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Global markets experience some kind of ‘the day (week) after’-feeling as investors tried the assess last week’s sharp repositioning post softer than expected US inflation data released on Thursday. Fed governor Waller during the weekend at least tried to put the report into perspective. The Fed maybe can consider slowing the pace of rate hikes (from 75 bps steps to 50 bps). However, it’s much too early to already start the debate on the end point of the rate cycle. Several Fed members scheduled to give their view later this week, will probably talk in a similar way. Technical factors are also in play. The US 2-year (currently 4.41%) end last week came within reach of the key 4.26% support area. A break below this level would coincide with markets dismissing Fed Powell’s guidance that interest rates will have to be raised beyond the 4.50/4.75% peak level indicated in the September dots. It’s too early already to expect such a U-turn in the Fed strategy/communication just on one ‘positive’ CPI reading with inflation still far above target. The US 10-y yield (4.88%) also hesitates whether there is already room for follow-through price action after breaking below a first support near 3.90% (ST neckline). US yields today rebound between 7 bps (2-y) and 4 bps (30-y) from Thursday’s closing levels (US bond markets were closed Friday). The repositioning on EMU bond markets last week was more limited compared to the US and German/EMU yields already reversed part of Thursday’s correction on Friday. German yields are easing between 6 bps (2-y) and 3.5 bps (30-y). Especially short-term European yields stay close to recent cycle peak levels as the ECB still has more work to do to arrest an ongoing rise in inflation. European equities show modest gains (+0.5%/1.0%). For now, the EuroStoxx 50 is holding above the 3819 neckline, which, if confirmed would suggest that a this year’s sell-on upticks pattern might roll over into more sideways trading. Brent oil eases slightly ($95 p/b area), extending its consolidation pattern.

The dollar already showed signs of a topping out pattern before the US CPI and last week dropped below several intermediate support levels. The short-term picture for the US currency remains fragile. DXY traded in the 113 area only 10 days ago, but now struggles to regain the 107 big figure. EUR/USD also hardly returns any of last week’s gains. At 1.0320, the pair is holding within reach of the key 1.0350/70 resistance area. The yen underperforms with USD/JPY regaining the 140 handle (140.4 from open of 138.75). EUR/GBP (0.8775) gains a few ticks as markets await an in extenso eco update later this week (labour data tomorrow, CPI on Wednesday and retail sales on Friday) as well as Fin Min Hunt’s autumn fiscal statement expected on Thursday. CE currencies last week only profited very mostly from the global risk rebound as domestic interest rates also nosedived sharply. Today, regional currencies are facing modest selling pressure, with the forint underperforming (EUR/HUF 408) even as the MNB indicated that market speculation on reducing high (18%) overnight interest rates are premature. The zloty also eases as the NBP in its November inflation report only expects inflation to return to the 2.5% (+/- 1.0%) target range end 2025.

News Headlines

The cartel of oil producing and exporting countries (OPEC) released its monthly oil market monitor today. The world economic growth forecast for 2022 and 2023 remains unchanged at 2.7% and 2.5%, respectively. The world oil demand growth forecast for 2022 is revised down by 0.1 mb/d to now stand at 2.5 mb/d. China’s strict anti-Covid measures and global economic uncertainty are the main reasons. Demand for OPEC crude in 2022 is revised down by 0.1 mb/d from the previous month’s assessment to stand at 28.6 mb/d, which is around 0.5 mb/d higher than in 2021. Demand for OPEC crude in 2023 is also revised down by 0.2 mb/d from the previous month’s assessment to stand at 29.3 mb/d, which is 0.7 mb/d higher than in 2022. OPEC expects that it will need to pump an average of 28.92 million barrels a day of crude to satisfy demand during the fourth quarter, keeping the market in surplus.

The National Bank of Poland published September balance of payments data today. The current account deficit shrank to €1.56bn from €3.33bn. The trade deficit fell from €2.64bn to €2.05bn with exports (€28.5bn from €25.75bn) rising faster than imports (€30.55bn from €28.39bn). The issue is mainly located in the goods industry with services posting a small surplus. High nominal dynamics of trade in goods were primarily the result of strong increases in transaction prices on both exports and imports. In contrast, real changes remained relatively small.

BoC Governor Tiff Macklem said in a speech, "to restore price stability, we need to rebalance demand and supply in the labour market to relieve price pressures.

"Monetary policy affects demand. By raising interest rates, we are moderating spending, and that will reduce the demand for workers," he said.

"The other way to rebalance supply and demand is to increase the supply of workers. That takes time, and with inflation already far too high and with elevated risks that high inflation becomes entrenched, increasing labour supply is not an alternative to slowing demand."

Full speech here.

