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Silver is testing the $22 per ounce mark today and crossed it briefly yesterday. Although Gold marks the fifth consecutive session of back-to-back gains, Silver may have been one step ahead in this market cycle.

In early November, the price of Silver pushed up from the 50-day moving average, which had worked as a support for a week and a half before, as the metal was bought off intraday on dips under this line.

Further, while the S&P500 and stock markets, in general, were recovering from the not-so-dovish Fed comments, Silver rallied more than 7% on solid NFP data, leaving the other precious metals behind. This was a clear game-changer event for this market.

By rising in the following days, the price has reached its 200-day moving average, which Gold, S&P500 and EURUSD have yet to do. Since late last week, Silver has been gaining support on declines towards this line, confirming a change in the long-term trend.

Silver has already lingered near $22 in May and June, digesting the April collapse. There have also been repeated reversals in this area late last year and early this year. There might likely be some shake-out of market participants and partial profit-taking again.

The strong price momentum at the start of November and an even more impressive 9% rise in early October point to a demand, which might turn the market around. This bullish reversal is probably happening in Gold, but it is a more liquid and thus “noisy” instrument.

If we are correct, and after the local shake-out, silver goes further up, it could immediately target levels above $25, near the local peaks of March and April. If the strengthening does not fail again, the price may rise to $30 by August 2023.

It will be premature to talk about the possibility of reaching the highs of 2012 ($35) or 2011 ($50), but targets near $25 by the end of the year and $30 eight months later look achievable.

Retail sales rose by 1.3% m/m in October, above the consensus forecast of a 1.0% gain. September data remained flat.

Sales at autos & parts dealers rose by 1.3% m/m erasing September's losses. Excluding autos, sales were up 1.3% m/m.

Gasoline station receipts rebounded from a three-month decline, rising 4.1% m/m. Sales at building materials and garden equipment stores were up 1.4% m/m.

Retail sales in the "control group," which excludes the most volatile categories (autos, gas stations and building materials) and are used in estimating personal consumption expenditures (PCE), rose a healthy 0.7% m/m – double what was expected.

• Within the group, the biggest contributors to growth were sales at non-store retailers (+1.2% m/m) and restaurants (+1.4%m/m) – the only barometers for the services sector in today's reading. Sales were solid at food & beverage stores (+1.4% m/m) and health stores (+0.5% m/m).
• Categories that reported losses in October were sporting goods & music stores (-0.3% m/m) and department stores (-0.2% m/m). Sales at apparel stores were flat on the month, after an upwardly revised gain of 1.0% in September.

Key Implications

A strong start to the quarter was broad-based with a little extra push from sales at gas stations, which reflect price gains. Meanwhile, growth in auto sales was primed by stronger production that helped increase dealers' inventories. In addition, auto sales got a boost from replacements after hurricane Ian, which is estimated to have destroyed between 30,000 and 70,000 cars. We should see demand moderation in future months, but with today's growth real durables goods consumption is forecast to finish the year with decent gains helping lift real PCE growth to 1.7% (annualized) in Q4 – an above trend clip.

Today's report also kicks off the holiday shopping season, pushing sales up in October. According to the National Retail Federation’s annual forecast, holiday spending is expected to be healthy but grow at roughly half the pace of last year – namely, 6-8%. With year-on-year inflation at 7.7%, real holiday sales are poised to move sideways or, at best, gain moderately. So retailers in categories with overbuilt inventories and stagnant sales (department stores, furniture & electronics, building materials) will need to discount their merchandise to appeal to consumers looking to maintain purchasing power.

Consumer price inflation held steady in October, at 6.9% year-on-year (y/y), down from 6.9% in September.

Higher gasoline prices in October were a key culprit keeping inflation elevated. Prices at the pump surged 9.2% in October, after three months of decline, and are up 17.8% versus a year ago.

Food inflation did ease very slightly, with prices up 10.1% y/y in October, down from 10.3% in September. Food purchased from stores was up 11% y/y.

The signals from various core inflation measures were mixed. CPI ex-food and energy was 5.3% higher versus a year ago, a tick lower than 5.4% in September. However, the average of the three Bank of Canada core inflation metrics remained unchanged (after rounding) at 5.4% y/y. Perhaps more importantly, the two measures that the BoC has indicated provided a more timely gauge of underlying inflation through the pandemic - CPI-trim and CPI-median, both picked up a tick to 5.3% y/y and 4.8% y/y respectively.

Shelter inflation accelerated in October, up 6.9% y/y, versus 6.8% in September, despite a cooling in homeowners replacement costs (+6.9% y/y from 7.7% y/y in September). Upward pressure came from higher mortgage interest costs (+11.4% y/y) – which saw the highest increase since 1991 – and rents (+4.7% y/y versus 4.2% in September).

Key Implications

Today's inflation report underscores the need for the Bank of Canada to keep the pressure on interest rates to help bring down inflation. October's CPI report is one of two key remaining data releases before the Bank of Canada's next rate decision in three weeks, and it certainly ticks the box for another 50 basis point increase.

The other key piece of data will be the November jobs report in a couple of weeks. As outlined in our recent report on job vacancies Canada's labour market remains very tight. Even if we see a weak report, it is unlikely to move the needle enough on the job market to move the BoC off its tightening bias.

Equity markets in Europe are back in the red on Wednesday, while the US looks largely unchanged around the open on Wall Street.

Reports of missile strikes in Poland on Tuesday naturally caused a shudder in the markets. The prospect of a sudden and unexpected escalation in the war in Ukraine, particularly involving a NATO state, doesn't bear thinking about but we were almost forced to and under the circumstance, the reaction was fairly modest.

It could have been much worse but investors appear to have come to the view that it was a situation that would be quickly de-escalated which is what occurred despite initial reports not looking good. ​

More strong Retail Sales data

US retail sales data will be a minor concern for investors as they continue to cross their fingers for a full Fed pivot next month. In an ideal world, the Fed could bring inflation back to target without causing much damage to the economy, while maintaining a strong labour market and healthy spending. But we don't live in an ideal world and it's unlikely that will be the case. So as long as we continue to see firm figures on employment and spending, the risk of high and stubborn inflation will remain. This won't provide the comfort the Fed wants in order to slow the pace of tightening and draw it to a close earlier than envisaged.

The news doesn't get any better for the UK

UK inflation hit a 41-year high last month as higher energy prices led to the CPI data exceeding expectations, as well as the BoE forecast for its peak. At 11.1%, the data implies a considerable squeeze on real incomes, with the pace far exceeding wages, which were confirmed to have risen 6% in the three months to September, yesterday (5.7% excluding bonuses).

The only upside is that this is expected to be as high as it gets. Of course, just as important is how quickly it's going to fall and the latest surprise to the upside isn't going to fill people with optimism. But with the cost-of-living crisis tipping the economy into recession, interest rates rising and the government about to enact a severe fiscal tightening, it's hard to imagine high inflation being sustainable for long.

With that in mind, I expect Bank of England Governor Andrew Bailey and his colleagues to continue to push back against the prospect of rates rising much further, as they did after the last meeting when highlighted the trajectory for growth and inflation under market-based expectations for interest rates. Today's surprise will be another blow for the central bank but I doubt it drastically changes its outlook.

Oil steadies after strikes in Poland

Oil prices are softer on Wednesday after a brief bout of volatility late Tuesday following reports of missile strikes in Poland. That unsurprisingly jolted financial markets, sending oil prices higher initially, but that quickly settled and crude prices are now back where they were before.

It goes without saying that any significant escalation in the war in Ukraine will likely add a substantial risk premium to oil prices, with Russia being a major producer and exporter, as well as one of the leaders in the OPEC+ alliance. A strike on a NATO member is an extreme example of that and could send oil markets into a frenzy. Thankfully, worst fears haven't been realised but investigations are still taking place which will keep oil traders on edge.

Gold battling resistance

Gold is struggling to take the next step higher after struggling around $1,780 once again today. That's not overly surprising considering this was a major level of support from January to July, at which point it gave way in style losing almost 4% in less than 48 hours.

What's encouraging is that it's not showing signs of easing up. Pullbacks have been minimal and pressure remains to the upside. A break of $1,780 could be the catalyst for another spike and ease any doubts about the sustainability of the rally in the process. Assuming both US inflation releases haven't done that already.

Is there a bullish case for cryptos?

Crypto HODLers may be relieved to see bitcoin finding its feet in recent days but I'm not sure they'll be feeling particularly comfortable with the situation. The headlines remain a concern and the price chart doesn't inspire confidence. In the near-term, it's hard to construct a bullish case for cryptos given the sheer amount of uncertainty in the space in the aftermath of the FTX debacle. That doesn't mean we can't see a recovery but it would certianly be the more surprising outcome at this stage.

Markets

NATO chief Stoltenberg said that yesterday’s missile explosion on Polish territory was probably caused by Ukrainian air defenses. An unfortunate accident, nevertheless sparked by the Russian attack against Kiev etc yesterday. By immediately taking the angle out of a potential explosive situation, both parties clearly wanted to avoid an unnecessary escalation in the conflict. Russia kept an extremely low profile attitude over the past 12 hours. From a market point of view, it put EUR/USD back on the recovery track following yesterday’s intraday, 2 big figure, meltdown. EUR/USD marched from an opening around 1.0350 toward and intraday high near 1.0435. The move stalled with Bank of France governor Villeroy de Galhau saying that jumbo ECB rate hikes will not become a new habit. If it were up to him, rates will likely reach about 2% in December, suggesting that the ECB will slowdown its tightening pace in sync with the Fed from 75 bps to 50 bps. While this seems granted for the Fed, we think the case for a 75 bps rate hike in Europe remains more than alive given the relative starting base and the fact that inflation is still setting new cycle highs on a monthly basis. EUR/USD eventually returned below the 1.04 big figure after October US retail sales beat consensus. Both headline and core sales rose by 1.3% M/M with the retail sales control group – proxy for consumption in GDP calculations -- increased by 0.7% M/M (vs 0.3% expected) with the September number upwardly revised from 0.4% to 0.6%. Resilient retail sales keep the Fed in tightening mode, even if they slowdown the pace. It’s all about the peak level and about how long rates will remain restrictive, as Chair Powell indicates. Retail sales forced a spike lower in US Treasuries, with the front end of the curve underperforming. Daily US yield changes range between +0.7 bps (2-yr) and -5.1 bps (30-yr). German Bunds outperform with the curve bull flattening. Yields fall 6 bps at the front end and 10-12 bps from the 5-yr sector on. European bourses correct 0.5% to 1% today after their breath-taking comeback of late.

Sterling lost marginally ground against the euro with EUR/GBP trading above 0.8750. The move came after multi-decade high inflation failed to lift BoE rate hike bets. Inflation accelerated by 2% M/M to 11.1% Y/Y with core CPI stabilizing at 6.5% Y/Y. Tomorrow could be the big day for UK investors with the new government presenting its long term Budget plans.

News Headlines

The ECB in its biannual Financial Stability Review warned that risks to the financial system are rising due to a toxic cocktail of slowing economic activity, inflation, rising financing costs and lower liquidity. The cost-of-living squeeze is weighing on consumer spending as well as their ability to service debts while Europe’s worsening growth prospects threaten corporate profits. This may lead to bankruptcies and greater volatility in financial markets. The ECB said the turmoil in the UK gilt market and the earlier cash crunch that hit European energy traders is testament to the system becoming increasingly vulnerable to such sharp market moves. The report also flagged potential dangers to public finances with governments borrowing a way out of the energy crisis by an estimated 1.4% of EMU GDP. With respect to property markets, the central bank spotted signs that real-estate expansion of recent could come to an end as overvaluation and mortgage rates stand at the highest levels in more than five years.

Canadian inflation as expected stabilized at 6.9% y/y in October. The largest contributor was shelter, adding 2.06 ppts to the yearly figure. The monthly dynamic accelerated from 0.1% to 0.7% m/m on the account of the gasoline category (0.39 ppts contribution). The three different core gauges either stabilized or increased marginally compared to the September figure, bringing their average from 5.37% to 5.43%. Inflation may not have risen in October, but it did show to be very persistent. This leaves the BoC no room yet to pause the tightening cycle. Combined with the stellar labour market report two weeks ago, the central bank is set to deliver another hike at the December 7 meeting. Money markets are currently split between a 25 and 50 bps rate hike. The loonie barely budged today with strong US retail sales published at the same time keeping USD/CAD balanced at around 1.327.

Daily Pivots: (S1) 137.80; (P) 139.20; (R1) 140.73; More...

Intraday bias in USD/JPY stays neutral for consolidation above 137.66 temporary low. Stronger rise cannot be ruled out, but upside should be limited below 145.16 support turned resistance. Break of 137.66 will resume the decline from 151.93, to 133.07 fibonacci level, as a correction to the larger up trend.

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 130.58).

Daily Pivots: (S1) 0.9377; (P) 0.9427; (R1) 0.9496; More...

Intraday bias in USD/CHF remains neutral for consolidation above 0.9335 temporary low. Upside of recovery should be limited below 0.9680 minor resistance to bring another decline. Below 0.9355 will resume the fall 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 0.9793) holds.

Daily Pivots: (S1) 1.0258; (P) 1.0369; (R1) 1.0458; More...

Intraday bias in EUR/USD remains neutral for consolidation below 1.0481 temporary top. Downside of retreat should be contained by 1.0092 resistance turned support to bring another rally. Break of 1.0481 will resume the rise from 0.9534 and target 1.0609 fibonacci level.

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) 1.1729; (P) 1.1878; (R1) 1.2016; More...

Intraday bias in GBP/USD is turned neutral with a temporary top formed at 1.2028, and more consolidations would be seen. Downside of retreat should be contained by 1.1597 minor support to bring another rally. On the upside, above 1.2028 will resume the rise from 1.0351 to 100% projection of 1.0351 to 1.1494 from 1.1145 at 1.2288.

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.

The financial markets are generally quiet today, with European indexes and US futures trading slightly lower into US session. In the currency markets, most major pairs and crosses are stuck inside yesterday's range, with Yen and Dollar on the softer side, Euro and Swiss Franc on the firmer side. Sterling and Canadian Shrug respecting inflation data. Aussie and Kiwi are mixed.

Technically, while Dollar's selloff might have lost momentum, it's far too early to call for a reversal. Levels to note included 1.0092 support in EUR/USD, 0.6521 support in AUD/USD, 0.9680 minor resistance in USD/CHF and 1.3494 resistance in USD/CAD. As long as these level holds, near term sentiment is still against the greenback.

In Europe, at the time of writing, FTSE is down -0.16%. DAX is down -0.83%. CAC is down -0.39%. Germany 10-year yield is down -0.079 at 2.034. Earlier in Asia, Nikkei rose 0.14$. Hong Kong HSI dropped -0.47%. China Shanghai SSE dropped -0.45%. Singapore Strait Times dropped -0.28%. Japan 10-year JGB yield rose 0.0014 to 0.244.

US retail sales rose 1.3% mom in Oct, ex-auto sales up 1.3% mom

US retail sales rose 1.3% mom to USD 694.5B in October, above expectation of 0.9% mom. Ex-auto sales rose 1.3% mom, above expectation of 0.4% mom to USD 565.1B. Ex-gasoline sales rose 1.0% mom to USD 630.4B.

Comparing with October 2021, total sales were up 8.3% yoy. Total sales in the three months through October were up 8.9% yoy.

Fed George: Maybe we even have economic contraction to slow inflation

Kansas City Fed President Esther George told the WSJ, "'I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn't get some painful outcomes".

"I'm looking at a labor market that is so tight, I don't know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there."

Canada CPI unchanged at 6.9% yoy in Oct

Canada CPI was unchanged at 6.9% yoy in October, slightly below expectation of 7.0% yoy. Excluding food and energy, prices slowed slightly from 5.4% to 5.3% yoy.

On a monthly basis, CPI rose 0.7% mom, below expectation of 0.8% mom, largely driven by the 9.2% mom rise in prices for gasoline.

Comparing to 5.6% you rise in average hourly wages, on average, prices rose faster than wages.

ECB de Guindos: Will discuss balance sheet reduction in December

ECB Vice President Luis de Guindos said, "we will discuss about the reduction of our balance sheet," at December meeting.

"I think this is important in terms of both to reduce the excess liquidity that we see in the marketplace, and secondly as well to alleviate the situation of scarcity of collateral," he added.

De Guindos also noted, "it's very difficult to have financial stability without price stability," adding that "the main risk now for financial stability, for growth, is to have inflation at very high levels."

UK CPI accelerated further to 11.1% yoy in Oct despite energy price guarantee

UK CPI accelerated from 10.1% yoy to 11.1% yoy in October, above expectation of 10.6% yoy. That's highest level since 1981 based on modelled data. Core CPI was unchanged at 6.5% yoy, above expectation of 6.4% yoy.

ONS said, "Despite the introduction of the government's Energy Price Guarantee, gas and electricity prices made the largest upward contribution to the change in both the CPIH and CPI annual inflation rates between September and October 2022."

"Rising food prices also made a large upward contribution to change with transport (principally motor fuels and second-hand car prices) making the largest, partially offsetting, downward contribution to the change in the rates."

Also released, PPI input came in at 0.6% mom, 19.2% yoy, versus expectation of 1.0% mom, 17.7% yoy. PPI output was at 0.3% mom, 14.8% yoy, versus expectation of 0.0% mom, 14.8% yoy. PPI core output was at 0.5% mom, 13.3% yoy, versus expectation of 1.3% mom, 14.0% yoy.

Japan machine orders dropped -4.6% mom in Sep

Japan private-sector machine orders dropped sharply by -4.6% mom in September, much worse than expectation of 0.7% mom. That followed a -5.8% mom decline in August.

Nevertheless, for October-December period, manufacturers surveyed by the Cabinet Office are expecting core orders to rise 3.6%.

The government also downgraded its view on machinery orders to "recovery is stalling", from "economy was picking up".

Australia Westpac leading index signals sustained weak growth next year

Australia Westpac Leading Index dropped from -1.09% to -1.19% in October, a new post-pandemic low. Westpac said the is consistent with "sustained weak growth" in 2023. It expects GDP growth to slow from around 3.4% in 2022 to just 1% next year.

It added, "key drivers of the slowdown are: monetary policy tightening; falling commodity prices; and softness in jobs growth as capacity constraints bite."

Regarding RBA policy, Westpac expects another 25bps rate hike at the December 6 meeting. And, "a mooted pause in the tightening is unlikely to occur in 2022 or the early months of 2023 as the Bank continues to underperform its inflation objectives."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1729; (P) 1.1878; (R1) 1.2016; More...

Intraday bias in GBP/USD is turned neutral with a temporary top formed at 1.2028, and more consolidations would be seen. Downside of retreat should be contained by 1.1597 minor support to bring another rally. On the upside, above 1.2028 will resume the rise from 1.0351 to 100% projection of 1.0351 to 1.1494 from 1.1145 at 1.2288.

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

Economic Indicators Update