The day’s big events lie ahead: the UK’s budget, the Bank of Canada, and the central bank of Brazil meetings.
The US data on tap, especially trade and inventories, will allow economists to fine-tune their forecasts for tomorrow’s first estimate of Q3 GDP. The mixed tech earnings helped spur a bout of profit-taking in Asia Pacific equities, where most of the large markets fell. Europe’s Stoxx 600 was posting a slight loss for the first time in four sessions, while US futures were slightly firmer.
The US 10-year note yield was softer and slipping below 1.60%. European benchmark yields were 2-3 bp lower. The dollar was stronger against most of the major currencies, but the yen and Swiss franc. The greenback was also firmer against most emerging market currencies, with the Turkish lira a notable exception, perhaps helped a little by a slightly smaller than expected trade deficit. The JP Morgan Emerging Market Currency Index was easing for the first time this week.
Gold was softer but still in the range set last Friday (~$1782-$1813). December WTI was off around 1.3%, which, if sustained, would be the largest loss in nearly three weeks, but so far, was holding yesterday’s low just below $83. Copper was off 1.4% to a two-week low. Thermal coal fell in China for the sixth consecutive session.
Asia Pacific
Australia’s Q3 headline inflation was in line with expectations. The 0.8% rise, matching the Q2 increase, was sufficient to bring the year-over-year rate to 3.0% from 3.8%. However, the underlying measures were a little firmer than expected, and both the trimmed mean and weighted-median rose above 2% for the first time since 2015.
This was encouraging a test on the central bank’s resolve to defend its yield-curve control policy as the April 2024 bond yield rose above 20 bp, a few basis points higher than when the RBA intervened at the end of last week (for the first time since February). The RBA was scheduled to buy A$1.6 bln of longer-term debt tomorrow. Its operations will be closely watched for clues of its commitment.
Separately, the WTO reportedly has agreed to set up a dispute-resolution mechanism to hear Canberra’s claim against China’s anti-dumping action against Australia’s wine.
Lastly, record imports for the third consecutive month lifted the New Zealand trade deficit to a new record high. The imports are flattered by higher prices, but also strong demand for capital goods.
Within hours of Yellen and Liu’s phone call and Bloomberg suggesting the relationship has warmed, the US Federal Communications Commission voted 4-0 to give China Telecom (NYSE:CHA) (America) notice to shut down its operations in the US. The FCC claimed significant national security and law enforcement issues, though the details seemed elusive. We do know two things. First, the FCC is engaged in a campaign to reduce the presence of Chinese companies in the US (e.g., Huawei, China Mobile (NYSE:CHL), China Unicom (NYSE:CHU), a subsidiary of ComNet, and companies involved with surveillance cameras).
Second, since 2002, China Telecom has leased lines from US providers and carriers to provide wireless and enterprise services. The company argues that it is independent and not subject to Beijing’s control. It offered to give the FCC greater visibility into its operations, which do not seem very extensive in the first place.
The FCC says that the facts are clear: “Our record makes clear it operates as a subsidiary of a Chinese state-owned enterprise, and as such the Chinese government can influence and control its actions. That can lead to real problems with our telecommunications networks, including surveillance and misrouted traffic,” Bloomberg quoted the FCC chair explaining.
Separately, Beijing pushed back against Washington’s efforts to upgrade Taiwan’s status at the UN.
After closing above JPY114.00 yesterday for the first time in four sessions, the greenback was sold, especially in late Asia/early European turnover to test the JPY113.60 area. There is a $1.5 bln option at JPY113.55 that expires today, and last week’s low was near JPY113.40. A break of JPY113.00 would weaken the technical outlook.
The Australian dollar reached a four-day high around $0.7535 before reversing lower and slipping below $0.7500 in Europe, where a A$700 mln option expires today. Another one at $0.7475 expires tomorrow. Support was seen in the $0.7450-$0.7460 area. The New Zealand dollar was approaching six-day lows near $0.7130. A break of the $0.7080-$0.7100 band would signal a deeper correction.
The dollar was bouncing against the Chinese yuan. Its 0.2% gain may not sound like much, but it was the largest dollar advance since mid-September for this closely managed currency pair. The PBOC’s dollar fix was set at CNY6.3856, tight against expectations (Bloomberg) of CNY6.3853. The greenback was at its best level for the week near CNY6.3960. Separately, The PBOC’s liquidity provision was smaller than the past two days’ operations, spurring a jump in the overnight repo.
Europe
The UK Chancellor of the Exchequer Sunak will deliver the budget shortly. Many of the details appear to have been leaked or otherwise discussed in the media, including a minimum wage high, an end to the public sector pay free, new spending (GBP31 bln?) on health and border security, and possibly, a rollback on the extra levy planned on bank profits.
The budget shortfall projected to be around 12.7% of GDP this fiscal year is anticipated to fall toward 9.5% next year. The Bank of England meets next week, and it is not clear if a less accommodative budget for the next fiscal year will temper its hawkishness. The December short sterling interest rate futures contract implied a slightly higher yield today, for the first time since the big jump on Oct. 18, in response to a particularly hawkish statement by Governor Bailey.
Just as German officials reiterated that the Nord Stream 2 pipeline does not put gas supplies at risk to the whims of Moscow, Gazprom (MCX:GAZP) was using its gas to try to pressure Moldova. The Financial Times reported that Gazprom wanted Moldova to delay the energy reforms agreed with the EU in exchange for cheaper gas. Russia had cut supplies last month, demanding double the terms, forcing Moldova to declare an emergency.
The euro was in about a 15-tick range on either side of $1.16, where a 1.45 bln euro option expires. Another option for 615 mln euros expires there tomorrow. The single currency posted an outside down day on Monday and has been unable to recover its poise. A convincing break of $1.1580 could spur a test on the year’s low set earlier this month, near $1.1525. Recall that the $1.1490 area corresponds to the (50%) retracement of the rally since March 2020 lows.
Sterling reversed lower after reaching the upper end of its recent range yesterday ($1.3835). It was probing the $1.3720 area in late morning turnover in London to near last week’s low around $1.3710. The next target was closer to $1.3675, the (38.2%) retracement of this month’s advance, and the 20-day moving average.
America
The Bank of Canada is meeting today, not yesterday, as we wrote in error yesterday. However, the analysis was correct. We summarize it in two points. First, the central bank is expected to reduce its bond-buying to C$1 bln from C$2 bln a week and may confirm speculation that it will stop it entirely at the end of the year.
Second, the market will watch the central bank’s economic update closely, particularly when it sees the output gap closing. Since April, it has said it would close in the middle of next year, which gave the market the green light to price in a hike around then. However, more recently, in response to robust data, the market has priced in a move in the March/April period.
The US reports September trade figures. Since a record shortfall (~$92 bln) was recorded in June, the monthly deficit has been $87-$88 bln. The September deficit is expected to be in that area too. The inventory update and durable goods orders report will let economists solidify forecasts for tomorrow’s first look at Q3 GDP.
The Atlanta Fed’s GDPNow sees the economy having nearly stagnated and sees the annualized pace at 0.5%. Its model will be updated later today. US oil inventories may draw greater interest than usual. The API estimate showed an overall increase of 2.3 mln barrels but a sharp drop in supplies at Cushing (-3.7 mln barrels), which, if confirmed today, would be the lowest in three years.
The US dollar appeared to have forged a rounded bottom against the Canadian dollar and was trading above CAD1.24 for the first time in nearly two weeks. Some demand for the greenback may be related to options where one for around $425 mln at CAD1.2385 expires today, and a $1.16 bln option expires tomorrow at CAD1.2375. We suspect the risk extended toward CAD1.2470-CAD1.2500 initially.
Mexico reports its September trade balance. There has been a marked deterioration this year. Consider that Mexico recorded an average monthly deficit of about $860 mln in the first eight months of the year. In the same period last year, the average surplus was $1.77 bln, and in 2019, the average surplus was a little less than $300 mln.
The greenback remains in the range set against the peso before last weekend (~MXN20.1250-MXN20.3350). It briefly traded below MXN20.12 yesterday before the North American session got underway and reached MXN20.24 before consolidating. Today, it reached MXN20.26 and stretched the intraday momentum indicators.
Lastly, Brazil’s central bank meets following yesterday’s slightly firmer than expected inflation reading. Expectations for today’s decision have gradually been lifted, and now most expect a larger move than the 100 bp that was delivered in both August and September. The Bloomberg survey median forecast is for a 150 bp move, but there is speculation that a 200 bp hike could be delivered.