Corrective Forces Dominate

The US dollar continues to consolidate its recent strong gains. Its pullback is shallow is corrective in nature. Nothing has materialized to challenge the divergence meme. The US 2-year premium over Germany has edged higher still today. It is a little more than 122 bp and is extending its widening streak to the eighth consecutive session. Although the 10-year premium over Japan has not increased for two days, it is holding above 200 bp, a threshold it moved above at the end of last week for the first time since September 2014. 

 ECB's Draghi speaks at the BOE's Open Forum shortly (~13:15 GMT/8:15 ET).  Many are looking for some fresh clues into what the ECB will do when it meets on December 3.  This may be asking too much.  This is not the proper forum.  Draghi is more likely to simply reiterate what he said at his press conference following the late October ECB meeting.  With downside risks growing, all policy options will be reviewed.  A Reuters story earlier this week claimed a consensus was emerging in favor of a cut in the repo rate.  This would serve two purposes.  It would ostensibly ease monetary policy further, though the impact of deeper negative rates is not clear, as Europe is being a pioneer.  It would also increase the universe of bonds that qualify for the program.  

The main economic report from Europe today was the UK's jobs report.   After recording a three-day high in Asia near $1.5185, sterling was pulling back before the employment data.   It had a knee-jerk push lower on the news but quickly stabilized.    The data was mixed.  The claimant count rose for the third consecutive month, but marginally.  The average increase has been a little less than 1.7k.  The ILO measure of unemployment unexpected slipped to 5.3% from 5.4%, a low since 2008.  

The average weekly earnings, which are reported with an extra month lag, were slightly softer than expected. Overall weekly earnings averaged 3.0% as they did in August.  The consensus thought the pace would tick up to 3.2%.  However, excluding bonus payments, earnings growth slowed to 2.5% from 2.8%, which was a bit more than the consensus expected.   It is the slowest growth this March.  Recall that in the BOE's recent Quarterly Inflation Report is anticipated slower rate growth in Q4  to 2.5% from 3.0% in August, though it kept the Q4 2016 estimate unchanged at 3.75%. 

Looking at short-term UK interest rates and sterling's performance, it seems clear the data is not a game changer; that views of the BOE's trajectory has not changed.  Since Monday's lows, sterling is holding an uptrend line on the hourly bar charts.  It is found near $1.5125 now and rises to $1.5140 by the end of the North American session.    Since November 2, sterling has dropped nearly nickel.  The initial retracement objective is near $1.5210 and then $1.5260.  A similar trend line on the euro-sterling cross comes in near GBP.7100 now.  A retest on yesterday's low near GBP0.7065 looks likely. 

China's stocks edged higher, but perhaps there is a rotation taking place that mirrors the economic transition that is being engineered.  Health care, technology and consumer discretionary led today's advance.  These are part of the new economy.  Energy, financials, materials and industrials were laggards.  They are part of the old economy, state-owned dominated sectors, in which excess capacity is evident.   

Today's data is consistent with this transition.  Industrial output was weaker than anticipated and retail sales stronger than expected.  Fixed asset investment slowed a touch.  Retail sales rose 11% year-over-year in October, a slight acceleration from the 10.9% pace in September. It is the strongest pace of the year.    Industrial output rose 5.6% in October.  This matches the March print for the low for the year and is just above the trough set in late 2008 at 5.4%.  Fixed investment rose 10.2%, matching expectations and slowing slightly form the 10.3% pace in September.  The pace of investment has not been slower since late-2000. 

The Portuguese government collapsed yesterday after a loose left coalition blocked the minority government's agenda.  It is still not clear what a new government will look like, but the market does not appear to be too bothered.  Portuguese assets had underperformed in the build-up yesterday's vote.  After a poor start today, Portugal's bonds have rallied.  The 4 bp decline in yields is slightly larger than the decline in yields being seen in Spain and Italy today.  Portuguese stocks are up marginally, about half as much as the Dow Jones Stoxx 600 0.5% gain near midday in London. 

The euro itself began recovering from the near low near $1.0675 in the North American afternoon yesterday.  The upticks were extended toward $1.0775 in Asia.  It consolidated in the European morning, holding above $1.0730.  This seems to denote the cent range for the near-term.  The dollar has been confined to about a quarter of a yen on both sides of JPY123.  The dollar is consolidating the run-up that took it from JPY120.25 on November 2 to JPY123.60 at the start of the week.  The first retracement objective is found near JPY122.30.   The fact that the dollar is holding above initial technical retracements reflects the underlying dollar bullishness that prevails.  

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