Markets do Cartwheels in Response to Traditional Pick for US Treasury Secretary

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Marc Chandler
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Overview: The selection of Scott Bessent, the hedge fund manager as next US Treasury Secretary was greeted euphorically in the capital markets:  one of their own and, arguably, like many of new economics team could have been picked in any Republican administration. Risk appetites have been animated. Still, we suspect market positioning may have led to an exaggerated response. The dollar has been sold. Stocks have bought. The euro is leading the G10 currencies higher, with a nearly 0.75% gain. The Canadian dollar is the laggard, up about 0.15%. Central European currencies are pacing the emerging market complex. Gold has been slammed. It is off 1.6% to end last week's five-day advance with prejudice. A close below last Friday's low (~$2668) warns of the risk of a deeper correction. 

Outside of China and Hong Kong, equities have rallied today. Several large markets rallied more than 1%, including Tokyo, South Korea, India, and New Zealand. Europe's Stoxx 600 is posting a small gain. Its third consecutive advance, if sustained, would match the longest rally in three months. US index futures are up at least 0.5%. Asia Pacific yields fell but European benchmark 10-year yields are mostly as much as two basis points firmer, as peripheral premiums widen a little. The 10-year US Treasury yields is off five basis points to 4.35%. Lastly, January WTI is consolidating quietly between about $70.40-$71.50.  

Asia Pacific

Bank of Japan Governor Ueda kept the door open to another hike next month. At the end of the week, Tokyo's November CPI is due. The headline and core are expected to have bounced back after energy subsides saw softer October number. The median forecast in Bloomberg's survey is for 2.2% increase in the headline rate (from 1.8%) and 2.0% in the core rate (from 1.8%). The measure that excludes fresh food and energy bottomed at 1.5% in July. It rose from 1.6% in September to 1.8% in October and is seen edging up to 1.9% in November. The swaps market has 15 bp of tightening discounted for next month. That is the most since the end of July. Japan also reports October retail sales and industrial output at the end of the week. After falling in September, both are expected to have risen in October, helping set the stage for stronger growth in Q4 after a 0.9% annualized pace in Q3. China reports industrial profits in the middle of the week, but the highlight is the November PMI at the end of the week. The lack of improvement would be disappointing. The Reserve Bank of Australia puts more emphasis on the quarterly CPI report, but the October monthly estimate is due on Wednesday. It is expected to rise for the first time since May, when the high for the year was recorded at 4%. It was at 2.1% in September and may have popped to 2.5% October. It was at 4.9% in October 2023. The futures market wavers between May and July 2025 for the first rate cut. The Reserve Bank of New Zealand, on the other hand, is widely expected to cut its cash rate by 50 bp tomorrow to 4.25%. 

The dollar appears to be tracing out a consolidative pattern against the Japanese yen between about JPY153.30 and JPY156.75 at the extreme. The consolidation looks more constructive than a reversal pattern. The trendline off the recent highs comes in near JPY155.30 today. Initially, as the markets (over) reacted to news of the US Treasury picked, the dollar was sold to JPY153.55 and is hovering around JPY154.45 in European turnover. The Australian dollar recovered from a four-day low near $0.6470 before the weekend, and in early trading today, made it to $0.6550. However, the early momentum stalled, and the Aussie was sold back to $0.6500 by early in Europe today. Initial resistance now may be in the $0.6525 area. The US dollar rose to its best level against the offshore yuan ahead of the weekend (~CNH7.2670) in nearly four months. The high was set in Europe and the greenback consolidated during the North American session. Amid the broader US dollar pullback today, it briefly dipped below CNH7.24. It recovered and traded nearly back to its settlement level (~CNH7.26) before falling out of favor again. The PBOC set the dollar's reference rate at CNY7.1918 (CNY7.1942 last Friday). The average projection in Bloomberg's survey was CNY7.2422, with the gap showing PBOC's efforts to slow the dollar's appreciation/yuan's depreciation. 

Europe

The economic calendar for the eurozone is subdued in the coming days. The highlight is at the end of the week with the preliminary estimate for November CPI. The base effect makes for a tough comparison. Eurozone CPI fell by 0.6% in November 2023. It is hard not to anticipate the second consecutive monthly increase in the year-over-year rate. It would be the first back-to-back increase since September-October 2022. The eurozone CPI fell to 1.8% in September before rising to 2.0% in October. Like US policymakers, ECB officials recognize a bumpy path. Still, neither the jump in negotiated wages in Q3 (5.4% year-over-year vs. 3.5% in Q2) will deter a December rate cut. In fact, the swaps market continues to price in a modest chance (almost 20%) of a 50 bp cut--which seems exaggerated. The UK economic diary is peppered with survey and consumer lending updates. Players must look elsewhere for new trading incentives. 

The euro hit an air pocket after the disappointing flash November PMI. It dropped a little more than 1.5-cents in the following hour from about $1.05 to $1.0335. It spent most of the remainder of the session between $1.0385-90 and $1.0435 and settled above the lower Bollinger Band (~$1.0390). News of the US Treasury pick sent the euro slightly through $1.05 in Asia Pacific turnover to start the week. Since the high was set, the euro has not traded below about $1.0450. It is trading near session highs in late European morning activity. Note that there are two large option expirations on Wednesday:  $1.0410 for nearly 2.6 bln euros and $1.05 for 2.1 bln euros. Sterling fell around a cent to slightly below $1.2490 when its PMI disappointed at the end of last week. It stabilized and traded mostly between $1.2500 and $1.2540. It reached slightly through $1.2600 in the initially flurry of dollar-selling today. It returned to about $1.2550 before it found bids in Europe to lift it back to $1.2580. There are options that expire Wednesday at $1.2600 for about GBP410 mln. 

America

The first part of the holiday-shortened week in the US features Fed survey data, house prices and new home sales. These tend not to be market-moving, even in the best of times. The second half of the week highlights include the PCE deflator, for which economists have a good handle on after the CPI and PPI. The consumption and inventory data will help shape expectations for Q4 GDP, which appears to be around 2.0%-2.5%. The next big data point will be the November jobs report on December 6. The early estimates are for around 175k, which is roughly this year's average. The average in the first ten months of 2023 was about 255k. Canada's economic week also begins slowly. The highlight at the end of the week is the September and Q3 GDP. Growth is believed to have accelerated, and October inflation was higher than expected. The odds of a 50 bp cut next month reflected in the pricing in the swaps market have been shaved over the past couple of weeks from near 60% to a little more than 20%. Mexico reports the October trade balance and the central bank issues its inflation report on Wednesday. The minutes from the recent central bank meeting will be published on Thursday. The basis for a new USMCA is taking shape. The US and Canada have been critical of Mexico's trade and investment with China and the US wants the processing of visas to be done inside Mexico. 

A series of better-than-expected Canadian data, which included a 0.9% rise in September retail sales excluding autos, the strongest in five months, reported before the weekend. The Canadian dollar was the strongest G10 currency last week, gaining almost 0.8%, its best week in three months. Canada's two-year discount to the US narrowed by 15 bp over the past week. The US dollar slipped slightly through CAD1.3930 today. The greenback must close below CAD1.3950 to bolster the case that a near-term high is in place. Softer Mexican price pressures in the first half of November supported speculation of another rate cut next month. The US dollar remained firm against the peso. It rose for the third consecutive session ahead of the weekend, snapping a five-day drop. The greenback gained about 0.65% against the peso last week and posted its highest weekly close against since July 2022 (~MXN20.48). Domestic and international considerations seem aligned against it, but in the broad US dollar drop earlier today, it fell about 0.5% to ~MXN20.3325 (~MXN20.4375 settlement). It bounced back to nearly MXN20.45 before finding new sellers in Europe. A break of MXN20.32 could see MXN20.24.