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Swiss KOF Economic Barometer, a key indicator for forecasting the economy's direction, has shown a slight improvement in November, rising from 95.1 to 96.7. This rise slightly exceeded market expectations, which were set at 96.2.

According to KOF Swiss Economic Institute, since mid-2023, the barometer has stabilized, though it remains at a level below the historical average. This stabilization indicates moderate outlook for the Swiss economy in the near future.

The increase in the KOF Barometer can primarily be attributed to positive developments in manufacturing sector and other services sector.

However, not all sectors are signaling positive trends. Indicators for hospitality industry and finance and insurance sector are showing slightly negative signals.

Full Swiss KOF release here.

• AUDUSD in the green again today, close to its 4-month high
• Aggressive move higher from the October lows
• Momentum indicators potentially ready to signal a reversal

AUDUSD is trying to register a strong green candle as it continues to trade above the key February 2, 2023 descending trendline. It has been an aggressive rally from the 2023 low of 0.6269 recorded in October, with AUDUSD currently hovering close to its 4-month high. All eyes are now on the momentum indicators for any clues on the continuation of the current upleg.

In more detail, the Average Directional Movement Index (ADX) is trading above its 25-threshold, thus signaling a decent bullish trend in the market. Similarly, the RSI continues to hover comfortably above its 50-midpoint, close to a 4-month high, but it appears unable to make a higher high. More interestingly, the stochastic oscillator is stuck at the upper end of its overbought area. While it can stay there for a while, the current movement could be seen as an early reversal signal.

Should the bulls remain confident, they could try to stage a move towards the July 14, 2022 low at 0.6681. Higher, the 38.2% Fibonacci retracement level of the April 5, 2022 – October 13, 2022 downtrend and the November 15, 2022 high at 0.6739 and 0.6797 respectively will probably test the bulls’ determination. If successful, the next key resistance area appears to be at the 50% Fibonacci retracement level of 0.6915.

On the flip side, the bears are probably keen to put a stop at the current bullish move. They could try to push AUDUSD back below the February 2, 2023 downward sloping trendline and the 200-day simple moving average (SMA) at 0.6576. They could then test the support set by the rectangle’s lower boundary and the 23.6% Fibonacci retracement at the 0.6521-0.6561 range.  If successful, they could stage a move towards the 0.6421-0.6471 range.

To sum up, AUDUSD bulls could have the chance for a higher high if they manage to withstand the expected bearish pressure and keep AUDUSD above the February 2, 2023 trendline.

Markets

Yesterday, first November EMU inflation data from Germany and Spain come out in line with market momentum. Spain HICP inflation declined 0.6% M/M easing the Y/Y measure from 3.5% to 3.2% (3.7% expected). Core inflation also declined substantially (4.5% from 5.2%). Similar story in Germany as HICP inflation printed at -0.7% M/M and 2.3% Y/Y (from 3.0%). Technical factors and ‘erratic’ base effects due to support measures implemented last year create some noise and might cause countermoves in coming months. Whatever, softer than expected is softer than expected. German yields again declined between 8.2 bps (2-y) and 4.6 bps (30-y). Admittedly, major part of the move already occurred before the publication of the data. US markets more or less copied the trend in Europe, easing between 8.9 bps (2-y) and 6.5 bps (10-y). Comments from Fed Waller on Tuesday that the Fed is well positioned to slow the economy in a way that also might bring inflation back to 2.0% supported the case for bond bulls. Waller’s wait-and-see assessment yesterday was joined by Fed Mester and Barkin even as they didn’t formally rule out a further rate hike. US equities tried the extend the interest rate-driven rally, but gains could not be sustained. US indices closed little changed (S&P -0.09%). Soft EMU inflation data annex lower EMU yields prevented EUR/USD to hold north of 1.10 (close 1.097). At the same time, broader USD selling also eased (DXY close 102.76 from opening levels near 102.58). Sterling again outperformed the euro, maybe partially on recent comments from BoE members warning markets on early rate cut bets (EUR/GBP close 0.8640).

Asian equity markets this morning mostly show modest gains. China November PMI’s again disappointed (composite 50.4 from 50.7) raising market hope for additional policy support. US yields are ‘rebounding’ 1-2,5 bps across the curve, but don’t help the dollar (DXY 102.75, EUR/USD 1.0980, USD/JPY 146.95). Later today, the Flash EMU November CPI will be published. After yesterday’s releases, the risk obviously is for a below consensus (-0.2% M/M and 3.9% Y/Y headline, 2.7% Y/Y core) outcome. Interesting to see whether there is still additional reaction on interest rate markets or whether some consolidation can start going into the December 14 ECB policy meeting. In the US the October PCE deflators (core expected  0.2% M/M and 3.5%Y/Y), but also jobless claims and Chicago PMI will be released. US markets might still be more sensitive to weaker data. This especially might be the case for the dollar. Interesting to see whether EUR/USD can regain the 1.10 barrier. USD/JPY also looks vulnerable sub 147.

News & Views

The Bank of Korea unanimously decided to keep its policy rate unchanged at the 15-yr high reached in January (3.5%). The number of board member seeing a possible need to lift rates further, dropped from six to four. A slight alteration to the policy statement creates more leeway for the central bank going forward. The commitment to keep policy rates restrictive for “a considerable time” made way for guidance that it would remain restrictive for a sufficiently long period of time to ensure inflation converged to its goal. The BoK nevertheless raised this year’s inflation forecast slightly to 3.6% and from 2.4% to 2.6% for next year following an unexpected inflation acceleration in October. Governor Rhee still indicated that inflation will converge to the 2% target by end 2024 or early 2025.  One board member contemplating last month the possibility of a rate cut if geopolitics affected the economy, no longer holds that view. The Korean central bank kept this year’s growth forecast unchanged at 1.4% while slightly downgrading the one for next year to 2.1%. The Korean won this morning holds near the strongest level against a weak USD since early August (USD/KRW 1291 area).

The Bank of Mexico released its latest quarterly inflation report. They expect a return to the 3% midpoint of the inflation target (+-1 ppt tolerance band) by early 2025, but inflation can prove slightly more sticky in the short term (core CPI: 5.3% from 5.1% for Q4 2023 and 3.3% from 3.1% for Q4 2024). Banxico also raised GDP forecast from 3% to 3.3% for this year and from 2.1% to 3% in 2024. It sees 2025 growth at 1.5%. Governor Rodriguez Ceja at the press conference afterwards she saw a possibility for the start of discussions on a rate cut at the meetings next year. The central bank still has a 11.25% policy rate in place since May, making real rates very positive. In November, they prepared a pivot by changing forward guidance from stable rates for an extended period to stable rates for some time. MXN loses ground this morning with USD/MXN rising from 17.14 to 17.28...

Market movers today

Today we get the HICP inflation numbers for the euro area. After yesterday's lower-than-expected Spanish and German prints, consensus expects the euro area figure at 2.5% y/y.

At 14:30 FED's preferred inflation gauge is released. Consensus expects the PCE core to slow down to 0.2% m/m SA, mirroring a similar decline in the CPI measure released earlier.

OPEC+ convenes on Thursday after their last scheduled meeting was postponed.

The 60 second overview

Heavy data releases from the euro area showed declining inflation, below consensus estimates, and mixed consumer confidence. European rates markets reacted strongly to the inflation release sending yields lower from the front end as additional rate cuts were priced. 10y German yields declined to multi-month lows of 2.42%. The German and Spanish inflation print came in below expectations at -0.4% m/m in November (cons.: -0.1%, prior: 0.0%), and -0.4% m/m (cons.: 0.1%, prior: 0.3%), respectively. This combined with slowing inflation in Belgium and Ireland means that today's euro area flash inflation print is pointing to a 2.5% release. The EU Commission confidence indicator was mixed across sectors with improved confidence in the service sector and lower confidence in the industry. Yet, over the past months, confidence in the industry has stabilized from the large downward trend during the previous years in a signal of activity bottoming out like we have seen in the PMIs.

In the US, we had positive economic data, including an upwardly revised Q3 GDP growth of 5.2% annualised rate, which has strengthened the broad USD, yet the Beige Book has signalled a pre-November 18 economic slowdown.

Overnight, the Chinese PMI pointing to a slowdown in the manufacturing sector with a 49.4 print, while services pointed to a largely stagnating sector of 50.2, both indicators below consensus.

Yesterday, we published a piece on the EU fiscal rules and what to expect from the negotiations on a new set of rules. Currently there is no agreement on the new fiscal rules and the clock is ticking, as the old rules will otherwise come into force again from 1 January 2024. We expect that the EU Member States will most likely not sign a final legal set of rules before year-end, however, we expect that they will agree on a "landing zone" for the new rules at the ECOFIN meeting on 8 December. We expect that the "landing zone" will reinstate the old 3% deficit and 60% debt targets, but with greater flexibility to adapt country specific fiscal adjustment paths. The fiscal stance in the euro area becomes tighter in the coming years as sustainable public finances get renewed focus. See more in Euro Area Research: New fiscal rules in the EU - aligning theory and practice?, 29 November 2023.

Equities: Equities were mixed on Wednesday, with US a tad lower and Europe half a percent higher. The European outperformance partly underscored by benign inflation numbers, but also catchup from the prior session. Interesting that the fall in yields have not chalked up a new wave of equity risk taking. AAII bull/bear spread is back at July highs, so positioning is probably a piece to the puzzle. Cyclicals beat defensives though, with an odd mix of both banks and real estate among best sectors. US futures and Asian markets are a little higher this morning.

FI: The inflation releases from Spain and Germany sent yields lower through yesterday's trading session with 10y Bunds ending the day 6bp at multi-month lows of 2.42%. Intra-euro area spreads saw little change. Curves steepened from the front end as the markets added to rate cut expectations with adding another 10bp yesterday to the 2024 pricing. Compared to Monday' close, markets have added 22bp in total with a total of 111bp of cuts priced in through 2024.

FX: EUR/USD sustained consolidation slightly below the 1.10 mark amid a prevailing strengthening of the USD. USD/JPY has exhibited a downward trajectory and currently hovers just above 147. Meanwhile, EUR/GBP experienced a further decline, settling within the mid-0.86 range. EUR/SEK dipped below 11.40, and EUR/NOK is positioned around 11.70.

Credit: Yesterday, credit markets were again positive with iTraxx Main 1.5bp tighter to 66.8bp while Xover tightened by 10.2bp to 367.1bp. In addition, the primary markets continue to be wide open with several financial and corporate issuers active with deals across the Nordic area and five Eurobond transactions. The current market sentiment is showing constructive credit conditions most types of credit transactions, however some seasonal slowdown should soon be expected to influence the current high activity.

Nordic macro

Riksbank Governor Bunge speaks about monetary policy and the latest decision. Recall the silent period has not yet passed, hence, she cannot say speak for herself, just on behalf of the Board's common decision.

The rally in US bonds continued at full speed yesterday and bonds are set to record their best month since the GFC this November. The US 2-year yield tumbled to almost 4.60% yesterday from nearly 5% at the start of the week. While the 10-year yield rebounded after hitting 4.25%. That makes an almost 40bp fall for the US 2-year yield and a 25bp fall for the US 10-year yield in three days only.

A faster fall in short-term yields means that that the market is busy pricing rate cuts (which we know it does), yet the amplitude of the move is relatively big.

Released yesterday, the US Q3 GDP was revised to an eye-popping 5.2% from an already high 4.9% printed earlier. The consumer spending component was revised slightly lower, and the price pressures seemed softer than previously announced. But we could easily say that the US economy’s Q3 performance made China jealous!

If you dig deeper: even though yesterday’s above-5% GDP print would’ve been an excellent trigger for a rebound in the US bond yields and the dollar – on belief that the US economy is strong enough to allow the Federal Reserve (Fed) to keep rates ‘high for long’ - it also surfaced the worries (or hope) that this incredible performance can’t last!

And guess what? The Atlanta Fed’s GDP Now forecast – which beautifully predicted last month’s above-average performance – is now pointing at a sharp decline in the US GDP growth in the current quarter to around 2%. Note that a 2% growth in the US is still above average and shouldn’t be enough to convince the Fed to start cutting the rates too early if the slowdown in inflation remains insufficient. But if inflation slows, nothing will stop the bond traders from continuing to rush in.

Today, all eyes on the US PCE index – the Fed’s favourite gauge of inflation. The headline PCE may have eased from 3.4% to 3.0% in October, and core PCE is seen down from 3.7% to 3.5%. A softer-than-expected figure could further fuel expectations of an early Fed cut, while a stronger-than-expected set of figures should, in theory, calm down the dovish enthusiasm and call for a rebound in the yields. Presently, activity on Fed funds futures gives almost 80% chance for a Fed rate cut in May, and the probability of a March cut is 50-50.

EUR/USD retreats despite soft Dollar

The rally in US bond markets, and the tumbling US yields weigh on the US dollar. The USDJPY extended its drop, and finds sellers above the 100-DMA, whereas the EURUSD couldn’t extend gains above the 1.10 mark as inflation data from some Eurozone countries came sufficiently soft yesterday. Spanish inflation fell more than expected to 3.2%, as German inflation fell more than expected to 2.3% in November. The Eurozone’s aggregate inflation will be released after the French and Italian figures this morning, and slowing inflation will certainly give cold feet to the euro bulls above the 1.10 level – even though it’s not impossible to see the pair surpass this level due to USD weakness.

Crude Oil rebounds before OPEC decision

OPEC is expected to announce an eagerly expected decision regarding its supply strategy today. The barrel of US crude is back to $78pb, and ready to jump above the 200-DMA if Saudi Arabia obtains a joint effort from other members in reducing supply.

Of course, OPEC will do its best to get the oil bulls on its side when it announced its decision today. But when expectations are high, they are harder to satisfy. Therefore, if a post-decision rally fails to send the price of a barrel above the $81pb level, the critical 38.2% Fibonacci support on September to November selloff that should distinguish between the actual bearish trend and bullish consolidation, it could be a better idea to sell the tops.

COP28

70’000 people flew to Dubai this week to talk about how to cut carbon emissions. 70’000 people. Staying where they were would certainly be a first step in gaining credibility on how to cut emissions. And that’s not all the absurd in this COP summit. The CEO of the Abu Dhabi National Oil Company will be leading this week’s summit. Yes, the CEO of a company that can survive only by keeping carbon emissions where they are. Additionally, the fossil fuel industry has been invited to participate more than any other COP since the gatherings began in 1995. You know, nothing says ‘let's save the planet’ like a summit led by a big oil CEO.

Daily Pivots: (S1) 0.8631; (P) 0.8647; (R1) 0.8657; More....

EUR/GBP's break of 0.8648 support argues that corrective rebound from 0.8491 has completed at 0.8764 already. Intraday bias is now on the downside for 0.8614 support first. Firm break there will target a retest on 0.8491 low. On the upside, above 0.8682 minor resistance will turn intraday bias neutral first.

In the bigger picture, outlook is mixed up by deeper than expected fall from 0.8764. On the downside, firm break of 0.8614 support will argue that down trend from 0.9267 (2022 high) is still in progress. Deeper fall would be seen through 0.8941 low. Nevertheless, break of 0.8764 will revive that case of medium term bullish reversal.

Daily Pivots: (S1) 1.6514; (P) 1.6560; (R1) 1.6621; More...

No change in EUR/AUD's outlook and further fall is expected with 1.6662 resistance intact. Firm break of 1.6449 support will argue that the pattern from 1.6319 has completed at 1.6844 as a corrective move, and fall from 1.7062 is ready to resume through 1.6319. On the upside, above 1.6662 minor resistance will turn bias back to the upside for 1.6844 resistance instead.

In the bigger picture, while 1.7062 is a medium term top, there is no clear sign of trend reversal as EUR/AUD continues to draw strong support from the medium term trend line. Break of 1.7062 will resume the larger up trend from 1.4281 (2022 low) to 1.7691 fibonacci level. Nevertheless, break of 1.6449 support will argue that deeper correction is underway to 38.2% retracement of 1.4281 to 1.7062 at 1.6000.

Daily Pivots: (S1) 161.24; (P) 161.75; (R1) 162.00; More....

EUR/JPY is extending the corrective fall from 164.29 and intraday bias remains on the downside. Deeper decline would be seen to 100% projection of 164.29 tot 161.22 from 163.77 at 160.63 and possibly below. But strong support should be seen from 159.75 resistance turned support to bring rebound. On the upside, above 162.24 minor resistance will turn intraday bias neutral first.

In the bigger picture, rise from 114.42 (2020 low) is in progress. Next target is 169.96 (2008 high). On the downside, break of 159.75 resistance turned support is needed to be the first sign of medium term topping. Otherwise, outlook will remain bullish even in case of deep pullback.

Daily Pivots: (S1) 186.51; (P) 187.02; (R1) 187.42; More...

Intraday bias in GBP/JPY stays neutral for consolidation below 188.63. While deeper retreat cannot be ruled out, near term outlook will stay bullish as long as 184.44 support holds. On the upside, break of 188.63 will resume larger up trend.

In the bigger picture, as long as 184.44 support holds, larger up trend from 123.94 (202 low) should still be in progress, next target is 195.86 (2015 high). However, firm break of 184.44 will now argue that a medium term top is formed, possibly in bearish divergence condition in D MACD, and bring deeper fall back to 178.02 support.

• November NBS Manufacturing & Non-Manufacturing PMIs for China came in weaker than expected.
• Recurring risk of the deflationary spiral in China has led to the underperformance of China & Hong Kong stock markets despite the recent bout of global risk-on-herding behaviour.
• The Chinese yuan has continued to appreciate against the US dollar driven by external factors; an increasing expectation of a dovish Fed pivot to come in Q1 2024.
• Watch the key medium-term resistance of 7.2675 on the USD/CNH (offshore yuan).

The November NBS Manufacturing PMI for China has remained a contractionary state; it declined to 49.4 from 49.5 in October and below the consensus estimate of 49.7. This observation suggests a weak external demand environment coupled with the ongoing dismantling of global manufacturing supply chains especially in the semiconductor industry due to the rivalry between the US and China in the high-tech Internet of Things space.

Even though the services sector has continued to record growth for the 11^th consecutive month, the NBS Non-Manufacturing PMI for November came in at 50.2, down from 50.6 recorded in October; its weakest expansion so far in the past 11 months.

Also, new export orders sub-component data of the NBS Non-Manufacturing PMI continued to contract deeper in November from a month earlier; 46.8 versus. 49.1.

All in all, the latest spate of lackluster key economic data and the ongoing depressed property market in China have allowed the deflationary spiral narrative to resurface again despite recently implemented targeted fiscal and monetary stimulus measures to alleviate the current severe liquidity crunch faced by China’s property developers.

One of the latest indirect monetary stimulus measures in the pipeline could potentially involve China state-owned banks providing short-term unsecured loans for the first time to qualified property developers. This measure does not seem to gel well in terms of positive sentiment for the Chinese stock market as it increases moral hazard risk in the financial system as well as erodes banks’ profit margins.

China & and Hong Kong stock markets continued their persistent underperformance

China’s key benchmark stock indices and its proxies have continued to underperform month-to-date for November despite a broad-based risk-on-herding behaviour that has taken shape for the rest of the world since late October 2023 due to a weakening US dollar trend.

The CSI 300 recorded a monthly loss of -2.12% for the month of November together with similar weakness seen in the Hang Seng Index (-0.51%), Hang Seng China Enterprises Index (-0.33%), and Hang Seng TECH Index (+3.44%) that underperformed the iShares MSCI All-Country World ETF (+8.61%) over the same period.

Yuan bulls remain resilient despite weakness in China stock market

Fig 1:  USD/CNH medium-term trend as of 30 Nov 2023 (Source: TradingView, click to enlarge chart)

The offshore yuan (CNH) has appreciated by +3.5% against the US dollar since 8 September 2023 and the primary catalyst is more external rather than domestic driven.

The recent yuan strength has been attributed to increasing expectations of a Fed Pivot to kickstart an interest rate cut cycle to come as soon as March next year.

Based on the current calculations from CME FedWatch Tool at this time of the writing, it has shown a 46% chance of a 25 basis points (bps) cut on the Fed Funds rate during the 20 March 2024 FOMC meeting.

This latest bout of dovish expectations on the Fed being priced by market participants has led to a significant shrinkage of the 2-year yield premium between the US Treasury note and China sovereign bond; the 2-year US Treasury note/China sovereign yield spread has dropped by -65 bps from its August 2023 print of 2.97%.

Also, the latest observation from a technical analysis perspective suggests that the yuan may continue to strengthen from a multi-week perspective as the medium-term downside momentum remains bearish for the USD/CNH (offshore yuan) foreign exchange rate as indicated by the latest reading of its daily RSI momentum indicator and trend analysis via the breakdown of its former medium-term ascending channel from 16 January 2023 low.

The USD/CNH now looks vulnerable to a further potential decline, a break below its near-term support of 7.1200 (also the key 200-day moving average) exposes the next medium-term support of 6.9900.

Only a clearance with a daily close above the 7.2675 medium-term pivotal resistance (also the downward-sloping 50-day moving average) ignites a potential medium-term bullish revival in the US dollar to see the major resistance zone coming in at 7.3750/4120 on the USD/CNH.