Overview: Risk appetites have returned but may be
tested by the US jobs report. News of progress with US auditors in China helped
lift Hong Kong and Chinese equities. Most of the large bourses in the region
also rose. Europe’s Stoxx 600 is up a little more than 1% near midday after
shedding 1.3% over the past two sessions. US futures also are trading with an
upside bias. Benchmark 10-year yields are mostly a little softer today. The 10-year
US Treasury yield is at 4.13%, down slightly. The greenback is softer against all
the major currencies and most of the emerging markets as well. The dollar-bloc
leads the G10, while Thailand and Hungary lead the emerging market currencies. Softer
rates and the US dollar are helping gold recover from the push below $1617
yesterday. It is probing $1645-$1650. December WTI is moving above $90 to reach
its best level since October 10. US natgas has been alternating between gains
and losses this week. It was off about 4.7% yesterday and is up a little more
than 4% today, ostensibly on weaker stocks. Europe’s benchmark is 1.6% lower
around 122.1 euros. It finished last week at 110 euros. Iron ore, which snapped
a six-session slide on Tuesday, is up for the fourth consecutive session today.
It has rallied 11% in this run. December copper is jumping 3.3% and is at its
best levels of the week. After falling almost 7% over the past two sessions, December
wheat has come back bid and is up nearly 1.2%.
Asia Pacific
News that the US audit
process of Chinese companies, required to prevent delisting has proceeded
faster than expected helped lift Chinese stocks. An index of mainland companies that trade
in Hong Kong rose nearly 6% today and led the region with an 8.9% gain this
week. The Hang Seng rose 5.3% for an 8.6% advance this week, easily the best
performer in the region. The CSI 300 gained nearly 3.3% today and 6.4% for the
week. There had been some speculation earlier this week that the zero-Covid
policy would be abandoned but this was denied.
The PBOC has been raising
the dollar's reference rate for six consecutive sessions through today. The dollar is allowed to rise by a maximum
of 2% above the fix, so this means that the dollar's cap has been moving higher.
At the same time, officials are gradually narrowing the gap between the fix and
market expectations. That gap reached 950 pips on October 20 amid the Party
Congress and narrowed to slightly less than 600 pips today.
Japan's markets re-opened
after yesterday's holiday and played a little catch-up, with the Nikkei losing
nearly 1.7%. The final
October service and composite PMI were better than the flash readings. The
service PMI was revised to 53.2 from 53.0 of the preliminary estimate and 52.2
in September. The composite stands at 51.8, not 51.7, and 51.0 in September. Both
are at their best levels since June. Separately, we note that three-month
implied yen volatility has slipped to its lowest level in three weeks, a little
below 12.3%. The dollar is little changed against the yen this week.
In its monetary policy
statement, the Reserve Bank of Australia upgraded its inflation outlook and
pared its growth forecasts. Its preferred inflation measure, the trimmed mean is expected to
peak at 6.5% at the end of this year (up from 6%) before falling to 3.75% by
the end of next year and reaching the top of its 2-3% target in 2024. It shaved
this year's growth projection to 3% from 3.25% and sees growth at 1.5% in 2023
and 2024.
The dollar is confined to a
JPY147.50-JPY148.50 trading range. We suspect that support is stronger than resistance. Still, the
dollar has not traded above JPY149 since October 25, and that was just barely.
With a brief but notable exception, since the second week in October, the
dollar has been largely confined to a JPY145-JPY150 range. The Australian
dollar fell from almost $0.6500 on Wednesday to near $0.6270 yesterday. It
has fallen for the past six sessions but has steadied today. It is firm but
within yesterday's range today. The $0.6375-$0.6400 offers the nearby cap. The
Chinese yuan is trading about 0.5% higher and recouping the losses of the past
two sessions. The PBOC set the dollar's reference rate at CNY7.2555 and
this ostensibly allows the dollar to trade as high as CNY7.40. It has not
traded above CNY7.3120.
Europe
Germany's services and composite PMI were revised but still show the economy struggling. The service PMI is at 46.5, up from the preliminary 44.9 and above September's 45.0. The final composite is at 45.1. The flash reading was 44.1 and it was at 45.7 in September. Separately, September factory orders were dismal, falling 4%, compared with expectations for a 0.5% decline after a revised 2% fall in August (initially a 2.4% fall). The French PMI was also revised up, but both the services and composite PMI was softer than September. Still, they both held above the 50 boom/bust level. The service PMI is at 51.7 (51.3 flash and 52.9 in September) and the composite is at 50.2 (from 50.0 flash and 51.2 previously). France also reported declines in September industrial output (-0.8%), and manufacturing (-0.4%). Italy's PMIs fell more than expected. The services PMI fell to 46.4 from 48.8, and the composite is at 45.8 from 47.6. Note that Prime Minister Meloni will present her budget today. Spain's service PMI rose to 49.7 from 48.5, but the composite slipped to 48.0 from 48.4. It reported that September industrial production fell 0.3% after rising by the same amount in August. The aggregate services PMI stands at 48.6, up from 48.2 of the initial estimate but still down slightly from September's 48.8. The composite is at 47.3, slightly better than the flash reading of 47.1, but down from 48.1. The composite has fallen since April's peak at 55.8.
The Bank of England
delivered the 75 bp rate but warned that the terminal rate would likely be
lower than the markets were discounting. BOE Governor Bailey said the markets saw a terminal rate of
5.25% next year. That may have been the case recently, but the swaps market
has implied a policy rate peak slightly below 4.70% on the eve of the BOE
meeting. The BOE warned that the economy may have contracted by 0.5% in Q3 as
the UK enters a several quarter recession. The first estimate is due at the end
of next week. The BOE sees the CPI peak at 10.9% later this year. This is down
from a previous forecast of 13%. The BOE's forecasts do not take into account
the budget that will presented November 17. Former Minneapolis Fed president,
Kocherlakota had written an op-ed piece recently arguing that the BOE's
regulatory lapse toward pension funds and its limited support for the Gilt
market led to Truss's downfall. Bailey defended himself yesterday in an
interview, claiming that it would have created a moral hazard. That seems to be
a rather weak defense, no matter what one thinks about Truss's fiscal
intentions. Can it be demonstrated that having the emergency program fully in
place through the budget statement been a significantly greater moral hazard?
Bailey also sidestepped the question about the regulatory approach to the
pension funds, and how does that relate to moral hazard?
America
Today's US employment report
is sandwiched between the FOMC meeting and next week's October CPI. The market looks for around a 200k
increase in nonfarm payrolls. This is a smaller increase than the US has been reporting
but would be a solid number. The monthly average in 2018 and 2019 was 150k. Contrary
to some claims, the Fed is well aware of its two mandates of price stability
and full employment. The unemployment rate was at 3.5% in September, matching
the pre-pandemic low. Whatever full employment means, the Fed is closer to
achieving that than reaching its inflation objective, hence the focus. That
said, one dimension that is problematic because of the implication for
potential growth is the participation rate. It stood at 62.3% in September. It
first reached that in February after hitting a Covid-low of 60.2% in April 2020.
However, before the pandemic struck the participation rate was 63.3%-63.4%. It
never fully recovered from the Great Financial Crisis when the participation
rate hovered around 66%. The Fed and many private sector economists had
expected that higher wages would pull people back into the labor market, but we
are more than homo economicus, and there appear to be some large social forces
at work.
In any event, as Fed Chair
Powell has pointed out on numerous occasions, there is no one number that does
for the labor market as the PCE deflator does for inflation. Powell continues to put stock in the job
openings as a sign of tightness of the labor market. Weekly jobless claims can
be noisy, and a four-week moving average smooths it out. In late 2019, the
four-week moving average was 230-340k. It has held below 220k for the past
seven weeks. Continuing claims have been gradually rising. At 1.485 mln in the
week through October 21, it is the highest since March, but is still in its
trough after bottoming in May near 1.306 mln. Before Covid, continuing claims
were considerably higher. It was slightly below 1.9 mln at the end of 2019. Given
the heightened sensitive to inflation, the average hourly earnings may be
important. A 0.3% increase in October, matching the pace seen in August and
September, would see the year-over-year rate ease to 4.7%, its slowest since August
2021. Recall average hourly earnings rose 2.9% year-over-year in December 2019,
and this was seen as insufficient. At his press conference, Powell, explained,
"I don't think wages are the principal story of why prices are going up. I
don't think we see a wage-price spiral. But, once you see it, you're in
trouble."
Canada also reports October
employment data today. Canada's
job creation has stalled. The number of full-time positions has fallen in three
of past four months. It has created an average of 16k full-time positions a
month this year. The average in the first half was around 38.5k. Counting
part-time positions, Canada has averaged an increase of 19k a month. The median
forecast in Bloomberg's survey looks for a 10k increase in jobs last month,
half of the pace seen in September. Canada's labor force participation rate
reached its pre-Covid level (65.5%) in September 2021 and has gradually pulled
back to 64.7%-64.8% for the past three months. Still, despite the widening of
policy rates, and the widening of the two-year US premium to near three-year
highs, the exchange rate appears to be more a function of the general risk
environment (S&P 500 as proxy) and the general direction of the US dollar. The
60-day rolling correlation of changes in the Dollar Index and the Canadian
dollar is the highest it has been in six years. Separately, Canada announced a
2% tax on share buybacks (the US Inflation Reduction Act has a 1% tax) and it
will launch a C$6.7 bln (~$5 bln) five-year tax credit program to clean energy
projects. Lastly, we note that the government is now projecting a C$36.4 bln
fiscal deficit. In April, it anticipated a C$52.6 bln shortfall.
The dollar-bloc is leading
the move against the dollar among the major currencies ahead of the employment
report. The Canadian
dollar's 0.8% gain trails the Antipodeans, which are up slightly more than 1%. The
greenback briefly traded above CAD1.38 yesterday and is near CAD1.3630 in
Europe. The week's low was set Tuesday around CAD1.3530. We identified the CAD1.35
area as a key to the medium-term technical outlook. A convincing break would
bolster the chances that the CAD1.40 level approached in late September was a
significant higher. Some of the US dollar selling may be related to expiring
options. At CAD1.37, there were options for $545 mln that expire today and
another set for $500 mln at CAD1.3630. Yesterday's price action saw old USD
support at MXN19.80 act as resistance. That area capped the
greenback's bounce and it reversed to close below MXN19.65. It is fraying the
MXN19.60 area in Europe. It reached a five-month low near MXN19.5065 on
Wednesday. The low for the year was set on May 30 around MXN19.4150. The peso
is the third best performing EM currency this week. Brazil is the best with a
3.5% gain coming into today, and the Thai baht is in second place with almost a
1.1% gain. The peso is slightly more than 1% higher this week ahead of today's
local session.
Disclaimer
Reviewed by Marc Chandler
on
November 04, 2022
Rating:
