Markets
Cracks in the AI financing narrative spilled towards Asian dealings this morning with the local poster boy – South Korean Kospi – ceding 7.5% in the end. Risk aversion spilled to Europe, but the damage remains contained given much smaller exposure to this specific sector. The US Nasdaq on the other hand is set to opened around 1% lower. An upbeat outlook in strong TSMC Q3 earnings failed to lift the mood. The developing story isn’t about product demand, but more about rapidly increasing funding costs eg for the likes of neocloud CoreWeave. Core bonds are back on track as safe haven alternatives with marginal buyers showing up after the September/October rout. The long end of the curve outperforms. The US yield curve bull flattens with yields currently 6.1 bps (2-yr) to 12.4 bps (30-yr) lower. The front end remains somewhat in dubio following another set of hawkish US eco data after yesterday’s hot September CPI print. September US producer prices increased by 1.3% M/M while consensus only counted on 0.6%. Apart from March 2022, it’s the largest monthly increase in the data series dating back to 2009. Transportation costs surged because of diesel and jet fuel prices. Several factors responsible for today’s PPI surge feed through in PCE deflators, suggesting significant upward pressure for the next release (Oct 29). In Y/Y-terms, headline PPI rose to 6.3%, the fastest pace since December 2022. Core PPI exceeded forecasts as well at 0.7% M/M and 5% Y/Y. While Fed Chair Warsh tends to hold his cards close to his chest, he probably won’t be happy about the extension of current price trends. Tomorrow morning, he participates in a fireside chat with IMF managing director Georgieva during the IMF annual meetings in Bangkok. Are markets underestimating the risks of faster Fed rate hikes to make amends? Other data showed weekly claims continue hovering near the very low 200k threshold and better (headline) US retail sales. Higher gasoline prices obviously accounted for most of the increase. The control group figure, which serves as a proxy for consumption in GDP-calculations, was slightly softer at 0.1% M/M (vs 0.3% expected) following a very strong month of August (+1.2% M/M). Summer retail sales suggest consumer spending roughly increased by 3% on an annualized basis in Q3. The dollar remains stuck around 1.12 today. The greenback fails to profit from the risk aversion which mainly stems from the US. Simultaneously, the euro fails to exploit the situation. AI-headlines might have hijacked the ones on budgets, but the likes of the French 10-yr OAT-spread etc remain stuck near recent highs.
News & Views
A UN official told Reuters that a food security crisis looms in parts of Asia and Africa unless the US and Iran agree on a UN-backed plan for moving fertilizer through the Strait of Hormuz. A taskforce began drawing up the proposal already in March but it has yet to be implemented. Before the Middle East war, roughly a third of the world’s most widely used fertilizer, urea, and about half of seaborne sulphur, another key input to achieve profitable crop yields and more nutritious foods, moved through the waterway. The official said the deal is essential in the next few weeks or it will miss the next planting season. UN Under-Secretary Jorge Moreira da Silva said that would significantly increase prices. An August report by the International Chamber of Commerce estimated that commodity prices could rise by up to 81% for cereals, 66% for oil crops and 30% for animal products if the Hormuz disruption continues.
The IMF’s Asia-Pacific department chief Srinivasan on the sidelines of the institution’s annual meeting in Bangkok said that China’s yuan is undervalued in real terms in a range of 17.3% to 25.3% (21.3% midpoint). The CNY’s nominal exchange rate (eg. USD/CNY) has appreciated the last 1.5 year or so. But taking into account inflation differentials, the yuan’s so-called real effective exchange rate has depreciated because of China’s very low inflation rate. Srinivasan said that this “reflects the symptom” of underlying domestic imbalances that need fixing. He’s imploring the Chinese government to be a lot more ambitious to address those with additional stimulus. The real FX depreciation does provide a competitiveness boost, which Srinivasan said has been the reason why the trade surplus has increased over the years.
