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Softer UK CPI Weighs on Sterling and Lifts Gilts, while Yen Slumps to New Low for the Year, Ahead of the FOMC

Overview: Softer than expected UK CPI has drawn
attention ahead of the key event of the day, the FOMC meeting. The UK’s CPI has
spurred a dramatic rally…



Overview: Softer than expected UK CPI has drawn attention ahead of the key event of the day, the FOMC meeting. The UK's CPI has spurred a dramatic rally in Gilts and saw sterling initially extend its recent losses, falling to new four-month lows before stabilizing. The swaps market sees less than a 50% chance of a hike by the Bank of England tomorrow. Meanwhile, even though US Treasury Secretary Yellen suggested conditions in which intervention by Japan would be understandable, the market has little fear of intervention today ahead of the FOMC meeting and took the dollar to new highs for the year above JPY148.00. The greenback is mixed with the dollar-bloc currencies firmer. Among the emerging market currencies, central European currencies and the Mexican peso are among the best performers. 

The large bourses in the Asia Pacific region fell today except South Korea's Kospi. It is the third consecutive losing session for the MSCI Asia Pacific Index. Europe's Stoxx 600 is up about 0.5% after falling nearly 1.2% over the past two sessions. US index futures are trading with a slightly firmer bias. European 10-year yields are mostly 1-2 bp lower. The two standouts today are the UK Gilts, where the 10-year yield is off 10 bp (to ~4.24%) and Greek bonds, where the yield has fallen by eight basis points (to ~4.0%). The 10-year US Treasury yield is a little softer near 4.34% and the two-year yield is off a couple of basis points to 5.07%. Gold is consolidating in about a two-dollar range on either side of $1930. November WTI reversed lower yesterday after reaching almost $92.45. Follow-through selling today has seen in slip briefly below $89 before stabilizing.

Asia Pacific

Japan recorded its first monthly trade surplus in two years in June (~JPY39.2 bln) but it was little more than a statistical fluke. It returned to deficit in July (~JPY66.3 bln) and earlier today, Japan reported a JPY930 bln deficit in August. Net exports more than offset the weakness of the domestic economy in Q2 but its contribution looks likely to become a drag this quarter. Exports fell on a year-over-year basis in August (-0.8%). It was the first back-to back decline since late 2020. The decline in imports accelerated. In August, they were nearly 18% lower than a year ago, and in August 2022, they had risen by almost 50% from August 2021, when they were nearly 45% higher over the previous 12 month. This likely reflects higher commodity prices and a weaker yen. Separately, Prime Minister Kishida's recent cabinet shuffle has not generated stronger public support. A poll by Mainichi Shimbun found that the approval rating slipping one percentage point to 25% over the past month. It was the third consecutive decline. The disapproval rating was unchanged at 68%.

Over the weekend, US General Milley, the chair of the Joint Chiefs of Staff said on national television that after a thorough investigation, the intelligence community has concluded with high confidence that the Chinese balloon over US airspace seven months ago was not collecting intelligence. Recall that US Secretary of State Blinken's trip to China was canceled (postponed). The balloon was shot down a on February 4. Milley concluded: I would say it was a spy balloon that we know with a high degree of uncertainty got no intelligence and did not transmit any intelligence back to China.

US Treasury Secretary Yellen indicated that intervention to smooth out volatility could be understandable and Japan's FX boss Kanda said that he was in day-to-day contact with his US counterparts. He warned that excessive moves were undesirable and would not rule out any steps to counter it. Still, ahead of the FOMC meeting outcome, intervention is unlikely, and the dollar has been bid to new highs above JPY148.00. Today is the sixth consecutive session that the dollar has remained above JPY147. One-month implied yen volatility fell to three-month lows yesterday near 8.6%. It is a little firmer today near 8.8%. To boost the chances of successful intervention, as was the case last October, it would help to pick a top to US yields too. US 10-year yield made a new high for the year yesterday (like the dollar) near 4.37%. As was the case before the weekend, the Australian dollar was capped just in front of $0.6475 yesterday. Still, it posted its highest close in two weeks. More formidable resistance is seen in the $0.6500-25. In the bigger picture the Aussie has stopped falling even if it is not making much headway higher. Note that it is higher on the month and has risen in two of the past three weeks. The yen's weakness makes it more difficult for Beijing to manage the yuan's descent. It is not simply because of the mechanism by which the currency is managed and the CFETS basket. For some market segments, the yen, and yuan (offshore) share a common characteristic:  extreme policy divergence, low interest rates, attractive candidate for funding currency (for carry trades or other financial structures). Chinese banks kept their loan prime rates steady after not passing through fully last month's cut in the one-year Medium-Term Lending Facility rate. The PBOC set the dollar's reference rate at CNY7.1733. The average estimate in Bloomberg's survey was for CNY7.2958. The gap between the two appears the largest to date. The dollar has held slightly below CNY7.30, but it reached a seven-day high against the offshore yuan near CNH7.3160.


Construction in the eurozone is not typically a market mover. Yet, amid the string of poor economic news, construction output was firm. Construction rose by 0.8% in July after a 1.0% decline in June. The euro is not only vulnerable to the outcome of today's FOMC meeting but also Friday's preliminary September PMI. The composite has been below the 50 boom/bust level for the past three months and likely remains there in September. 

The UK's August CPI rose by 0.3%, less than half of the median projection in Bloomberg's survey and the year-over-year rate slipped to 6.7% from 6.8%. The core rate fell to 6.2% from 6.9%. The 0.3% increase means that over the past three months, UK CPI has been flat. Meanwhile, producer prices continue to fall on a year-over-year basis. The Bank of England meets tomorrow, and today's data has seen a marked shift in expectations. As of yesterday, the swaps market had discounted an almost 80% chance of a hike. Now, post-CPI, there is less than a 50% of a hike discounted for tomorrow. The market has an almost 90% of a hike between now and the end of the year. Before today's CPI, the market was leaning toward two hikes this year. Some officials have suggested that the pace of QT could be accelerated from the current GBP80 bln a month. With GBP100 bln being the maximum (signaled by the top two BOE officials), GBP90 bln then seems most likely for central-bank think. Ahead of the weekend, the UK reports August retail sales. A bounce back after a 1.2% fall in the headline was reported in July (-1.4% excluding gasoline) is expected. The UK will also see the preliminary September PMI before the weekend. The composite fell below 50 in August (48.6) for the first time since January and likely remained in contracting territory this month.

The euro was turned back from approaching $1.0720 in early North American activity yesterday and was sold back to the session lows (~$1.0675) and closed poorly. The nine-week slide is longer than most traders have seen in their careers, and many are tempted to pick a bottom, maybe like seeing nine reds in a row at a roulette table. The price action, though, is not encouraging. The nine-week losing streak could become ten. Positioning in the futures market does not seem consistent yet with kind of capitulation often seen at the end of a such a persistent trend. The euro has been mostly confined to the quarter-cent range mostly below $1.07, so far today. Sterling bears have been stymied for the past three sessions near $1.2370. The soft CPI figures saw it give way, and sterling fell slightly below $1.2335 before recovering back to $1.2375. There is scope for additional albeit modest gains. Despite intraday penetration, it has not managed to close above $1.2400 either. It has also settled the past four sessions below the 200-day moving average (~$1.2435), the most this year.


What officials do is often more important than what they say, but this is not true for today's FOMC meeting. Even some of the more hawkish members have signaled the willingness to pause again after hiking rates at the last meeting. Ironically, despite past efforts to play down the significance of the summary of economic projections, the dot plot, it is the key today. The UAW strike, which may widen at the end of the week, unless there is more progress, and the threat of a partial government shutdown at the start of next month, are difficult to incorporate forecasts. These "known unknowns" may reduce the confidence that members have in their forecasts. If there is a consensus, it is for a hawkish hold by the Fed today. That hawkish element will be expressed through the updated macroeconomic forecasts. In broad strokes, new forecasts will likely anticipate stronger growth this year (perhaps has high as 2% from 1.0% in June). The median unemployment forecast may be shaved to 4.0% from 4.1%. It was at 3.8% in August. In June, the median forecast by Fed officials was for the headline PCE deflator to be at 3.2% at the end of the year with the core at 3.9%. It is possible that the new forecasts raise the headline rate but shave the core forecast. The hawkish hold will also be expressed by maintaining the possibility of a hike in Q4 while reducing the number of cuts anticipated next year from four to three. Lastly, we note that the market has often reacted to the FOMC statement one way and reversed it as Chair Powell's press conference got under way. 

Canada's August CPI was stronger than expected, and this encouraged the market to move in the direction it was moving boosting the odds of a Bank of Canada rate hike in Q4 and taking the Loonie higher. Headline inflation rose twice the 0.2% increase expected by the median forecast in Bloomberg's survey, and this lifted the year-over-year rate to 4.0% from 3.3%. It is the second consecutive increase in the 12-month rate and is the highest in four months. The underlying core measures (trimmed and median) also rose more than expected. Bank of Canada Governor Macklem has referred to the three-month moving average of the underlying core measures. This metric rose to 4% from 3.75% in July. There will be another CPI report before the central bank meets again on October 25. Gasoline prices rose 4.6% in August and the year-over-year rate turned positive for the first time since January. Shelter prices accelerated to 6% year-over-year from 5.1% in July. Grocery prices fell by 0.4% in August, which translates into a year-over-year rate of 6.9% (8.5% in July). The swaps market is now seeing slightly better than a 50% chance of a hike next month, around twice as much as before the inflation report. The swaps market has around an 85% chance of a hike at the December meeting. A week ago, it was seen as slightly less than a 50% probability. Note that the Canadian auto workers reached a tentative three-year deal with Ford that averts a strike. Details have yet to be disclosed. 

Oil prices are rising, but the Canadian dollar is not really a petro-currency, even though it has appreciated over the past couple of weeks. In fact, the correlation of changes in the exchange rate and WTI over the past 30-sessions is near the lowest since February (~0.18) and the 60-day rolling correlation is around 0.35, around the lowest since April. The 30-day correlation of changes in the exchange rate and the S&P 500 is near 0.45 and the 60-day correlation is a little lower (~0.41). The 30-day correlation between the Dollar Index and the USD-CAD exchange rate is around 0.57 and the 60-day is lower (~0.47). The correlation the changes in the exchange rate and the two-year interest rate differential with the US is near 0.34 for the past 30-sessions and slightly lower for the past 60 sessions (~0.32). 

The combination of a softer US dollar in early North America yesterday and surprisingly firm Canadian CPI saw the greenback tumble to almost CAD1.3380, its lowest level since mid-August before rebounding. It held below CAD1.3450 but rose to CAD1.3465 today before turning back. The US dollar has been pulling back against the Canadian dollar since the September 7 high (~CAD1.3700). In the eight sessions since that peak, the US dollar has risen once. The US dollar approached the (61.8%) retracement of the rally from the mid-July low (~CAD1.3090) that is found near CAD1.3365. A break of that is needed to sustain the momentum. There was no follow-through yesterday after the US dollar posted an outside up day against the peso on Monday. The dollar traded quietly inside Monday's range (~MXN17.03-MXN17.18) and remains at the lower end of the range today. Mexico still has retail sales and the CPI for the first half of September due this week and the central bank meeting next week. The peso may be sidelined a bit too by today's Brazil central bank meeting. It is widely expected to deliver its second 50 bp cut in the Selic rate (to 12.75%). For the past month and a half, the dollar has traded in a range between roughly BRL4.84 and BRL5.00. It tested the lower end of the range this week.


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Biden Joins Truth Social, Immediately Gets Pummelled Into Oblivion

Biden Joins Truth Social, Immediately Gets Pummelled Into Oblivion

Authored by Steve Watson via Summit News,
Leon Neal/Getty Images/Screenshot




Biden Joins Truth Social, Immediately Gets Pummelled Into Oblivion

Authored by Steve Watson via Summit News,

Leon Neal/Getty Images/Screenshot

In what seems like an act of desperation, the Joe Biden campaign joined President Trump’s Truth Social platform, and posted a message asking for “converts”, prompting a torrent of responses essentially telling them where to go.

In a second post, the Biden campaign used a clip of Ron DeSantis claiming Trump added $7.8T to the national debt, in a blatant attempt to sow division among conservatives:

The campaign told Fox News that it is attempting to have “a little fun” on Truth Social, as well as holding “MAGA accountable on their own platform.”

President Trump’s campaign spokesperson, Steven Cheung, said “Crooked Joe Biden and his team are finally acknowledging that Truth Social is hot as a pistol and the only place where real news happens.”

Cheung added, “Unfortunately for Biden, his continuation of spreading misinformation to gaslight the American people in order to distract from his disastrous record won’t work and they’ll be ratio’d to oblivion.”

How long before Biden’s handlers realise this just isn’t the place for them?

Meanwhile, Trump himself commented on a gag order placed on him by a DC judge, noting “I’ll be the only politician in history that runs with a gag order where I’m not allowed to criticize people, can you imagine that? I’m not allowed to criticize people.”

He added that he’s been indicted “more than Alphonse Capone.”

In a separate appearance Trump said that he is willing to go to jail to beat Biden, noting “They think the only way they can catch me is to stop me from speaking, they want to take away my voice.”

“This is weaponry, all being done because Joe Biden is losing the election, losing very, very badly to all of us in the polls. He’s losing badly,” Trump added.

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Tyler Durden Tue, 10/17/2023 - 17:25

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Global Debt At Record Levels And The Free Lunch Is Over

Global Debt At Record Levels And The Free Lunch Is Over

Authored by Michael Maharrey via,

Global debt rose $10 trillion to…



Global Debt At Record Levels And The Free Lunch Is Over

Authored by Michael Maharrey via,

Global debt rose $10 trillion to a record $397 trillion in the first half of 2023, according to the Institute of International Finance (IIF).

The big increase in debt occurred despite tightening credit conditions, and it is an increasingly worrisome problem because the “free lunch” of artificially low interest rates is over.

Over the last decade, global debt has increased by a staggering $100 trillion.

Combined government, household and corporate debt hit 336% of global GDP in the second quarter of this year. The global debt-to-GDP ratio has increased by 2 percentage points this year. Prior to 2023, the global debt-to-GDP ratio had declined seven straight quarters after reaching a record of 360% at the height of the global pandemic government lockdowns.

About 80% of the new global debt was piled up by developed nations, with Japan, the US, Britain and France leading the way. Among emerging markets, the largest economies saw the biggest debt increases, including China, Brazil and India.

“As higher rates and higher debt levels push government interest expenses higher, domestic debt strains are set to increase,” the IIF said in a statement.

Peter Praet served as chief economist at the European Central Bank. He told Reuters that the debt levels are still sustainable, but the outlook is worrying given the fact that spending needs aren’t going to decline.

You can take many, many countries today, and you will see that we are not far away from a public finances crisis.”

Praet seems over-optimistic.

The US government is over $33 trillion in debt. In fact, the Biden administration managed to add half a trillion dollars to the debt in just 20 days. Meanwhile, with rising interest rates, the federal government is now spending as much to make interest payments on the debt as it is for national defense.

And there is no end to the borrowing and spending in sight.

More than a decade of interest rates pushed artificially low by central banks worldwide incentivized a tidal wave of borrowing. This was intentional. The thinking was that borrowing and spending would “stimulate” a global economy dragged down first by the Great Recession and then by government-instituted pandemic policies. Nobody ever stopped to think the easy-money gravy train might run out of track.

But as Fitch Ratings managing director Edward Parker put it, “That free lunch is over and interest payments are now rising faster than debt or revenue.”

The US economy in particular was built on borrowing and spending. Easy money is its lifeblood. It simply can’t run without artificially low interest rates. The global economy is in much the same boat.

That puts the Federal Reserve and other central banks between a rock and a hard place. They need to keep interest rates high to counteract the trillions of dollars they created and injected into the global economy as stimulus causing a rapid increase in price inflation. But these higher rates will ultimately break things in the borrow-and-spend economy.

Tyler Durden Tue, 10/17/2023 - 16:45

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The average new car is more dangerous for the environment than older ones, says study

Research shows that buyers’ terrible habits affect the environmental impact of all cars.



The advertising of new cars has buyers convinced that what they are buying might be more efficient than the car they are currently driving. 

However, as Americans and others in developed economies see buyers chasing the allure, comfort and supposed safety of big SUVs or trucks, that may not be the case.

According to research by climate campaign group Possible, the popularity of larger cars like SUVs in countries like the United Kingdom and the United States means that a step backward was taken on the environmental impact of the average car.

Related: Elon Musk's Tesla at odds with major automakers over dramatic new regulatory proposal

Although improvements have been made to the efficiency of car engines, SUVs tend to be heavier and have larger engines to pull their weight. This offsets any improvements made as bigger cars populate the roads.

“The recent trend towards larger, heavier, more powerful cars such as SUVs means that on average, a car that was bought new in 2013 is likely to have lower CO2 emissions than a new ICE car bought in 2023,” said the climate group.

Between 2011 and 2016, the average car’s CO2 emissions dropped to a low of 120 grams per kilometer, but Possible reports that that figure has shot up to around 130 grams per kilometer in 2023. The climate campaign group states in their report that SUVs have an average of 20% higher CO2 emissions than conventional cars.

A Range Rover SUV moves along the production line at Tata Motors Ltd.'s Jaguar Land Rover vehicle manufacturing plant in Solihull, UK, on Jan. 20. (Photographer: Chris Ratcliffe/Bloomberg via Getty Images)

Bloomberg/Getty Images

The report also claimed that drivers with higher incomes would be more likely to own a gas-guzzling SUV. According to Possible’s data, UK households in the top 20% income bracket are 81% more likely to own a gas-guzzler than car owners in the other 80%. In addition, they found that the same top 20% drives three times as many miles per year as those in the other 80%.

A reflection across the pond

RAM vehicles seen outside a RAM dealership on Sept. 14 in Edmonton, Alberta, Canada. (Photo by Artur Widak/NurPhoto via Getty Images)

NurPhoto/Getty Images

Though the research mainly focused on the UK, motorists stateside are not far off from the data represented. A 2022 report by Forbes found that new trucks are outselling new cars in the United States at a rate of 3-to-1.

Additionally, University of Michigan professor and energy researcher John DeCicco wrote of a loophole in a September 2022 report in The Conversation.

“The targets an automaker has to meet get weaker if it makes its vehicles larger,” said DeCicco. “Vehicles classified as light trucks – including four-wheel-drive and large SUVs, as well as vans and pickups – are held to weaker standards than those classified as cars.”

As a result, he says is that it allows for automakers to position what was once classified as “work trucks” as “personal luxury vehicles,” as automakers load them up with appointments and technology features closer to those of luxury cars.

Possible’s emphasis on correlating the highest earners with driving the highest polluters allowed it to use its report to promote the increase of parking rates on higher polluting cars in the UK. The group urges local governments around the country to adopt this new progressive policy to help meet their climate goals. 

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