Markets
Yesterday’s ECB meeting was a non-event that, if anything, further raised the bar for rate cuts as downside risks to growth abated. ECB president Lagarde was referring to the US-EU trade deal, the ceasefire in the middle east and the progress made in the US-Sino relations. European yields were little changed. Bunds underperformed vs swap, adding 1.1-2.2 bps across the curve. US yields rose 1.1 bp at the front end, following Wednesday’s 10bps+ move higher. Powell forced money markets into resetting their view on a December rate cut (currently given a 65% probability compared to quasi 100%). That process could linger on for a while. Long-term bond yields added 3 bps with the 10-yr yield bottoming out further north of 4%. The Fed announced an end to QT but it will skew the proceeds from maturing bonds towards T-bills. UK rates are showing some similar bottoming out. The 10-yr Gilt yield hit strong support at 4.4% earlier this week, the 2-yr tenor is looking at 3.8%. We consider front end yields to be the most prone for a further decline. UK money markets keep gravely underestimating chances for the Bank of England to cut rates next week (25%) and in coming months. It may be the trigger that pushes GBP over the EUR/GBP 0.88 edge. The pair tested that barrier multiple times this week, including yesterday. The US dollar outperformed, supported by the modest risk-off vibes. EUR/USD revisited the previous October lows around 1.154 but closed at 1.1565. DXY (99.52) hit a 3-month high intraday of 99.91. USD/JPY strongly supported the trade-weighted dollar’s upleg. The Bank of Japan disappointed and added JPY weakness to overall USD strength. USD/JPY pierced through 154 for the first time since February.
The ongoing US government shutdown means we won’t get personal income and spending data. Neither will the PCE inflation indicators be released. It is this lack of economic input that prompted amongst others the Fed to poor cold water over the idea that a December rate cut is all but certain. Focus shifts to the euro area instead where headline inflation is expected to have eased from 2.2% to 2.1%. The core gauge would drop from 2.4% to 2.3%. Based on this week’s earlier member states’ release we see some upward risks but it won’t move markets much after the ECB basically cemented the long status quo. Stock sentiment will be the more important driver for markets in general going into the weekly and monthly close. Futures in Europe are signaling a modest red open. Those in the US are flashing green, supported by bumper earnings from Apple and Amazon. EUR/USD gently gravitates towards the October lows. A break would pave the way for a return to the August low (1.1392). EUR/GBP is taking another shot at 0.88.
News & Views
Tokyo inflation accelerated significantly and more than expected in October. Overall prices jumped by 0.6% M/M in the Japanese capital, both on a headline and a core (ex fresh food) level. Goods prices were up 0.9% and services 0.4%. Out of all reported subcategories, only prices for clothing & footwear were lower in October (-0.1% M/M) though coming off a 3.3% increase in September. Utility prices stood out with a 4.8% monthly increase as city-wide subsidies for water have run their course. On an annual level, Tokyo CPI accelerated from 2.5% to 2.8%, again both for headline and core inflation. Today’s numbers come on the heels of yesterday’s BoJ decision to stand pat at the moment and see how the economy and inflation both evolve with the intention to conduct a new rate hike in due time. The market implied probability that this could happen at the next, December, meeting remains broadly unchanged around 50% this morning. Other Japanese data this morning included disappointing September retail sales (0.3% M/M & 0.5% Y/Y) and stronger industrial production numbers (2.2% M/M & 3.4% Y/Y).
Official Chinese PMI for October showed the composite PMI sliding from 50.6 to 50, the boom/bust level representing no growth. The manufacturing sector remains mired in (mild) contractionary territory (49 from 49.8) while the services sector barely keeps its head above the water line (50.1 from 50). Manufacturing details showed a faster decline in new orders (also export) and a continuation of job axing. Price gauges showed higher input prices contrasting with lower output prices. Under the hood of the non-manufacturing PMI details were similar and weak as well with the exception of also falling selling prices.
. That process could linger on for a while. Long-term bond yields added 3 bps with the 10-yr yield bottoming out further north of 4%. The Fed announced an end to QT but it will skew the proceeds from maturing bonds towards T-bills.){kind=link}