Eyes turn to the ECB and the first look at third quarter U.S. GDP
European bonds cut yesterday’s gains and yields are up 2-6bp. The dollar is mixed. Among the major currencies, the yen, New Zealand dollar and Norwegian krone are firm, while the Australian and Canadian dollars, Swedish krona and euro are slightly lower. Emerging market currencies are also mixed. The Turkish lira and the South African rand are the weakest, while the Russian ruble, Thai baht and Indian rupee lead. The JP Morgan Emerging Markets Currency Index is slightly heavier after falling around 0.3% yesterday. Gold is faltering after yesterday’s rally but remains in Tuesday’s range (~ $ 1,782 – $ 1,808). Plans to resume talks between Iran and Europe and a larger-than-expected increase in US crude inventories saw December’s WTI initially extend yesterday’s losses, but new buys have emerged as they approach. 20-day moving average (~ $ 80.70). It hasn’t closed below that moving average for two months. After losing around 3% in the past two sessions, copper has rebounded more than 1% today. Iron ore and aluminum are softer.
As expected, the Bank of Japan left its policy in abeyance. It has shaved the growth and inflation forecasts for this year. The economy is now expected to grow 3.4% instead of 3.8%, while the CPI forecast drops from 0.6% to zero. While the growth projection for the next fiscal year has been raised from 2.7% to 2.9%, it is not enough to offset this year’s reduction. Growth in fiscal years 23-24 was unchanged at 1.3%. The CPI forecast for the next two years has not been revised to 0.9% and 1.0%, respectively. Separately, September retail sales rose 2.7%, nearly double the 1.5% forecast by the Bloomberg survey median. As a result, the year-over-year decline narrowed to -0.6% from -4.0%.
The Reserve Bank of Australia did not defend its target on the April 2024 bond, although the yield was well above the level seen last Friday when it intervened (A $ 1 billion) for the first time. times since mid-February. Its three-year yield jumped 19 bps (to 1.12%, its highest level in two years). This follows a nearly 16bp jump yesterday based on the underlying CPI above 2%. There is still a window of possibility that he will show his hand tomorrow. Yet today’s absence is fueling speculation that at next week’s central bank meeting the RBA may abandon its policy of controlling the yield curve.
The dollar is trading in a range of around 20 ticks on either side of 113.70 JPY. There are $ 1.7 billion in options in the JPY113.70-JPY113.75 area expiring today. The greenback has not traded above 114.00 JPY since yesterday’s Asian session. Support in the JPY113.40-JPY113.50 area looks strong. The Australian dollar slipped to a three-day low at near $ 0.7480 before rising to near $ 0.7525 before stagnating. There are options for just over A $ 1 billion at $ 0.7475 which expire today. The neighboring cap is in the area of $ 0.7530 to $ 0.7550. The greenback traded above CNY 6.40 for the first time this week, but was not held. The PBOC set the dollar benchmark rate at CNY 6.3957 compared to expectations (Bloomberg survey) of CNY 6.3949. Against the CFETS basket, the yuan is trading at its best for five years. Some of the demand for dollars by large public banks appears to be related to month-end adjustments.
The main focus today is the ECB meeting, although no further action is envisaged. ECB President Lagarde should stick to the idea that price pressures will be transitory. Earlier today, Spain announced that its harmonized EU inflation measure fell from 4.0% in September to 5.5% in October. The median forecast (Bloomberg survey) was 4.6%. The German states communicate their October figures, and around the Lagarde press conference, the national figure will be communicated. German inflation is expected to climb to 4.5% from 4.1%. Tomorrow, aggregate figures for the euro area will be released. The base rate is expected to remain stable at 1.9%, while the risk is that the overall rate year over year will exceed the median forecast by 3.7% (vs. 3.4%). The ECB was expanding its balance sheet before the pandemic and will do so after the end of emergency purchases (March). What is debated are the “modalities” of this facility. No decision is expected before December.
Rising energy prices are a major source of price pressure in Europe. Reports indicate that Russian President Putin late yesterday indicated that Gazprom would start increasing Europe’s gas supply after November 8. It was the day after Gazprom finished restocking its stocks. In addition, press accounts indicate that gas flows from Norway are increasing.
Sunak’s budget implication for debt issuance was lapped by the bond market, and the 10-year Gilt yield fell 12.5bp to below 1% for the first time this month. . It is down to around 0.98%, where it is now. The market was already moving in that direction, and the yield had fallen over the previous three sessions by almost nine basis points. The Debt Management Office forecasts a reduction of almost £ 58 billion in emissions. Most projections predicted a reduction of around £ 33 billion. We suspect this caused the biggest backlash in the market, though, of course, pub stocks love the fact that Sunak has canceled the impending alcohol tax hike.
