Overview: The situation in central Europe is still intense but it appears top US, European and Polish officials are more reluctant than some market participants to attribute the darkest of intentions and paint extreme narratives. The Polish zloty has recovered around 1.3% today and other central European currencies are also trading firmer to lead the emerging market currencies. The US dollar is broadly weaker against the G10 currencies. The large Asia Pacific bourses pared recent gains, and Europe’s Stoxx 600 is threatening to end a four-day advance. US equity futures are trading with a slightly firmer bias. European benchmark 10-year yields are softer, with Italy off 5 bp, but most are around 2-3 bp lower. The 10-year US Treasury yield is nearly two basis points higher, slightly below 3.80%. Gold is firm inside yesterday’s range and is knocking on the $1783-5 area. A 5.8 mln-barrel drawdown of US oil inventories, reportedly estimated by API would be the largest in three months if confirmed by the EIA. December WTI is trading quietly around $87 a barrel. US natgas is giving back yesterday’s 1.7% gain, while the EU is considering a cap on the Dutch TFF benchmark. It is off about 1.25% after surging by nearly a quarter over the past two sessions. Iron ore's recovery continues. It rose by about 2.65% today, its fourth consecutive advance. It has now risen 11 of the past 12 sessions for a little more than 26% amid optimism over China’s recent initiative in the property market and better targeting of its Covid restrictions. Covid cases are still surging in China and there are more than 20k reported infections, the most since April. December copper is nursing a small loss. It has not risen this week as it consolidates the gains scored in the last four sessions of last week. December wheat is snapping a three-day advance with a 2% loss today amid reports that new Ukraine shipments will be allowed.
Asia Pacific
The market
wants to believe. It
wants to believe that the more focused zero-Covid efforts is really a pivot,
even though Chinese officials deny it and virus cases are surging. It wants to
believe that the 16-point plan to support the real estate market will achieve
what no other country appears to have been able to do, namely arrest the
implosion of a housing market bubble, years in the making, with absorbing the
excesses. The market wants to believe that a three-hour face-to-face between
Biden and Xi have put the superpower relationship on a higher track, though
outside of some more meetings, it is not clear that Washington or Beijing's
behavior will change one iota. Yes, talking is often better than not, but it is
not the same as material actions. Talks may help minimize misunderstandings but
does little to alter the genuine conflict of national interests that the political
elite of both countries perceive.
Earlier this
month, the BOJ reported that its holdings of a particular 10-year JGB (368th
issue, the most recent offering) exceed the amount that actually existed. Huh? How can that
be? The conundrum has been resolved. It turns out that the BOJ lends out
the security and have been buying the bonds in its open market operations,
resulting in what the Nikkei called a "double booking of the same
instrument." New 368th bonds were sold on November 1, and the
BOJ's holdings slipped back below 100%. However, market participants keep
wagering that the BOJ will have to suspend or change its Yield Curve Control
and sell the bond short. The BOJ seems committed to the 0.25% cap. If these
skeptics continue to resist the YCC, and global bond yields exert upward
pressure on the JGB, the BOJ will persist and again hold more than 100%. The
last auction of the 368th bond will be on December 1. Reports suggest that the
BOJ is also uncomfortable holding more than 100% of the issue. The BOJ bought
about JPY23 trillion (~$165 bln) of JGBs in the last two months, which is about
the same amount purchased in June and July.
The dollar is
trading quietly within yesterday's range against the Japanese yen
(~JPY137.70-JPY140.60). Yesterday's low was a new low since August, but for the most
part, so far, this week, the greenback is holding above the pre-weekend low near
JPY138.50 but struggling to hold above the JPY140 area. The Australian dollar wobbled on yesterday's Polish developments but quickly returned to the upper end of
the range, a little shy of $0.6800. News that wages rose 3.1%
year-over-year in Q3, the most in at least a decade failed to have much impact
on the Aussie, which is consolidating in a narrow range (~$0.6730-$0.6785). Nor
did it change market expectations much for the December 6 policy decision,
where the market is pricing in about a 60% chance of a quarter-point hike ahead
of tomorrow's employment report. The greenback is trading firmer against the
Chinese yuan. After reaching a low near CNY7.0250 yesterday, the dollar
recovered to CNY7.0885 today, a little below the high set on Monday
(~CNY7.0930). It is poised for its first gain in five sessions. China's 10-year
bond yield edged up to about 2.85%, the highest this year, though there is some
speculation that the loan prime rates may be shaved next week (November 20). The
PBOC set the dollar's reference rate at CNY7.0363, which matched the median
projection in Bloomberg's survey.
Europe
The UK's
October inflation surprised on the upside. The consumer price index jumped to 11.1%. Economists
had looked for 10.7%, while the Bank of England had warned of 10.9% after 10.1%
in September. The core rate held steady at 6.5%, defying some expectations for
a small decline. Producer prices (input and output) were firmer than expected
and the September series was revised higher. The swaps market is divided
between a 50 bp and 75 bp hike when the BOE meets on December 15, unchanged
from a week ago. Tomorrow, Chancellor Hunt delivers the long-awaited budget,
and this may inject volatility in sterling and the Gilt market.
