by Marc Chandler
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Overview: The major central banks have successfully pushed back against the aggressive tightening the market had discounted. The Bank of England's decision not to raise rates after key officials seemed to suggest one was imminent. On the heels of what we argued was a dovish tapering announcement by the Fed, it spurred a dramatic decline in short and long-term interest rates. The drop in UK rates--21 bp in the 2-year and nearly 14 bp in the 10-year is the largest in several years. The S&P and NASDAQ rose to new highs. The former rose for the 15th time in the past 17 sessions. The latter is up for nine consecutive sessions coming into today. Still, the MSCI Asia Pacific Index pared this week's gains, as only Taiwan, Australia, and India rose among the prominent bourses. The Stoxx 600 was posting small gains in Europe. Barring a sharp reversal today, it is advancing for the seventh consecutive week. Benchmark 10-year bond yields are softer. The US Treasury is yielding 1.52%, off about three basis points this week. European bond yields are off 13-22 bp this week, led by Italy and Greece. After slipping after the FOMC statement, the greenback recovered yesterday, except against the yen, as cross positions were unwound amid the drop in yields. The dollar remains firm today. The Antipodeans, sterling, and the Norwegian krone are extending yesterday's losses. Outside of some central European currencies, most of the freely accessible and liquid emerging market currencies are heavy. The JP Morgan Emerging Market Currency Index is off slightly for the eighth time in the past 10 sessions. It will likely be the third consecutive weekly loss. The drop in yields has given gold a lift. After falling to about $1759 in the middle of the week, the yellow metal traded above $1800 for the first time this week today but encountered sellers. December WTI posted a big outside down day yesterday, falling to $78.25 but is back near $80 ahead of the US open. Copper has stabilized and paring this week's loss, which would be the third in a row. The CRB Index is off 1.8% this week coming into today. If sustained, it would be the second weekly loss since the third week in August.
Asia Pacific
Japan's formal emergency ended in September. The recovery in the world's third-largest economy is lagging behind the US and Europe. Japanese growth will be helped by additional fiscal stimulus. Today it reported that household spending rose for the first time in five months. The 5% month-over-month increase was stronger than expected and cut the year-over-year decline to -1.9% from -3.0%. There is talk that the economic package could be ready in a couple of weeks. Local press reports that among the measures being considered is a JPY100k cash payment for all children up to high school age.
The Monetary Statement of the Reserve Bank of Australia gave another opportunity to fine-tune the central bank's message, but instead, it stuck to its message. It does not envision that wage or inflation conditions that would allow it to hike rates before 2024. In some ways, Australia is more in the cyclical location of Japan rather than the US and Europe. Growth in the US and Europe likely peaked in Q2 or Q3. Australia's lockdown means the economy probably contracted in Q3. The RBA estimates this year's GDP at 3% and is set to accelerate to 5.5% next year. Meanwhile, the RBA will continue to buy bonds through mid-February at A$4 bln a week. The yield of Australia's generic three-year note fell nearly 30 bp this week after rising uninterrupted in the last five weeks by almost 100 bp. At 1.80%, the 10-year benchmark yield fell nine basis points this week, while the Australian dollar is edging out sterling for the worst performer this week with a nearly 1.9% loss (at ~$0.7380).
The greenback is holding slightly above this week's low against the yen recorded on Tuesday near JPY113.45. It has hardly been above JPY113.85 today and found support near JPY113.55. The expiration of the $1.6 bln of options at JPY113.70 may not have much impact today, given that the dollar has traded below it in three of the past four sessions. The Australian dollar has extended its losses to approach the (50%) retracement mark of last month's rally that is found near $0.7360. A break could spur a move to the next retracement objective (61.8%) closer to $0.7315. The US dollar edged slightly (<0.1%) higher against the Chinese yuan, and around CNY6.4015 is little changed on the week. For the first time in a couple of weeks, the PBOC set the dollar's reference rate lower than the bank models (Bloomberg survey) projected (CNY6.3980 vs. CNY6.3984).
Europe
Economists may have been split on the outlook for the BOE, and despite some officials noting it was a close decision, only two MPC members (Ramsden and Saunders) voted to hike rates. They were joined by a third member (Mann)who wanted to reduce the bond-buying. In an attempt to explain why the market got it so wrong, as reflected in the dramatic interest rate and currency moves, Governor Bailey said his comments were always conditional. This is to say it was the markets' fault because it did not read the fine print. Bailey went on to give several more interviews after the meeting, seemingly recognizing the need to explain himself. He said it was not his job to guide financial markets on rates, yet that is precisely what he and several colleagues did. Expectations for BOE policy shifted. It appears that slightly more than a 50% chance of a hike is seen next month, but a 25 bp hike (rather than 15) is nearly fully priced in for the February 3 meeting. Remember, the BOE says that it will stop recycling maturing proceeds back into the bond market when the base rate reaches 50 bp. There is a sizeable maturing issue in mid-March. The implied forward rate is now back below 50 bp.
German and French industrial production figures were atrocious, but they were for September and maybe too old to have much impact, especially given that we are almost halfway through Q4. In Germany, industrial output was forecast (median in Bloomberg's survey) to rise by 1%. Instead, it fell by 1.1%, and the news that the August series was revised to show a 3.5% decline instead of 4.0% hardly took away the sting. Through September, German industrial output has only risen in two months this year (March and July). French news was just as bad. Industrial production was expected to be flat in September but instead fell by 1.3%, offsetting in full the 1% gain reported in August. Manufacturing output slid by 1.4%, leaving it up a minor 0.1% year-over-year. Spain offered a pleasant surprise, albeit small. Industrial output rose 0.3% instead of the 0.1% forecast by economists, and the August loss was shaved to -0.2% from -0.3%. The aggregate figure is due next Friday, and the flat expectation in the Bloomberg survey will likely be revised lower. Compounding the bad but dated news, eurozone retail sales fell by 0.3% in September following poor national figures. However, the blow was softened by the upward revision to 1.0% from 0.3% in August.
The euro is less than a quarter-cent range above $1.1540. Yesterday fell with a few hundredths of a cent of the year's low set last month near $1.1525, which is also where the lower Bollinger Band is found today. There are 1.4 bln euros of options in the $1.1560-$1.1575 area that could come into play in the usual volatility generated by the US jobs report. That said, on balance, we expect new lows in the near term. Sterling posted a big outside down day yesterday and has yet to find a bottom. It has dipped below $1.3440 today after recording a low near $1.3470 yesterday. The low set in late September near $1.3400 is the low for the year so far. The note of caution is that the sterling closed below the lower Bollinger Band yesterday and is mostly holding below it today (~$1.3495). Without getting too far ahead of the story, a break of $1.34 could signal a move toward $1.3165-$1.3200.
America
The focus is on today's US jobs report, but with the Fed starting tapering, the policy-impact value is slim to none, while the headline risk is palatable. Fed Chair Powell spoke for many economists when he suggested that after a disappointing 2% annualized growth in Q3, the economy accelerated again in Q4. The October jobs report is widely expected to confirm this. The median and average forecast in the Bloomberg survey is 450k. The average of the top 5 forecasters for US jobs data, according to Bloomberg amazingly close at 455k. Powell spoke of the participation rate, and he seems to express uncertainty whether it will fully return to pre-Covid levels (63.3% in December 2019 vs. 61.6% in September). Just this year's growth and inflation levels are unlikely to be sustained, the talk of a labor shortage seems to be a brief moment and not a medium or long-term structural issue. At the low end of the pay scale, the trend toward automation will accelerate. These jobs will not be offshored but replaced by software, hardware, artificial intelligence, and robots. Consider that more than a third of American working men drive something for a living (cars, trains, planes, buses, forklifts, trucks, etc). At the higher end of the pay scale, the same forces of automation are replacing highly skilled functions.
For more than a generation American employers have set work rules (where, when, and how) practically unchallenged by employees. Covid and the work from home experience have re-opened these issues. Technology allows employers to increase their span of control (command, communication, and monitoring functions) and makes working remotely feasible. In some ways, the resistance by many employees to returning to the status quo ante work pattern is threatening the corporate culture as it has evolved. Surveys show that workers say that adjustable working hours and remote work have become more salient. Drinking the corporate kool-aid is a way to climb the hierarchy and turn jobs into careers, but this may be less appealing to those who find meaning and avenues of expression outside of the workplace. At the risk of oversimplifying, the labor shortage will likely prove to be a relatively brief moment in time. However, a more profound change may be taking place over the work processes themselves. We have begun what may be an extended experiment in hybrid models that will vary by employer, industry, and country.
The US private sector hired a net average of 488k per month in Q3. It was the weakest quarter of the year. In contrast, Canada filled 115k full-time positions on average in Q3, the strongest quarter of the year. The 193.6k in September was a little more than six times this year's average through August. The risk is of a reversion to the mean last month, which is around 50k. The Bank of Canada, unlike the other Fed, BOE, RBA, and ECB, turned more aggressive at its most recent meeting, stopping its QE without much warning and suggesting an earlier hike is possible. The swaps market is pricing in more than 100 bp hikes over the next year, and the 46 bp jump in Canada's two-year yield in the past month is the most among the high-income countries outside of Australia and New Zealand.
The Canadian dollar softened in the face of yesterday's large greenback rally, and it too has not recovered today. It is flirting with the (38.2%) retracement target of last month's decline (~CAD1.2470). The US dollar is in a narrow 20-pip range near yesterday's high, which is slightly shy of the 200-day moving average (~CAD1.2480). There are $725 mln of options expiring today at CAD1.2500. The next retracement (50%) is around CAD1.2525. After the key downside reversal on Wednesday from almost MXN20.98, the greenback found support near MXN20.50. It is trading near MXN20.61 in the European morning. We peg initial resistance in the MXN20.66-MXN20.68 area and then closer to MXN20.75. Note that Banxico meets next week. A 25 bp hike is expected.
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