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Markets

With no important data in the EMU, global markets held a wait-and-see approach going into the key US September inflation release. Once again UK markets were the exception to the rule. The BoE yesterday buying the biggest amount of long term and inflation linked bonds (combined £ 4.6 bln) eased market stress. The move was supported by (unconfirmed) rumours that the government was discussing how to scale back the amount unfunded tax cuts. Gilt yields early in afternoon trading at some point declined between 25 bps + (2-y) up to 35 bps (+) 30-y. Easing tensions on the gilt market to some extent also supported sterling. Cable (temporarily) regained the 1.125 handle. EUR/GBP dropped to test last week’s correction low near 0.8650. However, the rally on UK markets gradually slowed as the market focus turned going into to the US CPI release (cf infra).

After recent sharp rise in yields investors apparently assumed that the hurdle for a further hawkish repricing might have become rather high. US and German yields eased a few basis points going into the CPI data release. Unfortunately, market hopes for US (core) inflation topping out once again proved very premature. US headline inflation (8.2%) slowed less than expected. The dynamic in core inflation was even more worrisome. Prices excluding food and energy rose 0.6% M/M to 6.6% Y/Y, the fastest pace since 1982 (cf infra). In a logical curve inversion move US yields are rising between 22 bps (2-y) and 10 bps (30-y). The US 2-y yield set a new cycle top above 4.5%. The 10/30y yield are breaking/testing the 4.0% barrier. After another 75 bps Fed hike in November, markets now see a 2/3 chance of a similar additional step in December. EMU yields joined the US. Earlier EMU yield declines were reversed with German yields currently gaining between 12 bps (2-y) and 4 bps (30-y). In an interview (before the US CPI release), ECB’s Wunch said he wouldn’t be surprised to see the ECB policy rate exceeding 3.0% as he assumes the ECB has to go for a positive real policy rate at some point. The US upward CPI release evidently wasn’t good news for risk assets. The EuroStoxx50 is losing 2.0%, nearing last week’s cycle lows. US indices are ceding between 1.6 % (Dow) and 3.0% (Nasdaq) equally setting new YTD lows. UK bond markets keep a big part of their outperformance.

The higher than expected CPI reversed an intra-day US setback, but gains for the US currency could have been even bigger. DXY trades at 113.65 (open 113.2). EUR/USD (currently 0.965 ) lost a full big figure but is holding above the cycle low (0.9536). USD/JPY jumped to exactly test the 1998 top of 147.66. The likes of the Aussie dollar (AUD/USD 0.618), the kiwi dollar (0.553) and the loonie (USD/CAD 1.395) are all setting new cycle lows. Remarkably, Cable (USD/GBP 1.12) even maintains part of this morning’s gains. EUR/GBP trades near 0.8650.

News Headlines

Swedish inflation accelerated in September from 9.8% to 10.8% (1.4% m/m), the first 10%+ reading in four decades. Using a fixed interest rate (CPIF), prices rose 9.7% y/y and 1.1% m/m. CPIF excluding energy, the Swedish central bank’s preferred gauge, came in at a three-decade high of 7.4%. The numbers are exactly in line with the Riksbank’s own forecast and make a strong case for further, aggressive tightening, especially combined with the persistently weak Swedish currency. Back in September, the central bank hiked by 100 bps to 1.75%. Any rate hike less than 50 bps at the final policy meeting of the year (Nov 24) would be a major surprise. EUR/SEK trades unchanged following today’s release, testing the 11 big figure - the weakest SEK level since the pandemic - extensively.

Oof! US September CPI delivered a nasty surprise on all accounts. Starting with headline inflation, prices rose 0.4% m/m to be up 8.2% y/y. That’s less of a decline than the already tiny drop (from 8.3% to 8.1%) markets and analysts were hoping for. Core inflation accelerated more than expected. Monthly dynamics showed the same sharp increase as in August (0.6%), bringing the yearly figure higher from 6.3% to 6.6% (6.5% expected). Among the rare decliners last month were energy (-2.1% m/m) and used cars & trucks (-1.1%). Shelter (+0.7%), food (+0.8%) and airline fares and medical care (both 0.8%) were the main contributors.

Consumer price inflation registered +0.4% month-on-month (m/m) in September, following August's 0.1% increase. On a year-over-year (y/y) basis, headline inflation edged down by 0.1 percentage points (pp) from August (8.3%), slowing to 8.2%.

Energy prices fell by 2.1% m/m, as gasoline prices pulled back 4.9% m/m. Unfortunately, the decline in gasoline was partially offset by rising electricity and natural gas prices. Food prices rose 0.8% m/m (the same as in August), and are up 11.2% y/y.

Core inflation (excludes volatile items such as food & energy) was 0.6% m/m – equal to August's gain. Relative to last September, core prices are up 6.6% – 0.3 pp higher than last month.

Price growth across core services (+0.8% m/m) accelerated from last month's gain of 0.6% m/m. Shelter costs (+0.7% m/m) were again a meaningful contributor, with rent of primary residence and owner's equivalent rent both rising 0.8% m/m. Other categories including medical (1.0% m/m), transportation (1.9% m/m) and recreation (0.2% m/m) were also higher on the month. Price growth in education and communication services was unchanged (0.2% m/m) in August.

In a piece of good news, core goods prices (0.0% m/m) decelerated in September and resumed their downward year-over-year trajectory. Slowing price growth was seen across all categories as household furnishings (+0.6% m/m), apparel (-0.3% m/m), recreational (0.0% m/m), and transportation (-0.2% m/m) goods all decelerated. Price declines in transportation were led by a 1.1% m/m decline in used vehicle prices as new vehicle prices rose 0.7% m/m.

Key Implications

Ouch! Another month and another disappointing CPI report. Both the headline and core figures surprised to the upside and show that August's report was not a one-off. Looking forward, shelter costs will continue to underpin strong services inflation. So, despite multi-decade high mortgage rates and cracks emerging in the housing market, inertia in rents and homeownership costs will take time to moderate and be reflected in the CPI data. The good news is that the downward trajectory in core goods prices has resumed as price gains slowed to 6.6% in September from 7.1% in August.

Persistently strong core price inflation in September is going to keep the pressure on the Fed to keep the rate hikes coming. We continue to expect that the official policy rate will rise to 4.5% by early next year.

Daily Pivots: (S1) 0.8693; (P) 0.8780; (R1) 0.8831; More...

EUR/GBP's decline from 0.9267 resumed by breaking 0.8647 support. Intraday bias is back on the downside for 61.8% projection of 0.9267 to 0.8647 from 0.8869 at 0.8486. Such decline is seen as part of a long term range pattern. Deeper fall is now in favor as long as 0.8869 holds, in case of recovery.

In the bigger picture, as long as 0.8720 resistance turned support holds, rise from 0.8201 is seen as resuming larger up trend from 0.6935 (2015 low). Break of 0.9499 (2020 high) should be seen at a later stage. However, firm break of 0.8720 will argue that sideway pattern from 0.9499 is extending with another falling leg instead.

Daily Pivots: (S1) 1.5415; (P) 1.5477; (R1) 1.5526; More...

EUR/AUD's rally resumed after brief retreat and intraday bias is back on the upside. Current rally should target 161.8% projection of 1.4281 to 1.4965 from 1.4716 at 1.5823. On the downside, below 1.5426 minor support will turn intraday bias neutral and bring consolidations, before staging another rally.

In the bigger picture, a medium term bottom should be in place at 1.4281, on bullish convergence condition in daily MACD. Further rise would be seen back to 1.6434 key resistance next. Break of 1.4965 resistance turned support is needed to indicate reversal. Otherwise, further rally will remain in favor.

Daily Pivots: (S1) 0.9669; (P) 0.9702; (R1) 0.9735; More...

Intraday bias in EUR/USD remains on the downside for retesting 0.9534 low. Firm break there will resume larger down trend for 100% projection of 1.0368 to 0.9534 from 0.9998 at 0.9163. On the upside, above 0.9773 minor resistance will turn intraday bias neutral first.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 0.9998 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

Daily Pivots: (S1) 1.0971; (P) 1.1052; (R1) 1.1181; More...

GBP/USD's recover and break of 1.1178 minor resistance argues that pull back from 1.1494 might have completed at 1.0922. Intraday bias is back on the upside for 1.1494. Break will target 61.8% projection of 1.0351 to 1.1494 from 1.0922 at 1.1628. On the downside, below 1.0922 will turn bias back to the downside for 1.0351 low instead.

In the bigger picture, fall from 1.4248 (2018 high) is resuming long term down trend from 2.1161 (2007 high). Next target is 100% projection of 2.1161 to 1.3503 from 1.7190 at 0.9532. There is no scope of a medium term rebound as long as 1.1759 support turned resistance holds.

Daily Pivots: (S1) 0.9938; (P) 0.9971; (R1) 1.0011; More...

USD/CHF's rally resumed after brief consolidation and intraday bias is back on the upside. Decisive break of 1.0063 will confirm larger up trend resumption. Next target is 1.0283 projection level. On the downside, below 0.9914 minor support will turn neutral bias neutral again first. But outlook will stay bullish as long as 0.9779 support holds.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Daily Pivots: (S1) 146.09; (P) 146.53; (R1) 147.33; More...

USD/JPY's rally continues and is in proximity to 147.68 long term resistance. Break there will target 149.26 projection, and possibly to 150 psychological level. nevertheless, break of 145.89 support could be an indication that Japan has stepped in for intervention again, and turn bias back to the downside for deeper pull back.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high), and possibly to 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

Daily Pivots: (S1) 1.3775; (P) 1.3803; (R1) 1.3845; More...

USD/CAD's rally re-accelerates again and met 161.8% projection of 1.2005 to 1.2947 from 1.2401 at 1.3925. Initial bias stays on the upside. Sustained trading above 1.3925 will pave the way to 200% projection at 1.4285. On the downside, below 1.3776 minor support will turn intraday bias neutral first. But outlook will remain bullish as long as 1.3501 support holds.

In the bigger picture, up trend from 1.2005 (2021 low) is still in progress. Based on current impulsive momentum, it could be resuming long term up trend from 0.9056 (2007 low). Whether it is or it isn't, retest of 1.4689 (2016 high) should be seen next. This will now remain the favored case as long as 1.3222 resistance turned support holds.

Daily Pivots: (S1) 0.6242; (P) 0.6271; (R1) 0.6305; More...

AUD/USD's decline extends today and intraday bias remains on the downside. Next target is 100% projection of 0.7660 to 0.6680 from 0.7135 at 0.6155. Firm break there will pave the way to 0.5781. On the upside, above 0.6345 minor resistance will turn intraday bias neutral first. But outlook will stay bearish as long as 0.6539 resistance holds.

In the bigger picture, down trend form 0.8006 (2021 high) is expected to continue as long as 0.6680 support turned resistance holds. Next target is 0.5506 low. Medium term momentum will now be closely monitored to gauge the chance of break of 0.5506.