Markets
The Fed is done hiking and readying a full percentage rate cut by end next year. That’s what markets concluded from yesterday’s <0.1% ppt lower than expected CPI numbers. It triggered a mindboggling repositioning across the curve. It’s as if markets were waiting for one/any number to scoop up battered Treasuries. Yields fell 20-22.4 bps in the 2-7y bucket and 13.4-19.3 bps further out. The 2-y yield tested the recent November correction low at 4.80% while the 10-y hit lost support around 4.50% to finish at a two-month low of 4.44%. The rally in Treasuries caught German Bunds in their slipstream, pushing yields in the country between 9.3-11.3 bps lower across the curve. The 2-y over there lost the 3% mark, the 10-y tenor closed near the lower bound of the Oct-Nov downward trend channel at 2.6%. This level also coincides with the 38.2% retracement on the 2023 yield rally. The massive interest rate support loss and the equity rally it triggered (US stocks 1.4-2.4% higher) tackled the US dollar. DXY opened at 105.65 to close just north of 104 and in the process lost support at 105.51 and 104.38 (23.6% and 38.2% retracement on the 2023H2 DXY recovery). EUR/USD added almost two big figures into a close of 1.0879. Resistance areas at 1.0756, 1.0764 and 1.0862 posed no problems whatsoever. Dollar weakness even gave the ailing JPY a breather. USD/JPY fell to 150.37 (from 151.78). Compare this to EUR/JPY, which surged to a new 15-year high of 163.60.
Asian-Pacific equities keenly jump on the WS train. Stocks add up to 3% and more in China, with some good news in the country helping the move higher (see below). The yuan appreciated further to a three-month high of USD/CNY 7.24 with USD weakness helping at least as much. JPY pares some of yesterday’s gains amid poor Japanese Q3 growth and risk on. US Treasuries more or less stabilize. The economic calendar today contains US PPI and retail sales. Yesterday’s price action revealed a clear dovish skew towards data. Any downside miss is likely to extend the correction in US yields whereas a significant surprise to the upside is needed for a rebound worth the name. US 10-y yield support kicks in at 4.33% (Oct 22 interim high)/4.34% (38.2% retracement on the 2023 yield rise)/4.36% (Aug 23 interim high). Next resistance EUR/USD at 1.0945/1.0965 should hold as US bond sentiment will probably spill over to Europe as well. UK inflation numbers this morning printed a downside surprise similar to the US (0% m/m, 4.6% y/y and 5.7% for the core). The numbers, as in the US, cement market thinking of the BoE being done with hiking and instead preparing rate cuts mid-2024. Sterling losses are contained for now though. EUR/GBP rises towards 0.871.
News & Views
The Japanese economy contracted more than expected in Q3. After an 1.1% growth spurt in Q2, activity in Q3 contracted by 0.5% Q/Q (-0.1% expected). The decrease was mainly due to poor domestic demand (-0.4%), especially corporate investment. Private consumption stagnated after a substantial decline in Q2, underscoring sluggish underlying consumer demand. Government consumption was a supportive (0.3% Q/Q). Net exports shaved off -0.1 ppt as a modest rise in exports (0.5%) was offset by a 1.0% rise in imports. The BoJ may consider the poor performance of private consumption a sign that a sustained, demand driven inflation rise remains uncertain. In this respect, the BoJ probably won’t be in a hurry to exit stimulative policy. Even so, after a sharp decline at the open (mirroring the global market), the Japanese 10-y yield holds in the 0.80% area. USD/JPY this morning trades in the 150.65 area compared to levels of 151.5+ yesterday but this was due to USD weakness. The yen remains weak with the likes of EUR/JPY (163.9) touching multi-year peak levels.
Chinese October retail sales rebounded more than expected at 7.6% Y/Y from 5.5% Y/Y in September and 7.0% expected. YTD retail sales now are 6.9% higher compared to the same period last year. October industrial production data also showed a small beat (4.6% Y/Y vs 4.5% expected). At the same time, property investment (YTD -9.3%) remains a huge negative for the economy being a major drag on the fixed investment performance. The PBOC this morning offered much more cash (CNH 1450 bln) than expected (and what matured) via its 1-year Medium Term Lending facility. The cash injection suggests that the bank still sees the need for ongoing policy stimulation. The yuan this morning strengthened to USD/CNY 7.24, but this is mainly USD softness.
