Sample Category Title

EUR/AUD's dipped further to 1.6002 last week but recovered just ahead of 1.5996 key support level. Initial bias stays neutral this week first. On the upside, firm break of 1.6184 resistance should confirm short term bottoming. Intraday bias will be back on the upside for 1.6256/6629 resistance zone. However, sustained break of 1.5996 will carry larger bearish implications, and target 100% projection of 1.7180 to 1.6256 from 1.6629 at 1.5705.

In the bigger picture, as long as 1.5996 support holds, up trend from 1.4281 (2022 low) is still expected to resume at a later stage. However, decisive break of 1.5996 will argue that the medium term trend has reversed and turn outlook bearish.

In the longer term picture, rise from 1.4281 is seen as the second leg of the pattern from 1.9799 (2020 high), which is part of the pattern from 2.1127 (2008 high). As long as 55 M EMA (now at 1.6008) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF was bounded in range trading inside 0.9332/9506 last week. Initial bias stays neutral this week first. For now, the favored case is that rise from 0.9209 low is not finished yet. Break of 0.9506 will turn intraday bias to the upside for 0.9579 resistance and above. However, break of 0.9332 will dampen this view and bring deeper decline through 0.9305 support instead.

In the bigger picture, medium term corrective pattern from 0.9407 (2022 low) might have completed with three waves to 0.9928. Decisive break of 0.9252 (2023 low) will confirm long term down trend resumption. Next target will be 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851. For now, outlook will stay bearish as long as 0.9928 resistance holds, even in case of strong rebound.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 0.9928 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

Monday, Oct 7, 2024

Tuesday, Oct 8, 2024

Wednesday, Oct 9 2024

Thursday, Oct 10, 2024

Friday, Oct 11, 2024

• Strong US jobs report shifts Fed rate cut expectations from 50 bps to 25 bps.
• Geopolitical tensions in the Middle East drive up oil prices and safe-haven assets.
• Upcoming US inflation data and RBNZ rate decision in focus for the week ahead.
• Oil prices surge on Middle East tensions, with key support and resistance levels identified.

Week in Review: Strong Jobs Report Support Fed Narrative of 25 bps Cut

What a difference a week can make. It seems just yesterday that market participants were pricing in a 50 bps rate cut at the Feds November meeting and the US Dollar appeared to be teetering on the brink. However, renewed geopolitical risk and a blockbuster jobs report have left markets with a few new angles to consider heading into the new week.

Markets have all but priced out a 50 bps cut in November with a 97% chance of a 25 bps cut. This is a remarkable change from 7 days ago when markets were pricing in a 50 bps cut at around 60%.

Source: CME FedWatch Tool

The US jobs report showed exceptional strength across all areas—job creation, unemployment, wages, and hours worked. However, caution remains due to the absence of supporting data. Inflation is on the right path as well but as Fed policymaker Goolsbee stated “powell’s message that there are balanced risks is wise”. Goolsbee also warned that external factors have derailed many soft landings in the past.

Source: BLS

Now of course the next major market moving event this week was geopolitical risks. We are starting to see a return of the risk premium and safe haven flows in markets following Iran’s strike against Israel this week raised the alarm of a wider Middle East war. Oil prices were the largest beneficiary in this regard, rallying some 9.7% for the week.

Gold, US Dollar, CHF and the Yen also benefited in varying degrees from the safe haven appeal and demand created after the event. This is something that needs to be monitored as Israel has promised to retaliate and has even threatened Iran’s Oil production. This definitely spooked markets and led to the surge in Oil prices as markets look and ponder the effects on oil supplies of a wider regional war.

US Stocks also finished the week on a high following the jobs data. The S&P 500 and the Nasdaq 100 started the week with losses before finishing the week strong, trading almost flat at the time of writing. Emerging markets however came under renewed pressure this week as risk sentiment soured from a geopolitical risk perspective.

The Week Ahead: US Inflation and RBNZ Rate Decision

The week ahead sees high impact data take a bit of a breather but we do have a lot of risks to navigate nonetheless. The most pertinent of which is the geopolitical risk which hangs in the balance as the weekend approaches. Various scenarios could develop on this front next week with Oil being the major asset which could be directly affected.

US inflation data may be due but it does not hold the same weight as it did a few months ago. However, following the strong wage numbers and the job report today, markets may pay a lot more attention to this week’s print to ensure an uptick in inflation isn’t on the way.

Asia Pacific Markets

In Asia, data is sparse from the major economies with China and Japan not releasing any high impact data this week. China’s data calendar is relatively quiet for the upcoming week, as the country resumes work next Tuesday following the Golden Week holiday. We can expect some data on holiday travel and consumption, along with possible updates on the stimulus rollout as the week unfolds.

The New Zealand interest rate decision will be at the forefront of Asia Pacific data releases this week. Investors are confident that the RBNZ will reduce interest rates by 50bps next week, followed by another 50 bps in November. This suggests that the risks for the kiwi might lean towards the upside. If officials implement a double cut and indicate further aggressive easing, it would merely confirm market expectations, making significant depreciation of the kiwi unlikely.

Europe + UK + US

In developed markets, the Euro Area gets a break in terms of data releases whereas the UK releases GDP data on Friday. Besides that it will be a quiet week from both Europe and the UK.

The US will get the attention once more with US inflation and FED minute releases. There is also a host of Fed speakers which could give more insight to FED policymakers thinking heading toward the November interest rate meeting.

Preliminary S&P Global PMIs indicate that prices charged by businesses increased at the quickest pace in six months. While the ISM manufacturing survey showed a decline, the non-manufacturing report supported the idea of rising price pressures. This coupled with wage data this week and improving unemployment does hint at the fact that resurgent price pressures may rear their head once more.

Chart of the Week

This week’s focus is on Oil following the commodity recording its best weekly gain in nearly two years.

The rising tensions in the Middle East have led to a host of risks both from a supply and demand perspective. Iraqi militias who are seen as Iranian proxies just yesterday threatened global energy and Oil supplies should any attack take place on Iran. There is also the risk that a wider regional war could result in Iran potentially shutting down the Strait of Hormuz, through which 20-25% of the world’s Oil passes through.

Israel has touted potentially attacking Iranian oil infrastructure as well with the Kharg Island (Iran’s biggest oil export terminal) being named as a possible target. Such a move as well could send Oil prices hurtling higher and have a knock on effect globally. A delicate situation heading into the weekend.

Oil was up almost 10% for the week at the time of writing, Brent reaching a daily high just shy of the $80 a barrel mark. We could see a retracement if there are signs that escalation in the region may not materialize. However anything else could push Oil beyond the $80 a barrel mark.

From a technical standpoint, immediate support rests at 76.35 before the confluence area around the 75.00 handle comes into focus.

Conversely, on the upside immediate resistance rests at 79.00 before the psychological 80.00 handle comes back into focus. We have the 100-day MA just above 80.00 as well making the level even more crucial if further upside is to occur.  Beyond this we have key levels at 81.58 and 81.92.

Oil Daily Chart – October 4, 2024

Source:TradingView.Com (click to enlarge)

Key Levels to Consider:

Support:

• 76.35
• 75.00
• 73.00

Resistance:

• 79.00
• 80.00
• 81.58
• 81.92
• 83.00

U.S. Highlights

• The U.S. labor market perked up in September as job gains beat expectations, the unemployment rate ticked down and annual wage gains edged up.
• The economic outlook, however, has been buffeted by significant disruptions, namely Hurricane Helene and a port worker strike.
• The production side of the economy continues to travel two very different paths with manufacturing contracting, while services expand.

Canadian Highlights

• Canadian market conditions this week were dictated by U.S. and global developments amid a quiet domestic calendar.
• Markets are putting some odds on a larger 50 basis point cut at the Bank of Canada’s next rate announcement on October 23rd. We expect they will stick to a quarter point cut.
• The next two weeks will feature critical data releases including inflation, labour market updates and Bank of Canada surveys which will weigh heavily in the final decision.

U.S. – A Duo of Disruption Muddies the Economic Outlook

The labor market was the data highlight in a week rocked by a major strike and natural disaster. Ten-year bond yields were notably higher relative to yesterday’s close (0.11 basis points) and the S&P500 was also up about 0.4% as the strong jobs report tempered expectations about the Fed’s cutting cycle.

Today’s employment report revealed that while the labor market may be cooling, it is doing so at a moderate pace (see commentary). Payrolls gains handily surpassed expectations, the unemployment rate edged down slightly, and wage gains nudged higher (Chart 1). Overall, the report was better than many market participants had expected and complements the previously released JOLTS data for August. The JOLTS report showed that while firms have slowed the pace of hiring there still continues to be steady demand for workers, as the number of job openings rose slightly. After the superheated labor market witnessed earlier in the post-pandemic period, followed by a steady cooling, the current leveling off in demand and supply is in line with a labor market that is coming into better balance.

On the production side, the ISM Manufacturing Index was unchanged in September, remaining in contraction territory for the sixth consecutive month. On the services side, however, things were looking better, with the ISM Services Index rising notably in September. Overall, the services sector continues to hold its ground, offsetting much of the weakness evident in the country’s manufacturing sector (Chart 2).

In addition, a major dockworker strike at U.S. East and Gulf coast ports added to economic uncertainty. The strike was suspended late Thursday after the dockworkers’ union and the group representing ocean carriers reached an agreement to extend the currently expired contract, until January 15th. This allows dockworkers to resume work while negotiations over wages and port automation, which had been at an “impasse” for months, would now continue. While the worst effects of the strike have been avoided for now, the cloud of uncertainty continues to loom. If the two sides are not able to reach an agreement prior to the end of the extension, then things could be right back to where they were and the longer a strike persists, the greater the economic fallout.

The job market showing signs of only gradual cooling, lends support to Powell’s view expressed earlier in the week that officials didn’t see a reason to lower rates as aggressively as they did at their most recent meeting. Barring the uncertainty of recent events, the labor market remains key in the Fed’s assessment of the most appropriate policy action.

Canada – Taking Stock

This week served Canadian market watchers an opportunity to take a breather. There was no top-shelf economic data, no Bank of Canada (BoC) speeches, and no domestic headline-grabbing news. Beyond our borders however, a hefty U.S. jobs report pulled Canadian yields higher. The U.S. port strike also came to an end, stemming worries of potential near-term inflationary impacts. Elsewhere, conflict is escalating between Israel and Iran, which has sent oil prices almost 10% higher on the week to $74 per barrel. Despite the rise in oil prices, the Canadian dollar tracked modestly lower.

The BoC is 75 basis points (bps) into their cutting cycle, delivered in three 25 bps increments over their last three meetings. The pressing question for Macklem & Co. is whether they feel it’s necessary to deliver a supersized, 50 bps cut at their next meeting on October 23rd. Outside of the 2020 pandemic-emergency rate cuts, the ‘07–’08 Global Financial Crisis and the early-2000’s Dot-Com bubble, one would have to look back to Oct. 1996 to find the last time the BoC cut by more than the standard 25 bps in the middle of an easing-cycle (Chart 1).

With inflation now back to the two-percent target, the Bank is putting more stock into the growth outlook to ensure that inflation doesn’t fall too much. It’s a fair shift in priorities given the slowdown in the Canadian economy. Last week’s GDP reading for July, and advanced look-ahead for August, confirmed that third quarter growth is tracking well below both the BoC’s current estimate and potential growth (Chart 2). We don’t think the GDP data tipped the scales any more-or-less in favour of a potential 50 bps interest rate cut, which would follow the recent move from the Federal Reserve. The BoC also needs to accept that their current forecast is facing downside risk. A fresh set of forecasts via an updated Monetary Policy Report (MPR) at its next meeting will shed light on how they are looking at near-term growth.

Now, emphasis will be placed on upcoming inflation data and labour market trends, where the Bank will be assessing how durable the current 2% inflation is and whether or not labour markets are continuing to cool. The Business Outlook Survey (BOS) and companion consumer survey will also land next week and be closely watched.

With all we know to date, we look for the BoC to continue on their gradual path, delivering another 25 bps cut at their next meeting, bringing the policy rate to 4.00%. Market pricing, for what it’s worth, is attaching around a 30% chance of a supersized cut. We acknowledge the risk of a potential larger cut should incoming data display further signs of deterioration. Past this, we see rates continuing to gradually decline into next year before hitting 2.25% by early-2026.

Summary

United States: Jobs Up, Rate Cut Expectations Down

• Nonfarm payrolls blew past expectations in September, rising 254K. Upward revisions to the prior two months' data sweetened the headline gain and bucked the trend decline in hiring, while the unemployment rate unexpectedly ticked down a tenth to 4.1%. The solid jobs report tamped down expectations for another 50 bps rate cut at the FOMC's next meeting in November.
• Next week: NFIB Small Business Optimism Index (Tue.), CPI (Thu.), Consumer Sentiment (Fri.)

International: Faster Rate Cuts from the ECB Likely

• In the Eurozone, the September CPI report showed further progress on disinflation for the region’s economy. The combination of slower inflation and more downside risks to GDP growth has compelled us to update our forecast to include a faster pace of ECB rate cuts through early 2025.
• Next week: Japan Labor Cash Earnings (Tue.), Mexico CPI (Wed.), U.K. Monthly GDP (Fri.)

Interest Rate Watch: The Outlook for Longer-Term Interest Rates

• The FOMC cut the federal funds rate by 50 bps on Sept. 18, and other short-term interest rates promptly moved lower. However, longer-term yields generally have risen modestly since the FOMC reduced the federal funds rate a couple of weeks ago. For instance, the 10-year Treasury yield has climbed from 3.65% on September 17 to 3.95% today.

Credit Market Insights: On the Road Again: Student Loan On-Ramp Comes to an End

• As of the start of October, student loan borrowers who are late or miss payments can face credit reporting penalties, as the Biden administration’s year-long student loan “on-ramp” ended this month. For a portion of the over 40 million federal student loan borrowers, the end of the grace period means an additional financial hurdle for those who have missed payments.

Topic of the Week: Middle East Escalations Capture Attention

• A further escalation of miliary conflict in the Middle East captured headlines for most of this week. As the conflict intensified, market participants were reminded that the ongoing conflict in the region does not yet have an end in sight one year on from the start of the war.

Full report here.

The September jobs report and the Bank of Canada's Business Outlook Survey will be closely watched for signs of more economic weakness as the central bank considers whether to accelerate the pace of interest rate cuts.

The U.S. Federal Reserve kicked off its cutting cycle with a 50 basis point reduction in September—larger than the 25 basis point cuts from the BoC so far—but a strong September U.S. jobs report lowered the odds that the larger than “normal” cut will be repeated. However, the BoC has been willing to diverge from the Fed on monetary policy when Canadian economic conditions warrant it.

On Friday, we expect the Canadian unemployment rate ticked up again to 6.7% in September from 6.6% in August. That's 1.1 percentage points higher than a year ago and 1.9 percentage points above the lows after the pandemic. Much of the increase in unemployment has come from longer job search times, particularly for students entering the job market, rather than layoffs. Employment has continued to rise gradually, but not fast enough to keep up with rapid population and labour force growth. We expect that trend to continue in September with 15,000 jobs added, a modest slowing from 22,000 in August.

However, near-term risks remain for larger increases in unemployment. Job vacancies have continued to decline at a rapid pace (down more than 25% from a year ago) with early indicators (job postings on indeed.com) flagging that those declines continued into September. Wage growth has held up, but should continue to slow as hiring demand continues to cool.

Inflation indicators in the Q3 Business Outlook Survey on Friday will be analyzed for reassurance that price growth continues to slow, particularly in corporate pricing behaviour. The central bank is increasingly worried that the economy is slowing more than needed to get inflation sustainably back under control with Governor Tiff Macklem explicitly flagging risks that it could fall below the 2% target. While the start of the rate-cutting cycle and lower inflation could lead to some improvement in expected future sales and equipment investment, these gains are expected to remain minimal given the broader economic slowdown. BoC officials will also be watching for further deterioration in key capacity pressures, such as labour shortages and supply chain disruptions, which may signal deeper weakness in the economy. The Q2 survey already revealed labour shortages at their lowest level since the 2008/09 recession, outside of the pandemic period, underscoring softening labour demand and the risk of a sharper slowdown.

Week ahead data watch

The major data release in the U.S. will be the September consumer price index report on Thursday. Inflation pressures likely eased further, and we expect headline price growth decelerated from 2.5% year-over-year in August to 2.2%, thanks to lower energy prices. Excluding volatile energy and food components, core CPI likely came in at 3.1%, edging down from 3.2% in August.

On Tuesday, Canadian exports in August likely declined by 3% given the 6% reduction in oil prices, which natively impacted the energy trade balance. Imports are expected to lower by 0.6%, bringing the trade deficit to $1.1 billion.

We expect the U.S. trade deficit to narrow to US$70.2 billion from US$78.8 billion in the prior month. The goods deficit narrowed in August as well on higher exports (2.4%), and lower imports (-1.6%), according to the advance indicator.

• US CPI data to guide Fed rate cut bets and the dollar
• RBNZ expected to cut interest rates by 50bps
• Wounded pound awaits monthly GDP numbers
• Canada jobs data and BoC business survey also on tab

Dollar rebounds on safe haven flows and upbeat data

The US dollar staged a meaningful recovery this week aided by Fed Chair Powell’s remarks that the US central bank would likely stick with quarter-point rate cuts, adding that they are not “in a hurry”, as new data have bolstered their confidence in the economy. The currency extended its gains not only because of upbeat data but also due to safe haven flows after Iran launched missile attacks on Israel in retaliation for Israel’s operations against Tehran’s Hezbollah allies in Lebanon.

The better-than-expected ADP jobs report and ISM non-manufacturing PMI prompted market participants to scale back their rate cut bets, assigning only a 35% chance for a back-to-back 50bps reduction in November and around 67bps worth of reductions by the end of the year.

Fed minutes and US CPIs on next week’s agenda

Thus, barring any further escalation in the Middle East, dollar traders are likely to keep their gaze locked on the economic calendar. On Wednesday, the minutes of the latest FOMC decision are due to be released. Nonetheless, given that the dot plot pointed to 50bps worth of rate reductions by the end of the year and that most policymakers who spoke after the decision, including Chair Powell, favored quarter-point reductions from here onwards, the minutes are unlikely to shake the markets.

Therefore, the spotlight is likely to fall on the US CPIs for September due out on Thursday. According to the preliminary S&P Global PMIs, prices charged by businesses rose at the fastest rate in six months, and although the ISM manufacturing survey revealed a slide, the non-manufacturing report corroborated the notion of accelerating price pressures.

This implies some upside risks to Thursday’s data, especially to the core CPI rate. The headline rate could still ease somewhat as the year-on-year change in WTI crude oil slipped further into negative territory in September, despite the latest rebound in absolute prices.

Thus, should the data point to some stickiness in inflation, more investors may be convinced that the Fed will proceed as planned, cutting interest rates by 25bps at each of the November and December decisions. This could add more fuel to the dollar’s engines.

Will the RBNZ cut rates by 25 or 50 basis points?

Passing the ball to New Zealand, its own domestic dollar benefited last week from China’s decision to proceed with bold stimulus measures to revive economic activity. However, the latest wave of risk aversion and the recovery of the US dollar were reasons for a pullback.

Next week, on Wednesday, it will be the RBNZ’s turn to drive the kiwi. The last time RBNZ policymakers gathered was back on August 14, when they cut interest rates by 25bps and signaled that more are coming as inflation is expected to remain near the mid-point of the Bank’s 1-3% target band.

The decision to cut rates came one year ahead of the Bank’s previous forecasts, with the new ones projecting the cash rate at 4.9% in the fourth quarter of 2024. However, investors took a more aggressive stance just after the decision, penciling in more than 30bps worth of cuts for the October decision.

Since then, data revealed that retail sales tumbled more than expected in Q2, and while the overall GDP rate was better than expected, it still revealed contraction. The Q1 print was revised down to indicate a modest 0.1% expansion, after the economy suffered a recession in the second half of 2023.

Now investors are convinced that the Bank will cut interest rates by 50bps next week, and by another 50 in November. This means that the risks for the kiwi may be tilted to the upside because if officials do proceed with a double cut and signal more aggressive easing, this will just confirm market expectations and thereby, the kiwi is unlikely to depreciate much.

On the other hand, if they cut by only 25bps just solely in order to wait for more data and/or because they will not have updated economic projections to work with at this meeting, the kiwi is likely to recharge and resume its prevailing uptrend.

Will the UK data provide a helping hand to the pound?

Among the major currencies, the pound has been the best performer year-to-date and by a large margin. However, it suffered a big blow this week after BoE Governor Andrew Bailey said in an interview with the Guardian that they could turn “a bit more activist” on interest rate cuts if data continues to suggest progress in inflation. The market is now nearly fully convinced that a quarter point cut will be delivered in November, assigning a 65% probability for another one in December.

The next test for the pound could come in the form of the monthly GDP data for August, due out on Friday, which will be accompanied by the industrial and manufacturing production rates, as well as the trade data for the month. A disappointing set of numbers could add credence to Bailey’s remarks and prompt traders to push sterling lower.

Elsewhere, the minutes from the latest RBA decision are scheduled to be released on Tuesday, while on Friday, with loonie traders assigning a 30% chance for a bigger 50bps cut by the BoC on October 23, the Canadian employment report for September and the BoC business outlook survey will attract special attention.

This week saw a further escalation of the conflict in the Middle East, as Israel attacked Hezbollah in Lebanon and Iran launched missiles at Israel. There was little market reaction. Oil prices rose around two dollars per barrel but are still lower than last week, among other things held down by Saudi Arabia's wish to increase its production. It still seems most likely that the conflict will not evolve into attacks or blockades that will seriously affect energy production and exports, but there is clearly a risk of that happening.

Another factor that has contributed to relatively stable oil prices is weak demand growth in China, but it seems that authorities there are now fully committed to supporting the housing market and reigniting economic growth, and the strong rally in Chinese equities continued this week. We have also upgraded our expectations of growth in China. However, we are sceptical that the growth recovery will be strong enough to turn into a seriously inflationary force for the rest of the world and hence be a hindrance for expected rate cuts.

Euro area inflation declined in September to 1.8% y/y and is hence now below the 2% target. Perhaps more important, the month-to-month momentum in service prices dropped to just 0.14% by the ECB's calculation. There are some temporary factors at play and it is just one month, but we now judge the scale to have tipped in favour of an ECB rate cut at the next meeting on October 17, also because of weaker economic data (see Yield Outlook - Arguments for policy restrictiveness fade, 30 September). For example, although euro area unemployment remained at a record low in August, several indicators point to easing labour markets. Not least the reported labour demand from companies in the PMI surveys, which is usually a fairly good indicator of credit growth, has taken a turn downwards in the September data, but the euro area labour market also remains very fragmentated with more weakness to the North and strength to the South.

In the US, job growth of 254,000 in September was much stronger than expected. The unemployment rate declined to 4.1% from 4.2%, whereas average hourly earnings increased 0,4% compared to August, the second month with such a relatively strong increase. Together with other indicators of a relatively strong US labour market, this likely means that the next rate cut from the Fed will be 25bp rather than 50bp as last time. Note however that there will be one more job report before the rate decision in November, and as the September surprise illustrates, the job numbers are hard to predict and could surprise also in the other direction.

The most interesting data release scheduled for next week is US inflation data due on Thursday. The release is unlikely to change the market perception that inflation is mostly a solved problem and not a hindrance for rate cuts and that the labour market is the more important factor to watch, but how sticky service inflation is could well affect the Fed's thinking about the pace of rate cuts. With just a month to go before the election and the race being very close, US politics is also likely to draw attention - feel free to join our webinar on the fiscal, trade and market implications on 10.00 CET Thursday.

Full report in PDF.

