Sterling and gilts pressed lower by firmer CPI

Overview: US dollar and rates are firmer today. All the G10 currencies are lower, led by the Japanese yen. The UK reported firmer than expected CPI and this may have deflected some of the selling pressure away from sterling, which is off less than 0.2% to put it atop the pack ahead of the US open. Nearly all the emerging market currencies are lower led by central European currencies, the Mexican peso, and South African rand. 

As anticipated, China's prime lending rates were left unchanged at 3.10% (one-year) and 3.60% (five-year). China's stocks were among the few from the large markets that advanced today. South Korea and Indian equities traded higher. Europe's Stoxx 600 is trying to end a three-day slide. It is up about 0.5% through most of the European morning. US index futures are narrowly mixed. Nvidia earnings today are anxiously awaited. European benchmark 10-year yields are up 2-3 bp, though UK Gilts are an exception after the firm CPI reading and is up five basis points to approach 4.50%. The US 10-year yield is up almost three basis points to a little beyond 4.42%. The two-year is firm, slightly below 4.30%. The firmer dollar and rates seem to have stalled gold's rally near $2640. It is holding above yesterday's low (~$2610.50). January WTI is firm, near a three-day high as it approaches $70. 

Asia Pacific

Net exports reduced Japan's GDP in Q3 by 0.4%. They have reduced Japan's GDP by an average of 0.3% a quarter so far this year after contributing almost 0.4% a quarter in 2023. On a seasonally adjusted basis, Japan's trade deficit widened in October to about JPY358 bln from a little more than JPY274 bln (revised from JPY187 bln deficit in September.) Exports rose 3.1% year-over-year (-1.7% in September), and imports edged up by 0.4% (+1.8% in September). Still, the likely issue for the incoming Trump administration is that the Japan is set to run a current account surplus this year of more than 4% of GDP. The weakness of the yen boosts the value of foreign earnings, investment income, royalties, and licensing fees. The OECD's measure of purchasing power parity has the yen around 63% undervalued, not far from the June peak of almost 70%. 

Even without the help of firmer US Treasury yields, the dollar recovered from a six-day low set late in the Asia Pacific session yesterday near JPY153.30 to new session highs in North America near JPY154.80. Encouraged by higher US yields today, follow-through buying lifted the greenback to JPY155.85. There are nearly $980 mln at JPY156 options that expire today. The Australian dollar forged a base around $0.6440-50 in recent days. It settled above $0.6500 on Monday and reached almost $0.6535 yesterday, which is the (38.2%) retracement target of the post-FOMC slide (~$0.6690 to $0.6440). It reached $0.6545 today before reversing lower. It is approaching $0.6500 in Europe. Support may extend toward $0.6480. The greenback consolidated yesterday large within Monday's range against the offshore yuan. It did not trade below CNH7.2330 in North America yesterday. The price action looks constructive for the dollar. A move above last week's high (~CNH7.2665) could spur the move we are looking for toward CNH7.30. The PBOC continues to resist market pressure for a faster depreciation of the yuan. The central bank had previously been set the fix near expectations (average in Bloomberg survey), but it has deviated markedly in recent days as it resists the upward pressure on the dollar. The PBOC set the dollar's reference rate at CNY7.1935 (CNY7.1911 yesterday).

Europe

The UK's inflation was firmer than expected. The October headline rate rose to 2.3% after falling to 1.7% in September. That is slightly more than the market and Bank of England anticipated. The 0.6% month-over-month increase lifted the three-month annualized rate to 3.6% from less than 0.5% in September. The six-month annualized pace is 2,2%, up from 1.6% previously. The core rate ticked up to 3.3% (from 3.2%). Services inflation edged up as well (5.0% v 4.9%). Electricity prices rose the most. Deflation deepened among producer prices (input prices -2.3% vs. -1.9% year-over-year and output prices -0.8% vs. -0.6%). The market has about a 10% chance of a BOE cut next month and a little more than 75% chance of a cut in February. There are about 45 bp of cuts discounted for H1 25.

For the third consecutive session, sellers greeted the euro when it pushed ever so slightly above $1.06 earlier today. It has been sold back to $1.0545. Support was found in the last couple of sessions near $1.0525. The consolidation has yet to take on a more bullish tone. It would also help if the US two-year premium over German eased. It narrowed by about 14 bp Friday-Monday but popped back up yesterday and is a little firmer today near 215 bp. Sterling reached a four-day high today near $1.2715, but like the euro it has reversed lower. It is trading around $1.2660 in the European morning, where it had gravitated in yesterday's North American afternoon. The euro was  recovering after falling to a two-and-a-half-year low against sterling last week around GBP0.8260. It reached GBP0.8375 yesterday to meet the (61.8%) retracement of this month's slide that began near GBP0.8450 and has come off today. It is straddling GBP0.8330 in late European morning turnover.

America

The North American news stream is without high frequency data from the US, Canada, or Mexico. That leaves the four Fed officials with ostensibly the market's undivided attention. Governor Barr is testifying before the House Financial Services Committee, while Governor Cook talks about the economic outlook and policy at the University of Virginia. Governor Bowman address agency policymaking, which a recent ruling by the Supreme Court called into question. Lastly, Boston Fed President Collins speaks as the market closes today. Her views were discussed last week. Collins still sees inflation headed toward the 2% target. She is not a voting member this year but said that a December cut remains on the table. It is still better than a 50/50 proposition according to the pricing of the Fed funds futures. It was about an 80% chance last Wednesday. Tomorrow sees weekly jobless claims, survey data from the Philadelphia Fed and KC Fed. The index of Leading Economic Indicators is also due tomorrow. The last time it rose was February 2022. The six-month rate of change bottomed in March 2023 (-9.4) and gradually improved through May 2024 (-3.8) but has been trending lower again. In September, it was at -5.2, the lowest since February. Meanwhile, Canada's October CPI came in firmer than expected yesterday and the underlying core measures also ticked up. As a consequence, the swaps market shaved the odds of another 50 bp cut at next month.

The uptick in Canada's CPI helped the Canadian dollar extend its recovery. The greenback peaked a little above CAD1.41 before the weekend and fell slightly to about CAD1.3965 yesterday. This met the (50%) retracement of the US dollar's post-elections gain. Still, the greenback is firmer today. CAD1.3950 held and it is probing the CAD1.40 area again. The US two-year premium over Canada narrowed for the third consecutive session yesterday and is around 11-12 bp lower than last week's peak (118 bp). For its part, the Mexican peso advanced for the fifth consecutive session against the US dollar. It reached almost MXN20.0655. The peso's advance was all the more impressive given that Banxico Governor Rodriquez stuck a dovish note, suggesting rate cuts not only will continue but could accelerate. It is consolidating so far today (~MXN20.0980-MXN20.2150). Nearby resistance may be near MXN20.25. The US dollar peaked the day after the US election near MXN20.8070. The post-FOMC low was around MXN19.7620 and that could be the next technical target if MXN20.00 yields.