BOJ and China PMI Disappoint, While EMU Q2 Growth and October Inflation were Softer than Expected

Overview: The Bank of Japan softened its 1.0% cap on the 10-year, while lifting its core CPI forecast this fiscal year and next. This disappointed many who anticipated a bolder move to exit the extraordinary monetary policy. The yen was sold in disappointment and the dollar has returned to the JPY150.75 area. The eurozone contracted by 0.1% in Q3, while October CPI came in below expectations at 2.9%. The greenback is softer against most of the other G10 currencies. The Chinese yuan is softer but in an exceptionally narrow range following the softer than expected PMI. Most other emerging market currencies are firmer.

Japanese equities rose, but most of the large bourses in the region traded heavier. European stocks are extending yesterday's gains. The Stoxx 600 has practically recouped last week's 0.95% decline. US index futures are narrowly mixed. European and US bonds are rallying. Ten-year yields are mostly off 4-5 bp in Europe, though 10-year Gilts yields are down seven basis points. So is the 10-year US Treasury yield, putting it near 4.82%. Gold is recovering from a dip below $1991 to knock on $2000. December WTI is stabilizing after yesterday's nearly 3.8% slide, the largest drop since October 4. 

Asia Pacific

The Bank of Japan downgraded the 1.0% level of the 10-year JGB to a "reference level" and ended daily fixed rate bond buying but adjusted its forecasts, seeming to suggest that normalization of monetary policy will be forthcoming. The 10-year on-the-run JGB yield jumped to 0.94% and the dollar jumped back from yesterday's low near JPY148.80 to JPY150.50. The BOJ now sees core inflation (excluding fresh food) at 2.8% rather than 2.5% as it did in July. Core CPI for the next fiscal year was raised to 2.8% from 1.9%. However, for fiscal 2025, the CPI was kept below 2.0%, but raise to 1.7% from 1.6%. Growth this year was raised to 2.0% from 1.3%z. But GDP in FY24 was shaved to 1.0% from 1.2% and left alone the 1.0% for FY25. Note that before the outcome of central bank meeting, Japan reported a poor September industrial production gain of 0.2%. The median forecast in Bloomberg's survey was for a 2.5% gain. Retail sales also disappointed, falling by 0.1% instead of rising by 0.2% as expected, though the August series was revised up to 0.2% from 0.1%. September unemployment slipped to 2.6% from 2.7% as expected, while the job-to-applicant ratio was steady at 1.29% as anticipated. The data reinforces the sense that the Japanese economy contracted in Q3. 

China's October PMI disappointed. The long holiday at the start of the month may have dampened activity, and the impact of the increase in this year's central government deficit and increase in lending signaled have yet to have much impact. The manufacturing PMI that was below the 50 boom/bust level from April-August, recovered to 50.2 in September fell back to 49.5 in October. The non-manufacturing PMI has held above 50 this year. It peaked in March at 58.2 and in August recorded the low for the year at 51.0. It recovered to 51.7 in September and fell back to 50.6 in October. The composite PMI fell after rising for the previous two months. It stands at 50.7, down from 52.0. 

Speculation spurred by accounts in the Japanese press that the BOJ was going to adjust policy today dollar lower yesterday. It settled the North American session below the 20-day moving average (~JPY149.50) for the first time since late July. It found support near JPY148.80. Last week's high was near JPY150.80 and that is the immediate target. The upper Bollinger Band is found near JPY150.65 today. Last year's high was closer to JPY152. The prospect of a hike by the Reserve Bank of Australia next week helped lift the Australian dollar to a three-day high near $0.6385 yesterday. It has not closed above $0.6400 since October 11. In fact, yesterday's settlement was the highest close since then. The Aussie pulled back to almost $0.6340 before catching a bid. Options for A$1.12 bln expire at $0.6400 on Thursday. The high for the month was also set on October 11 near $0.6445. The dollar's pullback broadly, and especially against the yen (and euro) helped the yuan recover. It seems like a bit of what bike riders call drafting. In contrast, today, the dollar is in an exceptionally narrow range against the yuan (~CNY7.3160-90). The PBOC set the dollar's reference rate ever so slightly low (CNY7.1779 vs CNY7.1781) and the greenback is allowed to move 2% in either direction, which it rarely does. The average projection in Bloomberg's survey was CNY7.3019 (CNY7.3169 yesterday). 

Europe

The eurozone reported its preliminary estimate of October CPI and its first read of Q3 GDP. Headline inflation rose by 2.9% in the year through October down from 4.3% in September. The base effect played a significant role. In October 2022, the CPI surged by 1.5%. That dropped out of the 12-month comparison and was replaced with a 0.1% increase. The median forecast in Bloomberg’s survey was for a 0.3% increase. That means that eurozone CPI rose at an annualized rate of about 3.6% in Q3, up from 0.8% in Q2 and 6% in Q1. The core rate is stickier. It rose 4.2% year-over-year, as expected, down from 4.5% in September and the peak in March at 5.7%.

Eurozone's Q3 GDP contracted by 0.1%. It showed slight growth in Q2 (0.2%, revised from 0.1%) after stagnating in Q4 22 and Q1 23. Growth impulses are weak and the outlook for Q4 does not appear to be much better. Spain is the bright spot among the large eurozone members, with a 0.3% expansion. German contracted by 0.1%. French GDP, reported earlier today, rose 0.1% (0.6% in Q2 from initially 0.5%). Italy's economy stagnated after contracted by 0.4% in Q2. The ECB's September economic forecasts anticipates 0.7% expansion year-over-year this year and 1.0% next year. 

The pullback in the US dollar yesterday, against all the G10 currencies, saw the euro rise to $1.0625, a four-day high. It has risen to about $1.0645 today and spiked to $1.0675 after the data. The intraday momentum indicators are stretched, and this might mark the high. The $1.0630 area was the (61.8%) retracement of the euro's fall from last week's high near $1.0695. Yesterday, sterling traded marginally on both sides of last Friday's range (~$1.2105-$1.2160) and settled above the high. This constitutes a bullish outside day. Sterling has edged slightly higher today to a new five-day high near $1.2195. which is also the (50%) retracement of its loss from last week's high (~$1.2290). The intraday momentum indicators are stretched, and this may limit the gains in early North American activity. Some of sterling's buying may have been related to the GBP500 mln of options at $1.2160 that expire today. Note that are two batch options that expire Friday at $1.2100 (~GBP900 mln) and at $1.2150 (~GBP700 mln).

America

The market's focus is on tomorrow's Treasury announcement of the quarterly refunding size and the FOMC meeting. Yesterday, Treasury reduced its Q4 borrowing needs to $776 bln, down from $852 bln projected in July. Still, the size of next week's coupon offerings will likely increase for the second consecutive quarter. With the end of the BOJ meeting and the eurozone economic reports, the US is center stage. While house prices and the Conference Board's measure of consumer confidence may draw interest, the Q3 employment cost index may be the most important data point. This is a broad measure of labor compensation that includes direct costs, such as wages and bonuses, but also indirect costs, like social security contributions, medical benefits, taxes, and training. Employment costs rose by more than 1% a quarter from mid-2021 through Q1 23. They slowed to 1% in Q2 and are expected to have maintained that pace in Q3. Note that in the three years through the end of 2019, labor costs rose by a quarterly average of a little less than 0.70%. On Thursday, the US reports Q3 productivity and unit labor costs. Unit labor costs combine labor costs and productivity. ULC is reported as an annualized rate. Over the last four quarters through Q2 23, ULC has risen by an average of 2.55%. After rising by 3.65% in Q1 and 2.55% in Q2, ULC is expected to have slow to a 0.5% annualized rate in Q3. In 2019, ULC rose by an average of 1.55%.

Canada reports August GDP. The June and July monthly GDP prints were disappointing the Canadian dollar was sold as a result. The median forecast in Bloomberg's survey is for a 0.1% expansion after flat July print and a 0.2% contraction in June. As we have noted, there has been an adjustment in interest rate expectations. Canada's two-year yield has fallen by nearly 25 bp this month (the US two-year yield is practically flat). The swaps market is pricing in about a 45% chance of a Bank of Canada rate hike by the end of H1 24. As recently as October 18, the swaps market was pricing a an almost 70% chance of a hike. Mexico reports Q3 GDP today. The market expects it to match Q1 and Q2 increase of 0.8%. The central bank forecasts 3.0% growth this year.

The US dollar recorded an inside day against the Canadian dollar yesterday after setting the high for the year before the weekend near CAD1.3880. The US dollar is a little softer and is slipping toward CAD1.3800. A break of CAD1.3790 is needed to signal anything of note, and even then, there is a band of support around CAD1.3745-CAD1.3770. Canada's two-year yield that fell almost 15 bp last Thursday-Friday rose by six basis points yesterday. This coupled with the risk-on mood may have helped stall the greenback's rally. About $450 mln options struck at CAD1.3823 (~$0.7235) expire today. The dollar recorded an eight-day low against the Mexican peso near MXN17.9655 yesterday. Although it settled back above MXN18.00 it closed below the 20-day moving average (~MXN18.1130) for the first time this month. The daily momentum indicators are pointing lower, and the greenback continues to probe the MXN18.00 area.

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