Norway

We think that the Polish statistical office is unlikely to markedly change its flash estimate of November CPI. As we expected, November brought a substantial increase in fuel prices when compared to October, while food prices also increased in monthly terms.

 

The decline in household energy prices turned out to be smaller than our forecast and core inflation moderated more than we had projected. The details of November's CPI reading should allow us to scrutinise the factors behind this lower core inflation print and potentially make some adjustments in the projected path of core inflation, depending on whether November's surprise was down to one-off drivers or was broad-based.

Current account (Oct): €2200mn

We forecast a large surplus on the current account balance in October on the back of a substantial improvement of the primary balance (a much smaller deficit than in the previous months) amid continued surpluses on both goods and services trade. According to our foreca

What Might it Take for the Fed to Deliver a Hawkish Tapering Announcement?

What Might it Take for the Fed to Deliver a Hawkish Tapering Announcement?

Marc Chandler Marc Chandler 03.11.2021 14:43
Overview: With the FOMC's decision several hours away, the dollar is trading lower against nearly all the major currencies.  The Antipodeans and Norwegian krone are leading.  The euro, yen, and sterling are posting minor gains (less than 0.1%).  Most of the freely liquid and accessible emerging market currencies are also firmer.  The Turkish lira is a notable exception.  The decline in the core inflation and a smaller than expected rise in the headline pace embolden officials for another rate cut when the central bank meets on November 18.  The JP Morgan Emerging Market Currency Index is rising for the second consecutive session after falling in the previous four sessions.  Equities are lower.  The MSCI Asia Pacific Index fell for the fifth session in the past six.  Among the large markets, Taiwan and Australia bucked the trend.  The four-day advance of the Stoxx 600 in Europe is at risk, and US futures are weaker.   Benchmark 10 year yields are mostly two-four basis points lower across most high-income countries today.  That puts the US 10-year Treasury yield near 1.52%.  Australia's two-year yield fell almost 10 bp to 0.55%.  It had peaked above 0.71% last week.   The three-year yield is off nearly 30 bp in recent days.  Gold continues to chop within the range set last Friday (~$1772-$1801).  Ahead of the OPEC+ meeting tomorrow amid talk that the US may seek to coordinate sales for a coalition of strategic reserves and a build of US inventories reported by API weigh on oil prices.  December WTI has approached the 20-day moving average (~$82), which has not closed below since late August. Base metals are higher as iron ore snapped a five-day slide during which it lost over 20%.  Copper is also recovering after forging a base in the $432-$433 area.  It is up around 1.5% today.  If sustained, it would be the largest gain in three weeks.   Asia Pacific China's Caixin services unexpectedly rose to 53.8 from 53.4 in September.  Recall that the manufacturing reading had improved to 50.6 from 50.0.  The net effect was that the composite edged up to 51.5 from 51.4.  The composite has converged with the "official" PMI, which stands at 50.8.  Separately, note that China is experiencing a broad spread of the virus into a dozen provinces, and the number of new cases is the highest in a couple of months. Inter-provincial travel has been restricted, and new social protocols are being introduced.  According to reports, the government advised households to stock up in necessities and ensure adequate food supplies for local authorities.  Australia's service and composite PMI shows the recovery was not quite as strong as the preliminary data suggested.  The service PMI rose to 51.8, not 52.0  from 45.5.  The composite stands at 52.1 rather than 52.2.  It was at 46 in September.   Tomorrow Australia reports Q3 real retail sales, but it will still be picking up the weakness of the lockdown.  September trade figures will also be reported.  Weaker exports and stronger imports are expected to have narrowed the trade surplus by almost 20% to A$12.4 bln. Ahead of the weekend, the central bank will make its Monetary Policy Statement.  The swaps market is pricing in 70 bp, down from 80 bp, of tightening over the next 12 months.  The dollar has been confined to a narrow quarter yen range through the Asian session and most of the European morning.  Softer yields and equities would be expected to give the yen a bit of support.  The 20-day moving average is near JPY113.65, and the greenback has not closed below it since the September FOMC meeting.  In the bigger picture, we have suggested the dollar-yen rally from mid-September through mid-October puts the dollar in a new range.  We suspected JPY114.50-JPY115.00 marks the upper end and JPY113.00 may be the lower end.  The Australian dollar fell almost 1.4% yesterday, its largest decline since May.  It reached $0.7420 yesterday, just above the $0.7410 (38.2% retracement objective of last month's rally).  It has stabilized today and has (so far) been capped near $0.7450.  Resistance is seen in the $0.7460-$0.7470 area.   For two weeks, the Chinese yuan has been alternating between advances and declines, and net-net little changed over the period.  Yesterday, the yuan slipped (0.04%), and today it is firmer (0.06%).  The PBOC has consistently set the dollar's reference rate above model projections, and today's fix was at CNY6.4079 compared with median expectations (Bloomberg) for CNY6.4068.  The PBOC was unexpectedly generous in its open market operations, injecting CNY50 bln. As a result, the overnight repo rate fell 12 bp to 1.99%.   Europe Norway's central bank meets tomorrow.  It was the first of the high-income countries to raise rates this year, so far, followed only by New Zealand.  We overstated the case for Norway to hike rates at the meeting, but don't be mistaken. The case for a rate hike exists, but the pattern is not to move at these "off-meetings" (without updated formal policy path guidance).  Instead, officials will likely confirm their intentions to raise rates in December. The swaps market is pricing in almost three hikes next year.   The dollar trended lower against the Nokkie since August 20. The downward momentum stalled in late October.  Yesterday it rose above NOK8.50 for the first time since mid-October.  The momentum indicators have turned up.  The 200-day moving average is slightly below NOK8.55 and near NOK8.60 is the (38.2%) retracement of the down move.  The UK is emerging from the economic soft patch in the June-August period.  The final service and composite PMI report today showed stronger activity than the preliminary estimates.  The service PMI rose to 59.1 from 55.4 in September.  The flash estimate had put it at 58.0.  The composite stands at 57.8, up from the preliminary projection of 56.8 and September 54.9.    The Bank of England meets tomorrow.  There does not seem to be much conviction, and the market appears divided. In the Bloomberg survey, 22 out of 45 economists expect a hike that seems to have been largely discounted by the markets (15 bp).  Three of the largest UK banks do not expect a hike.  Some observers argue that what is the point of stopping now when it would end next month. We often think the signaling channel of QE is under-appreciated.  Stopping the bond-buying now adds to the seriousness of the moment if it does not lift rates. Sterling has retreated by 2.3 cents since last week's high to approach $1.36 yesterday in the US. The euro reached its lowest level against sterling since March 2020 in late October near GBP0.8400, and yesterday rose to above GBP0.8500 for the first time since October 12.   Poland's central bank is expected to hike the base rate 25 bp today to 0.75%.  Recall that it hiked 40 bp last month to begin the cycle.  It started later than Czech and Hungary.  Preliminary October CPI rose 1% on the month, accelerating the year-over-year pace to 6.8% (from 5.9% in September.  It was at 5% as recently as July.  The Czech central bank meets Friday and is expected to hike the repo rate 75 bp to 2.25%.  After two quarter-point hikes (June and August), it hiked by 75 bp in September. Inflation (CPI) rose to 4.9% in September from 4.1% in August.  It is the highest since 2008.  Turkey's CPI rose by 2.39% last month to bring the year-over-year rate to 19.89% (19.58% in September), slightly lower than expected.  The core rate slipped slightly to 16.82% from 16.98%.   The euro has been confined to about a quarter of a cent range above $1.1575 so far.  It stalled yesterday near $1.1615, the (50%) retracement of the pre-weekend slide from almost $1.1700 to $1.1535.  It is making session highs in the European morning, but we look for a less friendly North American session.  There are options for about 530 mln euros at $1.16 that expire today.  A hawkish Fed (see below) could bring option expirations tomorrow at $1.1525 (~825 mln euros ) and $1.1550 (~900 mln euros) into play.  Sterling tested $1.36 yesterday, the lowest level since October 13.  It has hardly managed to distance itself from the lows.  It found new offers near $1.3635.   There is a GBP675 mln option expiring today at $1.3650.  A larger one (~GBP820) is at $1.3615 also expires but has liked been neutralized.   America It seems well appreciated that the Federal Reserve will announce it will begin slowing the bond purchases. Most expect a reduction of $10 bln of Treasuries and $5 bln of Agency MBS.  Investors appear to be anticipating the monthly reduction of these amounts through June 2022.  Even with yesterday's upticks, the June Fed funds futures contract continues to discount a rate hike then.  If the effective Fed funds rate is steady in the first half of June at eight basis points and then rises to 33 bp for the second half of the month (25 bp rate hike on June 15), the average effective rate is about 20.5 bp.  The contract settled at an implied rate of 20 bp yesterday.   Since this is already in the market, the tapering announcement itself may not be hawkish.  There are two steps the Fed could take if it wanted to drive home the point.  First, the FOMC statement has been referring to inflation as largely "transitory."  It could simply drop this qualifier or modify it.  The Chair has already acknowledged that it will likely persist longer than initially anticipated.  Indeed, next week's CPI report is expected (Bloomberg survey median) is expected to have risen by 0.5%, which, given the 0.1% increase in October 2020, means the 12-month rate will accelerate to around 5.8%.   Second, after the last press conference, Powell was asked about needing to reduce monetary stimulus while the Fed was still engaged in QE.  The Bank of England said it would hike if necessary while it was still buying bonds.  Powell said in that situation, the Fed would not send contradictory signals but accelerate the tapering process.  Quicker tapering would be a hawkish signal, and reaction by the market would likely bring forward the first hike.   The Democratic Party lost the Virginia gubernatorial context.  Biden had carried the state by 10 percentage points last year, and the preliminary results suggest a loss of suburban voters, a key part of the new Democratic coalition.  New Jersey's governor contest is very close, and the Democratic incumbent is trailing. The results play on ideas that the Democrats are likely to lose both houses of Congress in next year's mid-term election, in which it is common for the party in the White House to lose seats.  Some in the press have been critical that Xi and Putin are not attending COP-26, but their leadership was always in doubt.  The election results may undermine US leadership because Biden's commitments may not get legislative support, and executive decisions could be reversed in 2024.   Today could be the first day since October 13 that the US dollar does not trade below CAD1.2400.  Still, note that the greenback remains in the CAD1.2300-CAD1.2435 range set last Wednesday when the Bank of Canada turned more hawkish.  Yesterday, the US dollar closed above its 20-day moving average for the first time since late September.  We suspect corrective forces could lift the exchange rate toward CAD1.2475, where the (38.2%) retracement of last month's decline is found, and the 200-day moving average (~CAD1.2485).  However, in its way stands the $920 mln option at CAD1.2450 that expires today.  The greenback reached almost MXN20.92120 yesterday, a new eight-month high. Sellers emerged, and the dollar closed lower to snap a five-day advance.  It is softer today but holding above yesterday's low (~MXN20.71).  Ahead of the FOMC outcome, the market may be cautious about taking the dollar below the MXN20.66-MXN20.70 area.   Disclaimer
November Monthly

