- The softening of US consumer prices provided early indications that global inflation may have peaked. It sparked a massive rally in risk assets that sent the USD plummeting to the steepest single day drop in a decade on 10 November.
- US midterm elections appear to be tighter than expected as the Democrats maintain control in the Senate and the Republican’s lead in the House narrows. Based on projections, it may end in a divided government for the remainder of President Biden’s term.
- China reopening rumors continue to percolate despite repeated denial from the government. Ultimately, the world’s second largest economy would need to end its zero COVID policy and when that happens it should take the edge off inflation and help restore global growth.
- It’s an important week for the UK with a slew of important economic data that includes employment, inflation, and retail sales. The delayed fiscal statement is also due on 17 November. British finance minister Jeremy Hunt will seek to fill the GBP 50B gap through spending cuts and tax increases.
Data/Events Calendar November 14-18
Monday (11/14): Eurozone industrial production, China industrial production, retail sales
Tuesday (11/15): US Producer Price Index, Empire Manufacturing, Eurozone ZEW survey, Eurozone Gross Domestic Product (GDP), Canadian Manufacturing sales, Reserve Bank of Australia minutes, Wage price index
Wednesday (11/16): US retail sales, Industrial production, Canadian Consumer Price Index (CPI), Australia employment
Thursday (11/17): US Housing, Philly Fed business outlook, Jobless claims, NAHB housing, Eurozone CPI, UK fiscal statement
Friday (11/18): US Leading index, Existing home sales, Canadian Housing price index, Industrial Production
Last Week's Range
EUR/USD 0.99-1.04 GBP/USD 1.13-1.19 USD/CAD 1.32-1.36 AUD/USD 0.64-0.67 USD/JPY 138.5-147.6 USD/CNH 7.06-7.28 USD/ILS 3.41-3.57 USD/MXN 19.3-19.6 USD/CHF 0.94-1 USD/INR 80.6-82.3 USD/BRL 5.05-5.41 USD/SGD 1.37-1.41 USD/DKK 7.18-7.52 USD/SEK 10.3-11 USD/NOK 9.9-10.5
- The USD index (DXY) has retreated -5.4% since 4 Nov on expectations that the Fed’s rate tightening cycle is nearing its peak. (See table at bottom) This has raised speculations that the Fed may downshift the pace of rate hikes and tilt towards a dovish pivot.
- Despite the softer consumer price index (CPI) in October that came in at 7.7% annualized versus estimates of 7.9% and 8.2% prior, it’s still a very high number compared to the Fed’s inflation target of 2.00%.
- US treasury 2-year yields fell -52 basis points (bps) from its peak on 4 Nov to 4.28% and the pricing in Fed funds futures contract for June saw implied rates retreat from 5.14% to 4.93%. Rate cuts are also embedded in for the backend of curve with -40 bps between June-Dec even as Powell had warned that rates are heading higher and will stay there for longer.
- The recent bull run was what the market had been hoping for, but the price action which was amplified by short covering and position squaring seemed excessive. Many investors felt that rate hike expectations are misplaced, and the moves are just too fast.
- While the Fed appears to have embraced a gradual tightening to interest rates, San Francisco Fed’s Daly quickly pointed out that “pausing is not in the discussion.”
- Expectations for the 14 Dec FOMC meeting have not changed with +50bps baked in and a further +25bps expected at each of the meetings in Feb and March. This would bring Fed funds rate to 5.00% and in-line with the market's perceived terminal rate.
- October’s CPI was just one data point and the Fed would probably need to see several months of weaker inflation and some cooling in the labor market to alter course. There is also another set of CPI and jobs report to get through before the next FOMC meeting.
- Early results from the midterm elections showed the Republicans will take the House while the Democrats maintain control of the Senate. The likely outcome is a divided government and policy paralysis. While the immediate financial impact may be limited, the complexities will become more evident when negotiations for the debt ceiling limit begin in the early 2023.
- Under Prime Minister Rishi Sunak’s new directives, monetary and fiscal policies are now better aligned. This seems to have boosted investor confidence as the Gilts market has stabilized with yields in the 10-year government benchmark bonds recovering from 4.46% to 3.35% in the past month.
- The Bank of England (BOE) announced plans to sell of GBP 19B in government bonds starting 29 Nov. Due to the recent rout in the Gilts market that threatened financial stability, BOE intervened to buy long-end gilts to provide liquidity and stabilize market conditions.
- This week’s inflation reports are likely to see UK CPI in Oct tick higher with estimates of 10.7% y/y and 1.7% m/m from 10.1% and 0.5% respectively in the prior month. Employment is expected to slow as well along with continued softness in retail sales.
- The fiscal statement on 17 Nov should see Chancellor Hunt try to plug the GBP 50 billion hole in the budget through painful means such as spending cuts and tax increases.
- Further tightening in interest rates with a cumulative 93 bps priced in over the next two BOE meetings have increased the odds of a deep recession for the UK. Currently, the market has the terminal rate at 4.50% versus 3.00% in the Bank rate.
- Still, the focus on the Fed and the risk of US rates plateauing have seen GBP/USD rally 4% post US CPI.
- EUR/USD rallied +4% to mid-August highs of 1.03’s after the weaker US inflation report from 10 Nov 10 that triggered a broad USD sell off. The short squeeze in positioning compounded the move as the market had been extremely bearish the common bloc currency for so long with year-to-date declines of -12%.
- The European Central Bank (ECB) have been challenged by high inflation and weaker growth, but they seemed to have prioritized the fight against inflation by raising the main refi rates by a cumulative 200 basis points to 2.00% since July. Still, inflation remains uncomfortably high and the road to bring inflation down to their 2.00% target is long.
- To guard against the energy crisis, European governments have been supportive by maintaining flexible fiscal policies. However, it conflicts with monetary tightening initiatives.
- Currently, the pricing in the overnight index swap futures have terminal rates for the ECB at 2.90% by mid-2023. They are expected to hold at those levels for longer.
- Compromises will come from weaker economic growth but it’s likely to be uneven with Germany and Italy expected to face contraction while other members like France and Spain may be more resilient.
- Eurozone Q3 Gross Domestic Product (GDP) on 15 Nov is expected to stay unchanged at 0.2% m/m and 2.1% y/y. Consensus for Eurozone CPI on 17 Nov shows core inflation to remain flat at 5.0% y/y while the headline number may print higher at 10.7% vs 9.9% in Sept.
- The gradual easing of COVID restrictions by the Chinese government seems to be underway with the announcement on Nov 11 to shorten the quarantine period for international travelers and scrapping COVID flight suspensions.
- There are speculations that further easing may be introduced after the National People’s Congress in March 2023. Due to weak economic growth and deflation pressures building, it might have motivated government officials to do more.
- The reopening of China’s economy should alleviate supply chain bottlenecks to help lower inflation and boost global demand and growth.
- USD/CNH made a U-turn and after reaching a peak of 7.3749 on Oct 25, it sold off -4% in conjunction with the broad USD weakness.
Performance relative to USD: Change since Change since Dec. 31, 2021 Current Spot Dec. 31, 2021 Nov. 4, 2022 Nov. 4, 2022 AUD 0.7263 0.669 -7.9% 0.6285 6.1% CAD 1.2637 1.3281 -5.1% 1.3733 3.3% CHF 0.9129 0.945 -3.5% 1.0145 6.9% CNH 6.357 7.0626 -11.1% 7.3391 3.8% EUR 1.137 1.0321 -9.2% 0.9743 5.6% GBP 1.3532 1.1782 -12.9% 1.115 5.4% JPY 116.17 140.32 -20.8% 148.4 5.4%
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