Markets

US payrolls hit a home run. Literally every bit of the report was outright strong and topped estimates: from employment growth in the establishment survey over details in the household survey (used to calculate the unemployment rate) to upward revisions in previous reports. Starting with the job gains, they were a much bigger than expected 254k. That compares to the 150k median estimate and even crushed the most optimistic one of 220k. It coincided with a +72k revision of the previous two months. Gains were broad-based with manufacturing (-8k) and the transportation & warehouse sector being the exception (-9k). Unemployment eased from 4.2% (seen as the equilibrium rate by the Fed) to 4.1%. Other readings of the household survey were exceptional as well: the labour force expanded by 150k, the number of unemployment tanked by 281k while its own employment estimate came in at a whopping 430k. Wages grew 0.4%, beating the 0.3% forecast, and brought the y/y figure back to 4%. The strong payrolls tops of a week that mostly contained other strong data including a JOLTS uptick and the services ISM.

This critical piece of information is just one of many to come in the run-up to the Fed November 7 meeting and they are bound to trigger market swings in one direction or the other. From a short-term perspective and until we get these other data points, however, it seals the debate on whether the central bank will move by 25 bps or stick to a 50 bps clip. Bets on the latter evaporated. Money markets now expect the Fed to move ahead with 25 bps on the next four meetings. US yields skyrocketed with the front end of the curve underperforming. Net daily changes vary between 7 bps (30-yr) to 15 bps (2-yr). German Bund yields more or less rose by halve the US gains to trade 3.8-8.9 bps higher in similar flattening. Oil prices extend their recent ascent to $78 (Brent) and are in any case not hindering the rise in yields. The dollar tops the FX scoreboard. EUR/USD loses the 1.10 support area to trade at the lowest since mid-August (1.097). DXY pierces through parallel resistance of 102.16-102.36 towards 102.58. USD/JPY (148.55) closes in on the August correction high of 149.35/39. Sterling pared some of the steep losses yesterday after Bank of England chief economist Pill pushed back against Bailey’s plea for a more aggressive stance. He supports a gradual withdrawal of policy restriction and said the central bank needs to guard against the risk of cutting too far or too fast. EUR/GBP eases from 0.84+ to 0.838. The pound is no match for USD of course. GBP/USD slips further to 1.308. UK yields gapped higher at the open and joined the US move higher to add 12 bps at the front.

News & Views

The European Commission announced that a proposal to impose definitive countervailing duties on imports of battery electric vehicles from China has obtained the necessary support from EU Member States for the adoption of tariffs. The vote represents another step towards concluding the EC’s anti-subsidy investigation and results in the EC imposing additional levies of between 7.8% and 35.3% on top of an existing duty of 10%. According to people familiar with the procedure, 10 members states (including France and Italy) voted in favour of the proposal. 12 countries (including Spain, Belgium and the Czech Republic) abstained. 5 members (including Germany, Hungary and Slovakia) are said to have voted against. The EU decision likely will cause retaliation from China as it already started investigations on European dairy products and pork, amongst others. Still the EU indicated that it continues to work hard to explore an alternative solution.

After a protracted decline (-27%) between March 2022 and February this year, the food price index of the Food and Agriculture Organization of the United Nations (FAO) in September showed an acceleration in prices. The index was up 3.0% from August, marking the largest month-on-month increase since March 2022. Prices for all five commodity categories strengthened, with monthly increases ranging from 0.4% for the meat price index to 10.4% for sugar. The FFPI in September was 2.1% higher than a year ago but 22.4 % below its peak reached in March 2022. Cereal prices were up 3.3% M/M but still 10.2% lower compared to September last year. A monthly rise in wheat prices was mainly due to concerns over unfavourable weather conditions in some key exporters (Canada, European Union). Maize prices also increased M/M. Vegetable oil prices reached the highest level since early 2023 due to a continued rise in the prices across palm, soy, sunflower and rapeseed oils. Dairy prices were up 4.6% M/M and 21.7 Y/Y, driven by higher prices across all dairy products. Sugar prices jumped a sharp 10.4%.

Graphs

US 2-yr yield soars after September payrolls blew past every (even most optimistic) estimate

DXY: trade-weighted dollar index takes out first resistance, solidifying the recent bottoming out process

S&P500 gaps higher. Equities bank on the soft (or no) landing narrative instead of fearing a slower return to less restrictive policy

CBR commodity index leaves recent lows further behind, driven by an uptick in soft commodity prices along with the likes of oil and iron