Overview: The capital markets' reaction to softer
than expected CPI was too much. The implied yield of the December 2024 Fed
funds futures fell by 25 bp as if the October's CPI was worth a full
quarter-point rate cut next year. US two- and 1-year yields are around two
basis points higher today and the dollar is mixed, with the euro and sterling
under the most pressure. China's data were uninspiring, and more stimulus is in
the pipeline. Japan's Q3 GDP contraction was sharper than expected, while the
UK's CPI slowed more than projected. Biden and Xi are to meet today with Biden
speaking to the press late in the North American afternoon. US retail sales are
expected to support ideas that the Q3 shopping spree is not sustainable.
Global equities have rallied on
the US coattails. Most of the large markets in the Asia Pacific region rose
more than 1%. Europe's Stoxx 600 is up about 0.6%, its third consecutive
advance. US index futures are also enjoying a firmer tone. Asia Pacific bond
yield tumbled, in a catch-up move. European benchmark yields are mostly softer,
with UK Gilts being the outlier, rising a couple of basis points. Soft yields
and the dollar's setback are helping gold recover. It frayed the 200-day moving
average on Monday (~$1935) and is pushing above $1970 today. Resistance is seen
closer to $1979. December WTI is pulling back after approaching $80 a barrel
yesterday.
Asia Pacific
The PBOC left its one-year
Medium Term Lending Facility rate unchanged at 2.50% and pumped up the lending
volume to CNY1.45 trillion, nearly double last month's amount. Separately, the monthly real sector data
reports showed steady industrial output (4.6% year-over-year vs 4.5%) and an
increase in retail sales (7.6% year-over-year vs. 5.5% in September). However,
year-to-date, year-over-year retail sales ticked up flattish at 6.9% from
6.8%). Fix asset investment slowed to 2.9% from 3.1% (year-to-date,
year-over-year). Property investment was off 9.3%, after falling 9.1% in
September, while sales fell 3.7% (3.2% in September year-to-date,
year-over-year). The survey jobless rate was also steady at 5.0%. China has
announced a series of new fiscal measures and added support for the property
market is being considered. The IMF's new forecast is for the Chinese economy
to grow 4.2% next year, which seems on the low side. The takeaway is that the
comparisons with last year when activity was depressed by Covid may exaggerate
the strength. Month-over-month industrial output rise by almost 0.4% after
almost the same in September, broadly similar to a year ago. Retail sales edged
up by less than 0.1% month-over-month.
The Japanese economy
contracted by more than expected. The median forecast in Bloomberg's survey looked for a 0.1%
quarter-over-quarter contraction, and instead output fell by 0.5%, for a 2.1%
annualized rate. The Q2 expansion was revised to 1.1%
quarter-over-quarter (from 1.2%) or a 4.5% annualized rate. Net exports swung
from a 1.8% boost to GDP in Q2 to a 0.1% drag in Q3. Business spending
unexpectedly continued to contract. The 0.6% quarter-over-quarter decline
compares with the median forecast of a 0.1% gain. Private consumption
disappointed too. First, the drag in Q2 was revised to -0.9% from -0.6% and it
was flat in Q3. Economists had expected a small recovery. Japanese officials
like their Chinese counterparts are not satisfied with the economic performance
and last week the cabinet approved a new economic package worth over JPY17
trillion (~$112.6 bln) that included income tax cuts and support of low-income
households and extended subsidies for energy.
Australia's wage index rose
1.3% in Q3 after increasing by 0.9% (initially 0.8%) in Q2. That is the largest quarterly rise since
at least the late 1990s and lifts the four-quarter average to almost 0.96,
which matches the highest since early 2009. Australia updates it employment
situation tomorrow with the October jobs report. In the first nine months of
the year, Australia grew an average of 33.6 jobs a month, or which almost half
(15.5k) were full-time posts. In the Jan-Sept 2022 period, Australia added an
average of 47k jobs a month and 49k full-time jobs (net loss of part-time
positions).
The dollar's sell-off
snapped a six-day rally against the yen and reinforces the sense that greenback
is toppish near JPY152. A break of JPY150 targets last week low near JPY149.20, though the
trendline from the early October low, and the late October and early November
lows is found today around JPY149.60. Still, the JPY149.20 could be the
potential neckline of double top, which, if triggered, could signal potential
toward JPY146.60. The Australian dollar surged above $0.6500, which had
proven to be a formidable for the past three months. A false break
took place earlier this month when the Aussie peaked slightly below $0.6525. The
$0.6510 area is the (38.2%) retracement objective of the Aussie's sell-off
since peaking near $0.6900 in June and retesting it in July. The next
retracement (50%) is around $0.6585, while the 200-day moving average is about
$0.6600. The dollar fell to nearly CNY7.2335 today, its lowest level in
around three months. It has steadied in the CNY7.24-CNY7.25 range. The
PBOC fixed the dollar lower at CNY7.1752 (it has been in the CNY7.1765-75
area). Compared with the average projection in the Bloomberg survey (CNY7.2452)
the gap is the narrowest in several weeks.
