Overview: Animal spirits are retreating today. Asia Pacific and European equities are lower, and US futures are narrowly mixed. US 2- and 10-year yields are edging higher, while European benchmark 10-year yields are mostly softer. Italy and the UK are notable exceptions. Gilt yields are firming ahead of the budget statement. The dollar is trading higher against the G10 currencies. It still appears to be in a consolidative mode, but we continue to see risk of a more genuine correction after its recent downside momentum stalled. Emerging market currencies are also trading with a downside bias today. Like the foreign currencies, gold’s upside momentum has faded, and near $1763 in Europe, the yellow metal is at a three-day low. Support is seen near $1750. December WTI is little changed near the trough carved in recent sessions near $84 a barrel. US natgas is higher for the fourth consecutive session, its longest advance in two months. It is up about 8.4% this week, recouping last week’s 8.1% drop. Europe’s natgas benchmark is up 3% today and is up a little more than 13% this week. Iron ore’s four-day rally stalled, and it slipped marginally today. December copper is extending its slump into the fourth consecutive session. It is off about 4.8% this week after rallying almost 14% over the past two weeks. December wheat is extending yesterday’s pullback. It fell 1.3% yesterday and is down 2.3% today.
Asia Pacific
Practically everyone agrees
that the Chinese yuan is closely managed. The PBOC sets the reference rate every
day. The dollar can move away from it, while other currencies, such as
the euro have a 5% band. More often than not, it deviates from market
projections. Yet, it also makes sense that over time, the tactics
change. Considerations change. Policy goals change. There are
many moving parts but often observers seek one grand unified explanation that
does not do justice to the intelligence and savviness of PBOC officials.
In most explanations the role of other currencies movements in explaining the
dollar-yuan changes are played down. Yet the rolling 60-day correlation
between the changes the dollar-yen and dollar-yuan is at the highest since
early 2017. Similarly, the 60-rolling correlation with the changes in the
euro and dollar-yuan is its highest since mid-2018. Of course, this is
not the final word, but this is to say that with Chinese officials as a known
unknown and the range of levers it uses to manage the currency, include what we
might call a modified halo effort (like slowing down when you see a police car
on the highway) opaque as ever, knowing what the dollar is doing against
the euro and yen, sheds some light on what the yuan doing, now.
Japan reported a larger than
expected October trade deficit. The JPY2.16 trillion (~$15.5 bln) shortfall was about a
third larger than expected. Exports slowed to 25.3% from 28.9%.
Imports accelerated to 53.5% from 45.7%. The J-curve effect through which
the trade deficit worsen after sharp depreciation of a currency
continues. Separately, weakening global demand is also evident.
South Korea and Taiwan have recently reported declines in exports. Today,
Singapore reported a 5.6% decline in its exports, the most in three
years.
Australia's grew 47.1k
full-time jobs in October, more than four-times September's figures. Overall job growth was more than
twice the median forecast in Bloomberg's survey. The participation rate was
unchanged at 65.5% after the September series was revised lower from
65.6%. The unemployment rate ticked down to 3.4%, matching July's
cyclical low. The increase in hours works bodes well for GDP.
Still, the swaps market does not have a 25 bp hike fully discounted for the
December 7 meeting (now about 65%). Nor has the robust report prevented
the Australian dollar from being among the weakest of the G10 currencies
today
The dollar continues to
trade in a narrow range against the Japanese yen, and today is the first day
since the end of August that the dollar has not been above JPY140. The consolidative tone persists, and
the greenback remains in the lower end of Tuesday's broad range
(~JPY137.70-JPY140.60). The Australian dollar's rally stalled in front
of $0.6800 for the past two sessions and now has backed off to below $0.6700. A
band of support is found $0.6640-60. The US dollar is extending
its recovery against the Chinese yuan after finding support near CNY7.0250 in
the past two sessions. It is moving above CNY7.14 now.
Ahead of the weekend, the greenback could see CNY7.1760 and possibly
CNY7.20-21. After a couple of days of setting the reference rate for the
dollar close to market expectation, in the face of more buying interest, the
PBOC fixed the greenback at CNY7.0655 vs. expectations for CNY7.0803.
Separately, the PBOC did two notable things. First, it warned that
inflation was likely to rise as the economy recovered. Second, in the
face of a slump in government bonds, it queried banks on liquidity.
Europe
The long-awaited UK budget
statement will be made today. Part of the latest delay is to the allow the Office for
Budget Responsibility to use lower interest rates than the ones that resulted
from investors panic strike in response to Truss/Kwarteng
proposals. Truss had won the rank-and-file vote over Sunak at least
partly because of her pro-growth program in comparison with Sunak's tax hikes
as Chancellor. After the chaos polls suggest that Tory voters would have
changed their minds. So what? Polls suggest that if people knew
then what they know now, the Brexit referendum would have gone the other
way. The UK is still out of the EU and Chancellor Hunt will deliver an
austere budget. There are many moving parts and nuances.