This week, Cable traders will have a lot to look at. Of course the big event later in the week is the long anticipated Autumn Budget that is expected to be released on Thursday.  It's not expected to be such a controversial affair this time around, but there are still some pending issues that could shake up the markets. And pending nervousness after what happened last time a new Chancellor announced a spending plan.

The main issue is how will Chancellor Hunt balance the books over an expected shortfall of £60B due to slower economic outlook and increasing costs. What has been leaked so far suggests that it will be a combination of higher taxes and spending cuts. While these measures are generally understood to weigh on economic growth, they are also expected to help with the inflation situation.

It's stagflation now

What happens with the budget is particularly relevant for the BOE, since it is facing something of a crossroads. After UK GDP came in negative for the third quarter, it's expected to show the beginning of the prolonged recession the BOE anticipated. The BOE is also forecasting that inflation will remain in the double digits for a couple of months, and won't start trending lower definitively until the middle of next year. In other words, stagflation.

The question is how will the BOE choose to deal with this situation. One way is to raise rates aggressively to kill off inflation, provoking a hard landing for the economy. Another is to try to rescue the economy and let inflation run hot until productivity can increase and stabilize the currency. Both are politically difficult solutions. Since the BOE and the new Chancellor are on the same wavelength, that could work with the Autumn Budget. An "austerity" budget would work with crushing inflation sooner, and shoring up the government's finances for an expected growth strategy later. Though, all of that is in theory; practice might be an entirely different matter. But it's useful to have some insight into how officials are thinking.

The data that could shake things up

The first bit of important information comes out tomorrow, which are labor figures. Here the market's focus is likely to be on the claimant count numbers, since the employment change and unemployment rates are from previous months. October claimant count is expected to continue its rise and reach 27K, up from 25.5K previously. That would be the largest number of people going on unemployment since March of last year.

Wednesday has what could be the market mover in cable this week, which is the release of October inflation, which is expected to move up to 10.6%, and another multi-decade high. That's above the previous 10.1%. The BOE doesn't expect inflation to peak until next year.

To tighten or not to tighten

Where the BOE could see some relief is in the core inflation rate, which is expected to tick lower to 6.4% from 6.5% prior, the first drop in months. This is likely to have more of an impact on monetary policy, since the BOE appears to be worried about tightening too much, which could impact liquidity in the financial sector. With the government looking to cut spending, liquidity could be even tighter.

So, if core inflation starts to move lower (or moves down faster than the market anticipates, like it did in the US), then that opens the very real possibility the BOE could let up on the tightening. That would weaken the pound, and push cable lower.

The Australian dollar is in negative territory today, after posting huge gains last week. In the European session, AUD/USD is trading at 0.6690, down 0.22%.

The US dollar took a nasty spill last week, and the Australian dollar made the most of it, gaining 3.6%. The US dollar was slammed after a soft inflation report, with headline and core inflation slowing in October and beating the forecasts. This lit up risk appetite and sent the Australian dollar to its highest level since September 22nd.

The soft inflation report had such a strong effect on the greenback because it has raised expectations that the Fed will ease up on its rate tightening. After four consecutive hikes of 0.75%, the markets have now priced in a 0.50% increase at the December meeting. That would still represent an oversize hike, but investors have been looking for a reason to rush into stocks and the drop in inflation provided that excuse. It’s still too early to tell if inflation has peaked, but the Fed has tweaked its terminology, with Fed members now describing rate policy with words like “gradual” and “measured”. The Fed hasn’t sent out any signals that it is planning a dovish pivot. Quite the contrary; the Fed has stated clearly that the terminal rate could be higher than it had expected, but the markets appear to be ignoring this message and expectations are rising that the Fed will lower rates in the second half of 2023.

RBA raises inflation forecast

In Australia, inflation is also the number one priority. The Reserve Bank of Australia has raised its inflation forecast, with a peak expected at 8 per cent in December and has said inflation will not decline to the 2 per cent target until 2025. The RBA is likely to raise rates by 0.25% for a third straight time at the December meeting. RBA Deputy Governor Michele Bullock said last week that the RBA could have raised rates more sharply to bring inflation down faster, but that a “scorched earth” policy would have meant the loss of strong job gains.

AUD/USD Technical

• There is resistance at 0.6821 and 0.6934
• AUD/USD tested support at 0.6667 earlier today. Below, there is support at 0.6574

Daily Pivots: (S1) 1.0224; (P) 1.0294; (R1) 1.0425; More...

EUR/USD's rally is still in progress and intraday bias remains on the upside. Current rise should target 1.0609 fibonacci level next. On the downside, below 1.0221 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

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) 1.1703; (P) 1.1779; (R1) 1.1911; More...