The 50% cut for one year for hospitality, leisure and retail companies seemed welcome, but most UK stock indices fell. The FTSE 250 made a slight gain (0.05%), but this is mainly due to two sectors, utilities and real estate, which seem more a function of the fall in long rates than of the other content of the budget. . . In total, tax cuts, cancellations and spending increases amounted to around £ 75 billion. After the budget, the market raised the odds of a Bank of England rate hike as early as next week. The implied yield on the December sterling futures contract rose 4.5bp to 0.465%. This was the first increase in half a dozen sessions, in which performance fell 13 bps. The yield is still up 6.5bp today. The pound sterling underperformed. It was one of the two major currencies that failed to assert itself against the greenback (the other being the Norwegian krone, for which Norway is more likely to hike rates next week).
The euro slipped to a new marginal low for the week around $ 1.1580. Below, attention will turn to the low of the year set on October 12 at near $ 1.1525. The euro was capped at nearly $ 1.1625 and there are 1.57 billion euros of options entered in the $ 1.1600 to $ 1.1610 area expiring today. Given the speculation on more aggressive central banks and the ECB’s lagging stance, we believe the risk is on the downside. The $ 1.1490 area is a retracement (50%) of the euro rally from last March to January 6 (ironically) The next retracement (61.8%) is a little below $ 1.13. The British Pound is trading quietly in yesterday’s range (~ $ 1.3710 – $ 1.3780). It hasn’t been able to resurface above $ 1.38 since the shooting star candlestick on Tuesday. A breakout of $ 1.3685 would be technically significant.
The Bank of Canada has been more hawkish than expected. It ended its bond buying program, which had been cut to C $ 2 billion per week. It will buy C $ 4 billion to C $ 5 billion in bonds per month by reinvesting maturing issues. Governor Macklem also acknowledged that a rate hike may be warranted sooner than previously thought. Due to supply constraints, the output gap could be closed in the middle of quarters next year rather than in the second half of the year. Still, the updated economic forecast is a bit incongruous. Consider that this year’s GDP has been reduced from 6.0% to 5.1%, and next year’s GDP has been reduced from 4.3% to 4.6%. Next year’s CPI forecast has been revised to 2.1% from 2.2%. The US dollar, which started local session at its best in two weeks around CAD 1.2425, reversed lower to test the CAD 1.2300 area. Last week’s low was slightly below CAD1.2290. The two-year Canadian yield jumped 20bps to exceed 1% for the first time since the start of March last year. Macklem confirmed the direction the market was heading. Rather than simply advancing the rate hike, the market is anticipating further hikes. The swap market is forecasting five rises over the next 12 months.
While the first weekly jobless claims are what comes closest to a live reading of the labor market, the first estimate of third-quarter GDP, which is subject to potentially statistically significant revisions, will draw attention. headlines today. The Atlanta Fed’s final GDPNow valuation is 0.2% (annualized), up from 0.5% previously. The Bloomberg survey’s median forecast is 2.6% after rising 6.7% in the second quarter. The decline in consumption (~ 70% of the economy) seems to have been the critical brake. It may have gone from an annualized rate of 12% to less than 1%. Despite the slowdown in consumption, the merchandise trade deficit hit a record $ 271.3 billion in the third quarter. Another measure of inflation is the GDP deflator. Although some economists believe it is a better measure of prices than the CPI or PCE deflator, it is still underestimated. Still, the GDP deflator and the quarterly personal consumption expenditure deflator are expected to have declined from the second quarter readings.
After a dramatic swing yesterday, the exchange rate between the US dollar and the Canadian dollar is moderate today. It is in a range of around 30 ticks (~ 1.2355 CAD-CAD1.2385). The inability of the Canadian dollar to reach new highs yesterday after the Bank of Canada announcements warns of the risk of further consolidation in the near term. Recall that the greenback recorded a high yesterday before the central bank meeting slightly above CAD1.2430. A breakout of this zone could stimulate a rally towards CAD 1.2475 which we believe would coincide with a pullback in stocks. The US dollar approached the upper end of its recent range against the Mexican peso (~ 20.35 MXN) yesterday. A move above there could signal a move to MXN20.42 and then MXN20.50. Yesterday, Brazil’s central bank hiked the Selic rate by 150bp (to 7.75%) and promised another similar move next month. The two-month trendline is approaching BRL 5.5050 today. A break could target mid-month BRL5.4350 low.