Tomorrow’s China Briefing Did Not Prevent the Continued Slide in Chinese Stocks Today

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Marc Chandler
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Overview: The combination of the firmer than expected US CPI and larger than expected rise in initial and continuing jobless claims saw short-term US rates fall, and the odds of a quarter-point cut by the Fed rose from about 83% to about 93%. The Fed funds futures market boosted the odds of another quarter-point cut in December (~90% vs.78%). The dollar initially weakened but recovered, though the key levels held, such as $1.09 in the euro, $1.30 in sterling, $0.6700 in the Australian dollar, and CAD1.38. The greenback is trading with a mostly heavier bias today. Among the G10 currencies, only the Canadian dollar and yen are softer. Among emerging market currencies, only the Indian rupee and Turkish lira are lower. 

Equities struggled in Asia Pacific. Japanese markets were mixed, while nearly all the other large markets were lower, including a nearly 2.8% drop in China's CSI 300. Hong Kong markets were closed for a local holiday. Taiwan was closed yesterday, and the main benchmark rallied more than 1% today. The Stoxx 600 in Europe is practically flat and US index futures are trading lower. Benchmark 10-year yields are 2-4 bp higher in Europe and the 10-year US Treasury yield is up three basis points to 4.09%. Gold forged a shelf near $2600 in the past three session and reached $2647 today before consolidating. The week's high was set Monday near $2660. November WTI is consolidating within yesterday's range. Recall that Tuesday-Wednesday, it traded in a wide range (~$71.50-$78.50). It settled near $74.40 last week, reflecting a 9.1% rally. At $75.25, November WTI is up about 1.2% this week, poised for its highest weekly close in nearly three months. 

Asia Pacific

Japan's parliament was dissolved in the middle of the week to prepare for the October 27 election. The LDP struck an internal compromise. Only a dozen of the most implicated lawmakers in the finance scandal will be barred from representing the LDP in the election, leaving others still able to run under the LDP banner. This would seem to taint Prime Minister Ishiba's effort to "clean" the party. Ishiba represents continuity and this cabinet appointments demonstrate this. Recent polls put public support near 50% for Ishiba's cabinet, which is low for new governments, but more than twice as high as the former government had. The LDP current holds 258 seats in the lower house, and 233 are needed for a majority. The LDP governs with the Komeito party, which holds 32 seats. This helps minimize the appearance of a one-party state, but the LDP have governed more or less since 1955. Interestingly, the Democratic Party has run Chicago and Cook County since 1955. Ishida appears braced for some LDP losses and the Komeito seats may become more important. What helps the LDP is that the opposition is divided and there appears to be limited cooperation. Turning to China, early tomorrow, the finance minister will hold a "briefing" on fiscal policy. There is some speculation that new fiscal stimulus will be announced. Some reports suggest expectations are for as much as CNY2 trillion. Beijing might talk about socialism with Chinese characteristics, but the central government adheres to the Maastricht requirements for EMU entry--a budget deficit no more than 3% of GDP, central government debt less than 60% of GDP, and a stable exchange rate (the euro has been in about a 2.2% band centered near CNY7.8170). There is some speculation that a 4% central government deficit will be accepted.

The seemingly conflicting signal from yesterday's US data sent the dollar to JPY149.50 and then to session lows near JPY148.30 within a little more than a minute. As long-term US rates turned higher and the short-term rates stabilized, the dollar recovered and poked above JPY149. Options for $1.55 bln expire there Monday. The dollar has not traded above JPY150 since August 1. Today, the greenback has been confined to the narrowest range of the week (~JPY148.40-JPY149.00). In the immediate response to the US data, the Australian dollar traded between about $0.6700 and $0.6730. It chopped around but recovered toward $0.6735 in late American dealing. Given that the Aussie is often treated as the G10 proxy for China, the short-term market may prefer not to be short it before tomorrow's fiscal policy briefing. It is little changed and held below $0.6750. Options for A$1.75 bln at $0.6775 expire next Tuesday. The dollar has traded between roughly CNH7.05 and CNH7.10 for the sixth session, counting today. We suspect there is scope for another leg up toward CNH7.14-CNH7.15, which is consistent with bias toward expecting the dollar to trade higher against the yen. The PBOC set the dollar's reference rate at CNY7.0731 (CNY7.0742 yesterday). 

