Markets
Today was more or less a copy-paste of yesterday with no or only second tier economic data, including a new pandemic low of 290k in US jobless claims. The Philly Fed Business Outlook retreated more than expected, from 30.7 to 23.8. This, however, relates to the general business activity only. Underlying details actually look pretty good with a strong jump in new orders, shipments on point and the payroll rising. Prices paid remain at very elevated levels. The indicator basically translates yesterday’s Beige Book into numbers, ie: demand is solid but (very) strong price pressures and lack of personnel is hampering output. The forward looking indicator is the odd man out, recovering only marginally from a steep drop in recent months (24.2 compared to the multiyear high of 69.2 in June). Markets largely dismissed the data as irrelevant though, maybe as they await a more high profile-batch of figures tomorrow (PMIs). Core bond yields forced an attempt to inch higher once again but that move soon reversed. The US yield curve at the time of writing flattens with the long end underperforming. Changes range from +2 bps (2y) to -1 bp (30y) with ever-increasing inflation expectations compensating for declining real yields. The 10y yield hit the upper bound of the ST upward sloping trend channel. German yields rise 1.1 bp (2y) over 2.5 bps (5y) to 1.9 bps (10y; tested 0.10% again). UK Gilt yields undergo a steepening trend, shifting 2 to 3.5 bps higher. Turning to FX markets, most action occurred on the EM front (see for example headline below). In advanced economies, the Japanese yen is today’s outperformer as sentiment on risky assets is fragile (oil down 1%, European stocks 0.5% lower, WS: up to 0.3% lower) while the increase in core bond yields is contained this time around. USD/JPY is on track to close below 114 just four days after capturing that barrier for the first time since 2018. EUR/JPY retreats sub 133. EUR/USD again flirted with resistance at 1.1664 but there was zero momentum for an actual break higher. Perhaps activity in EUR/CHF (slipping below 1.07) is weighing on the common currency as well. Sterling is holding decent given the trading background. This might be the result of today’s UK Gilt underperformance. EUR/GBP holds below key 0.845 support. The pound even barely loses vs the USD (GPB/USD testing 1.38 support).
News Headlines
The Central Bank of Turkey (CBTR) cut its policy rate by a bigger than expected 2% to 16%. CBRT already reduced the policy rate by 100 bps in September. The rate cut comes after president Erdogan last week replaced three MPC members as he wants monetary policy to be more supportive to economic growth. The rate hike comes even as both headline inflation (19.58% Y/Y) and core inflation (16.98%) rose further in September. Real rates thus became more negative. The CBRT ‘justifies’ the reduction as the drivers behind the rise in inflation are assessed to be transitory. The committee says it evaluated the impact of demand factors that monetary policy can have an effect on, core inflation developments and supply shocks. At the same time, the impact of earlier monetary tightening is already affecting credit and domestic demand as does macroprudential policy. Even so, the Committee assessed that, till the end of the year, supply-side transitory factors leave limited room for downward adjustment to the policy rate. The lira dropped to record low levels against the dollar and the euro, with EUR/TRY touching the 11-mark.
According to the Trends Survey of the Confederation of British Industry, price pressures in the UK industry remain at historically high levels. After touching the highest level since 1977 in July, the index of costs declined only marginally in October (71 from 73). Firms are passing through these costs to clients. Manufacturers in the three months to October raised prices at the fastest pace since 1980 (index at 59). Expectations for price rises over the next three months also rose to a multi-year high. The picture on activity remains constructive. Order growth slowed to the lowest since April (9 from 22), but output is expected to grow at a solid pace (33 from 25) . Business optimism in the quarterly survey remained in positive territory.
