Overview: US economic data surprised to the upside yesterday,
and although interest rates rose as one would expect, the dollar's initial
gains were pared, and the Dollar Index finished slightly lower on the day. This
seemed, in some respects, to echo how the greenback reacted to the recent jobs
report. However, then, interest rates softened, but the inability to rally on
seemingly good news is notable. The heightened tensions in the Middle East have
spurred a dramatic rally in oil prices. December WTI is nearly 3.5% higher near
$88.50 after gapping higher. Gold has also jumped after two relatively subdued
sessions and is near $1945, up more than 1%.
The safe haven buying in foreign exchange
market is limited. The dollar is heavier against most of the G10 currencies but
the euro and Swedish krona. The yen is little changed after the BOJ bought bonds in an
unscheduled operation, and the Swiss franc is up by less than 0.2%. Most
emerging market currencies are also firmer against the US dollar. The biggest
decline is in the Polish zloty, which seems to be subject to profit-taking
after its recent run-up. Equity markets are mostly lower. In the Asia Pacific
region, Japan, South Korea, and Australia saw minor gains. Europe's Stoxx 600
is slightly lower and US index futures show a heavier bias. Fixed income is
also not showing safe haven demand. Yields in Europe are mostly 1-2 bp higher. UK
Gilts and Italy's BTPs are under more pressure and yields are up nearly six
basis points. The 10-year Treasury yield is flattish near 4.84%.
Asia Pacific
China reported stronger than expected Q3
GDP. The 1.3% quarter-over-quarter
growth compares with a 0.9% median forecast in Bloomberg's survey. This put
year-over-year growth at 4.9%, better than the 4.5% pace anticipated. Beijing
has promised more measures to bolster growth, and this looks to entail more
fiscal and monetary support. The September details were mixed. Industrial
output was steady on a year-over-year basis at 4.5%, but retail sales picked up
(5.5% vs. 4.6%). Fixed asset investment was slipped to 3.1% (from 3.2%), while
property investment contracted by 9.1% (vs. -8.8% in August). The surveyed
jobless rate eased to 5.0% from 5.2%.
The Bank of Japan announced another
unscheduled bond buying operations today after the 10-year yield reached
0.815%, a new high. Separately,
but perhaps not totally unrelated, some press reports suggested the BOJ was
considering raising its inflation forecasts at the meeting later this month.
Japan will report September trade figures tomorrow. Japan's trade balance
improves in September, or it has in 19 of the past 20 years. August's JPY938
bln trade deficit may have been halved in September as exports may have risen
on a year-over-year basis for the first time in three months. Imports have been
falling since April but the 17.7% year-over-year decline in August may mark the
bottom, with the pace slowing in September. Australia reports September's
employment situation. It has created an average of almost 38k jobs a month this
year through August, slower than the nearly 51k average in the first eight
months of 2022. Of those jobs, about 23k on average have been full-time jobs
this year compared with 51k in the year ago period.
The dollar rose to a marginal new high of
JPY149.85 yesterday, which is its best level since the JPY150 level was
breached on October 3. It has
held below there today. The nearly 24 bp rise in the 10-year US yield in the
past two sessions proved too much. But as we noted the BOJ intervened in the
bond market not the foreign exchange market. Still, the yen and the JGB yield
are little changed. The Australian dollar set the session high shortly
after Europe went home yesterday near $0.6380. It stopped slightly
short of the 20-day moving average and the (61.8%) retracement of sell-off from
last week's high near $0.6445. Central bank Governor Bullock's first formal speech
played up the risks to inflation and may have helped the Aussie extend its
gains to almost $0.6395. A move above $0.6400 targets last week's high. The
greenback's uptrend against the Chinese yuan remains intact. It initially
fell to a four-day low slightly below CNY7.2990 before recovering and setting
new session highs near CNY7.3130. China's discount to the on 10-year rates fell
to a new extreme around 215 bp. The PBOC set the dollar's reference rate at
CNY7.1795 compared with the average forecast in Bloomberg's survey for
CNY7.3085.
Europe
The UK's CPI rose by 0.5% last month as
expected, which left the year-over-year rate unchanged at 6.7%. The core rate eased to 6.1% from 6.2%, which is the
slowest since January. Services inflation ticked up to 6.9% from 6.8%. Producer
prices are still falling on a year-over-year basis. Note that September's
inflation is used to set cost-of-living increases in some transfer payments.
The UK reports September retail sales before the weekend. In the swap market,
the odds of a hike on November 2 slipped slightly but rose to a bit above 50%
for the last meeting of the year on December 14.
The eurozone has a relatively quiet
economy schedule until next week's ECB meeting, where there is practically no
chance of a hike in key rates. Earlier
today was the release of August construction output, which tumbled 1.1% after a
0.8% increase in July. It is not a market-mover even in the best of times. Next
week, ahead of the ECB meeting, the markets and officials will see the
preliminary October PMI (which has been below the 50 boom/bust level for the
past four months) and September M3 money supply (it contracted on a
year-over-year basis in July and August for the first time since 2010).
