Inflation in Japan soared to the highest levels in more than 30 years, to 3.7% in October, up from 3% printed a month earlier. It was expected, maybe slightly higher than expected, and came as another proof that the Bank of Japan (BoJ) is making the same mistake of ignoring the rising inflation as did the Federal Reserve (Fed) last year.
High inflation print sure revived the BoJ hawks, and the calls for a policy rate hike, and kept the dollar-yen below the 140 level, but it’s unsure whether the BoJ will give up on its ultra-soft policy stance. Therefore, if the US dollar picks up momentum, which will certainly be the case, the USDJPY could easily rebound back above its 50-DMA, which stands near 145.
And the reason I think the US dollar will recover is because most Fed members remain relatively hawkish regarding the Fed’s policy tightening.
In this context, US stocks slid another day as more Fed members threw more hawkish comments into the mix, to dampen the investor mood, although some better-than-expected earnings from retailers pulled the S&P500 higher to the close.
The latest man to kill the market joy was St Louis Fed President, Mr. Bullard, who said that the rates should raise at least until the 5-5.25% range, while showing a chart that plotted rates between 5-7%. Maybe that was a mistake, maybe not! Other than him, Neel Kashkari also said that he wants to see inflation stop climbing, and that we are not there yet.
We are not there yet, is what the market is also pricing through US dollar options. Although the dollar index lost up to 8% since the end of September peak, it hit, and rebounded from a long-term trendline and option traders are building topside structure over the one-month tenor that covers the next US inflation report and the Fed’s next policy meeting in December. So traders see the dollar gain ground on potentially stronger inflation data in the next release, and a certainly hawkish Fed statement, accompanying the 50bp hike that’s priced at 80% as of today.
So, the ambiance in the stock markets is not as cheery as it was at the end of last week. The S&P500 started the day in a bad mood but recovered relatively well to close the session only 0.30% lower. A couple of encouraging earnings from retailers may have helped lift sentiment.
Moving forward, we could expect the downside correction on index level to deepen. The first bearish target for the S&P500 stands at 3855 level, which is the major 38.2% retracement on the latest rebound. That level should distinguish between the continuation of the actual bear market rally, and a bearish reversal for some more pain.
Higher taxes, windfall taxes, no spending cut, a gloomy growth forecast, but unharmed gilt & GBPÂ
The autumn budget announcement in Britain was… reasonable. The British government said it will borrow £170 billion instead of £185 billion expected. That, along with higher taxes helped boosting appetite in British sovereign bonds. The 10-year gilt yield tested the 3% mark to the downside for the first time since September, and could further ease given that the BoE also softened its policy stance lately on unideal economic conditions.
Now, one thing that was less expected was the spending cuts, or the lack thereof. Jeremy Hunt said yesterday that they won’t cut spending until the next general election. But the increase of the energy price cap which will have dramatic consequences for families, and their budget. A British family with two children, for example, will see its energy bill tripled.
From the economic lenses, both the U-turn on spending cuts, and higher energy bills will boost inflation, and that could be negative for the pound, if the Bank of England doesn’t compensate with higher interest rate hikes. And the BoE said last time that it won’t go crazy hawkish to avoid a complete economic meltdown in the UK.
And indeed, what was really scary for sterling traders yesterday was the gloomy growth forecast. Jeremy Hunt said that the UK is already in recession – stating the obvious. But he also said that growth will fall 1.4% next year, versus a 1.8% expansion printed previously, and recession will last over a year, while the BoE will probably be raising rates to fight inflation during this period. Even though it will probably be raising less than what it should to really fight inflation.
The outlook for pound sterling remains bearish, but because Cable selloff derailed sometime around April this year, and fell free with Liz Truss, the pair could further recover some of its losses. At 1.30, Cable will still be in the negative trend building since mid-2021.
