Capital Markets are Calm though Anxiety Continues to Run High
The capital markets seemed to have an exaggerated response to the US CPI, where the headline rate, flattered by the rise in energy, rose by 0.1% in September than forecast. Rather than decline, the headline year-over-year rate was unchanged at 3.7%. The core rate was as expected slowing to 4.1% from 4.3%. Next week’s US data, including retail sales, industrial production, existing home sales, and the index of leading economic indicators are expected to decline or weaken sequentially. There has been no follow-through dollar buying against the G10 currencies today with the notable exception of the New Zealand dollar, perhaps ahead this weekend’s election. Among emerging markets, Asia Pacific currencies are mostly weaker, including the Chinese yuan, while central European currencies, the rand, and the Mexican peso are firmer.
Equities are under pressure today and even talk of a new Chinese fund to support stocks failed to stem the tide. Hong Kong shares and mainland shares that trade there tumbled more than 2% but none of the large bourses were spared the losses that mostly pared this week'[s gains. Mainland Chinese indices posted next declines this week. Europe’s Stoxx 600 is off about 0.6%, which gives back more than the gains of the past two sessions, but on the week, it is up about 1.3% to snap a three-week drop. US index futures are posting small declines. The S&P 500 and NASDAQ snapped four-day advances yesterday. Benchmark 10-year yields are mostly 3-5 bp lower in Europe today and are off 4-9 bp this week. The 10-year US Treasury yield is off nearly seven basis points now and 17 bp this week, despite the sloppy auctions (tails at the coupon sales). Softer rates and a lower dollar are helping lift gold today after poor price action yesterday. With today’s gains, gold is up almost 3% this week, its best showing in seven months. November WTI is up 3.7% after pulling back the last three sessions after Monday’s surge in response to the weekend events. It settled near $82.80 last week and is straddling $86 now.
China reported September prices, trade, and lending figures today. Consumer prices were disappointing. Rather than rise to 0.2% as expected, they eased back to 0 (from 0.1% year-over-year in August). Food prices were the key drag, ahead national holidays. They fell by 3.2%, with pork prices are falling year-over-year and fresh fruit and vegetable prices slipping after rising in August. Non-food prices were firm, rising by 0.7% after a 0.5% increase in August, bolstered by higher energy prices/transportation. On a monthly basis, China’s CPI rose by 0.2% after a 0.3% increase in August. Deflation is still evident in producer prices, but less so. Producer prices are off 2.5% in the 12 months through September after falling by 3.0% previously. It is the third consecutive month that the year-over-year rate rose after bottoming in June at -5.4%. Oil prices rose while the decline in coal prices slowed. The output price sub-index of the September PMI rose to its highest level in nearly a year-and-a-half. China reported a $77.7 bln trade surplus in September, after a $68.20 bln surplus in August. Exports were off 6.2% (year-over-year) after falling 8.8% in August. Imports were off 6.2%, following August’s 7.3% decline. China’s trade surplus is running near last year’s levels. Consider that in the first nine months of 2023, the surplus averaged $70.1 bln a month. In the Jan-Sept 2022 period, the average monthly surplus was $70.2 bln. Lastly, China reported stronger than expected aggregate financing (CNY4.12 trillion). This was almost a third larger than August. Bank lending improved to CNY2.31 trillion from CNY1.36 trillion, which accounted for the bulk of the improvement, not the shadow banking sector.
In the first week of the second half of Japan’s fiscal year, the notable portfolio flow was foreign buying of Japanese equities. The JPY1.44 trillion purchased was the most since April.Japanese investors sold JPY644 bln of foreign bonds. Earlier this week, with the current account data, Japan reported monthly portfolio flows. It confirmed the general thrust of the weekly MOF data. The conventional wisdom that the adjustment of the upper band of the 10-year JGB yield under Yield Curve Control would lead to Japanese investors selling foreign bonds and keeping their money at home. Of course, there are different market segments, which do not act uniformly. Japanese trust accounts (seen as agents of pension funds) were net sellers of foreign bonds in August, but overall, in the first two months after the 10-year JGB was doubled at the end of July, Japanese investors have bought JPY5.15 trillion (~$35.8 bln) of foreign bonds. The country breakdown is not available for September but in the August, details show that Japanese investors bought JPY1.75 trillion of foreign bonds, of which about JPY643 bln (~$4.6 bln) were US bonds. Japanese investors also were net buyers of German Bunds in August for the first time since March. They were net sellers of Canadian bonds for the fourth month in the past five and were sellers of Italian bonds for the first time in three months. The continue to buy Australian and UK bonds. Foreign investors were particularly active last month. They sold a record JPY5.48 trillion of Japanese stocks and JPY2.03 trillion of Japanese bonds.
The jump in US yields saw the dollar poke above JPY149.80 to reach its best level since it was briefly traded above JPY150 on October 3. The dollar’s rise was sufficient to turn the five-day moving average (~JPY149.10) higher and avoid it crossing below the 20-day moving average (JPY148.80). The market is almost itching to clear JPY150 again. There are about $840 mln in options at JPY150 that expire today. Still, the greenback is in a narrow range of a about a quarter of a yen below JPY149.85. The Australian dollar walked up the staircase and took the elevator down. It took the Aussie six sessions to climb from about $0.6285 to $0.6445 and then proceeded to fall to near $0.6305 yesterday. It has held the low so far today. The nearly 1.6% decline yesterday was the largest since March. A break of the $0.6285 area leaves little in the way of last year’s low set last October near $0.6170. Nearby resistance is seen $0.6330-40. Note that Australia holds a referendum sponsored by the government for Aboriginal and Torres Strait Islander advisory bond in parliament, which look is likely to be defeated, while in New Zealand, the national election looks likely to swing toward a center-right government. The Chinese yuan has edged lower but has mostly traded quietly. The dollar has been in range mostly between CNY7.2990 and CNY7.3090. The fix was set at CNY7.1775 (vs. average estimate in Bloomberg’s survey for CNY7.3172).
Germany, France, and Spain, among the large eurozone members, had previously reported industrial output fell in August (-0.2%, -0.3%, and -0.8%, respectively). Italy was the only one of the Big Four to unexpectedly report a gain (0.2%). Today’s surprise was that the aggregate industrial production (seasonally adjusted) showed a 0.6% month-over-month gains after the 1.1% decline in July was revised to -1.3%. The eurozone economy expanded by 0.1% in Q1 and Q2. It is expected to eke out a similar gain in Q3. Still, the ECB’s forecast for this year’s growth of 0.7%, which matches the new IMF forecast (previously 0.9%) seems slightly optimistic. The median forecast in Bloomberg’s monthly survey sees 0.5% growth this year and 0.8% next. The IMF shaved next year’s growth projection for the eurozone to 1.2% from 1.5%. The ECB says 1.0% and the median in Bloomberg’s survey is for 0.8%.
Poland goes to the polls Sunday and the Law and Justice Party (PiS) seeks a third term. It has led the country in an “illiberal” direction over the past eight years. It has clashed with the EU over encroachments of the judiciary and media. Campaigning ends tonight. The opposition, led by the Civic Coalition (KO) trails by about five percentage points in the average poll over past couple of weeks, but in a coalition with the Third Way and The Left parties, a majority looks possible. The PiS polls between around 33% and 36%. A victory for the opposition means an unwinding of various judicial reforms, which would free up billions of euros in EU recovery funds. Separately, Poland’s central bank delivered a 75 bp rate cut in September and followed up with a 25 bp rate cut earlier this month. The base rate is now at 5.75%. September CPI was released earlier today. It stands at 8.2%, unchanged from August.