Despite the weakness of the German
economy, which last grew in Q3 22 and may expand in a single quarter this year,
Berlin is undeterred in its political agenda. It wants the re-establishment of the Stability and
Growth Pact that enforces fiscal discipline on members. The fact that Italy is
thus far avoiding a recession means that it cannot take advantage of the same
exception as Germany. Italy's 10-year premium over Germany that had recorded
the year's low in mid-June below 160 bp is back above 200 bp. Germany is also
having a row with France continues. The debate is over the extent that
government funds should be used to extend the life of nuclear reactors. Spain,
which holds the rotating EU presidency, is trying to work out a compromise that
would allow France to keep its aging nuclear reactors functioning while
minimizing the risk that it undercuts power prices in Europe. The EU summit
later this month will likely take up the issue, but a resolution does not seem
imminent.
The euro was surprisingly resilient in the
face of the stronger than expected US data and the jump in US rates. The single currency fell by about a third of a cent
after the US retail sales surprise but did not make a new low on the day. It proceeded
to recover fully and make record new session highs after European markets
closed near $1.0595. It met the (61.8%) retracement (~$1.0585) of the sell-off
from the October 12 high before stalling. Still, it settled above Monday's high
(~$1.0565). The euro is little changed within yesterday's range. There are
nearly 1.0 bln euros in options struck at $1.06 that expire today. Sterling
is uninspiring. It was confined to Monday's range (~$1.2125-$1.2220)
and the close was near mid-range. Unlike the euro, it was unable to record
session highs in North America, but it did manage to recover from about $1.2135
to almost $1.2210 before faltering. It is firm today and still within Monday's
range. It needs to resurface above $1.2255 to be significant.
America
Rather than lose momentum as Q3 wound
down, as we expected, the US economy strengthened. Retail sales rose by 0.7%, more than twice the median
in Bloomberg's survey. Even the core measure, which exclude autos, gasoline,
building materials and food services rose by 0.6%. The median forecast was for
a 0.1% rise. Moreover, retail sales for August were revised up to 0.8% (from
0.6%) on the headline and 0.2% on this core measure (from 0.15). Industrial
output also surprised. It was expected to be flat and instead rose by 0.3%, led
by a 0.4% rise in manufacturing production. Here, unlike retail sales, August
revisions were downward. The 0.4% rise initially reported in August industrial
output was revised to flat and the 0.1% rise in manufacturing was revised to -0.1%.
Business inventories stronger than expected, rising by 0.3% in August and 0.1%
in July (after an initial flat estimate). The Atlanta Fed's GDP tracker ticked
up from 5.1% for Q3 to 5.4%. Still, the futures market, the odds of a Fed hike
at the conclusion of the October 31-November 1 meeting, firmer to a still low
12% from about 8%. The odds of a hike at the last FOMC meeting of the year
(December 12-13) rose to about 48% from about 37%. However, the market also
made a large adjustment to converge toward the Fed's latest dot plot that
implied only two cuts next year. The implied yield of the December 2024 Fed
funds futures contract settled with an implied yield of 4.84%, an increase of
11.5 bp, the most since early September. The current effective Fed funds rate
is 5.33%.
On tap today, the US reports September
housing starts and permits. They
are expected to unwind some of August's changes, when permits rose by 6.8% and
starts fell by 11.3%. Economists expected permits to soft and starts to recover
about 2/3 of its decline. Late in the session, the Fed's Beige Book, prepared
for the upcoming FOMC meeting will be released. Six Fed officials speak
throughout the session, but the slightly different views are largely known
already.
Softer than expected Canadian September
CPI weighed on the Canadian dollar as it reduced the perceived chances of a
central bank rate hike next week. Instead
of increase, the headline rate slipped by 0.1% and this allowed the
year-over-year rate to fall to 3.8% from 4.0%. The underlying core measures
also fell by more than expected. The swaps market downgraded the chances of a
hike next week to about 15% from around 43% before the report. The probability
of a hike this year fell to about 43%, the lowest in a month, from nearly a 65%.
Canada also report September housing starts today. They have fell in July and
August and are expected to have fallen again. The median forecast in
Bloomberg's survey is for a little more than a 5% decline that would take
starts to about 240k, a six-month low.
In response to the combination of US
strong retail sales and easier than expected prices pressures in Canada saw the
greenback spike back to last week's high slightly above CAD1.3700. Over the next few hours, it trended back to almost
CAD1.3620. It spent the North American afternoon in a 20-pip range around
CAD1.3640. The US dollar is trading heavier and looks set to test CAD1.3600,
where there are about $655 mln in options that expire today. There is another
set of options there for $1.6 bln that expire Friday. A break likely spurs a
test on the CAD1.3550-70 area. The greenback has been stuck in a range
against the Mexican peso. It traded between roughly MXN17.8450 and
MXN18.11 before the weekend and remained in the range the last two
sessions. Like it did against the other currencies, the dollar initially
rallied on the economic data, unwound the gains, and then consolidated. The US
dollar made a marginal new session low in early North American afternoon
dealings near MXN17.8720. It is straddling the MXN18.00 area today.
Reviewed by Marc Chandler
on
October 18, 2023
Rating:
