Overview: The US 10-year yield is off around a dozen basis points off yesterday’s high and European growth in Q3 was better than expected. This appears to have encouraged some dollar liquidation today. The greenback is softer against the G10 currencies, but the Canadian dollar and sterling. The much-awaited UK Autumn budget will be announced shortly. Sterling is consolidating around $1.30. Most emerging market currencies also are enjoying a firmer tone today.
Asia Pacific and European equities are trading heavier. The Asia Pacific, all the large markets but Japan fell. The Hang Seng and mainland companies that trade there fell by more than 1.5%, to lead the region lower. The Stoxx 600 in Europe reversed early gains yesterday and fell by about 0.55%. Today, it is down around 0.7%. On the other hand, US index futures are firm. Benchmark 10-year yields are mixed. Gilts have caught a bid ahead of the budget and are off nearly six basis points. Other 10-year yields are narrowly mixed. The 10-year US Treasury yield is down about three basis points to approach 4.22%. Gold set a record yesterday and is extending its gains today to trade to almost $2790 today before consolidating a little. After gapping lower on Monday, December WTI remains pinned near its lows. It is trading roughly between $67.30-$68.20 today, well within yesterday’s range.
Asia Pacific
The Bank of Japan meeting begins today. It is not expected to do anything but provide updated forecasts and reiterate its forward guidance (that if the economy evolves as expected, further adjustment of monetary policy will be necessary). The swaps market has seven basis points of tightening discounted for December and anticipated 25 bp increase by the middle of next year. Australia reported Q3 CPI. The 0.2% rise on the quarter was the least since the first half of 2020 and translates into a 2.8% year-over-year pace. It is the first sub-3% reading since Q1 21. The underlying measures also eased. The monthly measures fell to 2.1% in September (2.7% August), its fourth consecutive monthly decline. It was 5.6% last September. Nevertheless, the futures market saw less of a chance of an RBA rate cut in the coming months. Tomorrow see Japan’s retail sales and industrial production ahead of the BOJ decision. China reports its October PMI. A small increase in the composite looks likely, though it is still early to see much impact from the stimulus measures.
The dollar recorded an inside trading day against the yen yesterday and its trading inside yesterday’s session in quiet turnover today. Monday’s range is intact: ~JPY152.40-JPY153.90. Yesterday, the dollar was pulled off its highs, 1/100 of a yen below Monday’s high, alongside the pullback in US 10-year yields on the weakness in the JOLTS report. Although the yield popped back up after the strong consumer confidence report, it quickly backed off and the greenback consolidated around JPY153.50. The US 10-year yield is trading about 10-11 bp lower than yesterday’s high. The Australian dollar fell for the third consecutive session yesterday to reach $0.6545 and fell to almost $0.6535, its lowest level since August 8, before recovering. A close above $0.6585 would lift the technical tone. The dollar reached CNH7.1640 yesterday, its highest level since August 19. The yuan recovered following news that Beijing is considering a large multi-year fiscal package of around CNY10 trillion (~$1.4 trillion) at the conclusion of the National People’s Congress in early November. The dollar’s gains were reversed, and it settled little changed against the offshore yuan (~CNH7.1450). Follow-through selling today took the greenback to about CNH7.1320. Chart support is seen around CNH7.11. The PBOC set the dollar’s reference rate at CNY 7.1390 (CNY7.1283 yesterday).
Europe
The eurozone economy grew by 0.4% in Q3, twice expectations. The German economy unexpectedly grew by 0.2% in Q3, but the Q2 contraction was revised to 0.3% from 0.1%. The French economy grew by 0.4%, which also stronger than expected and follows a 0.2% expansion in Q2. Growth in Spain was the most of the largest for members of EMU. Spain grew by 0.8%, more than Germany will likely grow this entire year, after a 0.8% expansion in each of the quarters in H1. Italy was the disappointment: stagnation in Q3. It was expected to have grown by 0.2%. Spain and German states reported October CPI ahead of the aggregate figure due tomorrow. Spain’s harmonized measure to by 0.4% for a 1.8% year-over-year pace. That is up from 1.7% in September. The German states point to a harmonized gain of 0.2%-0.3% for the country, which would lift the year-over-year rate to 2.1%-2.2% from 1.8%. The UK’s Chancellor of the Exchequer Reeves is set to deliver the Autumn budget shortly after midday in London. A combination of spending increases and tax hikes are expected. The spending increases appear to largely for public investment. Labour has adopted broader measure for the deficit (Public Sector Net Financial Liabilities instead of the Public Sector Net Debt, which the Tories used). The principle here is that day-to-day government spending should be covered by revenues, but borrowing can fund investment.
The euro is recovering. Yesterday, it fell to from the four-day low near $1.0770 in the North American morning and returned to almost $1.0820. This may serve as support now. The euro’s recovery may have been aided by the six-basis point narrowing of the US 2-year premium over Germany, the most since September 12. The premium had approached 205 bp, the most since April, before settling slightly around 196 bp, a new five-day low. It is off a few more basis points today. The euro reached almost $1.0860 today in European turnover. Resistance is seen in the $1.0870-80 area. After the US option expiration yesterday (GBP700 mln at $1.30), sterling set a fresh five-day high slightly above $1.3010. Buying interest dried up, leaving sterling consolidating in a narrow range around $1.30. Today it reached $1.3025 but the market is cautious ahead of the budget and sterling is still struggling to hold above $1.30. That said, sterling looks poised to recover after the budget announcement.
America
There are two important US reports today. The first is the ADP estimate of private sector employment. The ADP estimate this year has been fairly accurate, by which we mean close to the BLS estimate after revisions. Consider that through September, ADP estimates that the private sector has grown 150.4k jobs on month on average this year. The BLS estimate is closer to 162k on average. The median forecast in Bloomberg’s survey is for 112k increase (143k in September). The second important US report today is the first estimate of Q3 GDP. The median forecast in Bloomberg’s survey is 3.0%, the same as in Q2. The Atlanta Fed’s GDP tracker is at 2.8% after yesterday’s news that the September goods trade deficit widened (~$102 bln vs $86 bln in September 2023). The consumer looks a bit more active than in H1, while private investment may have slowed considerably (2.1% vs. 8.3% in Q2). Canada reports August GDP tomorrow. The economy may have stagnated after growing 0.2% in July. For its part, Mexico reports Q3 GDP today. The median forecast in Bloomberg’s survey is for a 0.7% expansion (0.2% in Q2). It would be the fasted growth since Q3 23. Still, the year-over-year pace of 1.3% would the weakest since an eight-quarter contraction ended in Q2 21.
The US dollar posted an outside up day against the Canadian dollar by trading on both sides of Monday’s range and settling above Monday’s high. The greenback reached CAD1.3930, holding a little below the year’s high set early August closer to CAD1.3945. With the market leaning toward another 50 bp rate cut in December, and Canada’s two-year discount to the US of more than 100 bp (the most since 1997), there does not seem to be a compelling reason to pick a top, though momentum indicators are stretched. The greenback is consolidating in a narrow range against the Canadian dollar today: ~CAD1.3905-CAD1.3930. The dollar remains firm against the peso but is also consolidating in quiet turnover. Yesterday, dollar buying interest re-emerged on a shallow pullback toward MXN19.95. It settled above MXN20.00 for the second consecutive session and has not traded below there yet today. Last month’s high, set near MXN20.15 beckons but the real draw may be the early August near MXN20.2180. Meanwhile, Brazil’s larger than expected current account deficit and less foreign direct investment, coupled with reports suggesting that President Lula is pushing back against efforts to reduce the minimum wage and social benefits in real (adjusted for inflation) terms weighed the Brazilian real. The US dollar rose nearly 1% to around BRL5.7650, its highest level since August 5 when the high for the year was recorded (~BRL5.8550).