Perhaps, among the most
important aspect for the market is the net new borrowing. Ironically, it may turn out that it is not
significantly different than Kwarteng projected. Debt is rising and the
cost to service the debt is rising. For most market participants outside
the UK, the precise details, like the bracket creep, or lowering the threshold
for the highest tax bracket, or the reduction of the surtax on banks, may be
less important than the appreciation that on top of the interest rate hikes,
and the balance sheet unwind, which includes outright Gilt sales, fiscal policy
is tightening. Broadly speaking, reports suggest a 60/40 mix of spending
cuts and tax increases. And this comes despite the BOE anticipating a prolonged
economic downturn that has already begun. Also, at the risk of being
cynical, political considerations and an eye to the next general election (by
January 2025) may also shape how the pain is distributed and for how
long.
The 30-year Gilt yield,
where much of the turmoil was focused has made a round trip. Consider in mid-August the yield was
around 2.50%. By the time Truss took office on September 6, the yield has
risen slightly above 3.40% amid the rise in global yields. During her
brief stint, the 30-year yield peaked on September 28 around 5.15%. The yield
backed off as Truss began backtracking and the BOE launched an emergency Gilt
buying operation, focusing on the long-end and inflation-linked bonds, which
pension funds were large owners. A miscommunication of misunderstanding saw the
30-year Gilt yield jump back to nearly 5.10% on October 12. Subsequently
the 30-year yield has fallen and yesterday, briefly slipped through 3.30% to
its lowest rate since, yes, September 6. It is not just a decline of the
yield in absolute terms, but also relative to German and the US. The UK
30-year premium over Germany rose to what appears to be a record high in late
September of almost 290 bp, twice what it was on August 31. Yesterday, it
was below 140 bp. The US typically pays a premium over the UK to borrow
30-years. That premium was around 80 bp at the start of the year.
It was hovering around 50 bp in mid-August, and by late September swing to a
record 116 bp discount. It did not switch to back until early in the second
half of October. The US was paying a 56 bp premium yesterday.
For the past two sessions,
the euro poked through the 200-day moving average on an intraday basis but
closed below it (~$1.0420 today). It is holding above yesterday's low near $1.0330, but it
looks vulnerable in the North American session as the consolidative phase
continues. A break of this week's lows (~$1.0270-80) may be the first
signal of a correction rather than just consolidation, and would target $1.02
initially, and maybe $1.0140-50. Sterling is faring better, but
also looks vulnerable. A break of yesterday's low around $1.1830
would be the first sign, and the initial risk may be around a cent. Some
late longs likely were washed out with the news from Poland earlier this week
that saw sterling fall to $1.1740. The week's low, set Monday, was closer
to $1.1710.
America
The US reports October
housing starts.
After the 8.1% drop in September, the median forecast in Bloomberg's survey
calls for a 2% decline last month. It would be the first back-to-back
decline since Jan-Feb 2021 and breaks the sawtooth pattern of alternative
increases and declines that characterize this year's data. Permits are
holding up better then starts this year. Starts were off about 7.7%
year-over-year in September. Permits were down half as much. After
the retail sales, industrial production, and business inventory data out
yesterday, the Atlanta Fed's GDPNow tracker was revised to 4.4% this quarter
from 4.0%. Weaker than expected starts could see it shaved.
The Philadelphia and Kansas
City Fed surveys are out. The former rather than latter can move the markets if it
significantly different than expectations. Recall that earlier this week,
the Empire State survey was considerably stronger than expected and moved above
zero for the first time in four months. Weekly jobless claims are not the
focus they were earlier this year. The four-week moving average is almost
219k, which is around the middle of the range seen in H2. Continuing
claims have risen for the past four weeks but at 1.493 mln they are still
associated with a tight labor market. They bottomed at 1.306 mln in late
May.
Canada's October CPI was
largely in line with expectations; unchanged at 6.9% year-over-year. The underlying core rates remained
firm. The swaps market was unmoved by the data and have about a 33%
chance that the Bank of Canada hikes again by half-a-point rather than slow
another notch to 25 bp. It meets on December 7. The target rate is
now at 3.75% and the market looks for a peak in Q2 23 between 4.25% and
4.50%. We continue to note the strong correlation between the changes in
the Canadian dollar and the S&P 500. The 60-day rolling correlation
reached beyond 0.78 yesterday, the highest since late 2011. The
relationship has been fairly stable, and the 120-day rolling correlation is around
0.72, the most 10 years.
The US dollar has carved a
shelf around CAD1.3225-35 for the past four sessions. Short-term momentum traders may be
covering short positions, which has lifted the greenback to a new high for the
week slightly above CAD1.3360. The immediate risk extends to around
CAD1.34. The US dollar is in its trough against the Mexican
peso. The downside momentum that saw it trade near MXN19.25
earlier this week has faded, but the carry gives the long peso positions some
cushioning. The dollar has held so far today below yesterday's high
(~MXN19.4030). If this is paid, the greenback can move toward
MXN19.47-MXN19.50.
Disclaimer
Reviewed by Marc Chandler
on
November 17, 2022
Rating:
