Overview: The risk that the war in Israel spreads
remains palatable, and several observers have warned of the greatest risks of a
world war in a generation. Still, the capital markets remain relatively calm. The
US dollar is softer after closing last week firmly. The only G10 currency
unable to post corrective upticks today is the Swiss franc. Among emerging
market currencies, the Polish zloty has been boosted by the pro-EU election
results, and the Mexican peso lead the complex. Gold, which rallied 3.4% at the
end of last week, is seeing its gains pared by nearly 0.9% today and the yellow
metal is straddling the $1916 area. December WTI rallied 5.5% before the
weekend to settle at $86.35. It saw a little follow-through buying today before
slipping back $85.65 today. It is near $86.20 in the European morning.
Equities are trading heavily. Weak
Japanese industrial production data took local indices down by 1.5%-2.0%. China's
CSI 300 was off nearly 1%, and nearly all the bourses in the region fell. Last
week, the MSCI Asia Pacific Index snapped a three-week slide of more than 4%
and closed 1.5% higher. Europe's Stoxx 600 is marginally lower after losing
nearly 1% before the weekend. It too snapped a three-week down draft last week
(~-3.7%) and closed up almost 1%. US index futures are firm. The S&P 500 and
NASDAQ closed lower last week, while the Dow Industrials eked out a small gain.
Bond markets are under pressure. Benchmark 10-year yields in Europe are up 3-6
bp and the 10-year US Treasury yield is up seven basis points to 4.68%. The
yield had fallen 19 bp net-net last week.
Asia Pacific
There are three developments
in China to note. First,
the PBOC kept the benchmark one-year Medium-Term Lending Facility rate
unchanged at 2.50%. Banks will set the loan prime rates at the end of the week
and have not fully passed through the last hike in the MLF. The PBOC stepped up
its liquidity provision at the facility to CNY789 bln from CNY591 bln last
month. Second, China's sovereign wealth fund bought bank shares last week.
Third, mainland brokers were discouraged from opening new offshore accounts for
domestic investors. Third, a key standing committee of the National People's
Congress will meet October 2-24. Reportedly under consideration are a new
equity stabilization fund (CNY1 trillion, or ~$137 bln) that has been discussed
for some time, and a proposal to boost local government borrowing ahead of the
new quotas typically issued in January-February.
Japan showed weaker August
industrial output than preliminary estimate. Rather than flat month-over-month, Japanese industrial
production fell by 0.7%, which dragged the year-over-year rate down to -4.4%
(not -3.8%) after a -2.3% pace in July. The extraordinary Diet session
begins on October 20 and two byelections will be held on October 22. The chief
purpose is to agree to a new supplemental budget. There are strains in the
governing coalition and the recent cabinet reshuffle did little to bolster
public opinion in the government. The chances of a snap-election this year
appear to be fading. Meanwhile, before the weekend, Finance Minister Suzuki
told reporters what told to the G20, namely that "excessive moves are
undesirable" and that there will be times that an "appropriate
response" is required in the foreign exchange market. Still one-week
implied volatility finished last week near 6.6%, the lowest since February
2022. Three-month implied volatility reached nearly 8.8% at the end of last
week, the lowest since the year's low was set slightly lower in mid-June. In
terms of a one-way market, which may also be objectionable, note that coming
into today the yen has weakened in six of the past ten trading sessions.
As widely expected, the
center-right won the New Zealand election and the National Party's leader Luxon
will be the new prime minister, ending six years of Labour Party governance. The National Party garners 39% of
the vote, meaning it will have to negotiate with the libertarian ACT (9% of the
vote) and the New Zealand First (6.5%). The National Party and ACT may have
enough to form a parliamentary majority, but it is vulnerable to special and
overseas votes that will not be published until November 3. Labour's share of
the vote was nearly halved to 27% from 50% in the last election three years
ago. Its alliance partner, the Green Party, took key districts from Labour as
it received almost 11% of the vote from a little less than 8% in 2020.
Separately, Australian's rejected the government-backed bid to boost the
representation of the Indigenous Australians, including the creation of an
advisory committee to parliament. The be approved the referendum needed a
"double majority"--a majority of states and voters. It secured
neither.
The dollar was confined to a
narrow range of less than 40 pips against the yen ahead of the weekend. It settled near the session low of about
JPY149.45. It slipped to almost JPY149.30 today. Last week's low was slightly
below JPY148.20. There are options for around $1.10 bln at JPY148.00 that
expire tomorrow. There no longer appears to be much near-term optionality
around JPY150. The Australian dollar posted its lowest settlement of
the year at the end of last week (~$0.6295). It has recovered slightly
through $0.6330 today to approach the pre-weekend higher $0.6335. Last week's
high was closer to $0.6445. The New Zealand dollar is also trading firmer but
is also holding below the high from the end of last week (~$0.5935). For the
fourth consecutive session, the greenback has risen above the previous session
high against the Chinese yuan. Today's high near CNY7.3130 is the best
since late September, before the early October extended holiday. The PBOC set
the dollar's reference rate at CNY7.1798, above the previous day's for the
first time in weeks. The average in Bloomberg's survey was for CNY7.3095.
Europe
In Poland, the Law and
Justice Party (PiS) received the most votes but was shy of a majority and this
gives Tusk's Civic Coalition an opportunity to build a wider coalition. This will likely lead to the reforms that
will free up billions of euros in Recovery Funds for Poland. The Polish zloty
was trending higher against the euro over the last couple of weeks. The euro
has fallen by about 2.3% since September 28 and is off another 1% in the
European morning, have fallen by nearly 2% in the immediate reaction to the
election news.
The eurozone's trade balance
has not returned to levels seen prior to Russia's invasion of Ukraine or
pre-Covid levels, but it is healing. The seasonally adjusted August trade surplus was 11.9 bln
euros. That brings the average in the first eight months to a surplus 1.365 bln
euros. The average in the Jan-Aug 2022 period was a deficit of 30 bln euros. In
the first eight months of 2019, the eurozone's average monthly seasonally
adjusted trade surplus was 16.23 bln euros.
The US and EU meet at the
end of the week. Three
topics seem to dominate: Russia/Ukraine, Middle East, and China. For discussion
are the price caps on Russian oil and the use of the profits from Russia's
frozen assets to be turned over to Ukraine, timing, and mechanisms still to be
worked out. This is a compromise solution between those who want to use all the
confiscated assets to rebuild Ukraine and those who are wary of setting a
dangerous precedent. US Treasury Secretary Yellen appears to have endorsed
"repurposing" the profits and expressed concern that the oil price
cap is not effective. Second, there is a real danger that the
war in Israel expands. The US has sent two carrier groups into the region to
deter Iran, Syria, and Hezbollah. At the same time, the US has warned that
Azerbaijan and Armenian hostilities are poised to escalate. Third, the US and
EU may try to coordinate positions on China, and in particular the excess
capacity (and carbon emissions) in steel and aluminum. This may help resolve
the dispute since 2018 between the US and EU over tariffs. There may also be an
attempt to strike a deal on rare earths ("critical minerals") to
allow EU to qualify for some assistance under the so-called Inflation Reduction
Act.
After posting an outside
down day after the US CPI, the euro headed further south ahead of the weekend
to slip a little through $1.05, though managed to close back above it. It has risen to almost $1.0545 today. Resistance
is seen in the $1.0560-70 area. A break of $1.0490 signals a retest of the
year's low set earlier this month slightly below $1.0450. Sterling was sold
to new lows for the week last Friday a little below $1.2125. It enjoys
a firmer bias today and reached almost $1.2180. Nearby resistance is seen in
the $1.2200-15 area. There may be some support near $1.2100 but October 3 low
was closer to $1.2035.
America
On top of the firmer than
expected US PPI and CPI last week, the University of Michigan reported a jump
in inflation expectations at the end of last week. Its preliminary results for October showed
the one-year inflation expectation jumped to 3.8%, a five-month high, from 3.2%
in September. The 5–10-year inflation expectation rose to 3.0% from 2.8% in
September. It stuck at 3% in the previous three months. Sentiment itself fell
to 63.0 from 68.1. It is the third consecutive decline and the largest fall
since June 2022. Still, expectations for the last two FOMC meetings of the year
are at a low ebb: less than 8% for November, down from around 30% after the
employment report on October 6. The odds of hike before the end of the year are
near 33%. It was slightly below 50% on October 13.
On today's economic agenda,
the US sees the NY State manufacturing survey, where the diffusion index is
expected to retreat into negative territory, and the September budget
statement. If the
September deficit is about $150 bln, that would bring the 12-month shortfall to
around $1.68 trillion. In the 12-months through September 2022, the deficit was
closer to $1.38 trillion. It puts the shortfall near 5.9% of GDP. It was 4.7%
in 2019. US continues to sell bills and will sell $143 bln today of 3- and
6-month bills followed by $75 mln cash management bill tomorrow and 4- and
8-week bills on Thursday. Coupon offerings are limited this week to $13 bln of
the 20-year bond that is re-opened, and $22 bln in five-year TIPS. However, it
is another busy week for Fed speakers. No fewer than 13 different officials
speak with Chair Powell speech at the Economic Club of New York on Thursday
being the highlight.
Canada has a busy data week
as well. Today's
wholesale and manufacturing sales are more for economists that the market. But
the market will likely take notice of the Bank of Canada's survey of the
business outlook. The quarterly reading has declined for the past six
consecutive quarters and fell below zero in Q1 23. Still, tomorrow's CPI report
is more important for policy expectations. The market sees a better chance that
the Bank of Canada hikes when it meets on October 25 than the Fed hikes on
November 1. The swaps market is discounting about a 38% chance of a hike this
month and slightly more than a 60% chance of a move before the end of the year.
After jumping up to
CAD1.3700 after the US CPI report, the greenback stalled and pulled back to
almost CAD1.3635 at the end of last week before settling at CAD1.3660. The US dollar did trade slightly below the
pre-weekend low and is trading quietly in the European morning below CAD1.3650.
Initial support may be near CAD1.3620. There are options for about $695
mln at CAD1.37 that expire today and $640 mln at CAD1.36 that expire on
Wednesday. The greenback posted an outside up day against the Mexican
peso last Thursday and follow-through buying lifted it to almost MXN18.11
before the weekend, a three-day high. The US dollar is better offered
today, falling to about MXN17.93. A break of MXN17.75-77 may be needed to
confirm a nearby top is in place.
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