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Fed Governor Michelle Bowman said she expect ongoing increase in rates at coming meeting. But, it will be "appropriate" to slow the pace of tightening. That will allow policymakers to full assess the impact of their actions.

Also, "we're still seeing extremely high levels of core and CPI inflation," she said. "Until I see our actions actually having some impact that would lower the rate of inflation, I think my expectation would be a slightly higher" terminal rate than projected back in September.

Markets

Yesterday’s (perceived) soft speech of Fed chair Powell (slowing the pace of rate hikes to 50 bps in December) at that time triggered a sharp rally both on US bond and equity markets (Nasdaq +4.41%). Today’s reaction in Asian and Europe was much more modest/diffuse. Gains on Asian markets were mostly limited to about 1.0%, even as comments from Chinese officials suggested a less strict anti-Covid approach going forward. European equities are also lagging far behind yesterday’s US gains (0.5%-1.0%). At the same time, European yields made another substantial step lower, and at some point even went a good way to matching yesterday’s moves in the US even as the ECB still lags far behind the US in its normalization process. We didn’t see much of an EMU specific driver, except for weak October German retail sales (-2.8% M/M and -6.6% Y/Y). Whatever the reason, German yields are ceding between 9/12 bps across the curve. Money markets lowered expectations for the peak ECB policy rate to 2.75%. This afternoon, US investors/data didn’t change the course of events. Challenger job cuts jumped sharply in November (77K, mainly due to cost cutting (30k)). US October personal income (0.7%, M/M) and spending ( 0.8%) were strong while the price deflators (headline 0.3 % M/M 6.0% Y/Y; core 0.2% M/M, 5.0% Y/Y ) marginally softer than expected. Weekly jobless claims eased from 241k to 225k, but continuing claims rose from 1551k to 1608k. The data thus painted a mixed picture, but in current environment, this is enough for bond markets to continue to err to the soft side. Despite yesterday’s sharp sell-off , US yields only gain 2 bps for the 2/5 year sector. The 30-y even cedes 1 bp in volatile trading. US and European bond yields for now also ignore a second consecutive day of higher oil prices (Brent $88.4 p/b compared to a low just north of $80 earlier this week). Whatever, current positioning still might change later today with the key US manufacturing ISM to be released after the publication of this report. Markets will be keen to see whether the ISM joins last week’s sharp decline in the US PMI’s.

Earlier, we described today’s moves as a bit diffuse and this also applies to FX markets. It’s not clear whether we should label today’s equity gains as risk-on or disappointing. Whatever the assessment, the dollar extends its decline with some cross rates event breaking relevant support levels. DXY dropped below the 105.30 area (currently 105.05). The decline in USD/JPY is even more striking. Opening north of 138 this morning, the pair already filled bids below 136. Despite today’s sharp decline in European yields EUR/USD is attacking the 1.05 big figure. Sterling even outperforms the euro with EUR/GBP (0.8575) on its way for a new test of the key 0.8560 area.

News Headlines

Swiss inflation rose 3% y/y in November, unchanged from October as the monthly dynamic flatlined at 0%. Core inflation accelerated slightly from 1.8% to 1.9%. The EU harmonized figure came in at 2.9%, also matching the month before. It’s the tenth month in a row that inflation surpassed the Swiss National Bank’s 2% target. It strengthens the case for the SNB to lift policy rates from the current 0.5% level at their last policy meeting of the year on December 15 by at least 50 bps. Vice president Schlegel earlier this week already hinted at that, saying inflation is still too high for them. That said, it is still far below the 10% on the EMU level, thanks in part to the strong Swiss franc which dampens import prices. Today the currency loses a tad vs the euro though. EUR/CHF advances from 0.984 to 0.987.

South African president Ramaphosa’s fate hangs in the balance. An advisory panel created by parliament found grounds for lawmakers to consider impeaching Ramaphosa over an alleged robbery cover-up at his game farm and potential violations of the constitution. Several senior officials within his African National Congress party have joined the opposition in calling for him to resign. According to people familiar, Ramaphosa is weighing this option. The incumbent president was widely popular within the ANC and the people before the scandal, allowing him to set in motion a range of reforms addressing corruption, the liberalization of the power sector and private sector infrastructure investments. It’s unclear who from the ANC would succeed him and even if someone is found, risks are that much of the reform agenda will be put on hold. Markets acknowledge the risk. A sell-off wave rolls over South African assets, including the rand. The currency gets a serious beating with USD/ZAR skyrocketing from 17.2 to almost 18 before paring losses to 17.73 currently.

Cable accelerated gains on Thursday, lifted by renewed risk sentiment, following comments from Fed Powell on Wednesday, which deflated dollar on less hawkish than expected stance, while solid US data on Thursday further boosted risk appetite.

Traders eye of US ISM manufacturing PMI (Nov f/c 49.8 vs Oct 50.2) which should contribute to positive tone on release above forecast, as well as Friday’s release of the US Nov labor report.

Fresh advance pushed the price to the highest level since Aug 8 and generated bullish signal on lift above falling 200DMA (1.2153), which also indicates continuation of larger uptrend from Sep 26 spike low at 1.0348.

Bulls pressure immediate barriers at 1.2293/76 (Aug 1,10 tops which formed a lower platform), break of which would unmask key Fibo barrier at 1.2449 (Fibo 61.8% of 1.3748/1.0348).

Today’s close above broken 200DMA to confirm strong bullish stance.

Res: 1.2273; 1.2296; 1.2332; 1.2400.
Sup: 1.2153; 1.2100; 1.2048; 1.2000.

US ISM Manufacturing PMI dropped from 50.2 to 49.0 in November, worse than expectation of 50.5 That's also the first contraction reading in 29 months since May 2020. Looking at some details, new orders dropped form 49.2 to 47.2. Production dropped from 52.3. to 51.5 Employment dropped from 50.0 to 48.4. Prices dropped from 46.6. to 43.0.

ISM said: "The past relationship between the Manufacturing PMI and the overall economy indicates that the Manufacturing PMI for November (49 percent) corresponds to a 0.1-percent increase in real gross domestic product (GDP) on an annualized basis."

Full release here.

Personal income advanced 0.7% month-on-month (m/m) in October, above market expectations for a more modest gain of 0.4% m/m. Compensation of employees, which gained a solid 0.5% m/m, was behind the strong headline income reading. Government social benefits was another strong contributor with growth of 1.6% m/m that reflected one-time refundable tax credits issued by states.

Controlling for inflation and taxes, real personal disposable income was up a healthy 0.4% m/m in October.

Personal consumption accelerated from October, rising by 0.8% m/m - on par with the consensus forecast.

In real terms, spending was up 0.5%, with goods taking the lead. Spending on goods rose 1.1% m/m, led by a 2.7% gain in durables, while nondurable goods was up 0.3%. Services spending added 0.2% on the month, with growth supported by spending on health care, food services and accommodations, as well as housing and utilities.

The personal saving rate fell for the fourth month in a row from an already weak 2.4% (revised down from 3.1%) to 2.3% on the month. This is 5.3 percentage points below the 7.5% pre-pandemic average.

Inflation as measured in the personal consumption deflator eased to 6.0 % from 6.1% year-over-year, while core PCE inflation (excluding food & energy) softened to 5.0% (from 5.1%).

Key Implications

While the strong upswing in goods spending was largely priced into the consensus estimate after the retail sales report, spending on services remained a wild card. The moderate gain and positive revisions to previous months lifted the health care category to almost one percentage point above its pre-pandemic level. The only two categories that remain below their pre-pandemic levels are transportation (-3.0%) and recreation (-3.4%). Robust growth in October puts us on track for a notable upgrade in our forecast for real consumer spending in the final quarter of 2022: we now expect it to come in at roughly 3% (annualized).

Starting next year, we expect consumers to tighten their purse strings. First, a full year of dwindling purchasing power will make consumers more selective once the holiday season is over. Second, high interest rates and tighter credit conditions will make borrowing less palatable, limiting spending financed by credit. Finally, consumers' pandemic savings build up has halved over the past year, and is on track to be exhausted by the end of next year should this trend continue. This suggests that real consumption growth will soften to a below-trend growth next year, making a case for the Fed to moderate "the pace of rate increases as soon as the December meeting".

Daily Pivots: (S1) 137.19; (P) 138.55; (R1) 139.44; More...

Intraday bias in USD/JPY stays on the downside at this point. Current decline from 151.93 should target 133.07 medium term fibonacci level next. On the upside, break of 139.88 resistance is needed to indicate short term bottoming. Otherwise, further fall will remain in favor in case of recovery.

In the bigger picture, a medium term top should be formed at 151.93. Fall from there is correcting larger up trend from 102.58. It's too early to call for bearish trend reversal. But even as a corrective move, such decline should target 38.2% retracement of 102.58 to 151.93 at 133.07, or further to 55 week EMA (now at 131.51).

Daily Pivots: (S1) 0.9409; (P) 0.9478; (R1) 0.9525; More...

USD/CHF is still bounded in consolidation from 0.9355 and intraday bias remains neutral. Near term outlook will remain bearish as long as 0.9680 minor resistance holds, in case of another recovery. On the downside, firm break of 0.9355 will resume the decline from 1.0146 to 0.9287 fibonacci level.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 might be a medium term down trend itself. Break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 55 day EMA (now at 0.9726) holds.

Daily Pivots: (S1) 1.0323; (P) 1.0376; (R1) 1.0462; More...

EUR/USD's rally resumed by breaking through 1.0496 and intraday bias is back on the upside. Next target is 1.0609 fibonacci level. On the downside, break of 1.0289 support is needed to indicate short term topping. Otherwise, further rally will remain in favor in case of retreat.

In the bigger picture, a medium term bottom was in place at 0.9534, on bullish convergence condition in daily MACD. Even as a corrective rise, rally from 0.9534 should target 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Sustained trading above 55 week EMA (now at 1.0566) will raise the chance of trend reversal and target 61.8% retracement at 1.1273. This will now remain the favored case as long as 1.0092 resistance turned support holds.

Daily Pivots: (S1) 1.1944; (P) 1.2015; (R1) 1.2130; More...

GBP/USD's rally resumed by breaking 1.2152 and intraday bias is back on the upside. Current rise from 1.0351 should target 100% projection of 1.0351 to 1.1494 from 1.1145 at 1.2288 first. Sustained break there will pave the way to 1.2759 medium term fibonacci level. On the downside, break of 1.1898 minor support is needed to indicate short term topping, otherwise, further rally will remain in favor in case of retreat.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1145 support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Dollar's selloff picks up momentum in early US session after PCE inflation slowed more than expected in October, while core PCE also declined. The data give a nod to Fed Chair Jerome Powell's comment that smaller rate hikes could start in December. Yen is the better performer as supported by extended pull back in US and European benchmark yields. But Euro and Sterling are clearly advancing with more conviction. Commodity currencies are also firm but lag behind.

Technically, EUR/USD is breaking 1.0496 while GBP/USD has taken out 1.2152 resistance, confirming resumption of recent rally. Similarly, Gold has also taken out 1786.83 resistance to resume the rise from 1616.51. Next target is 61.8% projection of 1616.51 to 1786.83 from 1728.43 at 1833.73. It's a bit early to judge, but there is prospect of extending the rise to 1900 handle, which is close to another cluster fibonacci level.

In Europe, at the time of writing, FTSE is up 0.16%. DAX is up 1.01%. CAC is up 0.46%. Germany 10-year yield is down -0.1074 at 1.827. Earlier in Asia, Nikkei rose 0.92%. Hong Kong HSI rose 0.75%. China Shanghai SSE rose 0.45%. Singapore Strait Times rose 0.07%. Japan 10-year JGB yield rose 0.0006 to 0.251.

US PCE slowed to 6.0% yoy in Oct, core PCE down to 5.0% yoy

US personal income rose 0.7% mom to USD 155.3B in October, above expectation of 0.4% mom. Personal spending rose 0.8% mom to USD 147.9B, matched expectations.

For the month, PCE price index rose 0.3% mom, below expectation of 0.5% mom. PCE core (excluding food and energy) rose 0.2% mom, below expectation of 0.4% mom.

From the same month ago, PCE price index slowed from 6.3% yoy to 6.0% yoy, below expectation of 6.0% yoy. PCE core price index slowed from 5.2% yoy to 5.0% yoy, matched expectations. Prices for goods rose 7.2% yoy and prices for services rose 5.4% yoy. Food prices rose 11.6% yoy and energy prices rose 18.4% yoy.

US initial jobless claims dropped back to 225k

US initial jobless claims dropped -16k to 225k in the week ending November 26, below expectation of 245k. Four-week moving average of initial claims rose 2k to 229k.

Continuing claims rose 57k to 1608k in the week ending November 19. Four-week moving average of continuing claims rose 30k to 1539k.