In one fell swoop, the euro retraced (61.8%) of the seven-day rally that had taken it from about $1.0450 to $1.0640. That retracement target was $1.0520 and there are a little more than 3 bln euros in options at $1.0515 that expire today. It is in a narrow range of almost $1.0530-60. A break below $1.05 could trigger more option-related selling. To stabilize the tone, the euro needs to reestablish a foothold above $1.0560, and ideally $1.0580. Sterling had rallied three cents since the low on October 3 near $1.2035. Yesterday’s sell-off surpassed the (50%) retracement near $1.2185, recording a low slightly ahead of $1.2170. So far today, it has held $1.2175. The next retracement (61.8%) is around $1.2150. A close above $1.2220 would begin repairing the technical damage.
Headline US September CPI was unchanged at 3.7%. The market had expected a small decline after rising for the previous two months. On the month, it rose by 0.4%. The median forecast in Bloomberg’s survey was for a 0.3% gain. Headline inflation rose at an annualized rate of 4.8% in Q3, after a 2.8% pace in Q2 and 4.0% in Q1. The core rate’s 0.3% increase allowed the year-over-year rate to continue to slow (4.1% vs. 4.3%). At an annualized rate, the core rose by 3.2% in Q3 after rising 4.0% in Q2 and 5.2% in Q1. The headline rate was lifted by a 1.5% rise in energy prices. Core goods prices fell by 0.4, driven, as it were, by 2.5% decline in used car prices, which the industry reports suggest should be reversing. Excluding used cars, core goods prices are flattish in recent months. Core services rose by 0.6%, with rent and owner equivalent unexpectedly firm (0.49% and 0.56% respectively). But even the measure Fed Chair Powell has referred to several times, core services excluding rent and owners equivalent, rose by 0.6% last month. The dollar and US interest rates rose, but the Fed funds futures market near-term contracts were more subdued. The pricing implies about a 10% chance of a hike at the October 31-November 1 meeting, less than half of what it was a week ago, after the employment data. The chances of a hike before the end of the year stands at about 36%. It was closer to 48% at the end of last week.
The US quarterly refunding is behind us. Demand softened and all three note/bond auctions tailed, meaning that the high yield was above the yield that prevailed in the when-issued market. Demand from indirect bidders, which include foreign participants, softened, as did the bid-cover ratios, and primary dealers absorbed a greater share of all three note/bond auctions. Although it was not a great reception to the quarterly refunding, it was not the catastrophe that some are depicting. Consider the bid-cover of the three-year note sale. It was 2.56x vs. 2.75x in the last auction that was also $2 bln smaller. The bid-cover of the 10-year note was 2.50x, down from last month’s sale of 2.52x. The 30-year bond sale produced a bid-cover of 2.35x compared with 2.46x at the last sale. There were also some mitigating factors, including the sharp decline in yields in recent days (the 10-year yield fell from 4.88% at the end of last week to almost 4.51% early yesterday) and the sale of the 30-year bond in an offered market after the CPI.
The US dollar surged in the first few days of October and reached CAD1.3785 on October 5. It fell to about CAD1.3570 on October 10. It consolidated on Wednesday and shot up to CAD1.3700 yesterday as the dollar was bid following the CPI. This met the (61.8%) retracement of the Oct 5-10 decline. It has held below CAD1.3700 today, but follow-through US dollar gains would target the CAD1.3785 area again. It has tested initial support near CAD1.3660. A break could trigger a move back to CAD1.3620. The greenback’s performance against the peso follows a similar pattern, but the peso held up relatively better technically even though it fell slightly more than the Canadian dollar. The US dollar rose sharply in early October and peaked on October 6 near MXN18.4860. It fell to a low early yesterday near MXN17.7550 and came screaming back, to reach MXN18.0850. The (38.2%) retracement was about MXN18.0340 and the next one (50%) is at MXN18.12. Still, today, the greenback is holding below MXN18.00 and fell to about MXN17.86 before steadying.
Bannockburn Global Forex