Europe

After two months of stagnation, the UK economy expanded by 0.2% in August. Industrial output, which fell by 0.8% in July rose by 0.5% in August. Construction output rose by 0.4% after contracting by 0.4% in July. The index of services expanded by 0.1%, the same as in July. The trade deficit narrowed. The market is confident of a BOE rate cut next month (~93% discounted) while the odds of a cut in December have been pared to a little below 50%. Next week's jobs report and September CPI will impact expectations. For the eurozone, next week's highlight is the ECB meeting (October 17). The below 2% CPI reading pushed a previously reluctant market to price in a quarter-point cut (after cutting last month). ECB President Lagarde is likely to be non-committal about the December meeting, but market has another 25 bp cut nearly fully discounted.

After setting yesterday's session high after the US data near $1.0955, the euro reversed and fell to a new session low near $1.09. There were bids near the two-month low that lift the single currency toward $1.0930. It is trading with a slightly firmer bias today but has held below yesterday's highs. A close above $1.0950 would be constructive, while a break of $1.0875 could spur a move to $1.08, the measuring objective of the double top pattern (around $1.12 with a neckline at $1.10). Sterling was unable to set a new session high after the US data but did record a new session low in early NY afternoon turnover near $1.3020. It recovered to a little more than $1.3050. Sterling is firm though inside yesterday's range. The $1.3080-$1.3100 offer a nearby cap. Investors have begun turning their attention to the Autumn Budget on October 30. The UK 10-year premium over Germany is nearly 200 bp, the most since last August.

America

The importance of today's US PPI report is not so much based on a pipeline theory of prices, which sees raw material prices rising and later leading to a rise in consumer prices. Even my local gas station does not pretend it is true. Rather the importance in the PPI is to be found in the components used by the Bureau of Economic Analysis to calculate the PCE deflator, which the Fed targets. That said, the year-over-year core PPI has risen every month this year except July, when its 0.8% decline offset the gains of the previous four months. It stood at 2.4% in August, compared with 2.5% in August 2023 and 1.8% at the end of last year. The preliminary results of the University of Michigan's consumer confidence survey will be reported, as well. A small gain is anticipated. The one-year inflation outlook has fallen since the 3.3% peak in May and stood at 2.7% in September, the lowest since the end of 2020. The 5–10-year inflation outlook ticked up to 3.1% in September, the highest since last November after having been stuck at 3.0% for the previous five months. Three Fed officials speak today (Goolsbee, Logan, and Bowman) but their views are known and repeating them will likely have minor impact. Canada reports September jobs data today. Ahead of it, the swaps market is discounting about a 38% chance of a 50 bp cut at the October 23 central bank meeting. The labor market is slowing faster in Canada than the US. Through August, Canada created 211k jobs this year, which is about a third less than in the first eight months of 2023. Of those jobs, about 77.5k have been full-time positions this year (vs. 257k in the January-August 2023 period). The unemployment rate has risen to 6.6% from 5.7% at the end of last year and 5.5% last August. The participation rate slipped to 65.1% from 65.5% last December. Wage growth slowed from 5.65% at the end of last year to about 4.90% in August. For its part, Mexico reports August industrial production figures. A gain on par with July's 0.2% rise is expected. The market impact is likely minimal.

The pressure on the Canadian dollar has been relentless. It has fallen for nine of the past 10 sessions coming into today. The Canadian dollar saw two-month lows yesterday. The US dollar reached CAD1.3775, surpassing and settling above the (61.8%) retracement of the Aug-Sept decline. It is holding below there today so far, but a move above CAD1.3800-20 re-targets the year's high set in early August near CAD1.3945. Yet, the momentum indicators are stretched and the greenback settled above the Bollinger Band for the second consecutive session. Initial support is seen in the CAD1.3720 area. The US dollar has not fallen below the previous session's low since October 2. Yesterday's low was slightly below CAD1.37. The US dollar extended its gains against the Mexican peso for the third consecutive session yesterday which followed a six-session fall. The greenback reached near MXN19.62 and settled near MXN19.46. It has traded today mostly between MXN19.4150 and MXN19.4725. Initial support is near MXN19.36.