The transitory inflation argument was given another jab to the kidneys today as the Monetary Authority of Singapore delivered a modest, but very surprising, tightening of monetary policy. The MAS will allow a slight appreciation of the Singapore Dollar Nominal Effective Exchange Rate or S$NEER. (for overseas readers, Singapore does not use interest rates for monetary policy, it uses the S$NEER mechanism.) That represents a slight tightening of monetary policy.
The MAS growth forecasts remained on track with the only cautionary note being COVID-19 tail risks. It noted that imported cost pressures would drive inflation in the quarters ahead, hence allowing the S$NEER to appreciate. What is notable is that Singapore’s MAS only adjusts monetary policy twice a year. Given that six-monthly cycle, if the MAS is tightening slightly now, it is clear they believe inflation is going to be here for longer. They likely also have one eye on the impending Fed taper. Thus, the transitory inflation “how long is a piece of string before its not transitory” becomes harder to justify.
The FOMC Minutes overnight also telegraphed a November/December start to the Fed taper although the stress appears to be being expressed in a flattening of the yield curve, with short end rates rising while longer-dated rates fall. That might be because long-term inflation break evens remain anchored around 2.50%.
US Inflation and Core Inflation MoM rose by 0.40%and 0.20% respectively. That left the YoY headline inflation slightly above forecast at 5.40% while core remained at 4.0%. Although inflation remains “sticky” at these levels, it was not enough to lead to an inflation shock for US markets and equities duly rallied while a bout of long covering pummeled the US dollar. It is likely to be only a temporary aberration for both.
On the inflationary front, markets have breathed a sigh of relief after China bucked the trend and posted slightly lower inflation data today. September MoM Inflation fell to 0.0%, below forecast of 0.30%, while the YoY fell to 0.70% from 0.80%. There is a sting in the tail though as September PPI YoY rose to 10.70%, the highest since records began. That suggests that inflationary pressures will persist in the China value chain.
Japan’s Industrial Production data is unlikely to move the needle today, with local markets focused entirely on the extent of the upcoming fiscal goodie bag after the end of month elections. The BOJ’s Noguchi said this morning that a reduction in monetary stimulus from the BOJ was not an option at the moment. That makes selling USD/JPY a dangerous trade going forward, but is music to the ears of local equity markets.
India’s WPI Inflation for September this afternoon is likely to make ugly reading, however. WPI Inflation YoY is expected to remain above 11.0% and while the food price pressures have ebbed, the fuel and manufacturing sub-indexes could make even more ugly reading given the moves in energy prices and the depreciation of the currency.
A print well north of 11.0% for inflation could see the modest recovery of the INR hit a brick wall, with USD/INR resuming its rally towards 76.000. The RBI has stopped its QE don’t call it QE program, but is still holding off on signaling more strongly that rate hikes are coming. Today's WPI is likely to heap further pressure on the central bank.
The Turkish lira is once again in the spotlight after President Erdogan fired three central bank officials. The USD/TRY, or as I call it, the USD/Try-my-patience, resumed its rally overnight, rising 0.50%, climbing another 0.70% to 9.1480 in Asia today. For context, President Erdogan believes that cutting interest rates causes inflation to fall, and he tends to fire central bank employees, including governors, who disagree with him in this respect. Readers should be penciling in USD/TRY trading on a 10.0000 handle sooner rather than later.
Europe’s calendar is second-tier today while US markets will be focusing on Initial Jobless Claims, PPI, and Core PPI. A sharp drop in Initial Claims, and/or a MoM rise above 0.70% for PPI should be enough to have the Fed taper trade back on track after a short overnight staycation.
Watch also for official US Crude Inventories data after a surprise jump in US API Inventories above 5 million barrels overnight. Forecasts are for a 700k barrel gain, a blockbuster climb could be enough to finally trigger an aggressively short-term correction lower I have been waiting for, to thin the herd of speculative long positions out there. Finally, by my count, we have at least six Federal Reserve regional presidents speaking today, good for intra-day volatility and likely to push US earnings releases into the background.
Asian equities are mixed today
It was another mixed day for Asian equities after US markets snapped a three-day losing streak overnight. With US inflation printing on target overnight, US long-dated yields fell with the US dollar, flushing out the buy-the-dip crowd and sending US stocks higher, notably in the technology growth space. The S&P 500 rose by 0.30%, the NASDAQ rose by 0.73% while the Dow Jones lagged, finishing just 0.01% higher. US index futures in Asia continued rallying, with all three indexes climbing by around 0.35%.
That has lifted sentiment in most of Asia, with Japan markets buoyed by dovish comments from a BOJ official. The Nikkei 225 jumped 1.34% higher with the KOSPI rallying by 1.15%. China was a laggard today after a record high print in PPI stoked supply chain concerns and the PBOC only rolled over CNY 10 bln of CNY 100 bln in maturing repos today, despite setting a weaker yuan fixing. The Shanghai Composite was just 0.15% higher, but the narrower Shanghai 50 fell by 0.65%, while the CSI 300 dropped by 0.30%. Hong Kong markets were closed for a public holiday.
Across the rest of Asia, markets were trading positively though. Singapore shrugged off an unexpected MAS tightening to rise by 0.25%. Kuala Lumpur edged 0.50% higher on profit-taking after energy prices traded sideways again overnight. Jakarta though, jumped 1.45% with Bangkok rising by 0.50%. Both continued to receive tourism reopening tailwinds.
A rise in natural gas, iron ore and copper futures today has given an additional boost to Australian markets, which were happily piggy-backing the US rally overnight. A rise in full-time employment this morning, and expectations of a reopening rebound, also lifting confidence. The ASX 200 was 0.95% higher, while the All Ordinaries rallied by 1.15%.
European stock markets should open higher this morning following a decent performance by US and Asian markets, and a lack of market moving headlines. Whether this proves to be a dead cat bounce for equities will depend on momentum being maintained in US markets. I am doubtful given the inflation indictors pouring in from around the world now and strong indications that the Fed taper will start as early as November.
The US dollar suffers a sharp correction lower
A strong 30-year bond auction overnight, and a flattening of the US yield curve once again, led by a fall in long-dated yields post US inflation data, saw the dollar index fall sharply. The dollar index plummeted by 0.54% to 94.00, before posting a modest gain to 94.05 in Asia. What cannot be denied was that the dollar index traced out a major top at 94.50, and a daily close above there will be a strong indicator of a further directional move higher. Only a fall through 93.50 changes the bullish outlook for the US dollar temporarily in my opinion.
Admittedly, part of the US dollar retreat was likely due to the large amount of speculative long dollar positions built up in futures markets versus the major currencies. In the major currency space, it was not coincidence that the euro, sterling and Swiss franc all rose by over 0.55% overnight, having been under the pump in recent days. Perhaps more significantly, USD/JPY, AUD/USD and NZD/USD hardly moved overnight, suggesting that yield differentials remain in play, and that risk sentiment remains elevated.
Although the PBOC withdrew a lot of money market liquidity today, it did set the CNY fix slightly weaker with USD/CNY fixed at 6.4412. With the CNY having hit multiyear highs on a trade-weighted basis this week, the PBOC might have an incentive to weaken the yuan to support exporters.
However, I believe that China’s imported energy and raw material bill is far more important in the short-term to the PBOC. I believe today’s weaker fix was an attempt to introduce some two-way volatility in a market complacently pricing in stronger fixings and was not the start of a weakening cycle. China is unlikely to mess around with the yuan too much ahead of US/China talks and trade negotiations.
The fall of the US dollar overnight was mainly confined to the DM space and mostly passed Asian currencies by as they posted only modest gains. The Bank of Korea intervention ahead of 1200.00 has worked for now, but USD/Asia started rising again this morning. Asian currencies remain acutely vulnerable to rising tapering expectations in the US and the accompanying stronger dollar.
With only the G-10 space correcting overnight, that signals it was a culling of speculative long-dollar positioning, and not a swing in overall directional sentiment. Unless regional markets try to get ahead of the curve like Singapore, the downward pressure on Asian currencies should resume sooner, rather than later.
Oil prices remain constructive
Oil prices traded sideways once again overnight. A much lower US dollar was offset by OPEC’s monthly report which lowered oil demand and a surprise spike in US API Crude Inventories above 5 million barrels. The OPEC report’s impact was negated as it stated that some members would have output challenges over the next few months. Brent crude was unchanged at $83.30 overnight, with WTI almost unchanged at $80.55 a barrel.
Physical market fundamentals remained positive for oil prices and natural gas prices resumed their climb in Asia today after a few sideways sessions. That saw Brent crude and WTI adding 0.50% to $83.70 and $80.95 a barrel in Asian trading.
Speculative long positioning in the futures markets remained heavy leaving open still the possibility of a sharp sell-off of $5 to $8 a barrel at some stage this week. As I have stated previously though, given the state of play in the physical market, a speculative long culling will be a dip to buy and is likely to be very short-lived in duration. A sharp rise in official US crude Inventories tonight could provide that catalyst.
Brent crude had resistance at $85.00 and $87.00 a barrel, with support at $82.00 a barrel. WTI had resistance at $82.00, with support at $78.70 a barrel. The relative strength indexes (RSIs) remained in overbought territory. The higher into overbought territory they go, the deeper the short-term correction lower will be.
Gold stages an impressive rally
Gold prices staged an impressive overnight rally as the US dollar staged a sharp reversal lower as long-dated US yields sank. Despite the noise that inflationary pressures are supporting gold, or haven buying, nothing in that space has materially changed over the past couple of weeks, so to suddenly suggest it miraculously occurred overnight is stretching credibility.
At the end of the day, gold was moving inversely to the US dollar and that is the end of the story. If you live in Turkey or Venezuela, you may want to buy some gold for that reason, otherwise gold remains a hedge for hyper-inflation, not rising inflation.
Gold spiked 1.87% higher overnight, climbing $33.00 to $1793.00 an ounce as the intra-day momentum attracted fast money looking for a quick buck in price action reminiscent of the crypto space or meme stocks. In Asia, some profit-taking from short-term traders pushed it back to $1790.00 an ounce as, you guessed it, the US dollar rises modestly.
Having broken through $1780.00 overnight, gold had interim support at that level followed by $1750.00 and $1740.00 an ounce. Longer-term support was at $1720.00 an ounce. Resistance was between $1795.00 and $1800.00 region which contains the 100 and 200-day moving averages (DMAs) and is a formidable barrier. That is followed by $1810.00 and $1835.00 an ounce.
If the US dollar, as I expect, resumes its rally, the overnight price gains will vanish into thin air as the fast-money players exit as rapidly as they arrive. Should the US dollar strength persist though, further gains cannot be ruled out.