Overview: Global equities moved higher in the wake of the strong gains in the US yesterday. US futures point to the possibility of a gap higher opening today. Most of the large Asia Pacific bourses rallied 1%-2%, with China’s CSI a notable exception, slipping fractionally. Europe’s Stoxx 600 is edging higher and is near two-week highs. If the gains are sustained, it will be the fourth consecutive advancing session, the longest in two months. Benchmark yields are higher—mostly 7-12 bp in Europe, while the US 10-year Treasury yield is up about three basis points to 4.04%. The dollar is mostly a little firmer with sterling, the Canadian dollar, and Norwegian krone about 0.25-0.30% lower. The greenback edged further above JPY149, but no intervention has been detected. Stronger than expected inflation lifted the New Zealand dollar, which leads the G10 currencies higher today. Among emerging market currencies Poland and Hungary are off slightly while the South Korean won, and Thai baht lead the advancers. The JP Morgan Emerging Market Currency Index is slightly lower after gaining 0.65% yesterday, the most in two weeks. Gold is trading in a narrow range (~$1648.7-$1660.9) inside yesterday’s range, which was inside last Friday’s range. Amid reports of new sales from the US Strategic Oil Reserve, December WTI is a little heavier and toying with the 20-day moving average (~$0.8385). Natgas is lower (-1.1% in the US) and (Europe’s benchmark is off 5.6%). EU officials meet today to try to regain control of the market. Iron ore rose 1.3% today after falling 2.3% yesterday. December copper is falling for the third session and is off about 0.8%. December wheat is down 1%. It posted a minor gain yesterday but is approaching its lowest level in about a month.
Asia Pacific
China's Q3 GDP was to have
been released today, but the National Bureau of Statistics indicated yesterday
that it would be delayed. No
reason was given which allows speculation to fill the void. Some suggested that
it would be disappointing, and officials did not want to publish during the
Party's Congress. The median forecast in Bloomberg's survey was for a 2.8%
quarter-over-quarter expansion after a 2.6% contraction in Q2. If the median is
accurate, it would be the strongest quarterly expansion since Q3 20202.
Is there really much to make
from reports that Chinese banks (aren't they all state banks?) were swapping
yuan for dollars in the forward market and then selling the
dollars? Could
they be acting at the behest of Chinese officials? Sure, but doing at their
behest does not mean with their money. Isn't that the way open-mouth operation
work? Consider the BOJ. It threatens decisive actions. What
happens? Japanese banks reduce their long dollar position. Is that
stealth intervention? Intervention is best thought of as an escalation
ladder and open-mouth operations have a place on that ladder. If verbal
intervention is sufficient there is no need to climb the ladder further. The
PBOC has continued to set the dollar's reference rate around CNY7.10-CNY7.11.
Since the dollar is allowed to move in a 2% band from the fix, the PBOC is
effectively capping the dollar around CNY7.25.
Unshaken by talk in Tokyo
that the BOJ may have intervened after the US CPI last week, the market took
the dollar above JPY149 in the North America yesterday. Comments by BOJ Kuroda earlier today did
not add anything new. The dollar backed off to slightly below JPY148.70 in
Japan. Three-month implied volatility is little changed, straddling 13%. Before
the intervention last month, implied vol was near 13.6%. We look for the
continuation of the recent pattern in which the dollar trades strong after the
threat of intervention diminishes for the day and the greenback was bid to new
highs (~JPY149.30) in the European morning. The Australian dollar
initially extended yesterday's gains to reach about $0.6330. It has backed off,
but we expect it to find support in the $0.6260-70 area. The New Zealand dollar
was bolstered by stronger-than-expected Q3 CPI (7.2% vs. 6.5% median forecast
after 7.3% in Q2). The odds of a 75 bp hike at the November 2 meeting rose to
around 80% from about 35% yesterday. The dollar is trading in a narrow range
against the Chinese yuan, holding slightly below CNY7.20. It is
consolidating within yesterday's range and is little changed. The dollar's
reference rate was set at CNY7.1086. The median projection in Bloomberg's
survey was CNY7.1590.
Europe
The UK government's reversal
of its fiscal thrust is fully appreciated by the market even as the Truss's tenure
as Prime Minister may still not be secure. Truss did not win the part of the
leadership challenge among the members of parliament, but she did win the vote
among the rank-and-file. For the MPs to remove her now seems anti-democratic,
yet her fiscal program has been gutted. Perhaps, one of the things that will
come out of this is that the Tories change the way its leaders are chosen. Germany
has its own remarkable reversal. Over-ruling the Vice Chancellor and Minister
of Economic Affairs and Climate Action Habeck, Chancellor Scholz announced that
Germany will extend the operation of the three remaining nuclear reactors until
mid-April 2023. It seems to be a compromise between the Greens, who do not want
an extension and the other coalition partner the Free Democrats, which wants
Germany to use all available means to overcome the energy crisis.