The Spanish
government has been negotiating with banks for two months about giving some
relief to households facing acute difficulty in servicing the mortgages. Roughly 75% of Spanish
households are homeowners, and of those around three-quarters have variable
rate mortgages. Those rates have soared. Given the rise of the benchmark yields,
many of these variable rate mortgage rates have risen sharply. The banks want
some forbearance too and do not want to be required to boost loan losses
reserves. An agreement of a very targeted program that extends the mortgages
for a few years may be close, with some expecting an announcement this week.
The Federal
Reserve's balance sheet peaked in April at $8.965 trillion. As of last week, it had
fallen by almost $290 bln. The ECB's balance sheet peaked late June at 8.836
trillion euros and has fallen by an inconsequential 72 bln euros through last
week. Reports suggest it may discuss the modalities of unwinding it next
month. Many ECB critics fault it for being too slow to raise rates and begin QT.
However, it will soon surpass the Fed's efforts on its balance sheet. The ECB
changed the terms of the long-term loans, giving many banks powerful incentive
to repay the loans early. Its balance sheet shows these loans are worth about
2.1 trillion euros. The median estimate in Bloomberg' survey expects 600 bln
euros to be repaid this month and another 285 bln euros repaid in December. This
month's early repayment commitment is expected to be announced ahead of the
weekend. By the middle of next year, when the swaps market looks for the ECB to
finish its hikes, which President Lagarde says QT can begin, around 3/4 of the
TLTROs are expected to have been repaid. The larger the pre-payment, we
suspect, the greater the discussion about the impact on the ECB's tightening
path.
The euro
dropped two cents yesterday on the Polish news, from about $1.0480 to $1.0280
but quickly rebounded as the market made its quick judgment as is its wont. It settled near $1.0350
and has not traded below $1.0330 today. It has traded back a little above the
200-day moving average ($1.0425) to almost $1.0440. The intraday momentum
indicators are stretched ahead of the start of the North American session. The
price action, and the dip buying seems to reflect the turn in market psychology.
On the upside, the next important chart area is near $1.0515, the halfway mark
of this year's range. Sterling reached almost $1.2030 yesterday, the highest
since mid-August, and just short of the middle of this year's range (~$1.2050). It
had fallen a little below $1.18 yesterday on the central European developments
and settled around $1.1865. It is making session highs in the European morning
near $1.1940 but is also stretching the intraday momentum indicators. The euro
surged from around PLN4.68 yesterday and did not stop until it reached nearly
PLN4.7850 today, but as the more scary and extreme scenarios ease, the euro has
returned to almost PLN4.69.
America
Our timing for
noting that the monthly changes in US CPI and PPI are not correlated could not
have been at a worse time as the October PPI surprised on the downside. The math is still right of
course, but here the psychology is important. The softer PPI was seen as a
confirmation that US inflation has turned. The psychological impact is more
important than the material impact. Attention reverts to the real sector today
with US October retail sales and industrial output figures. Shortly after the
reports, the Atlanta Fed will update its GDP Tracker, which stood at 4% for Q4
in the middle of last week. Retail sales will be flattered by the stronger than
expected auto sales and higher gasoline prices, but the core measure, which
excludes autos, gasoline, building materials, and food services, which is used
in some GDP models, rose by 0.3%, which matches the Q3 average. The
year-to-date average is 0.8%, and while the GDP was contracting in H1, this
nominal retail sales rose by an average of 1.2% and 0.8% in Q1 and Q2,
respectively.
Canada reports
October housing starts and CPI today. Housing starts in September rose 10.8% to
their highest level since March 2021. It is a volatile series and an 8.0%-8.5%
pullback is anticipated. Such a decline would still leave them around 15%
higher than a year ago. The CPI is a bigger draw. A large monthly gain of 0.8%
is expected by the median forecast in Bloomberg's survey, but due to the base
effect, the year-over-year rate may be unchanged at 6.9%. The headline
year-over-year rate has declined for the previous three months after peaking at
8.1% in June. The underlying core rates are expected to remain firm. The swaps
market shows the market split between a 25 bp and 50 bp hike when the Bank of
Canada meets on December 7.
The US dollar
traded on both sides of Monday's range against the Canadian dollar yesterday,
but the close was neutral. It is come back better offered today and is barely holding
above yesterday's low (~CAD1.3225). A break of CAD1.3200 signals the next leg
down after nesting for the past few sessions. Initial support may be found
around CAD1.3150, but the measuring objective of the large head and shoulders
pattern is CAD1.30. The greenback made a marginal new 2.5-year low against
the Mexican peso yesterday, slightly above MXN19.25. It settled near
MXN19.3730 and is hovering around there is Europe. The intraday momentum
indicators suggest the US dollar may trade higher in early North America. The
MXN19.40-MXN19.45 area may offer the nearby cap.
Disclaimer
Reviewed by Marc Chandler
on
November 16, 2022
Rating:
