Last Thursday’s US October CPI release still dominates the debates. The relative small downward surprise (headline 0.4% M/M & 7.7% Y/Y; core 0.3% M/M & 6.3% Y/Y) triggered an outsized market reaction. They flipped odds for the outcome of the December Fed policy meeting completely towards 50 bps where FOMC Chair Powell after the November policy meeting still left the door open for a continuation at the 75 bps rhythm. A lot of Fed governors welcomed the inflation number, effectively using the opportunity to slow things down. However, each and every one of them stressed that slowing isn’t the same as stopping. There’s a strong consensus that the policy rate peak in the US will be higher than the 4.5% suggested in the September dot plot.
US Treasuries rallied significantly on Thursday with bond markets closed on Friday for Veteran’s Day. The US 2-yr yield approached the neckline of a double top formation at 4.25%, but a real test didn’t occur. The US 10-yr yield closed the week below a similar technical reference at 3.9%, but is trying to regain this level this morning. US stock markets in a two-day rally gained as much as 9.5% for Nasdaq. The tech index managed to close above the neckline of a triple bottom formation at 4404. The S&P 500 won 7% with the move above the multiple bottom formation at 3908 suggesting that this year’s downtrend could morph into more sideways action going forward. The dollar fell off a cliff. The trade-weighted dollar (DXY) lost the support zone around 109-110, dropping out of this year’s upward trend channel to currently change hands at 106.85. The key and next reference is 104.64. The same pattern is visible in EUR/USD with the pair in no time leapfrogging all intermediate resistance to arrive at the big one: 1.0341 (2017 bottom/1.0350 (May low)/1.0368 (August high). Recall that the pair traded around 0.9950 ahead of the CPI release.
The post-CPI market reaction calls an end to very strong market trends (firmer USD, weaker stocks, weaker bonds) with more choppy action ahead. The narrative changed in the sense that the call for ever faster and ever more in the tightening cycle is over. The bigger risk is to overinterpret it as a sudden stop. From a momentum point of view, lack of important US eco data ahead of the key December releases, the confirmed Democratic Senate victory and the illiquid Thanksgiving weekend suggest markets could hold on to their corrective stance for a while. Today’s eco calendar in any case is empty apart from outdated EMU production numbers and speeches by some ECB governors. We retain from weekend comments that ECB governing council member de Cos made an opening to start running down the APP portfolio already in December rather than early 2023.
Bloomberg reports on a notice from the People’s Bank of China (PBOC) and Chinese financial regulators about a 16-point plan to support the real estate market. The plan contains a wide range of measures to support liquidity and financing for the sector, including debt extensions and easing of down-payment rules for home buyers. The headlines on the real estate support plan are supporting Chinese equity markets this morning.
In his weekly column published in the Mlada Fronta Dnes Newspaper, Czech central bank governor Michl said that nominal growth in Czech salaries should be capped at 5% next year to avoid a price wage spiral. The CNB governor also reiterated that in order to slow inflation, lower budget deficits and stable rates are necessary.
UK Q3 GDP growth came in at -0.2% Q/Q and 2.4% Y/Y last Friday. It was the first negative quarterly reading for UK growth since the first quarter of 2021. The contraction was due to a quarterly decline in private consumption (-0.5% Q/Q). Gross fixed capital formation (2.5% Q/Q), government spending (1.3%) and net-exports still supported global demand. The quarterly figure was slightly better than expected, but an unexpected sharp decline of the monthly figure of September (-0.6%) suggests further headwinds for the UK economy in the final quarter of the year.