Markets
Different market segments to some extent again focused on different markets themes/drivers. Core yields showed tentative signs of bottoming yesterday, after a protracted decline throughout most of this month. A jump in oil prices (Brent $65.75 p/b currently compared to low $60 p/b early this week) after the US announced sanctions against the two largest Russian Oil companies made investors’ pondering recent gradual easing in inflation expectations. Uncertainty ahead of today’s US CPI release probably also injected some caution. US yields yesterday rebounded between 4.5 bps and 5.6 bps with the belly of the curve slightly underperforming. The US 10-y yield is testing the 4% barrier. European yields followed at a distance with German yields rising about 2 bps across the curve. The rise in oil prices/higher yields hardly had any (negative) impact on equity markets. Equity investors apparently focused on a potential easing of trade tensions between the US and China as US president Trump and Chinese President Xi Jinping will meet next week. US indices added between 0.31% (Dow) and 0.89% (Nasdaq). No clear tend in for USD trading yet. EUR/USD closed marginally higher at 1.1618. The yen still underperforms (USD/JPY close at 152.6). EUR/GBP closed north of 0.87 as markets are still considering the timing of further BoE easing after this week’s better/less worse than expected UK inflation data.
Eco data for once might capture the market focus today with the EMU and US September PMI’s and the (delayed) US September CPI. The EMU composite PMI is expected to confirm sluggish growth at the start of Q4 (51.1). Even as the ECB is in a firm wait-and-see modus, markets recently were not convinced on the EU eco momentum, raising the implied probability of an additional rate cut next year to >50%. EMU yields and EUR/USD still might be a bit more sensitive to negative news rather than to in line/slightly better data. In the US, September headline CPI is expected to accelerate to 0.4% M/M and 3.1% Y/Y (from 2.9%). Core inflation is seen unchanged from August at 0.3% M/M and 3.1% Y/Y. Such data would only confirm rather stubborn inflation since April. Even so, with the Fed focus shifting to labour market softness rather than inflation, it’s unlikely the report will profoundly change expectations on the Fed further reducing policy tightening by 25 bps next week and in December, bringing it closer to neutral. Given the Fed focus on the labour market/economic activity, the US PMI’s (composite expected at 53.5 from 53.9) and, to a lesser extent, (final) Michigan consumer confidence also deserve attention. Overall, we see a slightly higher chance for US yields to take a breather after recent decline. It’s probably too early to step up expectations on the pace of further Fed easing next year. EMU yields might be a bit more vulnerable in case of negative news. In this context, the dollar might have slightly better cards compared to the euro. The 1.1542/43 area marks first intermediate support. In the UK, consumer confidence and especially September retail sales were much stronger than expected. In a first reaction, EUR/GBP is ceding some ground but for new still holds north of 0.87.
News & Views
Japanese headline inflation accelerated to 2.9% from 2.7% in September. The gauge excluding fresh food (preferred by the Bank of Japan) was a copy paste while the series without both fresh food and energy eased to 3% from 3.3%. Services CPI slowed to 1.4% from 1.5%. The waiver of child fees in Tokyo and slower gains in dining out on a drop in (still-elevated) rice prices are among the reasons cited. Other labor-intensive services showed quicker price rises. The umpteenth above-target (3%) reading is unlikely to result in a rate hike next week as reports suggested the BOJ sees no urgency to do so just yet. It may first need a clearer view on domestic policies by the freshly announced PM Takaichi. Japanese data also included the October PMIs. They all eased from last month with the composite signaling the slowest growth since May (50.9). Services momentum is dwindling (52.4 from 53.3) and manufacturing remains stuck in decline. The latter has become more upbeat on the year ahead though. Price indicators continue to point at strong inflationary pressures. JPY loses ground this morning with USD/JPY pushing towards 153.
US president Trump said he’ll terminate all trade negotiations with Canada. That announcement came after he having seen a Canadian advertisement in which former Republican president Reagan hailed the benefits of free trade and slammed tariffs. Trump said the move appears timed to interfere with the Supreme Court case that’s looking in the legality of his Liberation Day levies. It’s scheduled to hear oral arguments on November 5. It’s not the first time Trump has threatened to call off trade talks but the Loonie nevertheless is feeling selling pressures. USD/CAD this morning rises above 1.40.
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