Markets Remain on Edge
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_A7DyJQ2OMx7FAx92GVd_LaelMASuc5xKw-ZzIM_NOiFiOPXV3DgrVVhhixVJoe8QmSCngVQBaQn1mlkwj6rrDNoKl0MakeGVUWICrb6MshYoA5uRmrkwF8Wwuy6rkXU40BeL260Zpa1v_TtJ-xeEJjlWeAHEtVLRDtbpB1PBFeKo27jXbNstR0S54mBN/s787/blade.jpg"><img alt="" border="0" data-original-height="675" data-original-width="787" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_A7DyJQ2OMx7FAx92GVd_LaelMASuc5xKw-ZzIM_NOiFiOPXV3DgrVVhhixVJoe8QmSCngVQBaQn1mlkwj6rrDNoKl0MakeGVUWICrb6MshYoA5uRmrkwF8Wwuy6rkXU40BeL260Zpa1v_TtJ-xeEJjlWeAHEtVLRDtbpB1PBFeKo27jXbNstR0S54mBN/s400/blade.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>The markets remain on edge. The press
reports US President Biden is planning an imminent trip to Israel while Iran
warns of "multiple fronts" against Israel if the attacks on Gaza
continued. The dollar, which was offered yesterday, is better bid today. Still,
the capital markets are relatively quiet. Even the Swiss franc, which was the
strongest G10 currency last week (~0.9%) is slightly heavier today. Among
emerging market currencies, the Polish zloty continues to be underpinned by the
weekend election results. The Mexican peso's 0.45% decline is the most among
the emerging market currencies, giving back almost half of yesterday's gains. Gold
is firm but within yesterday's ranges and holding below $1933 that was
approached at the end of last week. <o:p></o:p></span></p><p><span>Asia Pacific and European equities were
lifted by the more than 1% rally of the S&P 500 and NASDAQ yesterday. All
the large bourses in Asia Pacific but Taiwan rallied earlier today, led by the
Nikkei's 1.2% gain. Europe's Stoxx 600 is slightly firmer, constrained perhaps
by the modest losses being recorded by the US index futures. The rise in yields
seen yesterday is continuing today. The 10-year JGB yield is up nearly three
basis points to edged closer to 0.80%. European benchmark yields are mostly 1-2
bp higher, but Italy's 10-year yield is up nearly four basis points amid
anxiety over its budget proposals. The 10-year Gilt yield is slightly softer
following the weaker-than-expected employment report. The 10-year US
Treasury yield is up four basis points to almost 4.75%. December WTI slipped briefly
below yesterday's low near $85 but has since recovered back to the opening area
near $85.70. <o:p></o:p></span></p><p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p><p><b><span>After reporting a 0.7% contraction in
August industrial output yesterday, Japan said that its tertiary sector
contracted by 0.3% in August. </span></b><span>It has risen by a revised 1.1% (0.9% initially in July) and the
median forecast in Bloomberg's survey looked for a 0.3% increase Japan’s
economy, the third largest in the world is struggling, despite easy monetary
and fiscal policies. Recall that it would have contracted in Q3 if it were not
for tourism. Consumer spending and private investment contracted. In Q3, both
appears to have stabilized, but weakness persist as seen in the industrial
output figures. Exports also look weaker and imports, stronger. The median
forecast in Bloomberg's monthly survey released last week sees a 0.3%
contraction in Q3 GDP at an annualized rate (vs. -0.4% previously). Growth is
expected to return in Q4 to 0.6% (0.5% previously). The Kishida government is
cobbling together a supplemental budget and more details are likely coming from
the extraordinary Diet session that begins at the end of the week.<o:p></o:p></span></p><p><b><span>The first thing tomorrow, China will
report Q3 GDP and details from September. </span></b><span>The median forecast in Bloomberg's survey
sees the world's second-largest economy expanding by 0.9% quarter-over-quarter
(0.8% in Q2). That would put the year-to-date, year-over-year pace at 5.0%.
Still, the economy is struggling to maintain forward momentum and Beijing has
promised more support. China's data is (purposefully?) challenging to read as
it is not reported like other countries. It appears that the economic performance
was little changed in September from August on a year-over-year basis. We note
that the yuan's rolling 60-correlation with changes in the Japanese yen has
eased over the past month to about 0.30 from 0.45 in the middle of last month.
The rolling 30-day correlation is around 0.50 down from 0.70 in early
September. According to Bard, the yuan and yen have moved in the same direction
against the dollar 58 sessions in the past 100, down from 63 sessions in the
previous 100. <o:p></o:p></span></p><p><b><span>Despite the 14 bp jump in US 10-year
yields between yesterday and today, the dollar is little changed against the
yen, holding below last week's highs slightly below JPY149.85. </span></b><span>It finished slightly lower yesterday and
is slightly higher today. The relationship between the exchange rate and US
yields has become more relaxed recently, and the safe-haven role (inverse
correlation with the S&P 500) is also not statistically significant now.
Looking at several other potential candidates, the (30-day) correlation with
the Dollar Index, almost 0.50, is the strongest, suggest a broad dollar move is
underway. <b>The Australian dollar recovered smartly from the sell-off in
the second half of last week. </b>The Aussie peaked last Wednesday near
$0.6445 and fell to almost $0.6285 ahead of the weekend. It recovered to meet
the (38.2%) retracement (~$0.6345) yesterday and is the only G10 currency
posting small gains against the US dollar today. It reached slightly through
$0.6365 today in early Asia Pacific turnover. The (61.8%) retracement and the
20-day moving average are found around $0.6380-85. <b>The greenback held
yesterday's high against the Chinese yuan near CNY7.3155. </b>Although it did
not make a higher high today for the first time in five sessions, it did record
a higher lower for the fifth consecutive session. The PBOC set the dollar's
reference rate at CNY7.1796 (CNY7.1798 yesterday), well below the average in
Bloomberg's survey of CNY7.3028 (CNY7.3095 yesterday). Reports indicate that
last week, the PBOC ordered state-owned banks to rollover existing local
government debt, lengthen maturities and lower rates, though not below
government bond yields. <o:p></o:p></span></p><p><b><span>Europe</span></b><span><o:p></o:p></span></p><p><b><span>Sentiment in Germany remains
fragile. </span></b><span>The economy
contracted in Q4 22 and Q1 23. It was stagnant in Q2 23 and appears to have
contracted in Q3 and likely contracts this quarter as well. The ZEW survey
showed that the current assessment continued to deteriorate. It fell to -79.9
from -79.4. It is the weakest since June 2020. It has not risen since April.
The expectations component bottomed in September 2022 near -62 and reached a
high in February slightly above 28. It has been negative since May and ticked
up to a still negative -1.1 from -11.4 in September. While China is providing
modest stimulus and Japan is preparing a supplemental budget and has maintained
a negative overnight target rate, it is more difficult to see where stimulus
comes from for Germany.<o:p></o:p></span></p><p><b><span>The UK jobs data were not inspiring. </span></b><span>After falling for the past two months
(~-4.5k), payrolls defied expectations for a small increase and instead fell by
11k. Average weekly earnings remain elevated at 8.1% over three-months through
August compared with a year ago, down from 8.5% previously. Excluding bonuses,
the average earnings were unchanged at 7.8%. Public sector pay was boosted
(12.5%) by an agreement with health care workers and civil servants, which
included a one-off payment. Private sector pay rose 7.1%, down from 7.7% in the
previous three months. Of note, adjusted for CPI, earnings rose by 0.7% in the
three months through August, up from 0.1% the three months through July.
Vacancies fell by nearly 990k in the three months to September. Tomorrow, the
UK reports September CPI. A 0.5% increase, which the median forecast in
Bloomberg's survey anticipates would translate to a 1.6% annualized pace in Q3,
down from an 8% pace in Q2. The Bank of England meets on November 2, the day
after the FOMC meeting concludes. The swaps market has a little less than a 25%
chance of a hike discounted, down from closer to 30% chance yesterday. and a
little more than a 40% chance of an increase before the end of the year, down
from about 50% yesterday. <o:p></o:p></span></p><p><b><span>The euro fell by nearly 1.5 cents from
last Thursday's high (~$1.0640) to the pre-weekend low ($1.0495). </span></b><span>It rose above $1.0550 to meet the (38.2%) retracement
objective. The euro made new highs late in the North American session of almost
$1.0565, to approach the next retracement (50%) and the 20-day moving average
seen around $1.0570. It is consolidating today in a narrow range in about a
third of a cent above $1.0530. Note that there are nearly 900 mln euros in
options at $1.05 that expire today and another set for 1.7 bln euros that
expire there tomorrow. <b>Sterling surpassed its (38.2%) retracement of
its losses from the second half of last week that came in a little above
$1.2220 yesterday. </b>It also nicked the 20-day moving average that was
closer to $1.2215. Sterling has held below $1.2220 today and was sold to
$1.2150 before stabilizing. The intraday momentum indicators suggest a return
to $1.2180-$1.2200 in the North American morning is favored. <o:p></o:p></span></p><p><b><span>America</span></b><span><o:p></o:p></span></p><p><b><span>Last week, the US high-frequency reports
were mostly about prices–PPI, CPI, and the University of Michigan's consumer
expectations. </span></b><span>Attention
shifts back to the real sector today with September retail sales, industrial
production, and business inventories. After rising by 0.6% in August, the
increase in retail sales is likely to be halved and even this is flattered by
auto sales and gasoline, without which a 0.1% gain in expected. The average monthly
gain in the first eight months of the year was 0.4% and, in the Jan-Aug 2022,
retail sales rose by an average of 0.9% a month. Excluding autos, gasoline,
building materials, and food services, retail sales is expected to be flat
after a 0.1% increase in August. That would make it the weakest since the 0.8%
decline in March. Remember, these are nominal numbers. Real consumption rose by
0.1% in August, matching the least since March. A pullback in the US consumer
will likely see upward pressure on inventories initially. August business
inventories are seen rising by 0.3%, which would not only be the most this
year, but the rise would offset the small net decline through July. While this
may aid Q3 growth, if the inventory growth is undesirable, as we suspect, it
will be a drag later. Industrial output and manufacturing production is
expected to have been flat in September, and if there is a surprise, it is more
likely to be on the downside. <o:p></o:p></span></p><p><b><span>Late in the session the August TIC data
will be reported. </span></b><span>Foreign
investors have bought nearly a net $500 bln of US stocks and bonds through
July. This is down from $876 bln in the first seven months of 2022. However,
recall that in the first Jan-July period in 2019, foreigners were net sellers
of a small amount ($3.5 bln) of US paper assets. That said, it does seem as if
the demand for US Treasuries has shifted. Foreign governments and the Federal
Reserve are buying fewer US government bonds. Hedge funds, asset managers
(pension funds and mutual funds), and insurers appear to be more significant
buyers of US Treasuries. Central banks use of the Federal Reserve’s custody
facilities boosted their (Treasury and Agency holdings by about $5.6 bln in
August. The custody holdings increased from $3.32 trillion at the end of last
year to $3.44 trillion at the end of August. <o:p></o:p></span></p><p><b><span>Canada's September CPI will help shape
expectations for next week's Bank of Canada meeting. </span></b><span>The risk of a hike, as reflected in the
swaps market has risen to about 48% from around 25% a week ago. In fact, the four-day
increase is the longest rising streak since May. Given the base effect a flat
month-over-month CPI reading will leave the year-over-year rate unchanged at
4.0%. The low point, so far, was recorded in June at 2.8%. The underlying core
measures may tick down slightly after edging higher in August. The market will
be sensitive to any disappointment. Although the Bank of Canada's Q3 survey,
reported yesterday, saw weaker sentiment, inflation expectations are slower to
adjust. Many businesses think that persistently high inflation will curb their
sales and investment plans over the next 12 months. Consumers also continue to
see elevated prices pressures that undermine plans for durable goods purchases.
August retail sales is due at the end of the week and a small decline in the
headline and ex-auto measure is expected. Lastly, the StatsCan reports Canada's
August portfolio flows today. Foreign investors were net sellers of about C$9
bln of Canadian securities in Q1 but returned to scoop up C$36.5 bln in Q2.
Foreign investors bought C$11.6 bln of Canada's bonds and stocks in July.<o:p></o:p></span></p><p>
</p><p><b><span>The US dollar peaked last Thursday near
CAD1.37 and fell to almost CAD1.3605 yesterday. </span></b><span>It has come back firmer today to probe the
CAD1.3645 area. A move above the CAD1.3665 area could signal test of last
week's high. It needs to break below last week's low (~CAD1.3560-70) to
extend the correction from the CAD1.3785 high set earlier this month. <b>The
Mexican peso feel by about 1.4% in the last two sessions last week and rallied
back about 1.1% yesterday. </b>The US dollar met the (61.8%) retracement
of the two-day rally, falling to a low late in the session near MXN17.8725.
Itis firmer today but holding below MXN18.00. Soft US economic data could see
the greenback fall back below the 200-day moving average around MXN17.7650. The
US dollar also approached last week low against the Brazilian real set last
Thursday near BRL5.0290. The 20-day moving average is around BRL5.03 and the
200-day moving average is about BRL5.0150. A break of BRL4.98 would confirm a
topping pattern and project back to the mid-September lows around BRL4.84.<o:p></o:p></span></p><p>
</p><p> <o:p></o:p></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span face=""Open Sans", sans-serif">Disclaimer</span></a></p><p><br /></p><p><br /></p>
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