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.
Reviewed by Marc Chandler
on
October 31, 2023
Rating:
