Who Changed: Powell or the Market?

by
Marc Chandler
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Overview:  A poor reception to the 30-year Treasury sale and Federal Reserve Powell pledged to raise rates again, if necessary, not exactly a new ground, but it spooked the doves--driving rates sharply higher and fueling a strong dollar recovery. There was a large five basis point tail on the bond sale. The eight-day rally in the S&P 500 and nine-day advance in the NASDAQ was snapped like dry kindling. The S&P 500 comes into today down on the week. The 10-year yield jumped 13 bp, almost back to the week's high near 4.66%. The two-year yield that was 4.80% after the jobs data pushed through 5.0% yesterday. With a light economic agenda, yesterday's North American developments are setting the tone for today's developments.

The dollar is in narrow ranges, holding on to most of yesterday's gains, even against sterling, despite the UK's better than expected GDP figures. On the week, it is up against all the G10 currencies, with more than 1% gains against the dollar bloc, sterling, and yen. Central European currencies are firmer today, while Asia Pacific currencies are softer. JP Morgan's Emerging Market Currency Index is off 1.1% this week to snap a four-week, 3% rally. Equities are weaker today. In Asia Pacific, Hang Seng's 1.75% drop set the pace. Europe's Stoxx 600 is giving back yesterday's 0.85% gain in full. US index futures are pointing to a lower open. Bonds are under pressure, and US Treasuries are extending yesterday's sell-off. The 10-year yield is near 4.65%, which is essentially flat on the week. European benchmark yields are up mostly 7-9 bp, but most are still a couple of basis points lower for the week. Note that Fitch announces its review of Italy's credit rating later today. Gold is consolidating in a narrow range between roughly $1951.60 and $1960.85. It settled at $1992.65 last week. December WTI is trading sideways and remains within the $74.90-$77.55 range seen Wednesday. It finished last week near $80.50. Barring a strong rally in North America, it will be the third consecutive weekly loss, the longest losing streak in six months.  

Asia Pacific

The regional session was quiet today amid the light news stream. There are three highlights next week. First, China reports October economic activity but after the apparent deepening of deflationary forces, speculation has increased that the PBOC will cut the one-year benchmark Medium-Term Lending Facility rate from 2.65%. Second, Japan is expected to report a small contraction in Q3 GDP. The government has already announced a fiscal support package and the Japanese economy is expected to return to growth here in Q4. Third, Australia reports its employment situation for last month. Job growth is expected to recover after a disappointing September that saw a nearly 40k decline in full-time jobs. Separately, wage growth appears to have accelerated in Q3. The central bank hiked rates last week and the pricing in the swaps and futures market are consistent with the end of the tightening cycle. 

The yen's response to the jump in US rates and broad dollar rally yesterday in North America was relatively mild. The dollar did inch up to almost JPY151.40, but it rose less than 0.25%. The greenback is firm today, but the gains have been limited to the JPY151.50 area. Perhaps, it is the fear of BOJ intervention that contributed to the market's caution. The Australian dollar continued to retrace its recent rally. On Wednesday, it met the (50%) retracement objective near $0.6400 and yesterday met the (61.8%) retracement target around $0.6365. Today, it is slipping lower to approach $0.6350. Nearby support is seen near $0.6330. The greenback gapped higher against the Chinese yuan and reached a new high for the week near CNY7.2935. The dollar is up about 0.20% against the yuan this week. It is the fourth weekly advance in the past five weeks. The PBOC set the dollar's reference rate at CNY7.1771 (CNY7.1772 yesterday), while the average in the Bloomberg survey was for CNY7.2947 (fromCNY7.2721).

Europe

The UK reported better than expected GDP data. The economy expanded by 0.2% in September after a revised 0.1% in August (from 0.2% initially) and a 0.6% contraction in July. Services and construction in September were stronger than expected, while industrial output was flat. The trade deficit was also reduced. This translated into a stagnant British economy in Q3 rather than the small contraction expected. The light from the economy is dim:  Consumption fell by 0.4% quarter-over-quarter after growing by 0.5% in Q2. Government spending, which jumped to 2.5% in Q2, contracted by Q3. Investment, both in in terms of fixed capital formation (-2.0%) and overall business investment (-4.2%), were weaker than expected. The median forecast in Bloomberg's survey looks for another couple of quarters of stagnation. The Bank of England's updated forecast is for the economy to be flat next year before growing by a measly 0.3% in 2025. Next week's highlights include the updated employment report, October CPI and retail sales. The market goes into next week with a strong bias toward the BOE being done and has a little more than 60% of the first cut discounted by the end H1 24.

The euro made a three-day high yesterday morning in North America near $1.0725. It stalled there but was hovering around $1.07 before Fed Chair Powell's comments. The single currency reversed low and was sold to $1.0660, one hundredth of a cent, Bloomberg says, of Wednesday's low. It has found support today near $1.0655. Note that the $1.0635 area is the (50%) retracement of the euro's recent bounce (that ended on Monday by $1.0755). The next retracement (61.8%) is closer to $1.0600. Sterling posted a bearish outside down day, as it traded on both sides of Wednesday's range and closed below its low (~$1.2240). It retraced more than (61.8%) of the recovery from the dip below $1.21 on November 1 (which was found around $1.2225) to Monday's high (~$1.2430). The slightly better than expected GDP figures failed to prevent sterling from extending yesterday's losses. It has approach support is seen around $1.2200, where the 20-day moving average is also found. A move above $1.2240 would help steady the tone. 

America

Initial weekly jobless claims remain low. The four-week moving average is slightly above 213k, and while it is the highest in a month, it is practically unchanged from a year ago. Continuing claims for the seventh consecutive week, and at 1.83 mln are at new seven-month highs. This lends support to the idea that what is happening in the labor market is not so much an increase of dismissals but a slowing in new hiring. Separately, it is difficult to identify what Fed Chair Powell said yesterday that he did not say at last week's press conference. In any event, next week's high frequency economic data may provide a softer backdrop for interest rates and the dollar. Headline inflation on a year-over-year basis for the first time in three months. After a shopping spree in Q3, the consumer is dropping. October retail sales may have fallen for the first time since March. That, coupled with a decline in industrial output, will reinforce the conviction that the US economy is slowing sharply in the final quarter of the year.

As expected, Mexico's central bank left the overnight rate at 11.25%. It has been there since the last rate hike was delivered in March. Since then, headline CPI has slowed from 6.85% to 4.26%. The core rate has slowed from almost 8.1% in March to 5.50% in October. The central bank tweaked its forward guidance indicating that the overnight rate would remain at 11.25% from "an extended period" to "for some time". It lowered in its inflation forecast for the end of this year to 4.4% from 4.7%. It sees CPI at 3.4% in Q4 24, unchanged from September's forecasts. 

Banxico’ s meeting concluded as comments from Fed Chair Powell hit the wires. In an unusual reaction, the market heard Powell as a hawk, sending US rates and the dollar sharply higher. The greenback surged to almost MXN17.88 from below MXN17.50. The dollar retraced more than 50% of the sell-off from MXN18.4240 area on October 26 to the low around MXN17.2835 last Friday (MXN17.8540). The close above the MXN17.75 area, the neckline of a possible double top pattern undermines what had been a more bullish technical case for the peso. The dollar remains firm today but below yesterday's highs. Nearby resistance is seen in the MXN17.94 area. The dollar jumped from around CAD1.3770 to CAD1.3815. It settled above CAD1.3800. It is in an exceptionally narrow range today between CAD1.3790 and CAD1.3815. The "correction" to last week's greenback drop is beyond retracement levels and given the momentum, there seems little on the charts to prevent a run at the November 1 high near CAD1.39.