GBP/USD's rally is still in progress and intraday bias stays on the upside. Firm break of 61.8% projection of 1.0351 to 1.1494 from 1.1145 at 1.1851 will pave the way to 100% projection at 1.2288. On the downside, below 1.1646 minor support will turn intraday bias neutral and bring consolidation first.

In the bigger picture, current development suggests that rise from 1.0351 is a medium term bottom. Rise from there is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1145 support holds. Sustained break of 38.2% retracement of 1.4248 to 1.0351 at 1.1840 will pave the way to 61.8% retracement at 1.2759 and possibly above.

Daily Pivots: (S1) 0.9313; (P) 0.9497; (R1) 0.9597; More...

USD/CHF's decline from 1.0146 is still in progress and intraday bias stays on the downside. Further fall should be seen to 0.9369 support, and then 0.9287 fibonacci level. On the upside, break of 0.9544 minor resistance will turn intraday bias neutral first and bring consolidation, before staging another decline.

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 0.9821) holds.

Daily Pivots: (S1) 137.34; (P) 139.91; (R1) 141.35; More...

Intraday bias in USD/JPY Is turned neutral with current recovery, and some consolidations could be seen. But upside should be limited below 145.54 support turned resistance and bring another fall. Break of 138.45 will resume the decline from 151.93, as a correction to the larger up trend, towards 133.07 fibonacci level.

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).

Dollar continues to trade mildly higher into US session as consolidations extend. Upside momentum in the greenback is very weak so far. But such consolidations could now extend for a further while. Aussie and Loonie are the next firmest. Yen is currently the worst performer, followed by Kiwi and Euro, and Sterling is mixed. Still, most major pairs and crosses are bounded inside Friday's range. With an empty economic calendar in the US and Canada, traders might need to wait until the coming Asian session before seeing any meaningful moves.

Technically, CHF/JPY's strong rebound today suggests that 143.73 resistance turned support is safe for now. The development keeps near term outlook bullish for up trend resumption at later stage. Break of 150.54 resistance will suggest that upside momentum is building up through 151.43 high. If that happens, EUR/JPY and GBP/JPY would likely approach 148.38 and 172.11 highs respectively.

In Europe, at the time of writing, DAX is up 0.40%. CAC is up 0.34%. CAC is up 0.35%. Germany 10-year yield is down -0.036 at 2.122. Earlier in Asia, Nikkei dropped -1.06%. Hong Kong HSI rose 1.70%. China Shanghai SSE dropped -0.13%. Singapore Strait Times rose 1.01%. Japan 10-year JGB yield rose 0.0114 to 0.243.

ECB Panetta: Aggressive tightening is not advisable now

ECB Executive Board member Fabio Panetta said in a speech, "after the progress we have already done in adjusting our policy stance, an aggressive tightening is not advisable, for two main reasons."

First, "current macroeconomic policies should be designed to avoid unnecessarily heightening the risk that the increasingly likely contraction in coming months becomes a severe and protracted one, which would scar the economy... it also requires that monetary policy does not ignore the risks of overtightening," he said".

Second, "even in the face of lasting consequences of supply shocks on potential output, the implications for the output gap, inflation dynamics and optimal policy calibration can only be derived over time. And this reinforces the case that, for as long as inflation expectations remain anchored, monetary policy should adjust but not overreact".

Eurozone industrial production rose 0.9% mom, EU up 0.9% mom

Eurozone industrial production rose 0.9% mom in September, well above expectation of 0.1% mom. Production of non-durable consumer goods rose by 3.6% and capital goods by 1.5%, while production of intermediate goods as well as durable consumer goods fell by -0.9% and energy by -1.1%.

EU industrial production also rose 0.9% mom. Among Member States for which data are available, the highest monthly increases were registered in Ireland (+11.9%), Belgium (+7.1%) as well as in Hungary and the Netherlands (both +1.6%). The largest decreases were observed in Lithuania (-8.2%), Greece (-4.5%) and Estonia (-3.6%).

BoJ Kuroda: Should continue with monetary easing

BoJ Governor Haruhiko Kuroda said in a speech that Japan's situation "differs" from both the US and the Eurozone. The country is still "on its way to recovery". Output gap has "remained in negative territory", but projected to "turn positive" as some point in H2 of this fiscal year. Inflation rate "has not risen from the demand side". Current rise in inflation was "led by rise in import prices", and the rate is projected to decline back to below 2% from fiscal 2023.

He reiterated that BoJ "deems that it should continue with monetary easing and thereby firmly support economic activity". By doing so, "it aims to provide a favorable environment for firms to raise wages and to achieve the price stability target in a sustainable and stable manner, accompanied by wage increases."

Regarding exchange rates, Kuroda said the "abnormally one-sided, sharp yen weakening appears to have paused, thanks partly to government's FX intervention." He emphasized it is "important for forex rates to move stably reflecting economic fundamentals".

USD/CNH falling towards 7.000, but shouldn't break there for long

Chinese Yuan surges today and hits the highest level against Dollar since early October. The rally was fueled by growing optimism that China is going to relax is strict zero-COVID policy, even as outbreaks worsen with highest infections in six months. At the same time, of course, decline in USD/CNH happened with global selloff in Dollar, after last week's lower than expected CPI data solidified the case for Fed to start to slow its tightening pace in December.

Technically speaking, there is room for more pull back in USD/CNH, towards 7.000 psychological level. However, there's an important cluster support, with 61.8% retracement of 6.7159 to 7.3475 at 6.9675 and 38.2% retracement of 6.3057 to 7.3745 at 6.9662 just nearby. Downside should be contained by this 6.9662/75 support zone to bring rebound, unless there are some fundamental changes, in China, or the US, or their diplomatic relations, or any combinations of these factors.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 137.34; (P) 139.91; (R1) 141.35; More...

Intraday bias in USD/JPY Is turned neutral with current recovery, and some consolidations could be seen. But upside should be limited below 145.54 support turned resistance and bring another fall. Break of 138.45 will resume the decline from 151.93, as a correction to the larger up trend, towards 133.07 fibonacci level.

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).

Economic Indicators Update

The recent rally in the markets may not be over, argues Morgan Stanley, which, however, adds: “let the bulls not rejoice, the Fed’s upcoming pivot on monetary policy will not be good, the worse is ahead of us.”

Since June, the market has rallied on mere suspicion that the Federal Reserve will ease monetary tightening, pivoting, or slowing the cycle of interest rate hikes. However, each time expectations have been defied, with Fed Chairman Jerome Powell preaching that the question of when to moderate the rate of increases is less important than the maximum interest rate and the time frame of the restrictive monetary policy.

Before the pandemic, the Fed’s narrative was to let inflation roll, rather than trying to keep inflation low for too long. This seemed reasonable as inflation is easy to deal with by raising interest rates and slowing economic activity. But the real problem is deflation. It is a very different story as it is an entrenched situation that is difficult to change.

Today, according to Powell, the Fed’s concern is that inflation may take hold, which will cause pain in the economy. Also, he mentioned that If we tighten too much, we can support economic activity, and the window for a soft landing in the economy is narrowing dangerously.

This confirms what we already know, that the Fed is beginning to realize that the risk of a “hard landing” is increasing. However, the reality is that inflation is not much of a problem. If the Fed did nothing, high prices would cure high prices. The real risk remains a deflationary spiral that suppresses economic activity and prosperity. Deflation is a much more insidious problem than inflation in the long run. This is why, for the past decade, the Fed has flooded the economy with liquidity and zero interest rates. Since the ‘’Great Recession’’, inflation has been consistently well below this average and even the target rate of 2%.

Although monetary interventions and zero interest rates failed to generate organic growth above 2%, they raised asset prices, inflated bubbles, and widened inequality. This leaves only two options for monetary policy. The first is for central banks to put the brakes on interest rates and allow inflation to run its course. Doing so would, of course, lead to a softer landing, but would theoretically stabilize inflation at higher levels. The second option, and the one chosen, is to raise interest rates until the economy slips into a deeper recession. Both options are bad for stocks. Of course, the second is significantly more dangerous as it creates an economic or financial event with serious consequences until the Fed’s aggressive rate hike campaign “breaks” something. Then there will be a “policy shift’’ or a ‘’pivot’’.

The expectation that when the Fed finally makes a “pivot” it will end the bear market may prove futile. Historically, when the Fed cuts interest rates, it is not the end of bear markets in stocks, but rather the beginning. The majority of “bear markets” appear after a Fed’s Pivot. The reason is that change comes with the recognition that something is broken financially (recession or credit event). When this event occurs and the Fed takes action, the market discounts lower economic and profitability rates.

The difference between producer and consumer price indices remains problematic. Historically, this suggests that producers will absorb inflation, eroding profit margins as consumer demand deteriorates due to precision. That could provide temporary relief to stocks in the near term as interest rates fall in anticipation of the change before the reality sets in on how much 2023 EPS estimates need to be cut.

Once the reversal begins, the Fed will cut interest rates to zero and restart the next QE program, which will start the next bull market cycle.

Elliott Wave analysis – SP500

From An Elliott wave perspective we see drop from 2022 highs as a correction, but as long the upper trendline resistance from 4800 holds the change in trend is uncofnrimed. Key bull/bear level is at 4100 area. We need this one broken to make sure price can travel higher.