Japanese Fireworks Continue as the Market Turns to the FOMC

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Marc Chandler
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Overview: The FOMC meeting is today's highlight but the drama in Japan continues to rivet the market. The Ministry of Finance warned of the risk of material intervention in the foreign exchange market, and the BOJ bought bonds in an unscheduled operation a day after its downgraded the 1.0% cap to a reference rate, whatever that means. The yen is trading with a slightly firmer bias. The Swiss franc is also trading a little firmer, but the other G10 currencies are a bit softer. Most emerging market currencies are lower too. Gold, which posted a bearish outside down day yesterday, extended its losses to about $1975 before stabilizing. 

Japan's equity indices jumped 2.4%-2.6% today. Most bourses in the region rose, though not Hong Kong. Note that South Korea reported the first increase in exports since late last year and the Kospi rallied 1%. Europe's Stoxx 600 is firmer, posting its third consecutive session of gains. US index futures are heavier, paring yesterday's gains. European benchmark yields are 3-5 bp higher today, but the 10-year US Treasury yield is a couple basis points lower near 4.90%. Details of next week's quarterly refunding will be announced today and there is an expectation of larger offerings. December WTI fell to near four-week lows yesterday near $80.75 a barrel. It has stabilized and trading near $82.

Asia Pacific

China's Caixin manufacturing PMI fell below the 50 boom/bust level to 49.5 in October from 50.6 in September. While this is weaker than expected, and the pattern this year where the first month of a quarter is sub-50 and then the Caixin manufacturing PMI grows. The new measures announced in late October, including a larger central government deficit and local governments tapping next year's bond quota have yet, of course, to filter into the data. Meanwhile, Bloomberg's new monthly survey (53 economists) found a median forecast for 5.0% growth in Q4, and this year's GDP is now seen slightly above the government's 5.0% targets.

The market continues trying to decipher the Bank of Japan's intent. Governor Ueda explained that yesterday's move was aimed at increasing the "flexibility so that long-term yields can be smoothly shaped, according to different future scenarios." The bottom line is that limit of 1% indicated in July is no longer binding. "We won't set a strict upper limit," Ueda explained, "but even when there's upward pressures on yields, I don't think they will go significantly above 1.0%." And although the BOJ raised its inflation forecast for this fiscal year and next, the forecast for core CPI in FY 25 remains below the 2% target. The MOF's Kanda warned, in early Tokyo hours today, that officials are prepared to intervene if necessary and a few hours later the BOJ stepped in a bought Japanese government bonds in an unscheduled operation. Japanese bond yields edged slightly higher. The on-the-run 10-year yield was up less than a single basis point to almost 0.95%. The 20-year yield was up about 1.5 bp and the 30-year yield rose by about three basis points. 

The BOJ helped spur the largest sell-off in the yen in six-months. The dollar soared 1.70% to approach last year's high (~JPY152). It shot through the upper Bollinger Band that is set two standard deviations above the 20-day moving average and greenback traded three standard deviations from the moving average. It is calm today. The dollar has spent most of the session so far between JPY151.15 and JPY151.50. Some participants are mulling a move toward JPY160. More immediately there are options for $2.3 bln at JPY152 that expire tomorrow. After stalling near $0.6385. the Australian dollar pulled back to support near $0.6315, where A$1 bln of options expire tomorrow. It is still holding today as the Aussie consolidates and trades toward $0.6350. Chunky options seem to block the upside. There at A$470 mln at $0.6400 that expire today and another set for A$1.2 bln tomorrow. Another set for A$1 bln expires at $0.6400 Monday. Note that an IMF staff paper called on Australia to tighten monetary policy further and slow public investment. The dollar finished October with a new high for the month against the offshore yuan near CNH7.3440. It has not been that high since September 11. Through formal and informal channels, Beijing has succeeded limiting the yuan's losses recently. The onshore yuan fell by 0.25% in October, which means it appreciated against most currencies. The greenback edged slightly higher against the onshore yuan to approach CNY7.32 to reach its best today since September 11. The PBOC set the dollar's reference rate at CNY7.1778 today, about 1/1000 of a yuan lower than yesterday, and exceptionally wide compared with the average in Bloomberg's survey of CNY7.3295. 

Europe

The preliminary estimate of October's eurozone CPI, reported yesterday at 2.9%, like fell below the US CPI for the first time since June 2022. The US October CPI is due November 14. A 0.3% increase could see the US year-over-year rate slip to 3.5% after being stuck at 3.7% in August and September. The eurozone's core rate is at 4.2%, its lowest level since July 2022. A 0.3% increase in the core rate would leave the year-over-year rate unchanged at 4.1%.

The final UK October manufacturing PMI slipped to 44.8 from the preliminary estimate of 45.2, but still edged up from the 44.3 final reading in September. The contraction eased for the second consecutive monthly. The last time it was above the 50 boom/bust level was July 2022. It bottomed this year in August at 43.0 and stood at 45.3 at the end of last year. The BOE meets tomorrow. While a unanimous vote is unlikely, the swaps market sees practically no chance of a hike and the odds of a hike next month are around 20%, down from a little more than 50%, a month ago. The BOE forecast 0.5% growth in 2024 and economists polled by Bloomberg see a risk that this is pared.

The euro set a five-day high near $1.0675 yesterday a couple of hours before the softer than expected CPI and Q3 GDP prints. It trended lower until European markets closed, reaching around $1.0560. The close was weak. Trading is light today many celebrate All Saints Day. Still, the euro is trading heavier and extended yesterday's losses to about $1.0545, near Monday's low. There are options for about 1.55 bln euros at $1.0540 that expire tomorrow. Last week's low was closer to $1.0525. Sterling peaked near $1.22 in early North American activity yesterday and was sold to $1.2120 before stabilizing. Since the low was set, sterling has not been able to rise above $1.2160. It is holding above yesterday's low, and Monday's low was near $1.2090 and last week's low was about $1.2070. Note that there options for around GBP550 mln at $1.2130 that expire tomorrow. 

America

Ahead of the conclusion of the FOMC meeting, there is a slew of US data. The data can be broken down into three groups. The first is about the labor market. The ADP sorely missed last month. Its 89k growth in the private sector jobs gave no clue of the BLS estimate the strongest private sector jobs growth since January at 263k. It is particularly unreliable in the short-term, yet it may still influence what has been dubbed the "whisper number" (i.e., last minutes guesstimates). The JOLTS report on job openings is also on tap. It surprised the market last month with August job openings jumping to 9.6 mln from 8.9 mln. The median forecast in Bloomberg's survey was for 8.8 mln. The median forecast sees job openings falling a little below 9.4 mln in September. Second, there are two real sector reports: September construction spending and October auto sales. With the first estimate of Q3 US GDP in hand, the construction spending report is of little broad interest. Auto sales for October give some inkling into consumption but given the strike, it might not be a clean read. In any event, auto sales are expected to be little changed from the 15.67 mln seasonally adjusted annual pace seen in September. Through September, US vehicle sales averaged 15.39 mln, which is about a 13% increase from the first nine months last year. The third bucket of data today are surveys. The final manufacturing PMI is of little interest. The preliminary reading of 50.0, up from 49.8, likely captured the change. It was the second consecutive month of improvement. Instead, the manufacturing ISM is new information. It runs a little lower than the manufacturing PMI (49.0 in September and it is expected to be unchanged). Prices paid are softening and employment growth may slow but watch new orders. The last time they were above 50 was in August 2022.

The brings us to the FOMC meeting. Judging by the pricing in the swaps and futures market, participants think the Fed is done and that the next move will be cut. The market has a little more than a 50% chance of a cut by the middle of next year and a quarter-point cut is fully discounted by the end of July 2024. The implied yield of the December 2024 Fed funds futures is 4.72%, which is about 60 bp below the prevailing effective Fed funds average. This is the market accepting the median Fed forecast in September for two rate cuts in 2024 and about a 40% chance of a third cut. We look for little change in the FOMC statement. The market often hears Fed Chair Powell as leaning dovish. We suspect that the rise in long-term yields, the causes and implications will be the subject of much discussion. Powell seemed more open to the possibility that increase supply is one of the drivers of the rise in long-term rates. Before the FOMC meeting concludes, the Treasury will announce the details of next week's quarterly refunding. Many expect another increase in the amount of coupons that will be sold. Although recent note and bond sales continue to be oversubscribed, the auctions have been frequently generating tails (difference between the average price the auction and the lowest accepted price). It means that the marginal buyer paid a lower price than average (securing a higher yield).

Canada's economy continues to disappoint. It was stagnant in July and August. Economists had anticipated a little growth in both months. The data boosts the risk that the Canadian economy contracted in Q3 after a 0.2% decline in output in Q2. Last month, the Bank of Canada suggested growth was going to rebound to 0.8% in Q3. StatsCan attributed the economic weakness to inflation, forest fires, and drought. Several sectors reported decline in activity, including mining, oil/gas, utilities, manufacturing, accommodation, and food services. The agriculture sector was especially hard hit in August, contracting 3.2%, the most in two years, largely due to dry conditions in the western part of the country. Services rose slightly (0.1%), while the goods-producing sector contracted by 0.2%. The manufacturing PMI is due today. It is not typically a market mover. It was last above the 50 boom/bust level in April.

Mexico's economy expanded by 0.9% in Q3 (quarter-over-quarter), which was slightly better than expected. It was the strongest expansion since Q3 22. Still, the year-over-year pace is gradually slowing. It was 3.3% in Q3, down from 3.6% in Q2 and 3.8% in Q1. Today's IMEF surveys will likely show that slowing is continuing into the start of Q4. Mexico sees the October manufacturing PMI too. It had been above 50 from February through August before slipping to 49.8 in September. Mexico also reports September worker remittances. Through August, worker remittances have brought in nearly $41.5 bln. This compares with almost $38 bln in the first eight months of last year. Worker remittances have become a key source of foreign exchange and capital inflows into Mexico.

The monthly GDP miss by Canada yesterday sent the Canadian dollar to a new low for the year. The US dollar briefly traded a little through CAD1.3890. The greenback traded on both sides of Monday's range but just missed closed above Monday's high (CAD1.3876, according to Bloomberg). The greenback is trading firmly near CAD1.3900. It has held above CAD1.3860. A disappointing jobs report on Friday could bring CAD1.40 into sight. The Mexican peso held its own. It was virtually flat yesterday. The greenback recovered after being sold to a two-week low near MXN17.9250. Still, it has not closed below MXN18.00 since October 16. Still, for the past four sessions, the dollar has recorded lower highs and lower lows. It is little changed today, hovering around MXN18.00. Brazil's central bank meeting concludes a few hours after the FOMC meeting and it has already signaled a 50 bp cut, which would bring the Selic rate to 12.25%.