Ueda lifts Yen, stocks slump, gilts under pressure post-budget

Overview: The main move in the foreign exchange market today is the recovery of the yen following what was seen as hawkish comments by BOJ Governor Ueda. Otherwise, the tone is one of consolidation. The equity market sell-off today may be weighing on the Scandis and dollar-bloc currencies amid risk-off impulses. Emerging market currencies are mixed. The Mexican peso, which fell to a new low for the year yesterday, is stabilizing today and is among the stronger emerging market currencies.. 

Only China's CSI 300 of the large markets in Asia Pacific rose today, and Europe's Stoxx 600 is off around 0.75%. If sustained, it will be the third consecutive decline. US index futures are around 1% lower. The equity sell-off in Europe is not spurring a bid for bonds. Benchmark 10-year yields are 4-8 basis points higher, with UK Gilt yields rising most post-budget. The 10-year US Treasury yield is little changed near 4.29%. Gold set a record high slightly above $2990 but is now lower on the day. Oil is firm, but the gap created by Monday's lower opening in the December WTI contract extends to about $71.80 has not been filled.  

Asia Pacific

It was a busy day in the region. The Bank of Japan left policy on hold as widely expected and the macro forecasts did not change much. Governor Ueda's comment that foreign exchange has a significant economic impact, understood to underscore his intent to hike rates spurred a short squeeze, helping the yen recover. September retail sales fell by 2.3% after rising 1.0% in August. The median forecast was for a 0.3% pullback. September industrial output rose 1.4% after plummeting 3.3% in August. Although it was a little stronger than expected, Japan's industrial output still fell by 0.4% in Q3. Australia reported a 0.1% rise, in September retail sales, softer than expected and below the average through August of 0.4%. Adjusted for inflation, retail sales rose by 0.5% in Q3 after falling by 0.3% in Q2. The RBA meets next week. And although Q3 inflation was softer than expected, the underling measures are still hovering around 3.6%-3.7%. Also, private credit expansion remains strong. There is no sense of urgency for the RBA to act. For its part, China reported an uptick in its PMI. The manufacturing PMI rose for the second consecutive month and edged back above the 50 boom/bust level at 50.1. The non-manufacturing ticked up to 50.2 from 50.0. It has not been below 50 since the end of 2022. The composite rose to 50.8 to match a five-month high.

The Dollar recorded an inside day yesterday against the Japanese Yen. The US 10-year yield, which peaked on Tuesday near 4.34% briefly dipped below 4.20% yesterday before the equity session began in North America. It recovered to around 4.28% but the dollar remained better offered against the yen. The dollar stalled just in front of JPY153.50, where options for nearly $1.4 bln expire today. The greenback was sold in response BOJ Governor Ueda's comments, and it briefly traded below JPY152 for the first time since Monday. There are about $1.4 bln in options that expire there today. It looks poised to recover toward JPY152.60-80. The Australian dollar posted an outside day, trading on both sides of Tuesday's range, but the technical signal was muted by the settlement within the range. The Australian dollar held below $0.6600. It is confined to a narrow range so far today, (~$0.6565-$0.6580). The US dollar may have formed a bearish shooting star candlestick on Tuesday, and follow-through selling yesterday took the greenback to around CNH7.1280 and to nearly CNH7.1200 today. However, like the dollar is recovering from the dip below JPY152 against the yen, it is also recovering against the yuan. The PBOC set the dollar's reference rate at CNY7.1250 (CNY7.1390 yesterday).

Europe

The UK budget was largely as touted: increase in some taxes (GBP41 bln or ~$53.3 bln), the most in a generation. Borrowing will also be lifted, and this saw the 10-year Gilt yield rise three basis points after having been down 10 bp before Reeve's budget speech. Still, the rise in Gilt yields was less than most eurozone bonds. While there is much that Labour stalwarts will favor, two elements may not sit well. First, Labour will end the freeze income thresholds and inflation also may spur bracket creep. Also, the fact that day-to-day public spending will increase by 1.5% may strike some as miserly after the Tories apparently had penciled in a 1% increase. The eurozone reported a small acceleration in inflation. Consumer prices rose by 0.3% in October for a 2.0% year-over-year rate (from 1.7% in September). The three of the largest members of the bloc saw their EU-harmonized measures stay below 2%. Germany was the exception (2.4% vs. 1.8%). Meanwhile, the aggregate EMU unemployment rate was steady at 6.3% because the August series was revised lower to 6.3% The fact that eurozone's unemployment is at record lows is impressive given the sub-par growth. The market has scaled back the odds of a 50 bp cut from the ECB in December to about 20% from a little more than 40% at the end of last week. At the same time, the market remains confident that the Bank of England will deliver a quarter-point cut next week. The odds of another cut in December have fallen below 20% from around 60% at the end of last week. Separately, we learned earlier this week that the Swedish economy contracted for the third consecutive quarter. After three quarter-point rate cuts since May, the swaps market is discounting about a 75% chance of a half-point move next week. Another 75 bp of cuts is expected in the following three meetings.

The euro made a marginal new high yesterday slightly above $1.0870 in the North American afternoon. This is the resistance area we noted, which also corresponds to the 200-day moving average. It is consolidating in narrow 10-tick range around $1.0855. Options for 1.65 bln euros struck at $1.09 expire today and another 1.3 bln euro options expire there tomorrow. The US two-year premium over Germany narrow by another seven basis points yesterday after narrowing by eight basis points on Tuesday. The premium, near 188 bp, is the least in a week. The volatility around the UK budget saw sterling trade in a little more than a one-cent range yesterday. It recovered from a four-day low near $1.2935 to a new session high slightly below $1.3045. Although sterling traded on both sides of Tuesday's range, the close was within the range. Yet, the inability to sustain a foothold above $1.30 was disappointing. It remains below there today, but also holding above yesterday's low. Options for nearly GBP430 mln at $1.29 and GBP370 mln options at $1.30 expire today. 

America

The September US personal income and consumption data were embedded in yesterday's Q3 GDP (2.8%). US Q3 GDP was a little softer than expected at 2.8%, but the consumption strengthened to 3.7% from 2.8%. This suggests the risk is to the upside of the median forecast in Bloomberg's survey for a 0.4% increase in the personal consumption (and/upward revisions). The thunder from the deflators has been stolen by the CPI and PPI figures, which pointed to a small (~0.1%) decline in the year-over-year headline rate (to 2.1%) and core rate (to 2.6%). A 0.2% rise in the headline rate, month-over-month, would put the three-month annualized rate at 2.0%. Recall that it was less than 1% in Q4 23, which may make for difficult comparisons this year. A 0.3% rise in the core PCE deflator last month would translate into a 2.6% annualized pace in Q3. In Q4 23, it rose at an annualized pace of about 1.6%. The Q3 Employment Cost Index also is on tap. It is the best measure of labor costs but does not incorporate productivity. The ECI is seen rising by 0.9%, the same as in Q2. If accurate, it would be the slowest increase in six months since H1 21. Tomorrow is the monthly employment report. The jump in ADP (233k) was twice as high much as expected and largely due to seasonal adjustments. It is the highest since last July when ADP reported an increase of 307k private sector jobs. The BLS reported a 148k increase in private sector employment in July 2023. Canada reports August monthly GDP today. It has reported a stagnant month in Q1 (March) and Q2 (June).

The US Dollar stalled yesterday a few hundreds of a Canadian dollar from the year's high set early August near CAD1.3945. It reversed and slipped slightly below CAD1.39. The greenback settled near its lows, but no important technical levels were taken out, including Tuesday's low (slightly below CAD1.3880). And the US dollar has come back bid, perhaps helped by the risk-off mood in the US equity market. It is pushing above CAD1.3920 in Europe. A move above CAD1.3940-45 could signal the next leg up toward CAD1.40. The Mexican peso buckled yesterday. It fell by more than 0.6% to a new two-year low. The US dollar rose to nearly MXN20.2280. The peso's slid despite the stronger than expected Q3 GDP (1.0% quarter-over-quarter rather than the 0.6% expansion projected by the median forecast in Bloomberg's survey). Investors and economists do not expect the growth to be sustained. Latam currencies accounted for the five worst performing emerging market currencies yesterday, led by the Chilean peso's 0.80% decline. The greenback failed to close above the previous high set in August (~MXN20.2180) and is consolidating at slightly lower levels near MXN20.15 in the Europe.