Markets
It seems like market pockets need some time to digest news or market events these days. Last week’s delayed FI reaction to the Fed’s hawkish normalization turn served as a point in case. Yesterday, the FX market (dollar) responded with a one-day delay to Tuesday’s huge sell-off in both stocks and bonds (with US Treasuries underperforming German Bunds). The FX response seemed outsized given equities’ and bonds’ intraday gains while lacking additional news/eco data. In any case, the dollar made up for Tuesday’s “off-day”. The trade-weighted greenback surged above 94 to close at the highest level (94.34) since September last year. Huge resistance is nearby in a combination of 38% retracement on the March2020/January2021 decline (94.47), the March 2020 pandemic low (94.65) and the September 2020 top (94.74). It’s clear that currencies from countries/economic zones who continue to play the ostrich in light of inflation developments get punished the hardest this year. This accelerating dynamic won’t change until they start facing the facts. USD/JPY kissed the psychological 112 mark and looks against important resistance in the form of the 2020 top (112.23) and the 2019 high (112.40). EUR/USD set a new YTD low after giving away the August bottom (1.1664) and is currently testing minor support at 1.1603 (November 2020 low). The more high profile reference is 1.1495 (March 2020 spike) to 1.1493 (50% retracement on March 2020/January 2021 rise). Friday’s September CPI inflation numbers might serve as a new wake-up call for the euro/ECB part of the equation. Sterling for a long time managed to keep up with the dollar but a slower reaction function after the normalization start now weighs. GBP/USD sets new YTD lows below 1.35 and has quite some way to go towards 38% retracement on the March 2020/February 2021 rise (1.3158).
Asian stock markets mostly trade positive this morning as disappointing Chinese PMI’s are met with PBOC easing rumours. The dollar takes five after yesterday’s impressive rally. US Senate Majority Leader Schumer said that lawmakers across the aisle reached an agreement to avoid a government shutdown with a stopgap spending bill which should keep operations running until December 3rd. The legislation is expected to pass both chambers today. The deadlock on raising or suspending the debt limit remains in place though with US Treasury Secretary Yellen warning for a October 18 default without a deal. Today’s eco calendar contains US weekly jobless claims, Chicago PMI, EMU unemployment rate, and German CPI numbers. The latter will set the tone for tomorrow’s EMU reading. Dominant market trends remain higher rates, lower stocks and a firmer dollar.
News headlines
The Official Chinese September PMI’s showed a divergent picture on the state of the economy. The manufacturing PMI unexpectedly dropped in contraction territory from 50.1. to 49.6. Most sub-indicators on activity, including production, new orders, and employment stay below the 50 boom/bust mark and are declining further. Price subindices remain firmly upwardly oriented. Activity is feeling an immediate impact from higher energy prices/shortages that are weighing on high-energy consuming industries, the NBS said. The setback in manufacturing was balanced by a better than expected performance of the non-manufacturing sector. This PMI rose from 47.5 to 53.2, with services rising from 45.2 to 52.4, but construction easing from 60.5 to 57.5. The rise in services amongst other was due to travel-related sectors rebounding from a sharp fallback in august. The private Caixin manufacturing PMI showed a more benign picture rebounding from 49.2 to 50. The yuan is trading stable near USD/CNY 6.47 as the PBOC continues to inject liquidity in the market to address end of quarter market tensions.
According to governor Kganyogo of the Reserve bank of South Africa, South Africa’s target range for inflation at 3%-6% is too wide and too high. He considers an inflation target closer to 3.0% as more appropriate. The central bank governor already made this call earlier, advocating that a lower inflation would help to keep interest rates lower. South Africa headline inflation was 4.9% in August. Core CPI printed at 3.1%, with the SARB policy rate at 3.5%.
