Weekly Market Recap (23-27 October)

<p>Monday</p><p>Monday was an empty day on the data front with just a
couple of notable events:</p><ul><li>We
haven’t seen a <a href="https://www.forexlive.com/news/middle-east-update-no-ground-moves-into-gaza-but-air-strikes-continue-syria-hits-also-20231022/">ground offence in Gaza</a> over the weekend, although the airstrikes continued.
Nonetheless, the risk sentiment improved as the ground operation is seen as
the biggest risk by the markets. Later in the day, we have also got a <a href="https://www.forexlive.com/news/hamas-says-it-is-releasing-two-israeli-hostages-20231023/">report that Hamas was releasing two hostages</a> in response to a Qatari-Egyptian mediation.</li><li>Treasury
yields fell across the board following a tweet from <a href="https://www.forexlive.com/news/bill-ackman-says-he-covered-his-bond-short-20231023/">Bill Ackman</a> where he said that he covered his bond short position
due to “the economy slowing faster than the recent data suggests”. Later on, <a href="https://www.forexlive.com/news/bill-gross-says-a-us-recession-is-coming-in-q4-higher-for-longer-is-yesterdays-mantra-20231023/">Bill Gross</a>, former PIMCO fund manager, said that “higher for
longer is yesterday’s mantra” as he sees a US recession in Q4. </li></ul><p>Tuesday</p><p>Tuesday was the PMIs Day with most of them
disappointing, except the US ones:</p><ul><li><a href="https://www.forexlive.com/news/australia-preliminary-pmi-manufacturing-480-prior-487-services-476-prior-518-20231023/">Australia</a> Manufacturing PMI 48.0 vs. 48.7 prior.</li><li>Australia
Services PMI 47.6 vs. 51.8 prior.</li><li><a href="https://www.forexlive.com/news/japan-jibun-preliminary-manufacturing-pmi-for-october-485-prior-485-20231024/">Japan</a> Manufacturing PMI 48.5 vs. 48.5 prior.</li><li>Japan
Services PMI 51.1 vs. 53.8 prior.</li><li><a href="https://www.forexlive.com/news/eurozone-october-flash-services-pmi-478-vs-487-expected-20231024/">Eurozone</a> Manufacturing PMI 43.0 vs. 43.7 expected and 43.4 prior.</li><li>Eurozone
Services PMI 47.8 vs. 48.7 expected and 48.7 prior.</li><li><a href="https://www.forexlive.com/news/uk-october-flash-services-pmi-492-vs-493-expected-20231024/">UK</a>
Manufacturing PMI 45.2 vs. 44.7 expected and 44.3 prior.</li><li>UK
Services PMI 49.2 vs. 49.3 expected and 49.3 prior.</li><li><a href="https://www.forexlive.com/news/us-september-sp-global-flash-services-pmi-509-vs-498-expected-20231024/">US</a> Manufacturing PMI 50.0 vs. 49.5 expected and 49.8 prior.</li><li>US
Services PMI 50.9 vs. 49.8 expected and 50.1 prior.</li></ul><p>The rest of the UK’s labour market report beat
expectations although it doesn’t change anything for the BoE at this point in
time:</p><ul><li>Employment change
-82K vs. -198K expected and -207K prior.</li><li>Unemployment rate
4.2% vs. 4.3% expected and 4.3% prior.</li></ul><p>RBA’s Governor Bullock just reaffirmed her focus on
bringing inflation back to target “within a reasonable timeframe”:</p><ul><li>Focused on brining
inflation to target within reasonable timeframe.</li><li>There are risks
inflation could return to target more slowly than forecast.</li><li>Will not hesitate to
raise rates if there is a material upward revision to inflation outlook.</li><li>Australian dollar is
relatively stable in trade-weighted terms, not a policy concern.</li></ul><p>ECB’s Makhlouf (dove – non voter) is watching the
developments in the Middle East closely as an expansion of the conflict could
cause another wave of energy inflation:</p><ul><li>Far too early to
tell consequences of Middle East situation.</li><li>We are watching the
developments very closely.</li><li>They are bound to
have economic implications for us to some extent.</li><li>Don't want to jump
to conclusions on extent of impact on economies, monetary policy.</li></ul><p>ECB’s President Lagarde (neutral – voter) is
acknowledging the positive developments on the inflation front but warns about
stagnation in the next few quarters:</p><ul><li>Inflation fight is
going well.</li><li>Eurozone economy to
stagnate in the next few quarters.</li><li>Risks to inflation
have become more balanced.</li><li>Fiscal impasse is
starting to turn into a headache.</li></ul><p>China has <a href="https://www.forexlive.com/news/icymi-china-will-issue-an-additional-1-trillion-yuan-137-bn-in-treasury-bonds-in-q4-20231024/">approved $139bn in new bonds</a> (1 trillion yuan) to bolster the economic recovery as
the stimulus widens the deficit to 3.8% from 3.0% this year. This has led to a
rally in Chinese risk assets, although the gains were completely erased the day
after. </p><p>Wednesday:</p><p>The Australian Q3 CPI data beat expectations across
the board leading the market to price in a higher chance of a 25 bps rate hike
from the RBA in November:</p><ul><li>CPI Y/Y 5.4% vs. 5.3%
expected and 6.0% prior.</li><li>CPI Monthly Y/Y 5.6%
vs. 5.4% expected and 5.2% prior.</li><li>CPI Q/Q 1.2% vs.
1.1% expected and 0.8% prior.</li><li>CPI Trimmed Mean Y/Y
5.2% vs. 5.0% expected and 5.9% prior.</li><li>CPI Trimmed Mean Q/Q
1.2% vs. 1.1% expected and 1.0% prior (revised from 0.9%).</li><li>CPI Weighted Mean
Y/Y 5.2% vs. 5.0% expected and 5.4% prior (revised from 5.5%).</li><li>CPI Weighted Mean
Q/Q 1.3% vs. 1.0% expected and 1.0% prior.</li></ul><p>The German IFO Business Climate Index beat
expectations:</p><ul><li>IFO Index 86.9 vs.
85.9 expected and 85.8 prior (revised from 85.7).</li><li>Current conditions
89.2 vs. 88.5 expected and 88.7 prior.</li><li>Expectations 84.7
vs. 83.3 expected and 83.1 prior (revised from 82.9).</li></ul><p>The BoC left interest
rates unchanged at 5.00% as expected:</p><ul><li>BoC sees "clearer signs that monetary policy is moderating spending
and relieving price pressures".</li><li>"There is growing evidence that past interest rate increases are
dampening economic activity and relieving price pressures".</li><li>BoC repeated that it " is prepared to increase the policy interest
rate further if needed".</li><li>Sees inflation returning to 2% at the end of 2025 vs. "mid-2025"
previously.</li><li>The global economy is slowing, and growth is forecast to moderate further
as past increases in policy rates and the recent surge in global bond yields
weigh on demand.</li><li>Weaker demand and higher borrowing costs are weighing on business
investment.</li><li>The surge in Canada’s population is easing labour market pressures in some
sectors while adding to housing demand and consumption.</li><li>The labour market remains on the tight side and wage pressures persist.</li><li>A range of indicators suggest that supply and demand in the economy are now
approaching balance.</li><li>The BoC projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6%
in 2025, little changed from previously.</li><li>Growth in the euro area has slowed further.</li></ul><p>New forecasts:</p><ul><li>Cuts 2023 growth
forecast to 1.2% vs. 1.8% prior.</li><li>2024 to 0.9% vs. 1.2% prior.</li><li>2025 to 2.5% vs. 2.4% prior.</li><li>Raises 2023
inflation forecast to 3.9% vs. 3.7% prior.</li><li>2024 inflation to 3.0% vs. 2.5% prior.</li><li>2025 inflation to 2.2% vs. 2.1% prior.</li></ul><p>Moving on to the Press
Conference, BoC Governor Macklem and BoC’s Rogers gave their remarks on the
policy decision:</p><ul><li>Inflation is on a
higher path than we expected.</li><li>Demand pressures
have eased more quickly than we forecast in July.</li><li>Overall inflation
risks have increased since July.</li><li>We held policy rate
steady because we want to allow monetary policy time to cool economy.</li><li>Worried higher
energy prices and persistence in underly inflation are slowing progress.</li><li>We've made a lot of
progress but we're not there yet.</li><li>We now expect oil
prices to remain higher than we assumed in July.</li><li>The exchange rate is
part of how monetary policy works.</li><li>Normally large rate
hikes boost the currency but because the US is also hiking, the currency
has been relatively stable.</li><li>We don't target the
exchange rate, but we take it into account.</li><li>We are seeing clear
evidence that higher rates are working.</li><li>We left the door
open to higher interest rates, if needed.</li><li>We need to see clear
downward momentum in core inflation.</li><li>There could certainly
be two or three quarters of negative growth.</li><li>A path to a soft
landing in Canada is narrower vs USA.</li><li>Highlights the
difference between US and Canadian mortgage markets.</li><li>BoC’s Rogers:
Relative to interest rates, we're not seeing the drop in housing prices
we'd expect.</li><li>BoC’s Rogers: Canada
continues to suffer from a lack of housing supply.</li><li>BoC’s Rogers: We're
paying very close attention to the mortgage-renewal cycle.</li><li>BoC’s Rogers: Will
look more at housing in November Financial System Review.</li><li>Government spending
doesn't look like it's been adding undue inflation pressure in the past
year.</li><li>It's easier to get
inflation down if governments and central banks are moving in the same
direction.</li><li>Now is not the time
to discuss reductions in the overnight rate.</li><li>Says he wouldn't use
the term 'stagflation'.</li><li>The risks that oil
could go a lot higher have increased.</li></ul><p>The following day we got
comments from Macklem on CBC Radio where he said that the economy was not
overheated anymore and if inflation were to cool as projected, the BoC wouldn’t
have to raise rate further.</p><p>The Israeli PM Netanyahu
delivered a speech late in the day that triggered risk aversion across the
markets as he said that they were “preparing for a ground invasion”. This was
preceded by a <a href="https://www.forexlive.com/news/israel-agrees-to-delay-invasion-of-gaza-report-20231025/">WSJ report</a> where it was said that
the US requested to delay the invasion so it could get more missile defences in
place:</p><ul><li>Doing everything
possible to bring hostages home.</li><li>We are preparing for
a ground invasion.</li><li>I won’t give the
details.</li><li>Timing of the
invasion will be reached by consensus.</li><li>Civilians in Gaza
should move to the South.</li><li>We encourage Israel
citizens to carry arms.</li><li>I will have to
answer for what happened on October 7.</li></ul><p>Thursday</p><p>RBA Governor Bullock
surprisingly downplayed the higher-than-expected CPI report with the markets
trimming the rate hike odds as a consequence:</p><ul><li>The CPI was a little
higher than we expected.</li><li>But CPI was about
where we thought it would come.</li><li>Goods prices coming
down, but services inflation remains persistent.</li><li>Services inflation
is higher than what we are comfortable with.</li><li>Will have to build
this into our forecasts.</li><li>The longer inflation
remains outside target band the more likely inflation expectations change.</li><li>RBA has always had a
low tolerance for inflation.</li><li>RBA aims to slow the
economy without tipping it into recession.</li><li>She says the Bank is
still thinking about if yesterday's inflation data showed a
"material" change to policy outlook.</li><li>Would not like to
say if CPI makes a rate rise more likely.</li><li>We are wary on inflation.</li><li>We have made it
clear we might have to hike interest rates again.</li></ul><p>The ECB left interest
rates unchanged as widely expected:</p><ul><li>Incoming information has broadly confirmed previous assessment of
medium-term inflation outlook.</li><li>Inflation is still expected to stay too high for too long.</li><li>Past interest rate increases continue to be transmitted forcefully into
financing conditions.</li><li>This is increasingly dampening demand and thereby helps push down inflation.</li><li>Key interest rates at levels that, maintained for a sufficiently long
duration, will make a substantial contribution to ensure that inflation returns
to its 2% medium-term target in a timely manner.</li><li>Future decisions will ensure that policy rates will be set at sufficiently
restrictive levels for as long as necessary.</li><li>To continue data-dependent approach to determining the appropriate level
and duration of restriction.</li></ul><p>Moving on to President
Lagarde’s Press Conference, she reiterated that rates held for longer will curb inflation and highlighted the weakening economic growth:</p><ul><li>Past hikes are
increasingly dampening demand.</li><li>Rates will make a
'substantial contribution' to curbing inflation.</li><li>The eurozone economy
remains weak.</li><li>Tighter conditions
are weighing on investment and savings; highlights drag from industrial
sector.</li><li>Economy is likely to
remain weak for the remainder of this year.</li><li>There are signs that
the labour market is weakening.</li><li>Food price inflation
slowed again, though it remains high by historical standards.</li><li>Risks to economic
growth remain tilted to the downside.</li><li>Domestic price
pressures remain strong.</li><li>Credit dynamics have
weakened further.</li><li>Now is not the time
for forward guidance, it's time for data dependency.</li><li>PEPP wasn't
discussed at this meeting.</li><li>Our determination to
bring inflation to 2% is intact.</li><li>Rise in yields is a
spillover that we take into account, it helps bring inflation down.</li><li>What we are seeing
is a very-strong transmission of our monetary policy in the banking system
in particular.</li><li>Hold doesn't mean we
will never hike again.</li><li>We know that growth
has weakened, we will have no forecasts in December.</li><li>PMI numbers are not
indicative of vigorous growth.</li><li>Decision was unanimous.</li></ul><p>The US Q3 Advance GDP
beat forecasts coming in at 4.9% vs. 4.3% expected:</p><ul><li>Final Q2 <a href="https://www.forexlive.com/news/us-q2-2023-final-gdp-21-vs-21-expected-20230928/">reading
</a>was 2.4% annualized.</li><li>Q1 was 2.0% annualized.</li><li>Best quarter since Q4 2021.</li><li>Estimates ranged from 2.5%-6.0%.</li></ul><p>Details:</p><ul><li>Consumer spending 4.0% vs. 0.8% prior.</li><li>GDP final sales 3.5%
vs. 4.5% expected and 2.3% prior.</li><li>GDP deflator 3.5% vs.
2.5% expected and 2.2% prior.</li><li>Core PCE 2.4% vs.
2.5% expected and 3.8% prior.</li><li>Exports 6.2% vs. -9.3% prior.</li><li>Imports 5.7% vs. -7.6% prior.</li><li>Business investment 8.4% vs. 5.2% prior.</li></ul><p>The US Durable Goods
orders beat expectations:</p><ul><li>Durable Goods 4.7%
vs. 1.7% expected and -0.1% prior (revised from 0.2%).</li><li>Nondefense capital
goods orders ex air 0.6% vs. 1.1% prior (revised from 0.9%).</li><li>Ex Transportation
0.5% vs. 0.2% expected and 0.5% prior (revised from 0.4%).</li><li>Ex Defense 5.8% vs.
-0.7% prior. </li><li>Shipments -$0.8
billion or -0.3 percent to $283.7 billion. This followed a 0.5 percent
August increase.</li></ul><p>The US Jobless Claims
missed expectations across the board this time with Continuing Claims now
showing a strong upward trend:</p><ul><li>Initial Claims 210K vs. 208K expected and 198K prior.</li><li>Continuing Claims 1790K vs. 1.740K expected and 1.727K prior (revised from
1.734K). </li></ul><p>Friday</p><p>The Tokyo CPI, which is
seen as a leading indicator for National CPI, came in higher than the prior
figures:</p><ul><li>CPI 3.3% vs. 2.8% prior.</li><li>CPI ex Food 2.7% vs. 2.5%
expected and 2.5% prior.</li><li>CPI ex Food and Energy 2.7% vs. 2.4% prior.</li></ul><p>The Australian Q/Q PPI
came in higher than the prior month:</p><ul><li>PPI Q/Q 1.8% vs. 0.5% prior.</li><li>PPI Y/Y 3.8% vs. 3.9%
prior. </li></ul><p>The US PCE came in line
with forecasts:</p><ul><li>PCE Y/Y 3.4% vs.
3.4% expected and 3.4% prior (revised from 3.5%).</li><li>PCE M/M 0.4% vs.
0.3% expected and 0.4% prior. </li><li>Core PCE Y/Y 3.7% vs.
3.7% expected and 3.8% prior (revised from 3.9%).</li><li>Core PCE M/M 0.3% vs.
0.3% expected and 0.1% prior.</li></ul><p>Consumer spending and
income for September:</p><ul><li>Personal income 0.3%
vs. 0.4% expected and 0.4% prior.</li><li>Personal spending 0.7%
vs. 0.5% expected and 0.4% prior.</li><li>Real personal
spending 0.4% vs. 0.1% prior.</li></ul><p>The highlights for next
week will be:</p><ul><li>Monday: Australia Retail
Sales.</li><li>Tuesday: Japan Jobs data,
Japan Retail Sales and Industrial Production, Chinese PMI, BoJ Policy Decision,
Swiss Retail Sales, Eurozone GDP and CPI, Canada GDP, US ECI, US Consumer
Confidence, New Zealand Jobs data.</li><li>Wednesday: Chinese Caixin
Manufacturing PMI, US ADP, Canada Manufacturing PMI, US ISM Manufacturing PMI,
US Job Openings, FOMC Policy Decision.</li><li>Thursday: Swiss CPI, US
Challenger Job Cuts, BoE Policy Decision, US Jobless Claims.</li><li>Friday: Chinese Caixin
Services PMI, Eurozone Unemployment Rate, Canada Jobs data, US NFP, US ISM
Services PMI. </li></ul><p>That’s all folks. Have a
great weekend.</p>

This article was written by Giuseppe Dellamotta at www.forexlive.com.