The slowing US housing market is making alive some memories from the 200—2009 great recession but there is some confusion about whether it’s a red flag for the economy these days. New home sales have been trending downwards so far this year and the August reading is expected to mark a new low at 500k from 511k previously, the lowest in six years. Pending home sales due today could show a steeper contraction of -1.4% from -1.0% previously, remaining negative for the third consecutive month.
A stabilization in the red-hot rent market in August, perhaps on the back of state limits in some regions, was probably a catalyst to a softer house demand too. However, more than half of the renters are still facing elevated prices year-on-year and given the inflation in construction materials as well as the tight supply of houses, there is little prospect for a significant slowdown in the market.
The strength in the labor market is also a tailwind for the real estate sector, delaying any defaults in loan payments. Personal income and consumption figures and together the core PCE inflation on Friday could provide some updates on that front. Although expectations are for a minor monthly pickup to 0.3% and 0.2% respectively, the indicators may not rise any concerns if they stay within normal levels. A potential mild increase in the core PCE inflation to 4.7% y/y would not be something new either after similar pace in the core CPI inflation reading.
Unless a significant negative deviation from forecasts takes place, this wek’s dataset may not have the power to shake the dollar. It’s obvious that monetary policy is the main player in town in global markets, therefore investors may appear more sensitive to speeches from Fed policymakers in the rest of the week, especially if comments shed more light on how big size of future rate hikes will be. Chairman Jerome Powell, as well as Charles Evans and James Bullard will be commenting at events today, while James Bullard, Loretta Mester and John Willams will follow next later in the week.
NZ business sentiment is less dire, RBNZ hint at rate cycle high
Business outlook is now -37.6, up 25.9 points higher than the June low. Business outlook rose for a third month and at its fastest m/m pace since December 2020. Activity outlook rose from-4 to -1.8. Import intentions expanded for a second month. A large improvement for profit expectations, even though it remains negative overall. Credit conditions highest since mid-2021. All sectors see improved activity vs 1-year ago. Pricing intentions are still high, but inflation expectations dipped below 6% for the first time in six months.
Business sentiment may not be going from strength to strength, but to see pessimism lose its grip after multi-year lows certainly a step in the right direction. Besides, investors tend to look at the rate of change over the absolute level of such indicators, and right now it looks very likely that business sentiment hit its low in June.
The inflation and higher rates are having a negative effect on business sentiment. At 3%, RBNZ has one of the highest cash rates among the major economies and second place to the BOC and Fed at 3.25%. It’s likely we’ll see another 25bp hike but it’s also possible we could be nearing the terminal rate. Governor Orr said in August that the next rate move is not obvious and earlier today he said, whilst there’s still work to do regarding rates, the tightening cycle was already very mature. So against that backdrop, we suspect a 25bp hike on October the 5th, and may even see a pause-and will look for such clues in the October statement and minutes.
AUD/NZD is currently within its seventh consecutive bullish month and risen over10% from its September 2021 low. It still has the potential to move back to the 2015 high round 1.1680, but we’ll also keep in mind the potential for a policy divergence between the RBNZ and RBA. And it is by identifying such potential inflection points ahead of time that investors stand a better chance of getting more for future moves in currency markets. On that note, AUD/NZD is on track for a bearish pinbar week around current levels, below 1.1500.
Recession Fears: The Ukraine war is affecting markets
The Ukraine ware is affecting markets around the world and generating extreme volatility. Worries over inflation in Europe have been brewing even before Russia war with Ukraine in February. While some considered it was temporary, others warned that it was a sign of a deeper crisis. Now, six months since the start of the war in Ukraine, is a recession inevitable in Europe?
The impacts of the conflict will likely vary depending on geographical location. Europe, and countries such as the Baltic states and Poland, are likely to experience more difficulties than countries that depend less on Russia for energy. Western Europe, in particular Germany, also has no easy alternative energy source to replace natural gas from Russia. After Moscow decided to temporarily suspend its gas supply to Germany, gas prices climbed to 295 Euro per Megawatt-hour. Recent data showed that business activity in Germany and France contracted in August due to falling demand and rising prices. The Euro hit a new 20-year low against the USD, making it more expensive to buy energy on international markets, which is paid with the USD. Bundesbank, Germany’s central bank, forecast that inflation, which is at 7.5%, will hit double figures in autumn.
In the US there are already signs of improvement as inflation fell in July from 9.1% to 8.5% due to drop in gas prices. However, Europe continues to pay for its dependence on gas and inflation in Europe is already greater than the figure in the US. Falling food prices and fall in oil prices have not been enough to counteract the increase in gas prices in Europe. But some analysts argue that a recession could help deal with inflation, as long as it is not a prolonged recession.
Due to the global nature of financial markets, this could mean the US investors will see more volatility in the coming months, even if the US avoids recession in comparison to Europe. The European Union’s economy is larger than that of the US and many US-listed companies depend on European consumers spend less due to fear of becoming unemployed in a recession, company earnings and prices of stocks in US investors portfolios could also decline.
Apart from Russia war, uncertainty is also likely to be raised by the prospect of unintended consequences resulting from western sanctions against Russia and the risks that policymakers will involve the US in a conflict that the US could otherwise mainly avoid the effects of.
Oil Prices Mixed as Markets Digest OPEC+ Supply Cut
OPEC meeting tomorrow to determine what should be done about the amount of crude oil that is supplies to the market. Two weeks ago, the talk looked like to be whether the countries should do anything at all. However, as the price of oil continues to fall, along with weaker manufacturing data and growing fears of a recession, worries of a lack of demand had set in. Rumors started circulating that OPEC would cut supply by 500,000 bpd to 1,000,000 bpd. Over the weekend, the rumors were that OPEC would cut up to 1,500,000 bpd. Russia is said to be leading the way for the supply cuts, as western countries would then need to look to alternative sources for energy. Earlier today, OPEC canceled the Joint Technical Committee meeting scheduled for 4th October.
WTI Crude Oil has been moving aggressively lower since June 14th when oil traded as high as 123.66. The price is moving in a downward sloping channel with brief false breaks above and below the channel. On September 26th, WTI made near-term low of 76.28. Today, Crude Oil has bounced to the top trendline of the channel, up 5%, as traders speculate on the amount of oil OPEC will cut today.
Will OPEC cut back on supply today ? If so, by how much ? It seems like the consensus is for a 1,000,000 bpd cut in supply. If that is the case, be careful of a “buy the rumor, sell the fact” trade. Crude oil traded up nearly 5% today. If price continues higher, there may be a pullback on the actual release if it is in line with consensus.
Oil Prices Mixed as Markets Digest OPEC+ Supply Cut
OPEC meeting tomorrow to determine what should be done about the amount of crude oil that is supplies to the market. Two weeks ago, the talk looked like to be whether the countries should do anything at all. However, as the price of oil continues to fall, along with weaker manufacturing data and growing fears of a recession, worries of a lack of demand had set in. Rumors started circulating that OPEC would cut supply by 500,000 bpd to 1,000,000 bpd. Over the weekend, the rumors were that OPEC would cut up to 1,500,000 bpd. Russia is said to be leading the way for the supply cuts, as western countries would then need to look to alternative sources for energy. Earlier today, OPEC canceled the Joint Technical Committee meeting scheduled for 4th October.
WTI Crude Oil has been moving aggressively lower since June 14th when oil traded as high as 123.66. The price is moving in a downward sloping channel with brief false breaks above and below the channel. On September 26th, WTI made near-term low of 76.28. Today, Crude Oil has bounced to the top trendline of the channel, up 5%, as traders speculate on the amount of oil OPEC will cut today.
The USD was the most strongest currency yesterday, supported by rising US yields and softer import/export data. And whilst the prices paid component of the ISM services PMI softened to a 20-month of 68.8, it remains historically high relative to its long-term average of 59.8- which suggests the aggressive Fed tightening is yet to make an impact on the inflationary forces of the robust services sector.
The main economic event for the dollar this week is tomorrow’s NFP report. There was some excitement that it may come in soft due to the notable fall in job openings, but ADP employment came in slight above expectations at 280k yesterday. But it is all to easy to get caught in the noise of individual data prints, so best to take a wider broader view of underlying trends.
The RBA surprised markets this week by slowing the pace of rates increase, opting for a 25bp move against expectations of a 50bp increase. Meanwhile, the RBNZ continued to show a heavy hand against domestic inflation pressures, having delivered a fifth consecutive 50bp rate hike.
In explaining their decision to raise the cash rate by only 25bp to 2.60% at their October policy meeting, the RBA referenced the considerable amount of financial tightening that has already been implemented, a total of 250bps to date. While the Board were cognizant of the domestic risks around inflation; consumer spending; housing and the labor market, a greater emphasis was placed on concerns around the deterioration in the global economy, likely in response to recent volatility within financial markets. As discussed by Chief Economist Bill Evans, we saw that developments in the global economy actually favored a larger increase at the October meeting, given the strength of US consumer inflation and it’s expected consequences of a more aggressive tightening cycle from the Federal Reserve, and hence further upward pressure on global interest rates.
EUR/USD updated another 20 years low last month, lowest at 0.9535. This was followed by a correction, and the pair came close to the equality level on Tuesday, October 04, rising to 0.9999. However, the happiness of the bulls was short, followed by another reversal to the south and the finish line at 0.9737.
The depressed state of the economy against the background of continuing inflation suggests the threat of stagflation in the Eurozone. The increase in energy prices adds to the negative. And it is likely to continue, as the OPEC + countries decided to seriously reduce oil production. Recall that these prices were one of the most powerful triggers for the global wave of inflation. Another negative factor is the proximity of the EU countries to the theater of Russian-Ukrainian military operations, especially since Russian President V. Putin constantly threatens to use nuclear weapons.
GBP/USD is one of the most popular pairs to discuss over the last month. When Chancellor Kwasi Kwarteng announced the plans for Prime Minister Truss’s new mini-budget program, markets were concerned as to where the money would come to fund it. The Bank of England had been slowly raising interest rates and investors were weary that the government would now have to borrow money at much higher rates. As a result, the Gilts and the GBP got hammered. A few days later, the BOE intervened in the Gilt market, which brought yields lower the value of the Pound higher. Th Central bank said it would continue to intervene in the market as necessary, buying up to 5 billion GBP per day worth of Gilts through October 14th, in order to keep liquidity in the markets.
AUD/USD continues to lose ground and can’t find its footing. The Aussie started the week on the wrong foot, with a decline of 1.0% on Monday. AUD/USD is trading at 0.6266 down 0.52%. Earlier the day, the Australian dollar fell to 0.6247, its lowest level since April 2020.
Australia has posted weak numbers this week, adding to the downward pressure on the ailing Australian dollar. The Services PMI fell into contraction territory with a reading of 48.0 in September, down from 53.3 in August, as the uncertain economic outlook is weighing on business activity. Business confidence levels are down, with NAB business confidence slowing to 5 in September, down from 10 in August. Westpac Consumer Sentiment indicated that consumers are also in a sour mood, with a reading of -0.9% in September after a gain of 3.9% in August, which was the sole gain over the past 11 months.
The September 21st FOMC meeting chose to hike the Fed Funds rate by 75bps for the third consecutive meeting to bring the key rate to 3%-3.25%. The Minutes from that meeting noted that the cost of doing too little outweighed the cost of doing too much. They also noted that the labor market would need to weaken to bring down high inflation. Some also said that after rates reach a sufficient level, they will need to hold this restrictive rate for some time. After the Minutes were released, the CME Fed Watch Tool showed that markets were pricing in an 84% chance of a 75bps rate increase at the November 2nd meeting. However, this may change after the US CPI data is released tomorrow.
EUR/USD displays a range bound structure around 0.9700 ahead of US Inflation
EUR/USD moved sideways along the 0.9700 horizon as markets waited for the release of US inflation data last week. October 14th the Department of Labor Statistics of the country published fresh values of the Consumer Price Index, which exceeded the forecast values. In monthly terms, the September CPI reached 0.6% against the forecast of 0.5%, in annual terms – 6.6% against the forecast of 6.5% and the previous value of 6.3%.
The dollar began to lose its position rapidly: DXY fell to 112.46, and EUR.USD broke through 0.9800. On the contrary, the S&P500 was positive by the end of Thursday and grew by 2.6%. Analysts cite the strong oversold stock market as the main reason for this change in sentiment and the sharp increase in risk appetites. It is believed that stocks lose about 30% during recessions.
It is expected that the official Cash Rate to reach a peak of 5% for this cycle and also a 75 basis point hike to 4.25% at the upcoming November Monetary Policy Statement, a step up from the 50 basis point increases in the last few reviews. Inflation in continuing to run red-hot across the economy, and core inflation is yet to show signs of easing despite the sharp rise in interest rates over the past year.
It is also seen that ongoing firmness in domestic economic conditions, including a drum tight labor market and resilience in household demand. Today’s inflation figures were unexpectedly bad. Prices are not only rising quickly but across the board, which increasingly points to a common cause rather than special factors. And even though forecasters were braced for a strong number today, the result beat all expectations. Combine that with a sense that domestic demand is holding up in the face of the interest rate hikes that we’ve seen to date, and it looks like the Reserve Bank has more work to do yet.
Canadian CPI for September was 6.9% YoY vs and expectation of 6.8% YoY and an August reading of 7%. The headline number was higher than expectations, it was the third straight month the inflation reading has declined since reaching a 39 year high in June. However, the core CPI increased to 6% YoY va an expectation of a drop to 5.7% YoY and an August reading of 5.8% YoY. The Canadian CPI release comes just hours after the UK reported an uptick in its inflation to 10.1% YoY.
As inflation continues to remain high in Canada, will the BOC be less aggressive, or pivot , as some have suggested after the RBA reduced its pace of rate increases at its last meeting? Expectations are closer to a 75bps rate hike than a 50bps rate hike when BOC meetings next Wednesday. Governor Macklem spoke earlier in the month and was hawkish, noting that further interest rate increases and warranted to tame inflation.
The Bank of Canada interest rate decision meeting will be held on Wednesday, October 26th. BOC Governor Macklem will follow with a press conference beginning at 11:00 ET.
BOC hiked rates by 75bps at their last meeting in September. This was the fifth consecutive rate hike and it brought rates to 3.25%, the highest since 2008. In addition, the BOC said that, given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. The Central Bank also said it will continue with its quantitative tightening program.
EUR/USD continues to power forward and has breached the parity line for the first time since 20th September. The euro is red hot, having gained 2.1% this week, as the USD has hit a dump in the road and is lower against all major currencies. In the North American session, EUR/USD is trending at 1.0069, up 1.02%.
The German economy, the largest in the eurozone, continues to show signs of weakness. September PMIs pointed to contraction in manufacturing and business activity, and these are unlikely to rebound as the Ukraine war continues and an energy crisis looms, with winter close by. The Ifo Business Confidence index fell for a fourth straight month in October and Gfk Consumer sentiment, which will be released today, is expected to remain deep in negative territory.
The RBA is set to hold their November meeting tomorrow and whilst the consensus is for a 25bp hike, it doesn’t mean they won’t do a 50bp one instead. Economists favor a 25bp hike, although money markets estimate a 51% chance of a 50bp hike tomorrow. It may be a closer call than economists think. And we’ll keep close eye on whether the RBA retain the comment of the 25 vs 50 being finally balanced. Overnight implied volatility has spiked higher ahead of the meeting.
It is expected that the RBA will repeat a second 25bp hike tomorrow and potentially even pausing in December. On one hand, Governor Lowe has said the RBA tend to forecast their policy on inflation expectations – which remain well anchored. On the other hand, if October’s debate for 25 ot 50bp was finally balanced then it poses the question as to whether the strong inflation report tips the scale towards a 50bp hike .
Euro area annual inflation up to 10.7% – European Union
Eurostat’s preliminary estimate indicated an acceleration of annual inflation in the euro region from 9.9% immediately to 10.7%. Economists are expecting no change, and the difference of 0.8 points is one of the most prominent indicators economists predict quite accurately on average.
But it’s not only this surprise that we want to point out, but also how fast price growth has spread beyond energy and food categories. Core inflation accelerated to 5% YoY in September, adding 0.6% MoM. Non-energy industrial goods rose at 1.2% MoM and 6.0% YoY.
These dynamics should signal that the ECB should not reduce the pace of monetary tightening.
The FOMC will conclude it’s monetary policy today. The expectation is that traders are pricing in nearly 90% odds of a 75bps interest rate hike, an expectation that was supported by the Wall Street Journal’s. Traders are currently pricing in a peak Fed Funds rate around 4.9% in May 2023, and this is where it’s more likely to see expectations shift in the wake of this week’s Fed meeting. Traders should be more focused on the Fed’s expected destination not the journey in the coming months.
The stakes couldn’t be higher for this month’s FOMC meeting. While the decision for a 75bps hike itself seems relatively straightforward, the accompanying statement and press conference will be closely monitored for any hints that the central bank is thinking of slowing the pace of rate hikes in the coming months.
Fed hiked rates by 75bp as highly expected. Powell delivered a hawkish message, emphasizing the need to tighten financial conditions further. We have not seen Fed make significant progress towards its goals over the past month. It is expected that a 50bp hike will come in February in addition to our earlier forecast for one more 75bp hike in December. Markets took FOMC statement not seriously, but the move faded during the press conference and EUR/USD declined below pre-meeting levels while 2y UST yield rose around 6bp. The forecast for EUR/USD is maintained at 0.93 in 12M.
Fed hiked rates by 75bp in its October meeting as widely expected. There was no updated ‘dot plot’ or economic forecasts. While Powell did acknowledge the downside risks to the economy, he also emphasized that it is very premature to be thinking about stopping.
Last week passed without any major movement. The main event was FOMC meeting of the US Federal Reserve at which it was unanimously decided to raise the key rate by 75 basis points to 4.00%. The highest level since 2008. Such a move was quite expected. Therefore, the subsequent press conference of the regulator’s management was of greater interest to market participants. Fed Chairman Jerome Powell said at the meeting that although inflation must be reduced drastically, monetary policy parameters can be changed as needed.
The DXY Dollar Index moved up, hitting 113.00. The US currency strengthened against all G10 currencies, except for the Japanese yen. Then a reversal followed, and before the release of the data on unemployment in the US on Friday, November 04, it fell to 112.35, and EUR/USD consolidated around 0.9800
Business reported another strong month of sales and profitability, although a dip in new orders and rising costs weighed on sentiment. Whilst consumer-driven demand remains high, National Australian Bank’s chief economist noted that forms appear wary that the current pace of consumption will continue.
PMI survey’s for Australia continue to trend lower with the S&P global composite below 50, with services PMI dragging the composite lower. Manufacturing, services and construction PMI are all below 50 according to another PMI survey by AIG. Put together it makes to wonder if growth for 2023 will have to be revised lower, as consumer spending appears to be propping up the show.
AUD/USD remains within a bearish channel on the daily chart, although has entered a corrective phase after finding support above the 2020 monthly close low. A large bullish engulfing candle formed on Friday and it looks like the market wants to test the 0.6535 resistance area.
EUR/AUD is consider about seeing another bout of Aussie dollar weakness in EUR/AUD. Large speculators are increasingly net-long EUR/USD futures and remain net-short AUD/USD futures, which is effectively the view of bullish EUR/AUD.
A strong bullish trend developed on the daily chart since the August low and prices have since been retracting within a potential bull flag pattern. Friday’s spike lower found support at the July high and prices are now holding above the monthly pivot point and July high. From here’s we’re waiting to see if momentum turns higher in line with its trend, to bring the resistance zones around the monthly R1 and R2 into focus.
The September headline inflation was 8.2% YoY, higher than expectations of 8.1% YoY, however lower than the August reading of 8.3% YoY. The Core CPI reading was higher than expected at 6.6% YoY vs expectations of 6.5% YoY and an August reading of 6.3% YoY. This was the highest reading since 1982.
The Fed has a dual mandate of price stability and maximum sustainable employment. With the labor market remaining strong, the Fed is focused on price stability, and has maintained that lowering inflation is its number one priority. During the press conference that followed the FOMC statement on 2nd November, Fed Chairman Powell noted that incoming data suggests that the ultimate level of rates will be higher than previously anticipated. In addition, he said that “how high to rise rates is more important that the pace of tightening”. These statements imply that the Fed believes inflation will remain higher for longer. But has the four consecutive 75bps rate hikes finally fed through to the real economy ? If yes, inflation may be lower than expected, which should lift stock prices and lower the value of the US Dollar.
EUR/USD has been moving higher since the US Non-Farm payroll data on November 4th. The first resistance is at the highs from October 26th at 1.0094. Above there is a confluence of resistance at the highs from September 12th and the 127.2% Fibonacci extension from the lows of September 28th to the highs of October 26th between 1.0193 and 1.0198. The 161.8% Fibonacci extension from the same timeframe in the nest level of resistance at 1.0318. If the data is higher than expected, EUR/USD could go lower. First support is at the low of November 8th at 0.9972. Below there, price can fall to the top trendline of the long-term channel near 0.9840 and then the low of November 3rd at 0.9730.
How to Profit From US Inflation: Investment Options
US inflation is expected to soften slightly – as markets have positioned themselves for it to do so. But that also presents opportunities for traders. The inflation prints as a proxy for Fed policy. Another hot report decreases the odds of a slower pace of Fed tightening, likely boosting the dollar whilst weighing on Wall Street, commodities and all other currencies. Whilst a softer inflation report keeps hopes alive that the big hikes are behind us and send dollar lower.
The US dollar index has held above a key support zone around 109.96, which comprises of the October 2002 high, October 2022 low and bullish trend line. A bar bullish reversal has also formed to suggest a swing low is in place, and with it comes the potential to head back to the monthly pivot point just beneath 112. At this stage it is equally open for it to top out, roll over and break trend support as it is breaking back above 112. But for now, the near term bias remains bullish whilst prices hold above this week’s low.
Officially which party has won control of the Congress is still not known. The trends and projections, the results are pretty much in line with what was expected. Republicans take control of the House, but by a smaller margin than expected. And control of the Senate is still unknown, and will likely come down to a run-off election in Georgia.
The initial reaction from the markets wasn’t favorable, likely because of the associated uncertainty. Investors don’t like knowing what’s coming, and with control of the Senate down to a single race that had less than a percentage point of margin, doesn’t inspire confidence. Additionally, Republican control by a small margin means that maintaining consistency will be harder. It only would take convincing a small number of Representatives to change legislative outcomes.
The UK GDP revealed that the economy shrank by only 0.2% in 3rd Quarter, which means that a contraction of more than 0.55% may be needed in the last three months of the year for the BoE’s forecast of a 0.75% contraction during H2 2022 to materialize. Yet, investors dragged their rate-path projections lower. The probability for a 50bps hike at the December gathering renamed near 80%, but the implied terminal rate was lowered to 4.47% from 4.6%.
The jobs report is forecast to show that the unemployment rate held steady at 3.5% in September and that the average weekly earnings excluding bonuses have accelerated. With an inflation rate at 10.1% during that month, real wages likely stayed well into the negative territory and disposable incomes at record lows.
The Australian dollar is in negative territory, after posting huge gains last week. In the European session, AUD/USD was trading at 0.6690, down 0.22%. US Dollar took a nasty spill last week, and the Australian dollar made the most of it, gaining 3.6%. The US dollar was slammed after a soft inflation report, with headline and core inflation slowing in October and beating the forecasts. This lit up risk appetite and sent the Australian dollar to its highest level since September 22nd.
The soft inflation report had such a strong effect on the greenback because it has raised expectations that the Fed will ease up on its rate tightening. After four consecutive hikes of 0.75%, the markets have now priced in a 0.50% increase at the December meeting. That would still represent an oversize hike, but investors have been looking for a reason to rush into stocks and the drop in inflation provided that excuse.
Markets Position, The lower-than-expected US inflation
The lower-than-expected US inflation print simply extended with economic data serving as an accelerator. European stocks add a normal 0.6% but US indices open with very solid 0.9-2.5% gains. The US NY Empire manufacturing index surpassed the bar with ease, coming in at 4.5 vs a -6 consensus. But new orders turned negative again and the outlook for six months ahead turned deeper below zero from -1.8 to -6.1. Financial markets definitely also spotted the PPI easing by more than expected.
Headline factory inflation for September was revised lower to 8.4% and slowed to 8% vs 8.3% expected. Core gauges retreated from 7.1% to 6.7% and 5.6% to 5.4%. All of them are still at elevated levels but similar to last Thursday’s CPI, that’s of no importance to markets who just want to see pressure decline, both on prices and on the Fed.
Equity markets in Europe are back in the red yesterday, while the US looks largely unchanged around the open on Wall Street.
Reports of missile strikes in Poland on Tuesday naturally caused a shudder in the markets. The prospect of a sudden and unexpected escalation in the war in Ukraine, particularly involving a NATO state, doesn’t bear thinking about but it’s almost forced to and under the circumstances, the reaction was fairly modest.
It could have been much worse but investors appear to have come to the view that it was a situation that would be quickly de-escalated which is what occurred despite initial reports not looking good.
Comments
The slowing US housing market is making alive some memories from the 200—2009 great recession but there is some confusion about whether it’s a red flag for the economy these days. New home sales have been trending downwards so far this year and the August reading is expected to mark a new low at 500k from 511k previously, the lowest in six years. Pending home sales due today could show a steeper contraction of -1.4% from -1.0% previously, remaining negative for the third consecutive month.
A stabilization in the red-hot rent market in August, perhaps on the back of state limits in some regions, was probably a catalyst to a softer house demand too. However, more than half of the renters are still facing elevated prices year-on-year and given the inflation in construction materials as well as the tight supply of houses, there is little prospect for a significant slowdown in the market.
The strength in the labor market is also a tailwind for the real estate sector, delaying any defaults in loan payments. Personal income and consumption figures and together the core PCE inflation on Friday could provide some updates on that front. Although expectations are for a minor monthly pickup to 0.3% and 0.2% respectively, the indicators may not rise any concerns if they stay within normal levels. A potential mild increase in the core PCE inflation to 4.7% y/y would not be something new either after similar pace in the core CPI inflation reading.
Unless a significant negative deviation from forecasts takes place, this wek’s dataset may not have the power to shake the dollar. It’s obvious that monetary policy is the main player in town in global markets, therefore investors may appear more sensitive to speeches from Fed policymakers in the rest of the week, especially if comments shed more light on how big size of future rate hikes will be. Chairman Jerome Powell, as well as Charles Evans and James Bullard will be commenting at events today, while James Bullard, Loretta Mester and John Willams will follow next later in the week.
Business outlook is now -37.6, up 25.9 points higher than the June low. Business outlook rose for a third month and at its fastest m/m pace since December 2020. Activity outlook rose from-4 to -1.8. Import intentions expanded for a second month. A large improvement for profit expectations, even though it remains negative overall. Credit conditions highest since mid-2021. All sectors see improved activity vs 1-year ago. Pricing intentions are still high, but inflation expectations dipped below 6% for the first time in six months.
Business sentiment may not be going from strength to strength, but to see pessimism lose its grip after multi-year lows certainly a step in the right direction. Besides, investors tend to look at the rate of change over the absolute level of such indicators, and right now it looks very likely that business sentiment hit its low in June.
The inflation and higher rates are having a negative effect on business sentiment. At 3%, RBNZ has one of the highest cash rates among the major economies and second place to the BOC and Fed at 3.25%. It’s likely we’ll see another 25bp hike but it’s also possible we could be nearing the terminal rate. Governor Orr said in August that the next rate move is not obvious and earlier today he said, whilst there’s still work to do regarding rates, the tightening cycle was already very mature. So against that backdrop, we suspect a 25bp hike on October the 5th, and may even see a pause-and will look for such clues in the October statement and minutes.
AUD/NZD is currently within its seventh consecutive bullish month and risen over10% from its September 2021 low. It still has the potential to move back to the 2015 high round 1.1680, but we’ll also keep in mind the potential for a policy divergence between the RBNZ and RBA. And it is by identifying such potential inflection points ahead of time that investors stand a better chance of getting more for future moves in currency markets. On that note, AUD/NZD is on track for a bearish pinbar week around current levels, below 1.1500.
The Ukraine ware is affecting markets around the world and generating extreme volatility. Worries over inflation in Europe have been brewing even before Russia war with Ukraine in February. While some considered it was temporary, others warned that it was a sign of a deeper crisis. Now, six months since the start of the war in Ukraine, is a recession inevitable in Europe?
The impacts of the conflict will likely vary depending on geographical location. Europe, and countries such as the Baltic states and Poland, are likely to experience more difficulties than countries that depend less on Russia for energy. Western Europe, in particular Germany, also has no easy alternative energy source to replace natural gas from Russia. After Moscow decided to temporarily suspend its gas supply to Germany, gas prices climbed to 295 Euro per Megawatt-hour. Recent data showed that business activity in Germany and France contracted in August due to falling demand and rising prices.
The Euro hit a new 20-year low against the USD, making it more expensive to buy energy on international markets, which is paid with the USD. Bundesbank, Germany’s central bank, forecast that inflation, which is at 7.5%, will hit double figures in autumn.
In the US there are already signs of improvement as inflation fell in July from 9.1% to 8.5% due to drop in gas prices. However, Europe continues to pay for its dependence on gas and inflation in Europe is already greater than the figure in the US. Falling food prices and fall in oil prices have not been enough to counteract the increase in gas prices in Europe. But some analysts argue that a recession could help deal with inflation, as long as it is not a prolonged recession.
Due to the global nature of financial markets, this could mean the US investors will see more volatility in the coming months, even if the US avoids recession in comparison to Europe. The European Union’s economy is larger than that of the US and many US-listed companies depend on European consumers spend less due to fear of becoming unemployed in a recession, company earnings and prices of stocks in US investors portfolios could also decline.
Apart from Russia war, uncertainty is also likely to be raised by the prospect of unintended consequences resulting from western sanctions against Russia and the risks that policymakers will involve the US in a conflict that the US could otherwise mainly avoid the effects of.
OPEC meeting tomorrow to determine what should be done about the amount of crude oil that is supplies to the market. Two weeks ago, the talk looked like to be whether the countries should do anything at all. However, as the price of oil continues to fall, along with weaker manufacturing data and growing fears of a recession, worries of a lack of demand had set in. Rumors started circulating that OPEC would cut supply by 500,000 bpd to 1,000,000 bpd. Over the weekend, the rumors were that OPEC would cut up to 1,500,000 bpd. Russia is said to be leading the way for the supply cuts, as western countries would then need to look to alternative sources for energy. Earlier today, OPEC canceled the Joint Technical Committee meeting scheduled for 4th October.
WTI Crude Oil has been moving aggressively lower since June 14th when oil traded as high as 123.66. The price is moving in a downward sloping channel with brief false breaks above and below the channel. On September 26th, WTI made near-term low of 76.28. Today, Crude Oil has bounced to the top trendline of the channel, up 5%, as traders speculate on the amount of oil OPEC will cut today.
Will OPEC cut back on supply today ? If so, by how much ? It seems like the consensus is for a 1,000,000 bpd cut in supply. If that is the case, be careful of a “buy the rumor, sell the fact” trade. Crude oil traded up nearly 5% today. If price continues higher, there may be a pullback on the actual release if it is in line with consensus.
OPEC meeting tomorrow to determine what should be done about the amount of crude oil that is supplies to the market. Two weeks ago, the talk looked like to be whether the countries should do anything at all. However, as the price of oil continues to fall, along with weaker manufacturing data and growing fears of a recession, worries of a lack of demand had set in. Rumors started circulating that OPEC would cut supply by 500,000 bpd to 1,000,000 bpd. Over the weekend, the rumors were that OPEC would cut up to 1,500,000 bpd. Russia is said to be leading the way for the supply cuts, as western countries would then need to look to alternative sources for energy. Earlier today, OPEC canceled the Joint Technical Committee meeting scheduled for 4th October.
WTI Crude Oil has been moving aggressively lower since June 14th when oil traded as high as 123.66. The price is moving in a downward sloping channel with brief false breaks above and below the channel. On September 26th, WTI made near-term low of 76.28. Today, Crude Oil has bounced to the top trendline of the channel, up 5%, as traders speculate on the amount of oil OPEC will cut today.
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The USD was the most strongest currency yesterday, supported by rising US yields and softer import/export data. And whilst the prices paid component of the ISM services PMI softened to a 20-month of 68.8, it remains historically high relative to its long-term average of 59.8- which suggests the aggressive Fed tightening is yet to make an impact on the inflationary forces of the robust services sector.
The main economic event for the dollar this week is tomorrow’s NFP report. There was some excitement that it may come in soft due to the notable fall in job openings, but ADP employment came in slight above expectations at 280k yesterday. But it is all to easy to get caught in the noise of individual data prints, so best to take a wider broader view of underlying trends.
The RBA surprised markets this week by slowing the pace of rates increase, opting for a 25bp move against expectations of a 50bp increase. Meanwhile, the RBNZ continued to show a heavy hand against domestic inflation pressures, having delivered a fifth consecutive 50bp rate hike.
In explaining their decision to raise the cash rate by only 25bp to 2.60% at their October policy meeting, the RBA referenced the considerable amount of financial tightening that has already been implemented, a total of 250bps to date. While the Board were cognizant of the domestic risks around inflation; consumer spending; housing and the labor market, a greater emphasis was placed on concerns around the deterioration in the global economy, likely in response to recent volatility within financial markets. As discussed by Chief Economist Bill Evans, we saw that developments in the global economy actually favored a larger increase at the October meeting, given the strength of US consumer inflation and it’s expected consequences of a more aggressive tightening cycle from the Federal Reserve, and hence further upward pressure on global interest rates.
EUR/USD updated another 20 years low last month, lowest at 0.9535. This was followed by a correction, and the pair came close to the equality level on Tuesday, October 04, rising to 0.9999. However, the happiness of the bulls was short, followed by another reversal to the south and the finish line at 0.9737.
The depressed state of the economy against the background of continuing inflation suggests the threat of stagflation in the Eurozone. The increase in energy prices adds to the negative. And it is likely to continue, as the OPEC + countries decided to seriously reduce oil production. Recall that these prices were one of the most powerful triggers for the global wave of inflation. Another negative factor is the proximity of the EU countries to the theater of Russian-Ukrainian military operations, especially since Russian President V. Putin constantly threatens to use nuclear weapons.
GBP/USD is one of the most popular pairs to discuss over the last month. When Chancellor Kwasi Kwarteng announced the plans for Prime Minister Truss’s new mini-budget program, markets were concerned as to where the money would come to fund it. The Bank of England had been slowly raising interest rates and investors were weary that the government would now have to borrow money at much higher rates. As a result, the Gilts and the GBP got hammered. A few days later, the BOE intervened in the Gilt market, which brought yields lower the value of the Pound higher. Th Central bank said it would continue to intervene in the market as necessary, buying up to 5 billion GBP per day worth of Gilts through October 14th, in order to keep liquidity in the markets.
AUD/USD continues to lose ground and can’t find its footing. The Aussie started the week on the wrong foot, with a decline of 1.0% on Monday. AUD/USD is trading at 0.6266 down 0.52%. Earlier the day, the Australian dollar fell to 0.6247, its lowest level since April 2020.
Australia has posted weak numbers this week, adding to the downward pressure on the ailing Australian dollar. The Services PMI fell into contraction territory with a reading of 48.0 in September, down from 53.3 in August, as the uncertain economic outlook is weighing on business activity. Business confidence levels are down, with NAB business confidence slowing to 5 in September, down from 10 in August. Westpac Consumer Sentiment indicated that consumers are also in a sour mood, with a reading of -0.9% in September after a gain of 3.9% in August, which was the sole gain over the past 11 months.
The September 21st FOMC meeting chose to hike the Fed Funds rate by 75bps for the third consecutive meeting to bring the key rate to 3%-3.25%. The Minutes from that meeting noted that the cost of doing too little outweighed the cost of doing too much. They also noted that the labor market would need to weaken to bring down high inflation. Some also said that after rates reach a sufficient level, they will need to hold this restrictive rate for some time.
After the Minutes were released, the CME Fed Watch Tool showed that markets were pricing in an 84% chance of a 75bps rate increase at the November 2nd meeting. However, this may change after the US CPI data is released tomorrow.
EUR/USD moved sideways along the 0.9700 horizon as markets waited for the release of US inflation data last week. October 14th the Department of Labor Statistics of the country published fresh values of the Consumer Price Index, which exceeded the forecast values. In monthly terms, the September CPI reached 0.6% against the forecast of 0.5%, in annual terms – 6.6% against the forecast of 6.5% and the previous value of 6.3%.
The dollar began to lose its position rapidly: DXY fell to 112.46, and EUR.USD broke through 0.9800. On the contrary, the S&P500 was positive by the end of Thursday and grew by 2.6%. Analysts cite the strong oversold stock market as the main reason for this change in sentiment and the sharp increase in risk appetites. It is believed that stocks lose about 30% during recessions.
It is expected that the official Cash Rate to reach a peak of 5% for this cycle and also a 75 basis point hike to 4.25% at the upcoming November Monetary Policy Statement, a step up from the 50 basis point increases in the last few reviews. Inflation in continuing to run red-hot across the economy, and core inflation is yet to show signs of easing despite the sharp rise in interest rates over the past year.
It is also seen that ongoing firmness in domestic economic conditions, including a drum tight labor market and resilience in household demand.
Today’s inflation figures were unexpectedly bad. Prices are not only rising quickly but across the board, which increasingly points to a common cause rather than special factors. And even though forecasters were braced for a strong number today, the result beat all expectations. Combine that with a sense that domestic demand is holding up in the face of the interest rate hikes that we’ve seen to date, and it looks like the Reserve Bank has more work to do yet.
Canadian CPI for September was 6.9% YoY vs and expectation of 6.8% YoY and an August reading of 7%. The headline number was higher than expectations, it was the third straight month the inflation reading has declined since reaching a 39 year high in June. However, the core CPI increased to 6% YoY va an expectation of a drop to 5.7% YoY and an August reading of 5.8% YoY. The Canadian CPI release comes just hours after the UK reported an uptick in its inflation to 10.1% YoY.
As inflation continues to remain high in Canada, will the BOC be less aggressive, or pivot , as some have suggested after the RBA reduced its pace of rate increases at its last meeting? Expectations are closer to a 75bps rate hike than a 50bps rate hike when BOC meetings next Wednesday. Governor Macklem spoke earlier in the month and was hawkish, noting that further interest rate increases and warranted to tame inflation.
The Bank of Canada interest rate decision meeting will be held on Wednesday, October 26th. BOC Governor Macklem will follow with a press conference beginning at 11:00 ET.
BOC hiked rates by 75bps at their last meeting in September. This was the fifth consecutive rate hike and it brought rates to 3.25%, the highest since 2008. In addition, the BOC said that, given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. The Central Bank also said it will continue with its quantitative tightening program.
EUR/USD continues to power forward and has breached the parity line for the first time since 20th September. The euro is red hot, having gained 2.1% this week, as the USD has hit a dump in the road and is lower against all major currencies. In the North American session, EUR/USD is trending at 1.0069, up 1.02%.
The German economy, the largest in the eurozone, continues to show signs of weakness. September PMIs pointed to contraction in manufacturing and business activity, and these are unlikely to rebound as the Ukraine war continues and an energy crisis looms, with winter close by. The Ifo Business Confidence index fell for a fourth straight month in October and Gfk Consumer sentiment, which will be released today, is expected to remain deep in negative territory.
The RBA is set to hold their November meeting tomorrow and whilst the consensus is for a 25bp hike, it doesn’t mean they won’t do a 50bp one instead. Economists favor a 25bp hike, although money markets estimate a 51% chance of a 50bp hike tomorrow. It may be a closer call than economists think. And we’ll keep close eye on whether the RBA retain the comment of the 25 vs 50 being finally balanced. Overnight implied volatility has spiked higher ahead of the meeting.
It is expected that the RBA will repeat a second 25bp hike tomorrow and potentially even pausing in December. On one hand, Governor Lowe has said the RBA tend to forecast their policy on inflation expectations – which remain well anchored. On the other hand, if October’s debate for 25 ot 50bp was finally balanced then it poses the question as to whether the strong inflation report tips the scale towards a 50bp hike .
Eurostat’s preliminary estimate indicated an acceleration of annual inflation in the euro region from 9.9% immediately to 10.7%. Economists are expecting no change, and the difference of 0.8 points is one of the most prominent indicators economists predict quite accurately on average.
But it’s not only this surprise that we want to point out, but also how fast price growth has spread beyond energy and food categories. Core inflation accelerated to 5% YoY in September, adding 0.6% MoM. Non-energy industrial goods rose at 1.2% MoM and 6.0% YoY.
These dynamics should signal that the ECB should not reduce the pace of monetary tightening.
The FOMC will conclude it’s monetary policy today. The expectation is that traders are pricing in nearly 90% odds of a 75bps interest rate hike, an expectation that was supported by the Wall Street Journal’s. Traders are currently pricing in a peak Fed Funds rate around 4.9% in May 2023, and this is where it’s more likely to see expectations shift in the wake of this week’s Fed meeting. Traders should be more focused on the Fed’s expected destination not the journey in the coming months.
The stakes couldn’t be higher for this month’s FOMC meeting. While the decision for a 75bps hike itself seems relatively straightforward, the accompanying statement and press conference will be closely monitored for any hints that the central bank is thinking of slowing the pace of rate hikes in the coming months.
Fed hiked rates by 75bp as highly expected. Powell delivered a hawkish message, emphasizing the need to tighten financial conditions further. We have not seen Fed make significant progress towards its goals over the past month. It is expected that a 50bp hike will come in February in addition to our earlier forecast for one more 75bp hike in December. Markets took FOMC statement not seriously, but the move faded during the press conference and EUR/USD declined below pre-meeting levels while 2y UST yield rose around 6bp. The forecast for EUR/USD is maintained at 0.93 in 12M.
Fed hiked rates by 75bp in its October meeting as widely expected. There was no updated ‘dot plot’ or economic forecasts. While Powell did acknowledge the downside risks to the economy, he also emphasized that it is very premature to be thinking about stopping.
Last week passed without any major movement. The main event was FOMC meeting of the US Federal Reserve at which it was unanimously decided to raise the key rate by 75 basis points to 4.00%. The highest level since 2008. Such a move was quite expected. Therefore, the subsequent press conference of the regulator’s management was of greater interest to market participants. Fed Chairman Jerome Powell said at the meeting that although inflation must be reduced drastically, monetary policy parameters can be changed as needed.
The DXY Dollar Index moved up, hitting 113.00. The US currency strengthened against all G10 currencies, except for the Japanese yen. Then a reversal followed, and before the release of the data on unemployment in the US on Friday, November 04, it fell to 112.35, and EUR/USD consolidated around 0.9800
Business reported another strong month of sales and profitability, although a dip in new orders and rising costs weighed on sentiment. Whilst consumer-driven demand remains high, National Australian Bank’s chief economist noted that forms appear wary that the current pace of consumption will continue.
PMI survey’s for Australia continue to trend lower with the S&P global composite below 50, with services PMI dragging the composite lower. Manufacturing, services and construction PMI are all below 50 according to another PMI survey by AIG. Put together it makes to wonder if growth for 2023 will have to be revised lower, as consumer spending appears to be propping up the show.
