Is the market putting on risk ahead of the weekend?

Overview: The US dollar is trading with a softer bias. Among the G10- currencies, only the euro and Swiss franc are the laggards and are nearly flat. In shifting expectations, the market sees the Reserve Bank of Australia as the most likely to hike rates again, while the swaps market appears to be bringing forward cuts by the European Central Bank and the Bank of Canada. The Australian dollar is the strongest G10 currency today and this week. After slow initial response, the yen is recovering after a firmer than expected Tokyo CPI. The dollar has pulled back from JPY150.40 back to dip slightly below JPY150.00.

Given the US strikes on Syria, it may be surprising the market is not shunning risk ahead of the weekend. Asia Pacific equities rallied, with the largest bourses in the region, but South Korea and Taiwan rallying more than 1%, with a 2% gain in Hong Kong and the mainland shares that trade there. Europe's Stoxx 600 is a little firmer but is still down about 0.1% for the week. Helped by favorable earnings reports, US index futures are trading with a higher bias as well, after falling sharply the past two sessions. Benchmark 10-year yields are 3-7 bp lower in Europe, which is sufficient to knock most yields down on the week. The US 10-year Treasury yield is near 4.86%, up about one basis point this week. Gold is firm near $1986, which is about $5 higher than last week's settlement. December WTI has recovered almost fully yesterday 2.5% drop. Still, after rising more than 8% in the first two weeks after the Hamas attack, near $85 a barrel, December WTI is almost $4 a barrel lower since the end of September.

Asia Pacific

Tokyo's October CPI was firmer than expected. The headline rose to 3.3% from 2.8% year-over-year. The median forecast in Bloomberg's survey was for a flat report. The core measure, which excludes fresh food, was also expected to unchanged at 2.5%, but rose to 2.7%. The measure that excludes fresh food and energy slipped to 3.8% from a revised 3.9% in September. There was little immediate reaction to the news. The dollar traded about 5-pip range on either side of JPY150.35 for almost two hours after the report before grinding lower through the European morning to fractionally through JPY150.

The BOJ meets next week. And as the 10-year JGB yield drifts to new highs (~0.87%), there is speculation that another increase in the 10-year band to 1.50% may be considered. There are other moving pieces too. The BOJ still has an easing bias, and even though its balance sheet is continuing to expand, the bias seems out of place. The overnight target rate is still below zero. This too seems unnecessary. The target is -0.10%, but it has been hovering around -0.02%. Bringing it to zero seems like small beer. Note that the 10-year yield target is zero, and the yield-curve control adjustments have been about widening the band. The center of it will also need to be adjusted in a normalization of Japan's monetary policy. The BOJ will update is forecasts and the market will be watching to see it brings up the CPI forecast for the next fiscal year, which begins April 1 from 1.9% to above 2.0%. The forecast for FY25 was 1.6%. It would be especially aggressive if it were lifted above 2.0%, as it would signal that the BOJ has now accepted price pressures are sustainable.

The dollar remained above JPY150 throughout the North American session yesterday but stayed well below the high set in Asia Pacific trading on Thursday near JPY150.80. Even the nearly 12 bp pullback of the US 10-year yield from the session high failed to spur top pickers. Still, ahead of the weekend amid elevated geopolitical tensions, the market may be reluctant to push the greenback below JPY149.80. The Australian dollar recovered from the lows for the year set near $0.6270 yesterday and settled above $0.6300 again. It made session highs in the North American afternoon near $0.6335. That makes eight intrasession moves below $0.6300 with only one close below. Steady follow-through buying today has lifted the Aussie to almost $0.6355 in the European morning. A move above $0.6360 may spur a test on $0.6400. The smaller than expected decline in Australia's Q3 CPI has seen the futures market nearly double the probability of a hike by the central bank on November 7 to ~50%. The chances of hike before year-end are near 75%, up from 45% a week ago. The greenback reached almost CNY7.3195 yesterday, the highest level since September 11. It has held slightly below there today, but on session highs (~CNY7.3180) in late dealings. A close above CNY7.3150 will mark the third consecutive week the dollar has risen against the yuan, but the cumulative move of slightly more than 0.25%. The PBOC fixing was as CNY7.1782, as fractional new low for the week, while the average projection in Bloomberg's survey fell to CNY7.3111 from CNY7.3206. 

Europe

The ECB did not surprise. It left policy steady and seemed to confirm market suspicions that policy will remain restrictive for some time. The ECB noted that September CPI fell "markedly". We note that the base effect warns of another sharp drop in the October series that will be reported next week. The headline rate, which stood at 4.3% in September could fall to a little above 3% this month. The market has brought forward expectations for the first ECB cut. The swaps market has about 30 bp of easing now discounted by the end of H1. On October 6, the market had discounted about 22 bp. Another cut is fully discounted for Q3 24 (vs. less than 70% on October 6). 

