Overview: The FOMC meeting is today's highlight but
the drama in Japan continues to rivet the market. The Ministry of Finance
warned of the risk of material intervention in the foreign exchange market, and
the BOJ bought bonds in an unscheduled operation a day after its downgraded the
1.0% cap to a reference rate, whatever that means. The yen is trading with a
slightly firmer bias. The Swiss franc is also trading a little firmer, but the
other G10 currencies are a bit softer. Most emerging market currencies are
lower too. Gold, which posted a bearish outside down day yesterday, extended
its losses to about $1975 before stabilizing.
Japan's equity indices jumped
2.4%-2.6% today. Most bourses in the region rose, though not Hong Kong. Note
that South Korea reported the first increase in exports since late last year
and the Kospi rallied 1%. Europe's Stoxx 600 is firmer, posting its third
consecutive session of gains. US index futures are heavier, paring yesterday's
gains. European benchmark yields are 3-5 bp higher today, but the 10-year US
Treasury yield is a couple basis points lower near 4.90%. Details of next
week's quarterly refunding will be announced today and there is an expectation
of larger offerings. December WTI fell to near four-week lows yesterday near
$80.75 a barrel. It has stabilized and trading near $82.
Asia Pacific
China's Caixin manufacturing
PMI fell below the 50 boom/bust level to 49.5 in October from 50.6 in September.
While this is weaker than
expected, and the pattern this year where the first month of a
quarter is sub-50 and then the Caixin manufacturing PMI grows. The new measures
announced in late October, including a larger central government deficit and
local governments tapping next year's bond quota have yet, of course, to filter
into the data. Meanwhile, Bloomberg's new monthly survey (53 economists) found
a median forecast for 5.0% growth in Q4, and this year's GDP is now seen
slightly above the government's 5.0% targets.
The market continues trying
to decipher the Bank of Japan's intent. Governor Ueda explained that yesterday's move was aimed at
increasing the "flexibility so that long-term yields can be smoothly
shaped, according to different future scenarios." The bottom line is that
limit of 1% indicated in July is no longer binding. "We won't set a strict
upper limit," Ueda explained, "but even when there's upward pressures
on yields, I don't think they will go significantly above 1.0%." And
although the BOJ raised its inflation forecast for this fiscal year and next,
the forecast for core CPI in FY 25 remains below the 2% target. The MOF's Kanda
warned, in early Tokyo hours today, that officials are prepared to intervene if
necessary and a few hours later the BOJ stepped in a bought Japanese government
bonds in an unscheduled operation. Japanese bond yields edged slightly higher.
The on-the-run 10-year yield was up less than a single basis point to almost
0.95%. The 20-year yield was up about 1.5 bp and the 30-year yield rose by
about three basis points.
The BOJ helped spur the
largest sell-off in the yen in six-months. The dollar soared 1.70% to approach last year's high
(~JPY152). It shot through the upper Bollinger Band that is set two standard
deviations above the 20-day moving average and greenback traded three standard
deviations from the moving average. It is calm today. The dollar has spent most
of the session so far between JPY151.15 and JPY151.50. Some participants are
mulling a move toward JPY160. More immediately there are options for $2.3 bln
at JPY152 that expire tomorrow. After stalling near $0.6385. the Australian
dollar pulled back to support near $0.6315, where A$1 bln of options expire
tomorrow. It is still holding today as the Aussie consolidates and
trades toward $0.6350. Chunky options seem to block the upside. There at
A$470 mln at $0.6400 that expire today and another set for A$1.2 bln tomorrow. Another
set for A$1 bln expires at $0.6400 Monday. Note that an IMF staff paper called
on Australia to tighten monetary policy further and slow public
investment. The dollar finished October with a new high for the month
against the offshore yuan near CNH7.3440. It has not been that high since
September 11. Through formal and informal channels, Beijing has succeeded
limiting the yuan's losses recently. The onshore yuan fell by 0.25% in October,
which means it appreciated against most currencies. The greenback edged
slightly higher against the onshore yuan to approach CNY7.32 to reach its best
today since September 11. The PBOC set the dollar's reference rate at CNY7.1778
today, about 1/1000 of a yuan lower than yesterday, and exceptionally wide
compared with the average in Bloomberg's survey of CNY7.3295.
Europe
The preliminary estimate of
October's eurozone CPI, reported yesterday at 2.9%, like fell below the US CPI
for the first time since June 2022. The US October CPI is due November 14. A 0.3% increase
could see the US year-over-year rate slip to 3.5% after being stuck at 3.7% in
August and September. The eurozone's core rate is at 4.2%, its lowest level
since July 2022. A 0.3% increase in the core rate would leave the year-over-year
rate unchanged at 4.1%.
The final UK October
manufacturing PMI slipped to 44.8 from the preliminary estimate of 45.2, but
still edged up from the 44.3 final reading in September. The contraction eased for the second
consecutive monthly. The last time it was above the 50 boom/bust level was July
2022. It bottomed this year in August at 43.0 and stood at 45.3 at the end of
last year. The BOE meets tomorrow. While a unanimous vote is unlikely, the
swaps market sees practically no chance of a hike and the odds of a hike next
month are around 20%, down from a little more than 50%, a month ago. The BOE
forecast 0.5% growth in 2024 and economists polled by Bloomberg see a risk that
this is pared.
The euro set a five-day high
near $1.0675 yesterday a couple of hours before the softer than expected CPI
and Q3 GDP prints. It
trended lower until European markets closed, reaching around $1.0560. The close
was weak. Trading is light today many celebrate All Saints Day. Still, the euro
is trading heavier and extended yesterday's losses to about $1.0545, near
Monday's low. There are options for about 1.55 bln euros at $1.0540 that expire
tomorrow. Last week's low was closer to $1.0525. Sterling peaked near $1.22
in early North American activity yesterday and was sold to $1.2120 before
stabilizing. Since the low was set, sterling has not been able to rise
above $1.2160. It is holding above yesterday's low, and Monday's low was near
$1.2090 and last week's low was about $1.2070. Note that there options for around
GBP550 mln at $1.2130 that expire tomorrow.
America
Ahead of the conclusion of
the FOMC meeting, there is a slew of US data. The data can be broken down into three
groups. The first is about the labor market. The ADP sorely missed last month. Its
89k growth in the private sector jobs gave no clue of the BLS estimate the
strongest private sector jobs growth since January at 263k. It is particularly
unreliable in the short-term, yet it may still influence what has been dubbed
the "whisper number" (i.e., last minutes guesstimates). The JOLTS
report on job openings is also on tap. It surprised the market last month with
August job openings jumping to 9.6 mln from 8.9 mln. The median forecast in
Bloomberg's survey was for 8.8 mln. The median forecast sees job openings
falling a little below 9.4 mln in September. Second, there are two real sector
reports: September construction spending and October auto sales. With the first
estimate of Q3 US GDP in hand, the construction spending report is of little
broad interest. Auto sales for October give some inkling into consumption but
given the strike, it might not be a clean read. In any event, auto sales are
expected to be little changed from the 15.67 mln seasonally adjusted annual
pace seen in September. Through September, US vehicle sales averaged 15.39 mln,
which is about a 13% increase from the first nine months last year. The third
bucket of data today are surveys. The final manufacturing PMI is of little
interest. The preliminary reading of 50.0, up from 49.8, likely captured the
change. It was the second consecutive month of improvement. Instead, the
manufacturing ISM is new information. It runs a little lower than the manufacturing
PMI (49.0 in September and it is expected to be unchanged). Prices paid are
softening and employment growth may slow but watch new orders. The last time
they were above 50 was in August 2022.
The brings us to the FOMC
meeting. Judging by
the pricing in the swaps and futures market, participants think the Fed is done
and that the next move will be cut. The market has a little more than a 50%
chance of a cut by the middle of next year and a quarter-point cut is fully
discounted by the end of July 2024. The implied yield of the December 2024 Fed
funds futures is 4.72%, which is about 60 bp below the prevailing effective Fed
funds average. This is the market accepting the median Fed forecast in
September for two rate cuts in 2024 and about a 40% chance of a third cut. We
look for little change in the FOMC statement. The market often hears Fed Chair
Powell as leaning dovish. We suspect that the rise in long-term yields, the
causes and implications will be the subject of much discussion. Powell seemed
more open to the possibility that increase supply is one of the drivers of the
rise in long-term rates. Before the FOMC meeting concludes, the Treasury will
announce the details of next week's quarterly refunding. Many expect another
increase in the amount of coupons that will be sold. Although recent note and
bond sales continue to be oversubscribed, the auctions have been frequently
generating tails (difference between the average price the auction and the
lowest accepted price). It means that the marginal buyer paid a lower price than
average (securing a higher yield).
Canada's economy continues
to disappoint. It was
stagnant in July and August. Economists had anticipated a little growth in both
months. The data boosts the risk that the Canadian economy contracted in Q3
after a 0.2% decline in output in Q2. Last month, the Bank of Canada suggested
growth was going to rebound to 0.8% in Q3. StatsCan attributed the economic
weakness to inflation, forest fires, and drought. Several sectors reported
decline in activity, including mining, oil/gas, utilities, manufacturing, accommodation,
and food services. The agriculture sector was especially hard hit in August,
contracting 3.2%, the most in two years, largely due to dry conditions in the
western part of the country. Services rose slightly (0.1%), while the
goods-producing sector contracted by 0.2%. The manufacturing PMI is due today. It
is not typically a market mover. It was last above the 50 boom/bust level in
April.
Mexico's economy expanded by
0.9% in Q3 (quarter-over-quarter), which was slightly better than expected. It was the strongest expansion since Q3 22.
Still, the year-over-year pace is gradually slowing. It was 3.3% in Q3, down
from 3.6% in Q2 and 3.8% in Q1. Today's IMEF surveys will likely show that
slowing is continuing into the start of Q4. Mexico sees the October
manufacturing PMI too. It had been above 50 from February through August before
slipping to 49.8 in September. Mexico also reports September worker remittances.
Through August, worker remittances have brought in nearly $41.5 bln. This
compares with almost $38 bln in the first eight months of last year. Worker
remittances have become a key source of foreign exchange and capital inflows
into Mexico.
The monthly GDP miss by
Canada yesterday sent the Canadian dollar to a new low for the year. The US dollar briefly traded a little
through CAD1.3890. The greenback traded on both sides of Monday's range but
just missed closed above Monday's high (CAD1.3876, according to Bloomberg). The
greenback is trading firmly near CAD1.3900. It has held above CAD1.3860. A
disappointing jobs report on Friday could bring CAD1.40 into sight. The
Mexican peso held its own. It was virtually flat yesterday. The greenback
recovered after being sold to a two-week low near MXN17.9250. Still, it has not
closed below MXN18.00 since October 16. Still, for the past four sessions, the
dollar has recorded lower highs and lower lows. It is little changed today,
hovering around MXN18.00. Brazil's central bank meeting concludes a few hours
after the FOMC meeting and it has already signaled a 50 bp cut, which would
bring the Selic rate to 12.25%.
Reviewed by Marc Chandler
on
November 01, 2023
Rating:
