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Traders took profit in the euro after the ECB raised its interest rates by 75 basis points as expected. A rally back to parity indicates strong interest in defending the historical exchange level. The price hit resistance at 1.0090 near September’s high (1.0200) and the current drawdown would allow the bulls to take a breather. 0.9940 from a previous breakout is the closest area to expect renewed buying as the RSI swung into the oversold area. A bullish breakout could lead to an extended recovery in the days to come.

Markets

The ECB hiked its policy rates by another 75 bps yesterday, bringing the total effort to 200 bps since the inaugural rate hike in July. The ECB deposit rate now stands at 1.5%. Rumours this morning suggest that three governors dissented in favour of a 50 bps move. The wording of the new policy statement in any case pointed to some disagreement on how to proceed from now on. It ditched a reference to continue hiking at several more meetings, though ECB Lagarde mentioned it at the Q&A session afterwards. Instead of focusing on frontloading, the opening paragraph now stressed the substantial progress made in withdrawing monetary policy accommodation. Both changes suggest no consensus on continuing the current 75 bps rate hike pace in December. At least not for the moment. EMU money markets discount a slowdown to 50 bps, bringing the policy rate at 2%. The jury is still out, but we prefer to err on the hawkish side of this consensus. Today’s first national October inflation readings (Germany, Spain, France, Italy, Belgium) could already serve as a wake-upcall. Especially should mild winter weather postpone the day of economic reckoning for the euro zone. The ECB will use its final policy meeting of this year to set out the blueprint for winding down its €3.2tn APP bond portfolio, a second pillar in the normalization process. Finally, they recalibrated TLTRO III terms from November 23 onwards (indexed to average applicable key ECB interest rates from that starting point). The correction higher on (European) bond markets accelerated following the “dovish hike” by the ECB. The German yield curve bull steepened with yields losing 9.7 bps (30-yr) to 17.8 bps (5-yr). 10-yr yield spreads vs Germany narrowed by up to 5 bps with Greece (-9 bps) and Italy (-17 bps) outperforming. The euro suffered from the significant loss of interest rate support, returning below parity. EUR/USD closed at 0.9964 from an open at 1.0081. EUR/GBP in the same vein slid from 0.8669 to 0.8616.

Today’s eco calendar centers around above-mentioned national inflation readings. First regional German figures showed a significantly higher M/M-pace, suggesting clear upside risks. German Bund futures immediately lost some of yesterday’s gains. We nevertheless think it’s too soon to call the bond correction already over with next week’s FOMC meeting potentially also delivering a dovish hike. Speeches by ECB members are wildcards. Overall risk sentiment turns more fragile again following disappointing Q3 earnings and weak outlooks.

News Headlines

The odd one out. The Bank of Japan sticks to its super easy monetary policy by keeping the main rate at a negative -0.10% and targeting a 10-y yield of 0% (with +/-25 bps deviations allowed). This is despite having lifted inflation forecasts for the FY ending in March from 2.3% to 2.9%. Inflation in the two years thereafter is seen back below 2% though, at 1.6%, a sign the BoJ views the current inflation (3% headline in September) as not durable. The central bank also grew more cautious on growth, revising it lower from 2.4% to 2% for the current year and from 2% to 1.9% for the next. The Japanese government yesterday announced a new economic package worth $200bn in support of the BoJ’s inflation quest. The extreme policy divergence with the likes of the US has inflicted serious damage to the JPY. USD/JPY recently breached the 150 barrier before the MoF stepped in again with yet-unconfirmed interventions. The pair currently trades unfazed around 146.25.

British PM Sunak and Chancellor Hunt are weighing tax increases and spending cuts totaling £50bn per year to fill a massive black hole in public finances, the FT reported citing people close to Hunt. The eyepopping number, to the tune of 2% of GDP, is based on Treasury calculations of an initial fiscal gap between £30 and £40bn. Filling this will require an effort of about £45bn because measures taken will also affect growth and thus government revenues. But Sunak and Hunt want to create some additional headroom to allow for the possibility that the economy performs worse than expected.

Swiss KOF Economic Barometer decreased from 93.8 to 90.9 in October, below expectation of 93.0. The index is now below its long-term average for the sixth month in a row. Outlook for the economy in the coming months "remains subdued".

KOF said: "The downward movement of the barometer is primarily driven by bundles of indicators from the manufacturing as well as the accommodation and food service activities sectors. Indicators for the construction sector, the financial and insurance services, and private consumption remained almost unchanged compared to the previous month. By contrast, indicators for the sector other services showed a slightly positive trend."

Full release here.

France GDP growth slowed to 0.2% qoq in Q3, matched expectations. That compares to 0.5% qoq growth in Q2.

Final domestic demand (excluding inventories) contributed positively to GDP growth this quarter (+0.4%). Thus, gross fixed capital formation (GFCF) accelerated strongly after an already relatively dynamic start to the year (+1.3%), while household consumption expenditure were stable (+0.0%). Foreign trade contributed negatively to GDP growth (-0.5%),

Full release here.

An ugly week of Big Tech earnings is coming to an end, having wipe out hopes of seeing earnings boost gains across the stock markets.

Yesterday, Meta plunged more than 24%; Nasdaq 100 lost almost 2%.

And today won’t be any better, as Apple and Amazon also lost in the afterhours trading.

Amazon lost up to 20%! Amazon’s Q3 revenues grew 15% versus last year, that was slightly less than expectations. The cloud segment grew 27% over the quarter, also worse-than-expected. The net income fell to $2.9bn from $3.2bn a year ago. But what really hit investors is the estimation of a holidays season revenue of around $140 to $148 billion, versus around $155 billion penciled in by analysts. The potential $15bn miss on holidays sales will send Amazon below the $100 mark at the open today. Whether the dive would attract dip-buyers is yet to be seen.

Apple, on the other hand, lost nearly 3% at its worse, after the bell. The company did better than the revenue and earnings expectations, but the uptick in iPhone sales was worse-than-expected, although Apple continues onboarding Android users, and grew its active user base to a fresh record. Apple lost more than 3% at yesterday’s tech selloff, and will unlikely recover much of it before the weekly closing bell.

In summary, the US Big Tech rather killed joy this week, so all eyes are on Big Oil to reverse mood. Exxon Mobil and Chevron will be reporting earnings this Friday, and are expected to announce stunning earnings.

But there are two important things to keep in mind. First, the expectations are high, so they will be harder to beat. And second, Joe Biden is pressuring oil companies not to use their stunning profits to buy back stocks, or throw out dividends, but rather to use them to increase supply, and bring oil prices lower.

In all cases, energy companies are the biggest winners of the energy crisis, and the rally is not ready to reverse.

Exxon Mobil flirted with $110 yesterday, extending its year-to-date rally to 80%, whereas the S&P500 lost up to 27%, and is 20% lower as of today due to high inflation – mostly triggered by skyrocketing energy prices, rising rates, and deteriorating economic outlook.

And that mixed US GDP

Investors didn’t know what to do with the mixed US GDP data yesterday. The latest GDP update showed that the US economy grew 2.6% in the Q3, reversing two consecutive month slowing.

Yet, growth was not necessarily driven by a stronger US economic activity. In fact, exports boosted the headline figure, while imports fell - meaning that the domestic demand from the US weakened despite a significant appreciation of the US dollar. Consumer spending, on the other hand, advanced way weaker than the previous period. So, the strong GDP number didn't boost the Federal Reserve (Fed) hawks. On the contrary, if the Fed wants a lower inflation, weaker demand is exactly what it needs – and weaker demand was a major conclusion of yesterday’s otherwise strong GDP print.

This is certainly why we saw the S&P500 stocks limit losses yesterday, while the Dow Jones eked out a 0.61% gain. The US 2-year yield eased almost 3%, although the dollar rebounded across major currencies.

ECB hiked, euro eased

The European Central Bank (ECB) hiked the interest rates by 75bp at yesterday’s meeting, but the hike was broadly expected and priced in. Investors mostly traded the post-meeting statement from Christine Lagarde, and that statement was rather… dovish.

Although Lagarde said that more rate hikes are on the pipeline, and that the pace and the size of the future actions will depend on data, she also said that a 'substantial progress' has been made in normalizing policy. And that ‘substantial’ word got many to think that the most aggressive part may have been already done.

Plus, the ECB said that the recession odds increased, and the officials didn't discuss QT at this meeting.

The EURUSD swung up and down around parity, and consolidates below 1 at the wake of the latest ECB decision. As a result, the 100-DMA offers, which stand a touch above parity couldn’t be cleared this week, and sentiment in the EURUSD remains negative, though less negative given some softening in USD outlook this week.

The yen on the other hand gave back some advance against the US dollar, as the stubborn Bank of Japan (BoJ) maintained its interest rate unchanged at -0.10% at today’s meeting, while revising the 2022 inflation forecast significantly higher from 2.3% to 2.9%.

If the BoJ is lucky, the dollar will weaken from the actual levels, and the depreciation in the yen would remain reasonable. Otherwise, we could see dollar-yen spike above the 150 level despite the BoJ’s direct interventions which do nothing more than burning money.

One last thing

Investors will be watching one last thing on the macro front before the weekly closing bell – and that’s the September PCE index, along with the personal income and spending data. Any weakness could further weigh on the dollar before we close the week, and before next week’s FOMC meeting.

Market movers today

Today we get the first Q3 GDP figures out of the big euro area economies. Consensus sees slowing but still positive growth in France and Spain. We expect Q3 will mark the start of at least a technical recession in Germany with a GDP decline of 0.3%.

We also get German inflation figures for October. Here we expect to see CPI inflation around last month's 10.0% level as a VAT reduction on natural gas kicks in but core inflation will likely edge higher.

We expect an unchanged high mom 0.6% increase in the US PCE core index, which leaves core inflation at 5.3% in September, up from 4.9% in August.

We also get flash GDP indicator out of Sweden and jobless rate and retail sales from Norway, see more below.

The 60 second overview

ECB: At yesterday's meeting, the ECB decided to hike all policy rates by 75bp and importantly sent signals that it is slowing the hiking pace. Lagarde emphasised the data dependency, and the meeting-by-meeting approach. There was no discussion about ending the QE reinvestment policy.

Rates markets lowered the ECB's expectations for further rate hikes by around 25bp yesterday. Markets are now pricing 57bp for the December meeting and a peak in the ECB deposit rate to around 2.6%. 10Y yields in Germany and Italy fell 15bp and 32bp, respectively. We expect a 50bp rate hike at the December meeting.

The ECB also announced changes to the TLTRO terms. The latter is set to cause a significant drop in excess liquidity already from 23 November. For more on the ECB meeting, see Flash: ECB review that we published yesterday.

Danmarks Nationalbank (DN) hiked its key policy rate by 60bp to 1.25% (15bp less than the ECB). The smaller rate hike should be seen in light of the recent large scale FX intervention selling of DKK. The spread to ECB's key policy rate is now -0.25%, which we think will be enough to weaken DKK and end the need for further FX intervention. Hence, going forward DN is expected to mirror ECB one-by-one. For more see Flash comment Denmark that we published yesterday.

US GDP: US Q3 Flash GDP rose more than expected by 2.6% q/q AR (consensus +2.4%). The strong headline figure masked weakness in the underlying growth, as it was supported by +2.8%-point contribution from net exports, mostly reflecting declining imports. Private consumption growth slowed to only 1.4% q/q AR despite the recovery in real purchasing power, which provided modest support for the recent market speculation of an earlier Fed pivot. Nevertheless, we still think Fed is likely to stick to hawkish narrative in the next week's meeting, read more in our Fed preview that we published this morning.

FI: European rates sent yields markedly lower on a dovish interpretation of the ECB meeting and was led by the short end of the curve. Italian bonds led the outperformance of peripheral bonds to Bunds as the Italian-German spread narrowed 17bp yesterday, in response to the fact that no reinvestment policy discussed yesterday.

FX: While ECB delivered 75bp, markets concluded it was a dovish hike as indicated by substantial repricing of shorter rates. In FX there was broad EUR weakness including some downside in EUR/SEK but, in particular, EUR/NOK - NOK/SEK closer to October highs just below 1.07. DXY has lost 5% over five trading days but now seems to find ground at the 110 support area. Focus in FX will now shift to the Fed on Wednesday.

Credit: Credit markets were relatively muted on Thursday on the back of mixed economic data and weakness in select sectors of the economy. Itrax main was basically flat (+0.4bp) ending the day at 113.3bp. Itrax Xover tightened 4.6bp to end at 552.6bp.

Nordic macro

Sweden: The (flash) GDP indicator for Q3 is released today. If m/m growth in September remains flat, this will take the quarterly figure to -0.4% (q/q), in line with our GDP forecast from Nordic Outlook. However, the monthly figures are notoriously volatile and thus hard to pinpoint, but given current outlook for Swedish consumers we believe that risks are tilted to the downside.

Norway: We expect the jobless rate to climb to 1.7% in October, and we will also be keeping an eye on job openings to see if the downward trend there continues. Retail sales rebounded slightly in August after the sharp fall in July, but without breaking the downward trend. Strong inflation, higher interest rates and the shift from goods to services following the pandemic will probably continue to undermine retail sales in the coming months. We therefore expect them to fall 0.5% m/m in September.

Daily Pivots: (S1) 145.62; (P) 147.01; (R1) 147.80; More...

USD/JPY is extending the consolidation pattern from 151.93 and intraday bias remains neutral. Deeper pull back could be seen, but downside is expected to be contained by 38.2% retracement of 130.38 to 151.93 at 143.69 to bring rebound. On the upside, above 149.69 minor resistance will bring stronger rebound back towards 151.93 high. But upside should be limited there to continue the corrective pattern.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). 147.68 (1998 high) was already met and there is no clearly sign of topping yet. In any case, break of 140.33 support is needed to be the first sign of medium term topping. Otherwise, further rise is in favor to next target at 160.16 (1990 high).

The markets are relatively quiet in Asia today. Yen is steady after BoJ stands pat as widely expected. Yet, there is some upside prospect for Yen if global benchmark yields continue to correct lower. Dollar remains the worst performer and today's PCE inflation data is unlikely to save it. Traders would more likely look beyond the data to next week's FOMC decision and guidance. There is so far no extended selloff in Euro after the post-ECB dip. Commodity currencies are firmer but lack follow through buying too.

Technically, US 10-year yield's close below 3.992 resistance turned support argues that it's already correcting the rise from 2.525 to 4.333. There is prospect of deeper pull back towards 55 day EMA (now at 3.624). If happens, that could help drag down Yen pairs, in particular USD/JPY towards 55 day EMA (now at 143.52).

In Asia, at the time of writing, Nikkei is down -0.77%. Hong Kong HSI is down -2.73%. China Shanghai SSE is down -1.25%. Singapore Strait Times is up 1.64%. Japan 10-year JGB yield is down -0.0116 at 0.242. Overnight, DOW rose 0.61%. S&P 500 dropped -0.61%. NASDAQ dropped -1.63%. 10-year yield dropped -0.078 to 3.937.

BoJ stands pat, maintains yield cap at 0.25%

BoJ left monetary policy unchanged as widely expected. Under the yield curve control framework, short-term policy interest rate is held at -0.10%. 10-year JGB yield is kept at around 0%, with bond purchases without upper limit. 0.25% fixed rate purchase operation will continue to be held to cap 10-year JGB yield. The decision was unanimous.

In the new economic projections:

• Fiscal 2022 GDP growth forecast was downgraded from 2.4% to 2.0%.
• Fiscal 2023 GDP growth forecast was downgraded from 2.0% to 1.9%.
• Fiscal 2024 GDP growth forecast was upgraded from 1.3% to 1.5%.
• Fiscal 2022 CPI core forecast was upgraded from 2.3% to 2.9%.
• Fiscal 2023 CPI core forecast was upgraded from 1.4% to 1.6%.
• Fiscal 2024 CPI core forecast was upgraded from 1.3% to 1.6%.
• Fiscal 2022 CPI core-core forecast was upgraded from 1.3% to 1.8%.
• Fiscal 2023 CPI core-core forecast was upgraded from 1.4% to 1.6%.
• Fiscal 2024 CPI core-core forecast was upgraded from 1.5% to 1.6%.

IMF cut Asia growth forecasts to 4% in 2022, 4.3% in 2023

IMF lowered Asia's growth forecast in to 4.0% in 2022, 4.3% in 2023, and 4.6% in 2024. Japan's growth forecast was held unchanged at 1.7% in 2022, downgraded slightly to 1.6% in 2023, and raised to 1.3% in 2024. For China, growth forecasts was downgraded to 3.2% in 2022, 4.4% in 2023, and 4.5% in 2024.

"As the effects of the pandemic wane, the region faces new headwinds from global financial tightening and an expected slowdown of external demand," the report said.

As for China, "with a growing number of property developers defaulting on their debt over the past year, the sector's access to market financing has become increasingly challenging," the report noted."Risks to the banking system from the real estate sector are rising because of substantial exposure."

Elsewhere

Japan Tokyo CPI core rose from 2.8% yoy to 3.4% yoy in October, above expectation of 3.2% yoy. Unemployment rate ticked up from 2.5% to 2.6% in September, above expectation of 2.5% yoy.

Australia PPI rose 1.9% qoq, 6.4% yoy in Q3, versus expectation of 1.5% qoq, 6.4% yoy.

Looking ahead, GDP from France, and GErmany will be the main focus in Euroepan session. Eurozone economic sentiment, Germany CPI flash and Swiss KOF will be featured too.

Later in the day, US personal income and spending, with PCE inflation will be the main feature.

USD/JPY Daily Outlook

Daily Pivots: (S1) 145.62; (P) 147.01; (R1) 147.80; More...

USD/JPY is extending the consolidation pattern from 151.93 and intraday bias remains neutral. Deeper pull back could be seen, but downside is expected to be contained by 38.2% retracement of 130.38 to 151.93 at 143.69 to bring rebound. On the upside, above 149.69 minor resistance will bring stronger rebound back towards 151.93 high. But upside should be limited there to continue the corrective pattern.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). 147.68 (1998 high) was already met and there is no clearly sign of topping yet. In any case, break of 140.33 support is needed to be the first sign of medium term topping. Otherwise, further rise is in favor to next target at 160.16 (1990 high).

Economic Indicators Update

IMF lowered Asia's growth forecast in to 4.0% in 2022, 4.3% in 2023, and 4.6% in 2024. Japan's growth forecast was held unchanged at 1.7% in 2022, downgraded slightly to 1.6% in 2023, and raised to 1.3% in 2024. For China, growth forecasts was downgraded to 3.2% in 2022, 4.4% in 2023, and 4.5% in 2024.

"As the effects of the pandemic wane, the region faces new headwinds from global financial tightening and an expected slowdown of external demand," the report said.

As for China, "with a growing number of property developers defaulting on their debt over the past year, the sector's access to market financing has become increasingly challenging," the report noted."Risks to the banking system from the real estate sector are rising because of substantial exposure."

Full report here.

BoJ left monetary policy unchanged as widely expected. Under the yield curve control framework, short-term policy interest rate is held at -0.10%. 10-year JGB yield is kept at around 0%, with bond purchases without upper limit. 0.25% fixed rate purchase operation will continue to be held to cap 10-year JGB yield. The decision was unanimous.

In the new economic projections:

• Fiscal 2022 GDP growth forecast was downgraded from 2.4% to 2.0%.
• Fiscal 2023 GDP growth forecast was downgraded from 2.0% to 1.9%.
• Fiscal 2024 GDP growth forecast was upgraded from 1.3% to 1.5%.
• Fiscal 2022 CPI core forecast was upgraded from 2.3% to 2.9%.
• Fiscal 2023 CPI core forecast was upgraded from 1.4% to 1.6%.
• Fiscal 2024 CPI core forecast was upgraded from 1.3% to 1.6%.
• Fiscal 2022 CPI core-core forecast was upgraded from 1.3% to 1.8%.
• Fiscal 2023 CPI core-core forecast was upgraded from 1.4% to 1.6%.
• Fiscal 2024 CPI core-core forecast was upgraded from 1.5% to 1.6%.

Full statement here.

Full Outlook for Economic Activity and Prices here.