It is not that ECB President Lagarde was dovish. She just did not change market psychology and of give reason for investors to alter their negative outlook for the eurozone. The euro bounced from about $1.0525 to around $1.0565 on position adjustment after the US CPI. The price action may have formed a bullish hammer candlestick pattern. It is in a roughly $1.0550-70 range today. Still, the euro looks pinned between two large option expirations today. There are 1.25 bln euros in options struck at $1.06 and another set for 1.3 bln euros at $1.05. The euro brings a three-day losing streak into today, the longest this month. Sterling recovered from the $1.2070 low set in Asia Pacific turnover yesterday and made session highs in the position-adjusting after the US GDP figures. It reached near $1.2140 and has spent most of today so far in about a third of a cent below there. Today, there are GBP540 mln of options at $1.21 that roll off and a set for GBP420 mln at $1.2150. Like the euro, sterling may have forged a possible hammer candlestick pattern. It may signal the end of the three-day 2 1/4-cent drop. Nearby resistance may be seen around $1.2155-80. The highlight next week is the Bank of England meetings on November 2. The market understands there is little chance of a change in policy. The base rate has been at 5.25% since the quarter-point hike in August.

America

US GDP surged by 4.9% at an annualized pace in Q3, almost halfway between the Atlanta Fed's tracker that was at 5.4% and the median in Bloomberg's survey of 4.5%. Consumption was strong, rising 4%. It rose by a little more than 4.6% in H1. Inventories added about 1.3 percentage points to GDP, while net exports unexpectedly were a small drag. Final sales to private domestic parties, which excludes trade, inventories, and the government, rose by 3.3%, nearly twice the increase recorded in Q2. It was a strong report, but this must have been anticipated by Fed officials as it was by the market. The market was in a "buy the rumor, sell the fact" mode. Many market participants are looking for the economy to slow down markedly in Q4. The median Fed forecast last month was for 2.1% growth this year. That has been achieved this year already. Moreover, the strength of Q3 GDP did not change the market's view of the trajectory of Fed policy. There futures market has virtually no chance of a hike discounted and a little less than a 25% chance of a hike in December. On October 6, the probability was seen closer to 50%.

The details of today's report of September personal income and consumption were largely embedded in yesterday's GDP estimate. That said, what we note is that consumption is expected to rise faster than income (0.5% vs. 0.4%) for the third month in the past four. This is unsustainable. Note that the median forecast in Bloomberg's monthly survey sees consumption growth slowing to 1% this quarter. The headline and core deflators are expected to rise by 0.3%. This would put the year-over-year rates at 3.4% (from 3.5%) and 3.7% (from 3.9%), respectively. A 0.3% increase in the September PCE deflator puts the Q3 23 annualized rate at 3.6% from 2.4% in Q2 and 4.0% in Q1. A 0.3% increase in the core deflator, puts its Q3 increase at an annualized pace of about 2.6% from a little over 3% in Q2 and around 4.8% in Q1.

While the other dollar-bloc currencies rose yesterday, the Canadian dollar pushed lower to new seven-month lows. The US dollar reached almost CAD1.3845. The high for the year was set amid the US bank stress in March near CAD1.3860. Above there, it is roughly another 1% to last year's high near CAD1.40. The greenback's three-day advance has pushed it above upper Bollinger Band (~CAD1.3815). The US dollar has come back offered today and is straddling the CAD1.38 area late in the European morning. Expectations for the Bank of Canada are in flux. Consider that on October 6, the swaps market was pricing in about a 55% chance of a hike by mid-2024. It is now pricing in about a 30% chance of a cut. The two data highlights next week are the August GDP and the October jobs data. The monthly GDP has not risen since May, but the economy appears to have grown slightly in August. Canada's labor market is slowing. Although the monthly print of full-time job creation is volatile, quarterly growth has slowed in the first three quarters of the year, from a nearly 61k average in Q4 22 to 57k in Q1 and almost 24k in Q2 to nearly 17k a month in Q3. 

The US dollar posted bearish outside down day against the Mexican peso. It initially made a new high for the week near MXN18.4250 and then reversed lower and closed well below Wednesday’s low (~MXN18.2370). Follow-through selling today has seen the greenback approach MXN18.08, slightly below the 20-day moving average (~MXN18.0935). A break of the week's low around MXN18.0775 could signal a move toward MXN17.75 next week. Mexico reports September trade figures today and an improvement from the $1.38 bln August deficit is likely. The data highlights next week include Q3 GDP on October 31 (~0.6% is expected quarter-over-quarter after 0.8% in Q1 and Q2), and September worker remittances the following day. Through August, Mexicans abroad have sent $41.5 bln back, almost 10% more than in the first eight months of 2022. Lastly, Chile's central bank delivered its third rate cut in the cycle yesterday. The first cut in July was for 100 bp. The next cut in September was 75 bp. Many expected another 75 bp cut yesterday, but a 50 bp cut was delivered that brought the policy rate to 9.0%. Perhaps the peso's weakness spurred the smaller move. The Chilean peso is the weakest currency this month in Latam, falling almost 4.5%, which is a little more than half this year's decline.