Previously, Habeck had
relented and accepted that two of the three plants. Germany's gas inventories are 95% full but
there is concern that is may not suffice in a cold winter. Recall that the FDP
failed to garner the 5% of the popular vote to be represented in the state
government in Lower Saxony earlier this month. Ironically, this defeat seems to
have emboldened the FDP (led by Finance Minister Linder) to press its case. We anticipated that
the state election results would strain the coalition but did not envision it
would be over nuclear power. Still Scholz did not let the issue stew for long. Still,
the Greens cannot be pleased as it has voted against the extension of nuclear
power at a party convention this past weekend. Meanwhile, Dutch natgas
benchmark gapped lower yesterday after gapping lower before the weekend. Indeed,
it gapped below the 200-day moving average. This long-term moving average have
not been violated in four months. It is still double the pre-war price even
though it is off more than 60% from its late August peak.
We anticipated that the US
two-year premium over Germany would peak before the exchange rate bottomed. The peak was two-and-a-half months ago,
around 277 bp. It fell to 220 bp early last month and recovered to almost 260
bp this month. A break of 240 bp sets up a test on 220 bp again. To get there
it needs to take out the 200-day moving average (~227 bp). It has not been
below the 200-day moving average since June 2021. In the October ZEW survey,
the assessment of the current situation deteriorated (-72.2 vs. -60.5), while
expectations unexpectedly improved albeit marginally (-59.2 vs. -61.9).
The euro extended
yesterday's gains to nearly $0.9875, a nine-day high before pulling back in
late Asia/early European turnover. The $0.9800 area may offer critical support. There are large
options struck there this week, including one billion euros today that expire
and about 3.5 bln euros the roll off Thursday and Friday. Ahead of it, support
may be seen around $0.9820. On the upside, regaining $0.9860 could spur
near-term gains toward $0.9915. Sterling reached almost $1.1440 yesterday as
some 2/3 of the Truss/Kwarteng's tax breaks were unwound. There are options
for GBP370 mln at $1.1450 that expire today. It has not been able to sustain
the momentum. It has not been above $1.1410 and is more than a cent below its
intrasession highs. Still, the intraday momentum indicators are getting stretched,
favoring new buying in early North America today. Support will likely be
encountered in the $1.1250area.
America
The market has nearly priced
in a 5.0% terminal Fed funds rate by the end of Q1 23. We think for the market to get beyond that
it needs stronger guidance by the Federal Reserve. One of the most hawkish
members voting members of the FOMC, Bullard declined to push the point in
recent days. It is true that the market is fickle, and this is not the first
time the market has reached some conclusion about the peak. Moreover, the
market continues to price in a cut in late Q4 23. The yield on the December
2023 Fed funds futures contract is a little more than 20 bp below the
yield of the September contract. Perceptions of peak Fed funds is understood as
a necessary precondition of a turn in the dollar. In this context, we note that
yesterday was the first session in 12 that the implied yield of the December
2022 Fed funds futures decline (albeit slightly).
As the near-term focus
shifts away from the key US economic data (inflation and employment), the
dollar looks ripe for at least a correction. We have suggested that sterling looks like it bottomed
against the dollar last month when amid panic and talk of the UK being an
emerging market economy to fell to $1.0350 in Asia. Then often it seems that
when the dollar does make an extreme, it comes in the form of a double top/bottom.
The Dollar Index peaked in late September slightly shy of 114.80. It fell to
about 110.00 before rebounding and reaching almost 113.95 after last week's
September CPI. A break of the 110 area could lend credence the view that a top
of some import is in place. A break of the trendline connect the mid-August and
mid-September lows comes in today near 110.90.
The Bank of Canada's
quarterly survey picked up a sharp fall in the business outlook while consumer
inflation expectations reached 7.1% in one year and 5.2% in two years. Forty percent of employees expected 4%+
wage gains. Consumers and businesses see a 50% chance of a recession, while a
Bloomberg survey put it at 45%. The Bank of Canada meets next week, and the
swaps market is pricing in a little more than an 80% chance of a 75 bp hike.
September housing starts and August portfolio flows will be reported today. Tomorrow
sees September CPI. The headline pace is expected to slow for the third month,
but the core rates are expected to be little changed.
For its part, the US reports
September industrial output and the August TIC report is due late in the
session. Industrial
production has risen by an average of 0.33% through August (0.35% in the
January-August period last year. It is expected to have stabilized (0.1%) after
falling by 0.2% in August. Manufacturing output is expected to match this
year's average of 0.2%. It rose 0.1% in August and rose by an average of 0.3%
in the first eight months of 2021. Note that the Fed's Bostic and Kashkari
speak late today.
Follow through selling
pushed the US dollar below the 20-day moving average against the Canadian
dollar (~CAD1.3695) for the first time in a month. However, it caught a bid near the middle of
the Asian session that carried through the European morning, lifting the
greenback to around CAD1.3770. With equities firm and the intraday momentum
indicator stretched, we look for the Canadian dollar to be better bid in North
America. Initial support may be around CAD1.3700. The Mexican peso is going
nowhere fast. The US dollar is straddling the MXN20.00 level in quiet
dealings. The lower end of this month's range is around MXN19.9350 and the
upper end is about MXN20.1550.
Disclaimer
Reviewed by Marc Chandler
on
October 18, 2022
Rating:
