FX and Rates Unwind Yesterday’s Powell Effect, US Index Futures Slide

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Marc Chandler
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Overview:  The dollar bounced, and US rates rose yesterday afternoon in response to comments by Fed Chair Powell. But he did little more that reiterate what he had said at the recent press conference. Powell expressed a lack of urgency to move after having led the central bank in delivering a 50 bp cut to start the easing in September while indicating that direction of travel will be to a less restrictive rate. The dollar has come back lower today against the G10 currencies and US rates are a little softer. It is also lower against most emerging market currencies, too. Japan's Q3 GDP (0.2%) was in line with expectations, while the UK disappointed (0.1% vs 0.2% projected). The US data highlight include October retail sales and industrial output. 

Equities are mostly softer. In Asia Pacific, China, South Korea, and India, among the large markets fell. Europe's Stoxx 600 is off 0.4%, giving back a chunk of yesterday's nearly 1.1% gain. US index futures look poised to gap lower after settling on the lows yesterday. The bond market is quiet in Europe. Benchmark 10-year yields are narrowly mixed, mostly less +/- one basis points. The 10-year US Treasury is little changed at 4.43%. That is a 12 bp increase on the week. In Europe, the six-basis point increase in the 10-year Gilt yield is the most this week. Gold is stabilizing and threatening to end the five-day drop. It is off about 4.3% this week, the most in three-and-a-half years, and the third consecutive weekly decline. January WTI is straddling the $68 area. It settled last week a little above $70. 

Asia Pacific

Japan and China reported real sector data earlier today. Japan said its economy grew by 0.2% in Q3 quarter-over-quarter, slowing from 0.5% in Q2 (initially 0.7%). Consumption improved (0.9% vs. 0.7%) and business spending contracted (-0.2% vs. 0.9%). Government spending increased. Inventories contributed 0.1% to GDP, while the drag from exports increased (-0.4% vs. -0.1%). Separately, but related, Japan report that industrial output rose by 1.6%, snapping the alternating gains and declines in the time series beginning in February. The tertiary industry index fell by 0.2% after falling 1.1% in August. Turning to China, it may be too early to see the impact of the monetary initiatives Beijing has announced in recent weeks on consumer and producer prices and it is hard to see yet in the real sector reported today. Retail sales did improve (3.5% year-to-date, year-over-year, up from 3.3%) and survey unemployment eased to 5.0% from 5.1%. Industrial output slowed slightly, and fixed asset investment was steady. The decline in new and used home prices slowed. The implosion of property sales also moderated. 

The greenback reached JPY156.25 in Europe yesterday and was tugged lower in the North American session by the pullback in the US 10-year yield. It is posting an outside day today having traded on both sides of yesterday's range. The close is key. Support is seen around JPY155, and barring a dramatic drop in North America, the greenback will post its sixth weekly advance in the past seven. Three-month implied volatility is near 10.7%. A three-and-a-half-month low was recorded at the end of last week around 10.25%. It peaked in early August by 12.8%. Yesterday was the first time since April 23 that the Australian dollar spent the entire session below $0.6500. It fell to nearly $0.6440. It has been capped near $0.6475 today, but can retest $0.6500. Like the yen, the Aussie is recording its sixth weekly loss in the past seven. The US dollar spiked to CNH7.2665 yesterday, its best level since late July. The high was recorded around the same time that the greenback was setting its high against the yen. Yet, when it reversed, the dollar held above the session low against the yen but set a new low against the offshore yuan near CNH7.2370. The dollar eased to nearly CNH7.23 today. The PBOC set the dollar's reference rare at CNY7.1992 (CNY7.1966 yesterday). The PBOC had been setting the dollar's fix tight to expectations (Bloomberg survey average), and many observers are concluding that by deviating from that in the last few days, officials are quietly leaning against the dollar's surge.

Europe

The UK economy contracted by 0.1% in September and eked out a 0.1% quarter-over-quarter in Q3. Industrial production fell 0.5% in September (offsetting in full August's gain), and manufacturing contracted by 1% (grew 1.3% in August). The index of services activity was flat, and construction output increased by 0.1%. The trade deficit grew. Looking at the quarterly composition, consumption rose 1% after stagnating in Q2. Business investment improved (3.6% vs. 0.7% in Q2). Government spending slowed (1.8% vs. 2.1%). Net exports improved. The data disappointed by has had little impact on the outlook for the Bank of England. The swaps market sees little chance of a cut next month and about an 80% chance of a cut in February, practically unchanged on the day. 

The euro recovered from the brief dip below $1.05 in the European morning before the North American session began in earnest yesterday and reached almost $1.0580 before running out of steam. It has been unable to make further progress so far today, but the options for 2.4 bln euros at $1.05 that expire today seem less relevant. Even though the price action looked constructive, we are not yet persuaded. The two-year interest rate differential moved the in US direction yesterday and no important levels, such as $1.06, were overcome. A close above $1.0620 would help stabilize the technical tone. Sterling's price action was similar. It recovered after approaching $1.2630 late in the European morning and set a new session high near $1.2720 in North America. Still, sterling is putting the final touches on what will be the seventh consecutive weekly decline. This matches the longest losing streak since February-April 1980. Like the euro, sterling did not take out any key level, and in fact, spent little time above the Wednesday's settled near $1.2710. Both settled below their lower Bollinger Bands. Sterling is trading quietly in a little less than a half-cent-range above $1.2650. 

America

After the inflation gauges over the past couple of sessions, attention turns to the US real sector today with October retail sales and industrial production. The US consumer continues to shop, and retail sales rose by an average of 0.6% a month in Q3. It is not sustainable. The median forecast in Bloomberg's survey is for a 0.3% increase, which is still a little better than the average through the September. Auto sales improved, but the average price of gasoline fell. The core measure that excludes autos, gasoline, building materials, and food services, may have risen by 0.3% after jumping 0.7% in September. Industrial output is expected to have matched September's 0.3% decline. Manufacturing is expected to have been a significant drag, with a 0.5% decline anticipated it fell 0.4% in September. For all practical purposes, US manufacturing output is flat this year and through September, about 100k fewer manufacturing jobs (distorted by the strike and temporary developments). As the week winds down, the swing in the pendulum of Fed expectations is notable. Fed Chair Powell's comments yesterday reiterated three points he has made before:  policy is move to a more neutral setting; the path is not preset, and despite beginning the cycle with a 50 bp cut, the economy is in a good place and action is not urgent. The odds of a December cut fell from around 82% to less than 60% yesterday. Between now the end of 2025, the Fed funds futures are pricing in about 70 bp of cuts to 3.88%, which is about 25 bp higher than from the eve of election.

The US dollar extended its gains against the Canadian dollar to almost CAD1.4065 yesterday, and a little bit further today, to its best level since May 2020. It is finding bids near CAD1.4040 in the European morning. Canada reports October CPI next week (November 19), a pick-up in price pressures may dampen speculation of another half-point cut next month. The US dollar settled above its upper Bollinger Band for the second consecutive session. It is difficult to talk about meaningful resistance, but the next interesting chart area is around CAD1.41. Unlike against the Canadian dollar, the greenback did not make new highs against the Mexican peso. The US dollar consolidated, and for the second day, remained within the range set on Tuesday (~MXN20.24-MXN20.70). It remains in that range today. Banxico cut the overnight target rate by 25 bp to 10.25% as widely expected. The peso appreciated by around 1% in the North American session ahead of the central bank meeting and gained a little more after the announcement. The swaps market has almost 125 bp of cuts to be delivered over the next 12 months. Yesterday, the three strongest emerging market currencies were from Latam (Mexican peso, Chilean peso, and Peruvian sol were up 0.30%-0.35%).