021 contract.
The US dollar is consolidating its recent losses against the Canadian dollar. Yesterday, the greenback was sold to a new low for the move (slightly below CAD1.2290) and then reversed higher. However, there has been no follow-through US dollar selling today, and a cap at CAD1.2385 was strengthened. The most likely scenario ahead of the weekend is continued consolidative trading in the greenback's trough. The US dollar rose 0.5% against the Mexican peso yesterday, its biggest gain of the week. It has come back offered today but within yesterday's range. Mexico reports its biweekly CPI figures, and some stability is expected. Nevertheless, many observers think the issue for the November 11 Banxico meeting is whether it will hike by 25 or 50 bp. Lastly, we note that the Brazilian real is being undermined by political and economic developments. The currency has fallen for the past four sessions and is off about 3.6% for the week. It will be the sixth weekly decline in the past seven. The dollar closed a little below BRL5.66 yesterday. The high for the year was set in early March near BRL5.8740.
Disclaimer
Reviewed by Marc Chandler
on
October 22, 2021
Rating:
