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BOJ Doesn’t Surprise, but EMU does with October CPI and Q3 Growth

Overview: Bonds and stocks are being sold ahead of the weekend.  Poor corporate earnings and higher inflation in Japan and Europe are weighing on sentiment.  The dollar is mostly higher. Hong Kong and mainland China led large Asia Pacific markets lower.  India and Singapore were notable exceptions.  The Stoxx 600 in Europe is off 0.9%, the most in three weeks, and US futures are off sharply.  The S&P 500 looks to go back below the 3800 “breakout” seen earlier this week.  European bond yields are up 16-20 bp on the back of higher national EMU October inflation reports.  The 10-year US Treasury yield is up nine basis points to resurface above 4.0%. Note that it is still off about 23 bp on the week. With higher inflation and an unchanged BOJ stance, the yen leads the G10 currencies lower today with nearly a 1% drop.  The euro is a little softer around $0.9950. Outside of a couple of Asian currencies, emerging market currencies are heavy.  The South African rand is the heaviest and it is off almost 1%. A stronger dollar and higher rates are no match for gold which is pushing back below $1650 for the first time in three sessions.  December WTI is giving back yesterday’s 1.3% increase.  It is near $87.90 after settling last week slightly above $85.  A smaller-than-expected rise in US inventory is helping US natgas prices snap a nine-week decline.  The price has surged 12.3% today to about $5.83 from a little below $5.00 at the end of last week.  Europe’s natgas benchmark is up for the fourth straight session, but at 112.50 euros it is still slightly lower on the week.  Iron ore fell for the fifth session and at $80.95, is off by about $10 a ton this week and at new two-year lows.  Demand concerns are a key drag. December copper is around 2% lower today to give back this week’s gains and a little more.  December wheat could not sustain yesterday’s early gains and lost 0.25% yesterday and is off another 1.1% today.  It is holding barely above the month’s low that was set on Wednesday.

Asia Pacific

There are three developments in Japan to note.  First, as widely anticipated, the BOJ left its policy setting unchanged. Yet it increased the frequency of its bond buying in Q4 and according to the BOJ’s statement, this will translate into buying more bonds.  It had already announced it purchase more long- and super-long bonds in the Oct-Dec period.  In its updated projections, it lifted CPI (this year to 2.9% from 2.3%, 1.6% next year from 1.4%, and 1.6% from 1.3% in the following year) and adjusted its GDP forecasts (2.0% this year from 2.4%, 1.9% next year from 2.0% and 1.5% from 1.3% in the following year).

Second, Prime Minister Kishida unveiled a JPY29.1 trillion (~$200 bln) budget to boost growth and cushion rising prices, which apparently are rising fast enough to squeeze households but not fast enough for the BOJ to adjust policy.  When local government and private sector measures are taking into account, the package is seen around JPY71.6 trillion.  It suggests as much as JPY10 trillion will come from previously earmarked funds.  Money will be spent to offer companies for incentives to boost wages and lower household electricity bills by about 20%.  Gasoline and wheat subsidies were extended last month.  Some JPY10.6 trillion will be aimed at improving resilience to natural disasters and “changes in the national security environment.” There are also new funds to boost tourism and to encourage re-shoring.

Third, Tokyo prices jumped this month.  The year-over-year pace of CPI accelerated to 3.5% from 2.8%.  The core measure, which excludes fresh food, rose to 3.4% from 2.8%, while the measure that excludes fresh food and energy increased to 2.2% from 1.7%.  All of these readings were stronger than expected.  Separately, Japan reported an unexpected rise in unemployment last month to 2.6% from 2.5%, while the job-to-applicant ratio rose to 1.34% from 1.32%.

The Bank for International Settlements survey shows overall turnover in the foreign exchange market rising to $7.5 trillion a day, up 14% since the last survey three years ago.  Most of the major currencies share was little changed.  The US dollar remained on one side of 88% of the trades while the euro’s share slipped to 31% from 32%.  The yen and sterling’s shares were steady at 17% and 13% respectively.  The big change was with the Chinese yuan.  Its share rose to 7% from 4% three years ago.  This makes the yuan, the fifth most actively traded currency.  The BIS report can be found here.

The US dollar has rebounded after approaching JPY145 yesterday.  It is trading near JPY147.60 in the European morning.  The JPY147.75 area is the (38.2%) retracement objective of the dollar’s pullback from the multiyear high set on October 21 just shy of JPY152.  The next retracement (50%) is closer to JPY148.50.  The North American market may be cautious given the overextended intraday momentum indicators, and it may be on-guard for risk of BOJ intervention at the start of next week.  The Australian dollar has returned to the breakout near $0.6400.  Yesterday, was turned back from around $0.6520.  Support is seen in the $0.6380-$0.6400 area.  The intraday momentum indicators are stretched after recording session lows in early European turnover.  The central bank meets on November 1 and the futures market sees a quarter-point hike.  After trading below CNY7.17 over the past two sessions, the greenback recovered to trade above CNY7.26 today.  It remains within the range set in the middle of the week (~CNY7.1660-CNY7.30).  The dollar’s reference rate was set at CNY7.1698.  The median in Bloomberg’s survey was for CNY7.2090.  It was the strongest dollar fix since 2008.


The market read the ECB’s 75 bp hike dovish.  It focused on the dropping of the phase about hiking rates “over the next several meetings,” even though ECB President Lagarde was clear that more work needs to be done.  The central bank also adjusted the terms of the TLTROs that makes them somewhat less lucrative and increases the likelihood of early repayment.  Lagarde noted that the risks to inflation are on the upside and on the downside for growth. The German two-year note yield slumped 17 bp yesterday, essentially matching the decline of the previous four consecutive sessions. It is around nine basis points higher today. The deposit rate is now 1.50%.  Late last week, the swaps priced in a 2.75% rate at the end of Q1 23.  It has also fallen for five sessions through yesterday to stand at 2.35%.  It stands closer to 2.45% today after some national CPI figures.

Every state in Germany that has reported October CPI figures showed an increase in the year-over-year rate, threatening the median forecast (Bloomberg) for an unchanged EU-harmonized rate of 10.9% (national figure of 10.1% after 10.0%).  Separately, Germany surprised by estimating that it expanded by 0.3% in Q3 rather than contract by 0.2%. The French economy expanded by 0.2%, but the news that its EU-harmonized measure of inflation surged from 6.2% to 7.1% was the bigger shock.  Italy’s harmonized October inflation surged 4% in the month for a 12.8% year-over-year pace. The median forecast (Bloomberg’s survey) was for a 9.9% pace. The best news was from Spain. Its preliminary harmonized CPI estimate saw prices pressures ease to 7.3% from 9.0%. The median forecast was for an 8% pace.  Separately, Spain reported 0.2% growth in Q3. On Monday, the eurozone reports the aggregate figures for October CPI and Q3 GDP.

The first week has been a honeymoon for Italy’s new Prime Minister Meloni. The 10-year yield fell from 4.75% at the end of last week to dip below 4% yesterday for the first time since mid-September. It has jumped back today to around 4.15%. The two-year yield fell by more than 60 bp to 2.40% and is now near 2.55%. Italy’s 10-year premium over German fell below 2.05%, its lowest in three months.  It is a couple of basis points firmer now. The two-year premium is little changed today near 65 bp and below its 200-day moving average for the first time since July.  Capital seems to be given Meloni the benefit of the doubt and has not struck as it did against the UK.

And what a honeymoon for Sunak, the new UK Prime Minister. The 30-year yield has completed its round-term. It was trading around 3.50% before Kwarteng’s mini-budget and surged above 5%. Yesterday, it briefly traded below 3.50%. It is near 3.55% now. The Economist’s reference to “Britaly” seems confused at best. Those references to the UK being an emerging market economy also seem like fever talking. Its five-year credit default swap is slightly below 28 bp (five-year CDS), which is below the US, Japan, Canada, Italy, and France.  Among the G7, only Germany is lower.

The euro approached $1.01 yesterday before the ECB meeting and traded down to around $0.9960. It extended the pullback to almost $0.9925 today the European morning. The intraday momentum is oversold and there may be scope toward $0.9980 or so.  With the ECB meeting behind us, the market’s focus will shift toward the FOMC meeting and the US employment report due next Friday. The shape and depth of the euro’s downside correction/consolidation may shed light on near-term technical outlook. Sterling’s recovery stalled in front of $1.1650. It returned to almost $1.15 today but the low does not yet seem to be in place. The downside may extend toward $1.1475. The BOE meets on November 3 and the market has downgraded the chances of a 75 bp move to about a 2/3 chance. At the start of the week, a small chance of 100 bp was still discounted.


The US economy expanded at an annualized pace of 2.6% in Q3, a touch firmer than the median expected in Bloomberg’s survey and not quite as good as the Atlanta Fed tracker suggested. However, it means little. As anticipated, the story as essentially a reversal of the downside skew that came from trade in H1. In Q3, net exports added 2.8 percentages to GDP, without which a small contraction would have been recorded. The pace of inventory building slowed, and this shaved growth by about 0.7 percentage points.  Consumption rose 1.4% at an annualized pace in Q3. It rose 2% in Q2 and 1.3% in Q1. Consider that it averaged 2.3% a quarter in the two years before Covid. In the September Summary of Economic Projections (Fed’s dot plot) the median forecast for this year’s GDP was slashed to 0.2% from 1.7% projected three months early. The GDP deflator rose 4.1%, less than half the 9.0% pace reported in Q2 and less than the 5.3% median forecast in Bloomberg’s survey. It was the lowest since Q4 20. The dollar’s strength, one of the channels that Powell and Yellen have referred to through which financial conditions are tightening, may have weighed on import prices. One of the implications of yesterday’s report is that today’s September personal spending and income data is largely known by economists that tease of the monthly details.

The income effect of more people working helps underpin consumption. However, in Q3, aggregate hours were nearly flat. The points to a rise of around 2% in productivity. Yet this was not enough to make ends meet. Households appear to have dipped into saving. The savings rate as a fraction of disposable income has fallen steadily in H1 from 7.5% at the end of last year to 3.0% in June, as Covid-related accumulation was drawn down.  It stabilized at 3.5% in July and August, but likely slipped again last month. That 3% print was the lowest since April 2008. In addition to drawing down savings, many American families took equity out of their homes when they refinanced, but the jump in interest rates choked off this channel.  Americans are using their credit cards. Their balances rose by $17.2 bln in August (the most recent data), which is the third-highest month on record. The monthly average increase this year is about $14 bln.  It is just a huge number even if one makes allowances for higher prices. Last year’s monthly average through August was almost $3.3 bln. Even though the savings rate was higher, that 2021 average is closer to “normal.” In 2019, the Jan-Aug average was $3.6 bln, slightly less than $3.0 bln in 2018, and $3.7 bln in 2017.

Mexico reported a much smaller than expected trade deficit for last month, and despite gaining ground against most of the G10 currencies, the dollar fell against the Mexican peso. It approached but did not penetrate the lower end of the more than two-month-old trading range around MXN19.80.  Exports, led a recovery in the auto sector (supply chain issues), rose 25% from a year ago. Imports were up 21%. The trade deficit was a little less than $900 mln. It was almost $5.5 bln in August and the market had looked for around a billion-dollar improvement. Worker remittances (September figures due November 1) are more than covering the trade deficit. The dollar’s low in September was near MXN19.75, but it did not close below MXN19.80. There are little charts below until closer to MXN19.60. Widening out the view, shows that Latam currencies were four of the five top EM currency performers yesterday. Ahead of this weekend’s run-off election, where polls give Lula a small advantage, there has been some profit-taking on Brazil. The real is off 3.35% this week, making it the worst EM performer.

The US dollar briefly dipped below CAD1.35 yesterday, a new low for the month. However, it settled higher on the day and is back above CAD1.36 in Europe. A move above the CAD1.3635 area could see CAD1.3675-CAD1.3720. The key still seems to be the broader risk appetite and the performance of US stocks. Like we have seen with several of the other pairs, the greenback’s advance has stretched the intraday momentum indicators. This suggests an element of caution may be warranted among early North American dealers about chasing it. Canada reports August GDP.  It is unlikely to be much of a market-mover after the central bank meeting earlier this week. The MXN19.80 area is holding for the third session and the dollar is trading with a firmer bias. Look for it to remain within yesterday’s wide range (~MXN19.81-MXN20.04). Mexico reports Q3 GDP Monday. After expanding by 0.9% (quarter-over-quarter) in Q2, growth is expected to have slowed to 0.3% in Q3.

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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