AUD/USD remains within a bearish channel on the daily chart, although has entered a corrective phase after finding support above the 2020 monthly close low. A large bullish engulfing candle formed on Friday and it looks like the market wants to test the 0.6535 resistance area.
EUR/AUD is consider about seeing another bout of Aussie dollar weakness in EUR/AUD. Large speculators are increasingly net-long EUR/USD futures and remain net-short AUD/USD futures, which is effectively the view of bullish EUR/AUD.
A strong bullish trend developed on the daily chart since the August low and prices have since been retracting within a potential bull flag pattern. Friday’s spike lower found support at the July high and prices are now holding above the monthly pivot point and July high. From here’s we’re waiting to see if momentum turns higher in line with its trend, to bring the resistance zones around the monthly R1 and R2 into focus.
The September headline inflation was 8.2% YoY, higher than expectations of 8.1% YoY, however lower than the August reading of 8.3% YoY. The Core CPI reading was higher than expected at 6.6% YoY vs expectations of 6.5% YoY and an August reading of 6.3% YoY. This was the highest reading since 1982.
The Fed has a dual mandate of price stability and maximum sustainable employment. With the labor market remaining strong, the Fed is focused on price stability, and has maintained that lowering inflation is its number one priority. During the press conference that followed the FOMC statement on 2nd November, Fed Chairman Powell noted that incoming data suggests that the ultimate level of rates will be higher than previously anticipated. In addition, he said that “how high to rise rates is more important that the pace of tightening”. These statements imply that the Fed believes inflation will remain higher for longer. But has the four consecutive 75bps rate hikes finally fed through to the real economy ? If yes, inflation may be lower than expected, which should lift stock prices and lower the value of the US Dollar.
EUR/USD has been moving higher since the US Non-Farm payroll data on November 4th. The first resistance is at the highs from October 26th at 1.0094. Above there is a confluence of resistance at the highs from September 12th and the 127.2% Fibonacci extension from the lows of September 28th to the highs of October 26th between 1.0193 and 1.0198. The 161.8% Fibonacci extension from the same timeframe in the nest level of resistance at 1.0318. If the data is higher than expected, EUR/USD could go lower. First support is at the low of November 8th at 0.9972. Below there, price can fall to the top trendline of the long-term channel near 0.9840 and then the low of November 3rd at 0.9730.
US inflation is expected to soften slightly – as markets have positioned themselves for it to do so. But that also presents opportunities for traders. The inflation prints as a proxy for Fed policy. Another hot report decreases the odds of a slower pace of Fed tightening, likely boosting the dollar whilst weighing on Wall Street, commodities and all other currencies. Whilst a softer inflation report keeps hopes alive that the big hikes are behind us and send dollar lower.
The US dollar index has held above a key support zone around 109.96, which comprises of the October 2002 high, October 2022 low and bullish trend line. A bar bullish reversal has also formed to suggest a swing low is in place, and with it comes the potential to head back to the monthly pivot point just beneath 112. At this stage it is equally open for it to top out, roll over and break trend support as it is breaking back above 112. But for now, the near term bias remains bullish whilst prices hold above this week’s low.
Officially which party has won control of the Congress is still not known. The trends and projections, the results are pretty much in line with what was expected. Republicans take control of the House, but by a smaller margin than expected. And control of the Senate is still unknown, and will likely come down to a run-off election in Georgia.
The initial reaction from the markets wasn’t favorable, likely because of the associated uncertainty. Investors don’t like knowing what’s coming, and with control of the Senate down to a single race that had less than a percentage point of margin, doesn’t inspire confidence. Additionally, Republican control by a small margin means that maintaining consistency will be harder. It only would take convincing a small number of Representatives to change legislative outcomes.
The UK GDP revealed that the economy shrank by only 0.2% in 3rd Quarter, which means that a contraction of more than 0.55% may be needed in the last three months of the year for the BoE’s forecast of a 0.75% contraction during H2 2022 to materialize. Yet, investors dragged their rate-path projections lower. The probability for a 50bps hike at the December gathering renamed near 80%, but the implied terminal rate was lowered to 4.47% from 4.6%.
The jobs report is forecast to show that the unemployment rate held steady at 3.5% in September and that the average weekly earnings excluding bonuses have accelerated. With an inflation rate at 10.1% during that month, real wages likely stayed well into the negative territory and disposable incomes at record lows.
The Australian dollar is in negative territory, after posting huge gains last week. In the European session, AUD/USD was trading at 0.6690, down 0.22%. US Dollar took a nasty spill last week, and the Australian dollar made the most of it, gaining 3.6%. The US dollar was slammed after a soft inflation report, with headline and core inflation slowing in October and beating the forecasts. This lit up risk appetite and sent the Australian dollar to its highest level since September 22nd.
The soft inflation report had such a strong effect on the greenback because it has raised expectations that the Fed will ease up on its rate tightening. After four consecutive hikes of 0.75%, the markets have now priced in a 0.50% increase at the December meeting. That would still represent an oversize hike, but investors have been looking for a reason to rush into stocks and the drop in inflation provided that excuse.
The lower-than-expected US inflation print simply extended with economic data serving as an accelerator. European stocks add a normal 0.6% but US indices open with very solid 0.9-2.5% gains. The US NY Empire manufacturing index surpassed the bar with ease, coming in at 4.5 vs a -6 consensus. But new orders turned negative again and the outlook for six months ahead turned deeper below zero from -1.8 to -6.1. Financial markets definitely also spotted the PPI easing by more than expected.
Headline factory inflation for September was revised lower to 8.4% and slowed to 8% vs 8.3% expected. Core gauges retreated from 7.1% to 6.7% and 5.6% to 5.4%. All of them are still at elevated levels but similar to last Thursday’s CPI, that’s of no importance to markets who just want to see pressure decline, both on prices and on the Fed.
Equity markets in Europe are back in the red yesterday, while the US looks largely unchanged around the open on Wall Street.
Reports of missile strikes in Poland on Tuesday naturally caused a shudder in the markets. The prospect of a sudden and unexpected escalation in the war in Ukraine, particularly involving a NATO state, doesn’t bear thinking about but it’s almost forced to and under the circumstances, the reaction was fairly modest.
It could have been much worse but investors appear to have come to the view that it was a situation that would be quickly de-escalated which is what occurred despite initial reports not looking good.