Eurozone PMI manufacturing finalized at 47.1, welcome moderation in downturn intensity

Eurozone PMI Manufacturing was finalized at 47.1in November, up from October's 46.4. Looking at some member countries, Ireland PMI Manufacturing was at 48.7 (30 mth-low), Italy at 48.4, Greece at 48.4, France at 48., Austria at 46.6, Germany at 46.2, the Netherlands at 46.0 (29-mth low), and Spain at 45.7. All were in contraction.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: "The PMI signals some welcome moderation in the intensity of the eurozone manufacturing downturn in November, which will support hopes that the region many not be facing a winter downturn as severe as previously anticipated by many. However, the survey's production index continuing to run at one of the lowest levels recorded over the past decade. At these levels the survey is indicative of a marked annualised rate of contraction of approximately 4%. While official manufacturing data have been more buoyant – and more volatile – in recent months, such weak PMI readings have always been followed by commensurate steep declines in the official statistics."

UK PMI manufacturing finalized at 46.5, further contraction, outlook darkened

UK PMI Manufacturing was finalized at 46.5 in November, up from October's 46.2. S&P Global said intermediate goods remained the weakest performing sector. Business sentiment dipped to the lowest since April 2020. Input price inflation eased to three-month low.

Rob Dobson, Director at S&P Global Market Intelligence, said: "November saw a further contraction of the UK manufacturing sector, as weak demand, declining export sales, high energy prices and component shortages all hit industry hard. The outlook for the sector also darkened, as confidence among manufacturers fell to its lowest level since April 2020. ... The trend in new export business was especially weak, as Brexit issues and supply chain stresses exacerbated the effects of a weakening global economic backdrop, leading to lower sales from the US, the EU and China."

Swiss CPI unchanged at 3.0% yoy in Nov

Swiss CPI was unchanged at 3.0% yoy in November, above expectation of 2.6% yoy. Core CPI (excluding fresh and seasonal products, energy and fuel) rose from 1.8% yoy to 1.9% yoy. Domestic product inflation rose from 1.7% yoy to 1.7% yoy. But Imported product inflation slowed from 6.9% yoy to 6.3% yoy.

FSO said: "The stability of the index compared with the previous month is the result of opposing trends that offset each other overall. Prices for housing rentals, gas and fuels increased, as did those for foreign and Swiss red wine. In contrast, prices for heating oil, fruiting vegetables and hotel accommodation decreased."

Also released, retail sales dropped -2.5% yoy in October, worse than expectation of 3.3% yoy rise.

BoJ Noguchi: Must maintain monetary easing

BoJ board member Asahi Noguchi said the central bank must continue to maintain monetary easing, keep interest rates at low levels now as achievement of 2% inflation target remains uncertain.

"While not as much as other countries, Japan's consumer prices have risen sharply. This increase is driven mostly by rising imported goods prices," he said. "What's more important in deciding monetary policy is trend inflation based on domestic macro-economic factors, which remains at low levels."

Inflation is likely to fall back below 2% once these cost-push factors dissipate.

China Caixin PMI Manufacturing rose to 49.4 in Nov, pandemic continued to take a toll

China Caixin PMI Manufacturing rose from 49.2 to 49.4 in November, above expectation of 48.6. Caixin said that Covid-19 restrictions continued to constrain output. New orders fell, albeit at softest rate in four months. Supply chain delays worsened.

Wang Zhe, Senior Economist at Caixin Insight Group said: "Overall, the pandemic continued to take a toll on the economy. Output contracted, total demand was under pressure, overseas demand remained weak, employment deteriorated, logistics was sluggish, and manufacturers faced growing operating pressure. As the measure for suppliers' delivery times is negatively correlated to the PMI, the fall in the measure partially offset the drop in the PMI, leading the decline in November manufacturing activity to be underestimated."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1944; (P) 1.2015; (R1) 1.2130; More...

GBP/USD's rally resumed by breaking 1.2152 and intraday bias is back on the upside. Current rise from 1.0351 should target 100% projection of 1.0351 to 1.1494 from 1.1145 at 1.2288 first. Sustained break there will pave the way to 1.2759 medium term fibonacci level. On the downside, break of 1.1898 minor support is needed to indicate short term topping, otherwise, further rally will remain in favor in case of retreat.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1145 support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Economic Indicators Update