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Markets

Markets tried to extend the Trump trade yesterday after higher US October producer price inflation and solid (low) weekly jobless claims. They sparked a reaction higher in the dollar and lower in US Treasuries. However those moves didn’t go far and even started a modest correction move on this month’s one-way traffic. Enter Fed Chair Powell. After European close he spoke on the economic outlook at a Dallas Fed event. He labelled the recent performance of the US economy as “remarkably good” in an echo to last week’s press conference following the Fed’s 25 bps rate cut. While he shied away from commenting on US politics, he did admit that the economy is not sending any signals that they need to be in a hurry to lower rates. These comments first of all indicate that the Fed embraces the recent market repricing on a landing zone for the policy rate next year (3.75%-4%; clearly above neutral). Secondly Powell seems to be closer to already pausing the interest rate cycle lower. While we stick to the view that we’ll see another 25 bps rate cut in December, it won’t take much to hold in January. US money markets are already contemplating the possibility of a skip at the final meeting of this year with a 25 bps rate cut only 60% discounted. Earlier on the day, dovish Fed governor Kugler said that the Fed must focus on both inflation and jobs goals. “If any risks arise that stall progress or reaccelerate inflation, it would be appropriate to pause our policy rate cuts,” she said. “But if the labor market slows down suddenly, it would be appropriate to continue to gradually reduce the policy rate.” Kugler’s comments seem to be skewing to the upside inflation risks (stubborn housing inflation and high inflation in certain goods and services) which obviously carries some weight given her more dovish status. Daily US yield changes eventually ranged between +5.9 bps (2-yr) and -4.9 bps (30-yr). This flattening move contrasts with the bull steepening in Europe where German yields shed 6.4 bps (5-yr) to 0.9 bps (30-yr). EUR/USD closed at a new YTD low (1.0530) after testing the 1.05 mark during the day. The range bottom and 2023 low stands at 1.0448. Today’s US retail sales have the potential to trigger a test if they showcase more strength. We think risks are becoming asymmetric though. If it weren’t for Powell’s intervention, the dollar and US Treasuries would have already corrected on the strong trend. It’s our preferred scenario going into the weekend.

News & Views

The Central Bank of Mexico yesterday cut its policy rate by 25 bps to 10.25%. Annual headline inflation rebounded to 4.76% in October while core inflation continued decreasing to 3.80% .The central bank forecasts headline and core inflation to converge to the 3% inflation target (with a tolerance band of +/- 1.0%) by the end of next year and stay there in 2026. Upside risks to this scenario remain. Looking ahead, the board expects that the inflationary environment will allow further reference rate adjustments, supported by expectations of ongoing weakness in the economy. The Mexican peso (MXN) since Q2 is on a downward trajectory against the dollar with recent political events in the US confirming this trend. USD/MXN currently trades at 20.48, compared to a low of 16.26 early April.

Japanese growth slowed from 0.5% Q/Q in Q2 to 0.2% Q/Q in Q3 (0.9% Q/Qa). The outcome was marginally stronger than expected (0.7% Q/Qa). The details show a mixed picture. Private consumption printed much stronger than expected at 0.9% Q/Q (from 0.7% in Q2 and 0.2% expected). On the negative side, capital spending was weak at -0.2% Q/Q (from 0.9% in Q2). Net exports also unexpectedly contributed negatively (-0.4%) to Q3 growth. In the previous quarter this negative contribution was only -0.1%. From a monetary policy point of view, the solid performance of domestic demand probably is the more important factor for the BOJ to gradually continue policy normalization. Recent weaking of the yen also points in the same direction. Markets are now looking forward to a speech and press conference of BOJ governor Ueda next Monday. Analysts currently are divided whether a next step should already take place in December or only come at the January meeting. USD/JPY tentatively extends its gain trading north of 156, to be compared to sub 140 levels mid-September.

Daily Pivots: (S1) 1.0490; (P) 1.0536; (R1) 1.0576; More...

A temporary low is formed at 1.0495 in EUR/USD, just ahead of 100% projection of 1.1213 to 1.0760 from 1.0936 at 1.0483. Intraday bias is turned neutral for consolidations first. But outlook will remain bearish as long as 1.0760 support turned resistance holds. Firm break of 1.0495 will target 1.0404 key fibonacci level.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage.

Daily Pivots: (S1) 1.2623; (P) 1.2674; (R1) 1.2719; More...

GBP/USD's fall from 1.3433 is still in progress and intraday bias stays on the downside. Next target is 100% projection of 1.3433 to 1.2842 to 1.3047 at 1.2456. On the upside, above 1.2768 minor resistance will turn intraday bias neutral first. But outlook will stay bearish as long as 13047 resistance holds, in case of recovery.

In the bigger picture, considering mildly bearish divergence condition in D MACD, a medium term top is likely in place at 1.3433 already. Price actions from there are seen as correction to whole up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. Strong support should be seen there to bring rebound.

Daily Pivots: (S1) 0.8861; (P) 0.8890; (R1) 0.8932; More…

USD/CHF's rally is still in progress and intraday bias stays on the upside. Sustained break of 61.8% retracement of 0.9223 to 0.8374 at 0.8899 will pave the way to 0.9223 high. On the downside, below 0.8835 minor support will turn intraday bias neutral and bring consolidations, before staging another rally.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern. Rise from 0.8374 is seen as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes.

Daily Pivots: (S1) 155.60; (P) 156.01; (R1) 156.68; More...

USD/JPY's rally is still in progress and intraday bias stays on the upside. Current rise from 139.57 should target 61.8% projection of 141.63 to 153.87 from 151.27 at 158.8. On the downside, below 153.40 minor support will turn intraday bias neutral again first. But near term outlook will remain bullish as long as 151.27 support holds, in case of retreat.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.6431; (P) 0.6465; (R1) 0.6488; More...

Intraday bias in AUD/USD remain son the downside for the moment. Current fall from 0.6941 should target 61.8% projection of 0.6941 to 0.6511 from 0.6687 at 0.6421. Firm break there will target 100% projection at 0.6257 next. On the upside, above 0.6511 support turned resistance will turn intraday bias neutral and bring consolidations first. But outlook will stay bearish as long as 0.6687 resistance holds, in case of recovery.

In the bigger picture, rise from 0.6269 (2023 low) should have completed with three waves up to 0.6941. Corrective pattern from 0.6169 (2022 low) is now extending with another falling leg. Deeper decline would be seen back to 0.6269 as sideway trading extends.

Federal Reserve’s (Fed) Jerome Powell, who leads a team that started cutting the interest rates with a 50bp point in September by fear that the US jobs market would deteriorate quickly and added another layer of 25bp cut last week, said that ‘the economy is not sending any signals that [they] need to be in hurry to lower the rates’. Maybe, the plans have changed after Trump’s election on rising inflation risks due to pro-growth policies and tariffs.

And beyond Trump, the inflation data released this week wasn’t that encouraging, either. The US headline inflation rebounded from 2.4% to 2.6% parallel to market expectations, while yesterday’s surprised to the upside, with both headline and PPI data printing figures above the market expectations. On top, the initial jobless claims came in lower than expected. All in all, the Fed is coming to the realization that cutting rates hurriedly was not a brilliant idea, and the first thing to do now is to do nothing in December. The probability of a December cut went from 60 to 80%, and is back to around 60% in the aftermath of this week’s data and comments. The US 2-year yield consolidates near 4.35%, the 10-year yield flirted with the 4.50% level, with treasury sceptics eyeing an easy advance to the 5% mark, and the US dollar extended gains to the highest levels in more than a year, supported by the hawkish shift in Fed expectations. The price action makes sense, but the fact that the US dollar has now stepped into the overbought territory will likely slow the short-term demand for the US dollar and could lead to a minor correction. But the price pullbacks should continue to be interesting dip-buying opportunities for the dollar bulls looking for a further extension of gains against majors.

The EURUSD tipped a toe below the chilly 1.05 level yesterday, on the back of a stronger dollar and a 2% decline in Eurozone’s industrial production, but rebounded to 1.0540, as the market hasn’t yet digested the idea that the EURUSD – which was testing the 1.10 offers 6 weeks ago – is now diving below the 1.05 mark. But once the information is digested, the move could materialize. There is a louder call for a 50bp cut in December from the European Central Bank (ECB), and some start talking about a 75bp cut – which I think is clearly not happening. But the Stoxx 600 saw support yesterday, partly thanks to more aggressive ECB rate cut expectations that support valuations and partly thanks to a nearly 3% jump in ASML after the company projected a sales growth between 50 and 100% - yes that’s the prediction range: 50 to 100% growth in sales.

Oil remains offered

Crude oil’s positive attempt yesterday remained short-lived, again, and the barrel of US crude is drilling below the $68pb at the time of writing, despite encouraging retail sales data from China. The USDCAD extends gains above the 1.40 mark and the USDJPY consolidates and extends gains above the 156 mark, with bears eyeing a further rise toward the 160 mark, where authorities would say stop to the bleeding with a direct intervention.
Meli-melo of other news

Disney jumped more than 6% yesterday on better than expected Q3 results, especially for its streaming business, but the rest of the market didn’t look as great. The S&P500, Nasdaq, Dow Jones and Russell 2000, they all fell yesterday on Powell saying – all of a sudden – that there is no need to hurry with the rate cuts. Tesla fell nearly 6% on news that Trump would eliminate the $7500 consumer tax credit for EV. But wait, because Tesla is already profitable, it is better positioned than the rest of the EVs to thrive.

The week will end with the UK GDP, a few more inflation numbers from the Eurozone and US retail sales and industrial production data. The incoming data could give an immediate reason to buy more dollars, or let the dollar soften to buy a dip. But in all cases, the outlook for the US dollar remains comfortably positive as the week comes to an end.

In focus today

From the US, October retail sales and industrial production data will provide markets with the latest hard evidence of the health of the US consumer and manufacturing sectors. We expect that with still positive employment and solid wage gains, retail sales should remain on a steady growth path over the coming months.

In the euro area, the European Commission publishes its economic outlooks for 2025 and 2026. It will be interesting to follow their changes in projections as a signal of what we can expect from the ECB at their new projections in December, which will guide the monetary policy.

In Sweden, SCB publishes the October results from the Labor Force Surveys. While a further increase cannot be completely ruled out, we anticipate peak levels will be reached soon, and unemployment should start decreasing during next year. Importantly, the monthly unemployment figures should be assessed with caution due to their relatively high volatility.

Economic and market news

What happened overnight

In China, the monthly batch of data for October gave a mixed picture. Growth in retail sales exceed expectations at 4.8% y/y (cons: 3.8%, prior: 3.2%), reflecting how the country's recent stimulus efforts are kicking in. Conversely, industrial production and fixed asset investments fell short of expectations, printing 5.3% y/y and 3.4% y/y, respectively (cons: 5.6%, 3.5%). New home prices dipped 5.9% y/y, sliding the most in annual terms since October 2015. The monthly figure, however, fell 0.5% m/m, compared to the decline of 0.7% in September, signalling that stimulus measures are starting to support the fragile housing sector.

In Japan, GDP growth for Q3 matched consensus, growing a modest 0.2% q/q SA following the 0.7% rebound in Q2. Private consumption was stronger than expected, whereas capital spending and net external demand (exports minus imports) fell 0.2% q/q SA and 0.4% q/q SA, respectively. The decline in net external demand particularly stood out compared to consensus of 0.1% q/q SA growth.

What happened yesterday

In the US, yesterday's data releases had limited market impact. Akin to CPI on Wednesday, October PPI was very much as expected, increasing in October, with headline and core at 0.2% m/m SA and 0.3% m/m SA, respectively. While jobless claims edged slightly lower to 217k, the move was nothing too dramatic.

Fed Chair Powell stressed that the economy is not yielding any signals that the Fed should be in a hurry to slash rates. At the same time, Powell highlighted that the current sound economic backdrop gives the Fed time to approach their decisions carefully, hinting that the Fed likely will cut rates gradually, with inflation coming closer to the 2% target, "but not there yet". We pencil in a rate cut of 25bp cut in December.

In the euro area, industrial production declined by 2.0% m/m in September (cons: -1.4% m/m, prior: 1.5%). Given that the data is quite volatile on a monthly basis and this month was driven by a downtick in Ireland of 11%, we focus more on Q3 as an average. In Q3, industrial production declined 0.3% q/q, highlighting that industry remains weak, likely dragging on activity. The outlook for the coming quarters remains bleak and we do not expect a recovery in the sector before H2 2025 when interest rates likely have declined further.

Euro area employment continued to grow in Q3, increasing 0.2% q/q compared to a downward revised 0.1% in Q2, albeit when judged on the second decimal it was broadly unchanged (from 0.15% to 0.18%). Hence, the euro area labour market remains resilient. The employment situation is heterogeneous across euro area countries. The strength is due to continued increases in employment in Spain, while the picture in Germany is very different with employment declining in Q3. However, we see clear risks of the labour market weakening in the quarters ahead. We expect aggregate euro area employment growth around 0.0-0.1% q/q in the coming quarters as the EU Commission employment expectations index indicates continued mildly positive employment growth in Q4 and indicators of services demand remain positive. The outlook for the euro area is driven by our expectations for employment gains in Southern Europe countered by employment declines in Germany. We see risks as tilted towards the downside due to the weak manufacturing sector, as indicated by the weak wage agreement in German IG Metal for 2025.

Minutes from the ECB's October meeting indicated that risk management considerations were central to its decision to cut rates by 25bp to prevent unnecessary economic strain. Policymakers emphasised that the risks of cutting in October and potentially being too early in the easing cycle were lower than the risks of waiting and potentially acting too late. It was also highlighted that the ECB could pause its cutting cycle in December if activity improves. We believe that the ECB will deliver another 25bp cut in December, bringing the deposit rate to 3.00%.

In Sweden, the final inflation data for October was in line with last week's flash estimates. Decomposing details, the upside deviation seemed to be more broad-based than we had expected and not fueled by higher food prices. There were no worrying developments in the data, however.

Equities: Global equities were lower yesterday, albeit with significant regional variations. European stocks outperformed their US counterparts by approximately 2%, on a day when macroeconomic fundamentals did not provide any material reasons for this divergence. Additionally, the long end of the bond market was more or less moving in sync, and dollar continued to strengthen. In our opinion, this relative movement is a result of some reversal of the massive outperformance the US has demonstrated recently. Indeed, the US has displayed superior macroeconomic and microeconomic data, but not enough to justify the US outperformance we have seen. Hence, the Trump victory/trade has simply caused investors to flock to the US. This trend can be observed in both positioning and flow data, but the real alarm is sounded by relative valuation. Following the post-election movements, the US premium to Europe reached 65% based on a 12-month forward P/E ratio. To put it in perspective, when Trump was elected president back in 2016, the premium stood at 14%. With the movements in equities yesterday, individual stock performance, and for that matter, crypto currencies, it seems that we have put the largest part of the Trump trade behind us. Hence, going forward, both absolute and relative performance should again increasingly be driven by fundamentals. Some of the most extreme Trump trades are also prone to reversal.

In the US yesterday: Dow -0.5%, S&P 500 -0.6%, Nasdaq -0.6%, and Russell 2000 -1.4%.

Asian markets are quite varied this morning, though the major markets are leaning higher. European and US futures are lower.

FI: Global yields generally declined yesterday with the 10y point in Germany down about 8bp. Late in the evening, Powell's remarks on the Fed being in "no hurry to lower rates" spurred a sell-off in USD rates wit 2y treasuries rising 10bp to 4.35% and markets taking out 5bp of December Fed cut pricing. European markets are expected to see some spillover this morning.

FX: Powell's remarks on the Fed being in "no hurry to lower rates" spurred a second wind for the USD during US hours where EUR/USD briefly touched below 1.05. Scandies recovered some of the previously lost ground vs the euro and NOK/SEK kept above 0.9850 throughout the session. USD/JPY continues to edge higher whereas EUR/GBP defied otherwise elevated G10-volatility and traded remarkably stable between 0.8310-0.8320.

UK economy contracted by -0.1% mom in September, falling short of market expectations for 0.2% mom growth. The contraction was driven largely by declines in manufacturing output and information and communication services, with monthly services output showing no growth. Meanwhile, production sector experienced a notable -0.5% drop, primarily due to a sharp decline in manufacturing. Construction output offered a slight silver lining, rising by 0.1%.

For Q3, GDP grew by a marginal 0.1% qoq, marking a steep slowdown from Q2’s 0.5% qoq growth and missing forecasts of 0.2% qoq. The services sector, which accounts for the largest share of economic activity, expanded by just 0.1%, while construction demonstrated resilience with a 0.8% increase. However, the production sector contracted by -0.2%, reflecting persistent weaknesses in the industrial base.

Full UK monthly & quarterly GDP release.

Daily Pivots: (S1) 1.4010; (P) 1.4038; (R1) 1.4087; More...

Intraday bias in USD/CAD remains on the upside for the moment. Current rally is part of the larger up trend. Next target is 61.8% projection of 1.3418 to 1.3958 from 1.3841 at 1.4175. On the downside, below 1.3993 minor support will turn intraday bias neutral and bring consolidations first. But outlook will stay bullish as long as 1.3841 support holds, in case of retreat.

In the bigger picture, up trend from 1.2005 (2021) is resuming with break of 1.3976 key resistance (2022 high). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3418 at 1.4391. Now, medium term outlook will remain bullish as long as 1.3418 support holds, even in case of deep pullback.