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Japan's industrial production rose by 3.0% mom in October, marking the second consecutive month of growth but falling short of market expectations of a 3.9% mom increase. This uptick is nonetheless an improvement from September's 1.6% mom growth.

Out of the 15 industrial sectors surveyed, 11 sectors—including production machinery and motor vehicles—reported increased output, while four sectors, such as electronic parts and devices, experienced declines.

The Ministry of Economy, Trade and Industry maintained its previous assessment, stating that industrial production is fluctuating "indecisively."

Looking ahead, the ministry projects that industrial output will decrease for two consecutive months, by -2.2% mom in November and a further -0.5% mom in December, likely dragged down by sectors like production machinery and transport equipment.

A ministry official expressed concern over "downside risks from overseas demand," which could significantly impact the output of products like semiconductor manufacturing equipment and motor vehicles.

In additional economic data, retail sales increased by 1.6% yoy in October, missing expectations of a 2.1% yoy rise. Unemployment rate edged up from 2.4% to 2.5%, matching forecasts.

Tokyo's November CPI data pointed to resurgence of inflation pressures in Japan, raising expectations for BoJ to tighten policy further.

Tokyo Core CPI, excluding food, climbed from 1.8% yoy to 2.2% yoy, beating expectations of 2.1%, driven largely by the reduction in energy subsidies.

Core-core CPI, excluding food and energy, edged higher from 1.8% yoy to 1.9% yoy from 1.8%. Services prices, a key indicator of domestic demand-driven inflation, also increased, rising from 0.8% yoy to 0.9% yoy.

Headline CPI surged significantly, jumping from 1.8% yoy to 2.6% yoy.

This inflation data has heightened market anticipation of a policy change from BoJ. Overnight swaps now indicate over 60% probability of a rate hike at the December meeting. Meanwhile, more than 80% of economists surveyed recently forecasting an adjustment by January.

With the BoJ's current policy rate at 0.25%, the decision appears imminent, likely within the next two months.

Headlines on Thursday revealed that Israel may have violated the recent Gaza ceasefire just one day after it began, with reports of tactical military actions targeting areas not included in the agreement. Meanwhile, OPEC+ postponed its output policy meeting from Sunday to December 5, citing scheduling conflicts with Kuwait's Gulf Cooperation Council meeting.

Crude oil prices are struggling, with WTI trading at $68.76 and Brent Crude at $72.54. The oil market faces challenges as global demand slows and non-OPEC suppliers increase production, raising concerns for the group's future. North Sea oil loadings for January are set to drop to their lowest level since October, adding to the uncertain outlook.

The US Dollar Index (DXY) bounced off a technical support level, even as US markets are closed for Thanksgiving. This bounce is partially driven by European concerns, where French Prime Minister Michel Barnier warned of instability if France's Parliament fails to pass its budget. Additionally, reports highlight that China's refiners are snapping oil from the Middle East and Africa as Iranian supplies become more expensive due to stricter US sanctions.

XBRUSD – H3 Timeframe

The 3-hour timeframe chart of Brent crude shows the price approaching a confluence of two resistance trendlines after breaking below the previous low. The confluence region also falls within a supply zone near the 88% Fibonacci retracement level. The clear sentiment in this case is bearish.

Analyst's Expectations:

• Direction: Bearish
• Target:71.45
• Invalidation:75,26

XTIUSD – H3 Timeframe

WTI crude's analysis resembles the Brent analysis above. The price action features the same confluence of resistance trendlines and the supply zone at the 88% Fibonacci retracement level. The verdict is bearish.

Analyst's Expectations:

• Direction: Bearish
• Target:67.41
• Invalidation:71.65

The shift to a more services-based economy increases economy-wide depreciation rates, and so the need to invest. Higher average interest rates – and economy-wide profit shares – are among the likely results.

An important reason for our house view that the global structure of interest rates will be higher going forward than it was pre-pandemic relates to the balance between saving and investment. A range of forces are pointing in the direction of higher investment, without an obvious counterbalance to boost saving at the same time. Among these forces are the energy transition and energy-intensive new technologies, including AI with its high compute requirements.

In a note earlier this week, Westpac Economics Senior Economist Pat Bustamante highlighted that some of that shift to higher investment is already evident in the Australian data. The industries that are most involved in the energy transition and the adoption of leading technologies are already increasing new investment, especially in software and other so-called ‘intangibles’.

As Pat also observed, there are two implications of these transitions that are not immediately obvious. First, the shift to a more services-based economy, away from traditionally capital-intensive industries such as manufacturing, does not necessarily mean that business investment is lower. Second, and relatedly, new investment is increasingly in the types of capital with higher rates of depreciation and obsolescence than traditional physical plant and machinery. Businesses must ‘run harder to stay in place’, lest their capital stock starts to diminish. Industries that are not obviously capital-intensive nonetheless may need to invest intensively. Pat’s note shows that, as an economy, Australia’s depreciation rate is rising, and has been for some decades.

To the extent that new investment adds to the capital stock and improves its quality, we can expect some payoff in the form of higher productivity and output growth. But the investment that is replacing existing capital is simply covering depreciation. While some of the new technologies may fall into the first category of productivity-enhancers, much of the investment into the energy transition is pure replacement of existing capital stock – effectively an accelerated depreciation. In this respect, there is a bigger payoff to investments that make other activities more energy efficient than to those simply replacing existing generation and distribution infrastructure.

Investing to replace depreciated capital or execute the energy transition is still worth doing. The costs of not doing so are large. But if the economy-wide depreciation rate on the capital stock has risen, this has other implications that are perhaps not widely understood.

To the investors go the spoils

If a higher depreciation rate partly occurs because of higher rates of technical obsolescence – as you’d expect with increased usage of software-based innovation, for example – then new investment introduces different types of capital. New skills may be expected of the workers using the newly-installed capital. More generally, if the optimal mix of labour skills and capital changes as new capital replaces old, then a faster rate of technical change and obsolescence means a faster rate of churn in the kinds of jobs available.

We saw the same thing happen in the first wave of the software revolution. The adoption of PCs and later the internet accelerated obsolescence rates, as did the increased integration of software elements into traditional physical capital. The result was increased physical churn in the capital stock, but also in the skills needed of workers. This lowered the bargaining power of workers and shifted some of the share of income from production away from wages towards profits, especially in countries where there were also barriers to entry for new firms.

Or at least, this is one of the possible explanations of the upward trend in the profit share (downward trend in the wage share) seen in a range of industrialised economies from about the mid-1980s to just before the Global Financial Crisis. And nearly two decades after proposing that explanation in a paper I wrote with former RBA colleague Kathryn Smith (partly based on prior work by Hornstein, Krusell and Violante, subsequently published here), it’s still the explanation that I think makes most sense. To be fair, there are other hypotheses that also fit some aspects of the data, but the hypothesis in that paper explains the timing and cross-country pattern in the trends, in a way that some other explanations do not.

In particular, the nexus between capital obsolescence rates, labour market churn and income shares helps make sense of the end of that upward trend in the profit share in the mid-2000s. Across advanced economies, the post-GFC period was one of low private investment, low productivity growth – and little apparent trend in the profit and wage shares. In Australia, for example,

RBA analysis shows that the profit share outside mining has been broadly flat for two decades. This fits in with the idea that the earlier upward trend in the profit share was at least partly explained by the wave of adoption of an earlier generation of IT products, and that by the mid 2000s, this wave had matured.

If we are indeed on the cusp of a period of faster replacement of existing capital, and some of that demands new skills of workers, it’s possible that we will see this trend increase in the profit share (decline in the wage share) resume. That might be good for productivity growth, but it is not guaranteed that real wages growth will keep pace.

At the least, it is a reason to be cautious about wages forecasts and avoid being too bullish. This is especially so in a country like Australia, where wages growth undershot official forecasts for years, even with a flat trend in the share of wages in national income.

Key Highlights

• USD/JPY started an upside correction from the 150.50 zone.
• A major bearish trend line is forming with resistance at 152.50 on the 4-hour chart.
• EUR/USD is struggling to recover above the 1.0600 resistance.
• GBP/USD must settle above 1.2720 to start a decent increase.

USD/JPY Technical Analysis

The US Dollar started a major decline from well above 155.50 against the Japanese Yen. USD/JPY declined below the 153.50 level to enter a bearish zone.

Looking at the 4-hour chart, the pair settled below the 152.50 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). Finally, it tested the 150.50 zone. A low was formed at 150.46 and the pair started an upside correction.

There was a move above the 151.50 level. The pair climbed above the 23.6% Fib retracement level of the downward move from the 155.88 swing high to the 150.46 low.

On the upside, the pair could face resistance near the 152.50 level. There is also a major bearish trend line forming with resistance at 152.50 on the same chart. The first major resistance is near the 153.20 level or the 50% Fib retracement level of the downward move from the 155.88 swing high to the 150.46 low.

A close above the 153.20 level could set the tone for another increase. The next major resistance could be 154.00, above which the price could climb higher toward the 155.80 resistance.

On the downside, immediate support sits near the 151.00 level. The next key support sits near the 150.50 level. Any more losses could send the pair toward the 148.00 level.

Looking at EUR/USD, the pair started a recovery wave but upsides face many hurdles near the 1.0600 level.

Upcoming Economic Events:

• Euro Zone CPI for Nov 2024 (YoY) (Prelim) - Forecast +2.3%, versus +2.0% previous.
• Euro Zone Core CPI for Nov 2024 (YoY) (Prelim) - Forecast +2.8%, versus +2.7% previous.

• GBPUSD reversed from support level 1.2500
• Likely to rise to resistance level 1.2720

GBPUSD currency pair continues to rise after the earlier upward reversal from the support level 1.2500 (which also reversed the pair in May) coinciding with the lower daily Bollinger Band and the daily down channel from September.

The upward reversal from the support level 1.2500 started the active intermediate impulse wave (1).

GBPUSD currency pair can be expected to rise to the next resistance level 1.2720 (former top of the minor correction from the middle of November).