Europe
Headline inflation in the UK
tumbled to 4.6% in October from 6.7% in September. The key, as we have noted, was that the 2%
increase in October 2022 drops out of the 12-month comparison and was replaced
by an unchanged figure from last month. The other measures were stickier. The
core measures slowed to 5.7% from 6.1%, which brings it to match its lowest
level since early last year. Service prices pressures moderated to 6.6% from
6.9%. At the end of last year, the UK's service price inflation stood at 6.8%,
twice the pace seen at the end of 2021. Separately, the UK reported deepening
deflation among input and output prices. Output prices fell -0.6%
year-over-year from a revised 0.2% gain in September, initially -0.1%. Input
prices were 2.6% lower than a year ago -2.1% (initially -2.6%). Ahead of the
weekend, the UK is expected to report a 0.5% increase in retail sales, which it
true, would be the largest increase in seven months. Lastly, note that the UK
Supreme Court ruled against the government plans to export asylum seekers to
Rwanda.
Yesterday, Eurostat
confirmed that the eurozone economy contracted by 0.1% in Q3. It makes today's news of a 1.1%
contraction in the region's industrial output in September redundant. It
followed a 0.6% increase in August after a 1.3% decline in July. Similarly, the
eurozone's September trade surplus is old news. However, it is notable that Q3
was the first quarter in two years that a trade surplus was reported every
month.
The euro had its best day of
the year against the dollar, appreciating by 1.7%. It closed above the 200-day moving
average for the first time since the end of August. The euro is consolidating
in a narrow range mostly above $1.0845. The single currency met the (50%)
retracement objective of the losses from the year's high (~$1.1275) near
$1.0860. The next retracement (61.8%) is a cent higher. It was also
sterling's strongest performance of the year, rising by a little more than 1.8%
to push above $1.2500. It surged through the 200-day moving average
(~$1.2440) and reached its best level since mid-September. It met the (38.2%)
retracement of the losses since the July high (~$1.3140) found near
$1.2460. The next retracement target (50%) is a little below $1.2600.
Sterling is holding below $1.25 today and found some bids near $1.2445.
America
October US CPI came in a
little softer than expected, sending interest rates and the dollar broadly
lower, while lifting stocks. The market feels more comfortable with its prior that the Fed's
tightening cycle is over. Shelter prices, which account for around a third of
the CPI basket, rose 0.3% last month, about half of the pace seen in September.
Core service prices, excluding housing, are up 3.7% year-over-year, which is
the lowest in a couple of years. Core goods prices fell for the fifth
consecutive month. Through October, core goods prices are flat for the year
after rising by about 3% in the first ten months of 2022.
US reports producer prices
today, but the focus will be on retail sales. It is not good enough for price pressures to ease to
boost confidence that inflation is moving toward the Fed's target, but demand
needs to slow. Today's October retail sales report is expected to show just
that. Retail sales rose at nearly an 8.5% annualized pace in Q3 and a 5.2%
annualized increase in Q2. The median forecast in Bloomberg's survey is for a
0.3% decline, which would be the first since March.
Note that the December 2024
Fed funds futures implies an effective rate of about 4.43%. Currently, the effective average is
5.33%. This is to say that the market has 90 bp of cuts discounted by the end
of next year. That is tantamount to three cuts fully priced in and about 60% of
a fourth cut. The yield is about 26 bp lower than at the end of last week. This
seems to be an exaggerated response to the modest miss on the CPI report. The
futures market has around 80% of the first cut discounted for next May and two
cuts by the end of July. It is difficult to envision the pendulum swinging more
this direction.
The US dollar posted a
bearish outside down day against the Canadian dollar, trading on both sides of
Monday's range and settled well below its low. It extended yesterday's loss to
slightly below CAD1.3880 before steadying. The greenback may be carving out a
larger topping pattern against the Canadian dollar. A break of the CAD1.3600-30
area bolsters the case. The US dollar reversed lower at the end of last
week from almost MXN17.94. It fell to almost MXN17.34 yesterday and
briefly traded below MXN17.31 today. The low set earlier this month was about
MXN17.2835. The double-top pattern forged last month projects
toward MXN17.00.
Reviewed by Marc Chandler
on
November 15, 2023
Rating:
