Serenity Now

Overview:  The markets are calmer after yesterday's post-US election drama. A consolidative tone has emerged in the foreign exchange market, and the dollar is softer against all the G10 currencies, led the 1% gain in the Norwegian krone, after the central bank left rates on hold. Sweden's Riksbank delivered the expected half-point cut and the krona is up 0.5%. Japanese officials warned against excessive moves, and the PBOC set the dollar's reference rate almost 1% lower to limit its rise. Emerging market currencies also are mostly firmer today. 

Equities are higher today. All the large bourses in Asia Pacific advance, with China's CSI300 up 3%. India is the main exception, and main index is off 1%. Europe's Stoxx 600 is recouping most of yesterday's 0.55% decline, and US index futures are posting modest gains. Most European 10-year yields are jumping 8-9 bp today. The UK Gilt is an exception. The yield is off almost two basis points. The 10-year Treasury is flat near 4.43%. The Federal Reserve is anticipated to cut the Fed funds target by 25 bp. This is nearly taken for granted, and there is much interest in what Chair Powell says about the next administration. He will likely be circumspect, avoid hypotheticals, and be ready to respond to policies not rhetoric. Gold extended yesterday's sharp sell-off and reached $2643.50 today but is recovering and now traded near $2667, a new session high in European turnover, even though Chinese reserve figures show no new gold buying for the sixth consecutive month. December WTI is trading inside yesterday's range, consolidating near $71. 

Asia Pacific

Many economists and investors appear confused over the nature of consumption. They often seem to think that simply giving people money will make they consume more. But consumption must be learned and high consumption a cultural creation. Consider that this year's increase in Japan's labor earnings is the strongest since 1997. Moreover, using the same sample base, produces even strong gains. Wage had not kept pace with inflation, and real labor earnings contracted from April 2022 through May 2024. They have been positive in two of the past four months through September. Yet, household spending, in real terms, continues to contract. It fell 1.9% year-over-year in August. September data is due tomorrow. The median forecast in Bloomberg's survey is for a 1.8% decline. The year-over-year rate has not been positive for two consecutive months for two years. We have noted before that the average Tokyo apartment is about a third or more smaller than the average NYC apartment. Less space also means less stuff. But consumption is not only about having space to put things, but also requires a desire for what is new and devalue what is old. There is also likely a demographic component. An older population may be less interested in consuming even in a high consumption country, like the US, for example. Turning to China, it reported a surge in exports in October (12.7% vs. the median forecast in Bloomberg's survey for 5%). Exports were a two-and-a-half year-high ahead of a jump in US tariffs expected next year. Imports fell by 2.3%, slightly more than expected. This results in a $95.7 bln trade surplus, the largest since June's record $98.6 bln. China also reported that October reserves fell $55.3 bln to $3.26 trillion. The decline offsets the past two months of gains and seems to reflect the US dollar's appreciation last month against the other major reserve currencies. The PBOC did not buy gold for the sixth month. 

The US 10-year yield rose almost 25 bp from low to high yesterday. The last time it rose by more was on April 10. On that day, the dollar rose nearly 1% against the yen. Yesterday, the dollar rose almost 2% to JPY154.70, the highest level since July 30, and near the upper Bollinger Band. US rates have steadied, and the greenback is consolidating in the upper end of yesterday's range. It reached JPY153.65 in late Asia Pacific turnover, holding above the JPY153.40 area, which is the (38.2%) retracement of yesterday's rally. The Australian dollar was driven slightly below $0.6515 yesterday, its lowest level since August 8, and frayed the lower Bollinger Band. It recovered to almost $0.6600 in Europe before consolidating in North America between about $0.6550 and $0.6595. It is trading firmly to reach nearly $0.6640, the 20-day moving average. Yesterday's higher was about $0.6645. The next technical target may be near $0.6680. The dollar's surge yesterday, especially against the Japanese yen, saw the US dollar rise to nearly CNY7.21, the highest level since August 2. In one fell swoop, the dollar surpassed the (61.8%) retracement of the July-August decline (~CNH7.1850) and the 200-day moving average (~CNH7.20). The dollar gained about 1.2% against the offshore yuan yesterday. The last time it rose by more than 1% was February 2023. It took out yesterday's high briefly today (to reach slightly above CNH7.2130) but reversed lower to reach almost CNH7.1655 in early European turnover. The dollar also rose nearly 1% against the onshore yuan to nearly CNY7.18. The PBOC set the dollar's reference rate at CNY7.1659, almost 1% higher than yesterday's CNY7.1659 fix). It is the weakest level in a year. It is a particular large adjustment given that the greenback is allowed to move in a 2% range around the fix. 

Europe

Four European central banks meet today. Sweden's Riksbank has already announced a 50 bp cut in the deposit rate to 2.75%. It also reported unchanged October headline inflation at 1.6%. Norway's Norges Bank left rates on hold. It does not anticipate a cut until in Q1 25. The Bank of England is widely expected shortly announce a quarter-point cut to 4.75%. The Czech central bank is also expected to announce a quarter-point cut in its repo rate to 4.0%. Turning to Germany, the 1.5% rise in September factory orders, reported yesterday, did not prevent a slump in industrial production. Industrial output fell 2.5% (-1.0% was the median in Bloomberg's survey after rising a revised 2.6% (initially 2.9%). in August. Recall that earlier this week, France reported a 0.9% drop in industrial production. The median forecast in Bloomberg's survey was for a 0.6% contraction. The German and French reports point to a weak aggregate number when it is reported on November 13. Separately, weaker exports (-1.7%) and stronger imports (2.1%) saw the German trade surplus narrow to 17 bln euros from 21.4 bln euros. Separately, just at the moment in time when one the need for strong European governments is needed, Germany's unpopular chancellor fired the finance minister. Scholz hopes to hold a minority government through the end of the year to pass important legislation, like next year's budget, but this seems symptomatic of the milquetoast approach that has frustrated Germans and Europeans. Opposition and CDU leader Merz is does not want to wait for January to have the confidence vote as Scholz desires but wants it as early as next week. We note that the French government is struggling too. 

The euro bottomed in North America yesterday slightly below $1.0685 and managed to recover to almost $1.0760, last month's low. It reached a little above $1.0770 today, holding below the high seen in Europe yesterday ($1.0780). It managed to settle slightly inside the lower Bollinger Band, which comes in today near $1.0735. Sterling fell a little more than two-cents yesterday to about $1.2835, taking out the October low by a tenth-of-a-cent. It fell well through the lower Bollinger Band (~$1.2875) but settled barely back inside. Sterling is also consolidating today but stalled near $1.2950, after retracing about half of yesterday's loss. It has returned to $1.29 in Europe as the BOE meeting outcome is waited. Support may be seen near $1.2875. 

America

The markets typically do not react much to the quarterly nonfarm productivity and unit labor cost reports. Although both measures are particularly important to the underlying competitiveness of an economy, neither is measured directly and are derived from the GDP. In Q2, productivity grew by 2.5% and is expected to have matched that in Q3. In the four years through 2019, US productivity averaged about 1.6% and in the last four years (through Q2 24) it rose by 1.9% (seasonally adjusted annual rate) Unit labor costs are the most comprehensive measure that includes wages, benefits, and productivity. Unit labor costs exploded during the pandemic. The four-quarter moving average peaked in Q3 21 at 6.7% (seasonally adjusted annual rate). In the past four quarters, (through Q2 24) unit labor costs have risen by an average of about 0.4%. Still, the focus (outside digesting the implications of the election) is on the FOMC meeting. One might thing that the nearly 75 bp backing up of the two-year yield since September 25, a week after the FOMC delivered a half-point cut, would give the Fed pause. The 10-year yield bottomed a day before the last FOMC meeting near 3.60%. It reached nearly 4.40% last week and nearly 4.48% after the election results. Some observers have argued that the market has rejected the Fed's cut. That seems to be a bit strong. The market is discounting around a 66% chance of a cut next month. By the middle of next year, the Fed funds market is discounting 75-100 bp of cuts. As it did earlier this year, the market ran ahead of the Federal Reserve only to converge with it later. At the end of September, the Fed funds futures were discounting slightly more than 160 bp of cuts by the end of Q2 25. Mexico reports October CPI today. The headline rate is expected to rise a little from 4.58% in September to around 4.75%. It finished last year near 4.65%. The core rate is a different story. The last time it rose was in January 2023. It fell through 4% in September for the first time since February 2021 and is expected to have slipped to 3.85%.

After retreating Monday and Tuesday, the US dollar jumped against the Canadian dollar amid yesterday's post-election surge. It reached almost CAD1.3960, matching the year's high set last Friday. It found support near CAD1.3915 but has extended the pullback to CAD1.3870 today. This met the (61.8%) retracement objective of yesterday's rally. The next area of support may be near CAD1.3850. The US dollar leapt to about MN20.8070 yesterday, its highest level since September 2022. The high was set in the Asia Pacific session and the greenback trended low through midday in North America. It tested and held support near MXN20.00. It is trading in the lower end of yesterday's range, and still holding above MXN20.00. The dollar has not been above MXN20.21 today. Ahead of the central bank's decision to accelerate its tightening, the Brazilian real was one of two emerging market currencies that resisted the greenback's advance. The real rose 1.2% against the dollar to reach a seven-day high. The dollar settled below its 20-day moving average (~BRL5.70) for the first time in a month. The Turkish lira was the other emerging market currency to appreciate (~0.30%). 

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