• AUDUSD reversed from pivotal support level 0.6450

  Likely to rise to resistance level 0.6550

AUDUSD currency pair recently reversed up from the pivotal support level 0.6450 (which has been reversing the price from April) standing near the lower daily Bollinger Band.

The upward reversal from the support level 0.6450 formed the daily Japanese candlesticks reversal pattern Bullish Engulfing. This support level also formed the daily Morning Star earlier this month.

Given the strength of the support level 0.6450 and the bullish divergence on the daily Stochastic, AUDUSD currency pair can be expected to rise to the next resistance level 0.6550 (top of the previous correction ii).

Markets

US markets are closed for Thanksgiving so the focus turned to Europe instead. Inflation prints were due in Belgium, Spain and Germany ahead of tomorrow’s EMU figure. Spanish CPI flatlined month on month in November but accelerated in yearly terms to 2.4% due to base effects. Core inflation in the country ticked lower, from 2.5% to 2.4% vs the 2.6% consensus estimate. German prices eased by a more-than-anticipated 0.7% m/m, allowing the y/y figure to match October’s 2.4% instead of accelerating to 2.6% analysts were projecting. Basket heavyweights Italy and France have yet to report tomorrow, but these national inflation numbers so far suggest some downward risks for the EMU. But even if that would be the case, it doesn’t necessarily imply lower bond yields. Today’s price movement is indicative: German yields barely budged during the releases with less than 1.5 bps of declines at the front end. With markets pricing in an ECB policy rate trough of around 1.75%, there’s simply no room left to stack up easing bets. The influential central bank board member Schnabel was pretty vocal about that in yesterday’s interview. Her French counterpart Villeroy felt the urge to balance it out a little though. He wants full optionality on the frequency & size of cuts and doesn’t exclude going below neutral. His comments triggered additional Bund gains, pushing yields now down 3.2 bps (2-yr). Moving into another corner of the bond market: OAT’s. French bonds are suddenly back in the center of attention these last couple of days. A limped minority government looks increasingly incapable of pushing through the 2025 budget that seeks to do something (reducing next year’s deficit from 6%+ to 5%) to the dire state of public finances. Other then spreads vs. Bund and swap rising to new multi-year highs recently, France today is less than a basis point away from borrowing at a higher rate than … Greece. French finance minister Armand this morning said the government is prepared to amend the budget in order to avoid the Rassemblement National joining forces with the far-left in a motion of no confidence. The flipside is less fiscal consolidation that could put financial markets on high alert. The political sage is another unwelcome development for the euro. Any recovery is bound to run into resistance soon. EUR/USD already pares some of yesterday’s gains to trade around 1.0533, be it in holiday-thinned trading. EUR/GBP eases towards 0.832.

News & Views

Belgian headline inflation slowed to 0.17% M/M in November, with the annual figure stabilizing at 3.2%. The increase in inflation in recent months is the result of the extinction of the impact of the basic package for electricity and natural gas. Energy inflation rose from 7.26% Y/Y to 9.44%. This effect will play until February 2025. Other significant (monthly) price increases concerned clothes, household appliances and repairs, holiday villages as well as bread and cereals. Price drops were mainly registered in the transport sector. Core inflation fell back to its September level (2.8% Y/Y), reversing the October increase to 3.01%. Both services (3.52% from 5.97%) and inflation for rents (4.59% from 4.50%) was lower this month on an annual basis. Food inflation rose by 0.3% M/M but fell from 1.86% Y/Y to 0.80% Y/Y, mainly because of the base effect. The first inflation estimate according to the European HICP flash estimate for Belgium amounts to 4.9% in November 2024.

The Brazilian real weakened to USD/BRL 6 for the first time ever. The latest move followed Finance Minister Haddad’s proposal of $12bn in spending cuts. Too little and too late, argues the market. Brazilian public finances have been stretched since President Lula da Silva regained office in 2023 pledging to improve living standards. Significant weather events dug even deeper holes. The fiscal spending drift led to a new increase in inflation (expectations), forcing the Brazilian central bank into a U-turn. The BCB cut its key selic rate from a 13.75% peak level to 10.50% between August 2023 and May 2024. In September and November, they reverted to rate hikes of respectively 25 bps and 50 bps. BRL weakness adds to the inflation worries suggesting more tightening can be expected.

Daily Pivots: (S1) 1.0498; (P) 1.0543; (R1) 1.0612; More...

EUR/USD is staying in range of 1.0330/0609 for now. Intraday bias remains neutral and further decline is in favor. On the downside, break of 1.0330 will resume the fall from 1.1213. Also, sustained trading below 1.0404 key fibonacci level will carry larger bearish implication. Nevertheless, firm break of 1.0609 will confirm short term bottoming, and turn bias back to the upside for 1.0760 support turned resistance first.

In the bigger picture, immediate focus is now on 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404. Strong rebound from this level will keep price actions from 1.1273 (2023 high) as a medium term consolidation pattern only. However, sustained break of 1.0404 will raise the chance that whole up trend from 0.9534 has reversed. That would pave the way to 61.8% retracement at 1.0199 first. Firm break there will target 0.9534 low again.