November Monthly

Marc Chandler Marc Chandler 03.11.2021 15:17
Three main forces are shaping the business and investment climate:  Surging energy prices, a dramatic backing up of short-term interest rates in Anglo-American countries, and the persistence of supply chain disruptions.  The US and Europe have likely passed peak growth.  Fiscal policy will be less accommodative, and financial conditions have tightened. Japan appears to be getting a handle on Covid and after a slow start.  Its vaccination rate has surpassed the US.  The lifting of the formal state of emergency and a hefty dose of fiscal stimulus is expected to be delivered in the coming months. Many developing economies have already lifted rates, some like Brazil and Russia, aggressively so.  They will likely finish earlier too.      US light sweet crude oil rose nearly 12% last month, even though US inventories rose last month for the first time since April.   The price of WTI rose almost 10% in September.  Statistically, the rise in oil prices is strongly correlated with the increase in inflation expectations.  OPEC+ will boost supplies by another 400k barrels a day at the start of November and is committed to the same monthly increase well into 2022.   At the same time, new Covid infections in several Asia-Pacific countries, including China, Singapore, and Australia, warn of the risk of continued supply-chain disruptions.  In Europe, Germany and the UK recently reported the most cases since the spring. Belgium is tightening curbs.  Bulgaria is seeing a rise in infections, and Romania was at full capacity in its intensive care facilities.  The fact that Latvia lags the EU in vaccination at about 50% leaves it vulnerable.  The US may be lagging behind Europe, and the next four-six weeks will be critical.  Roughly 40% of Americans are not fully vaccinated.   The rise in price pressures and the gradual acknowledgment by many central bankers that inflation may be more persistent have helped spur a significant backing up of short-term rates in the Anglo-American economies. The ultimately deflationary implications of the surge in energy prices through demand destruction and the implications for less monetary and fiscal support still seem under-appreciated. Yet, the market has priced in aggressive tightening of monetary policy over the next 12 months.   The focus of the foreign exchange market seems squarely on monetary policy.  From a high level, the central banks perceived to be ahead in the monetary cycle have seen stronger currencies. The likely laggards, like the Bank of Japan, the Swiss National Bank, and the ECB, have currencies that underperformed.  Norway and New Zealand have already raised rates and are expected to do so again in November.    Of course, as you drill down, discrepancies appear.  In October, the Australian dollar was the top performer among the major currencies with a 4% gain.  It edged out the New Zealand dollar and the Norwegian krone, whose central banks are ahead of the Reserve Bank of Australia.  The RBA has pushed against market speculation that has 90 bp of tightening priced into 12-month swaps.  The Australian dollar outperformed sterling by about 2.5% in October even though the Bank of England has been so hawkish with its comments that the market had little choice but to price in a high probability of a hike as early as the November meeting.  In fact, the market has the UK's base rate above 50 bp by the end of Q1 22.  This is important because in its forward guidance that BOE has identified that as the threshold for it to begin unwinding QE by stopping reinvesting maturing issues.  Interestingly enough, when the BOE meets on March 17 next year, it will have a sizeable GBP28 bln maturity in its portfolio.   In an unusual quirk of the calendar, the Federal Reserve meets before the release of the October jobs report.  All indications point to the start of the tapering process.  It is currently buying $120 bln a month of Treasuries ($80 bln) and Agency Mortgage-Backed Securities.  The pace of the reduction of purchases is a function of the duration, and the Fed has clearly indicated the tapering will be complete around mid-year. That suggests reducing the purchases by about $15 bln a month.  Chair Powell indicated that unlike the Bank of England, the Fed will stop its bond purchases before raising rates. A faster pace of tapering would be a hawkish signal as it would allow for an earlier rate hike.  The gap between when the tapering ends and the first rate hike does not appear predetermined. Powell has talked about the economic prerequisites, which emphasize a full and inclusive labor market in the current context. The Fed funds futures entirely discount a 25 hike in July, with the risk of a move in June.  Comments by several officials hint that the Fed may drop its characterization of inflation as transitory, which would also be understood as a hawkish development.   Partly owing to the extended emergency in Japan, it is marching to the beat of a different drummer than the other high-income countries. Inflation is not a problem.  In September, the headline rate rose to 0.2% year-over-year, the highest since August 2020.  However, this is a function of fresh food and energy prices, without which the consumer inflation stuck below zero (-0.5%).  In December 2019, it stood at 0.9%.  In addition, while fiscal policy will be less accommodative in Europe and the US, a sizeable supplemental budget (~JPY30 trillion) is expected to be unveiled later this year.   After expanding by 1.3% quarter-over-quarter in Q2, the Chinese economy slowed to a crawl of 0.2% in Q3, which was half the pace expected by economists. Some of the decline in economic activity resulted from the virus and natural disasters (floods). Still, some of it stemmed from an effort to cut emissions in steel and other sectors.  The problems in China's property development space, accounting for a large part of its high-yield bond market,  unsettled global markets briefly.  Talk of a Lehman-like event seems a gross exaggeration. Still, given the sector's importance to China's economy (30% broadly measured) and the use of real estate as an investment vehicle, it may precipitate a structural shift in the economy.   The Communist Party and the state are reasserting control over the economy's private sector and the internet and social network.  It has also weighed in on family decisions, like the number of children one has, how long a minor should play video games, the length of men's hair, what kind of attributes entertainers should have, and appropriate songs to be played with karaoke.   It seems to be reminiscent of part of the Cultural Revolution and a broader economic reform agenda like Deng Xiaoping did in the late 1970s and Zhu Rongji in the 1990s.  At the same time, Beijing is wrestling with reducing emissions and soaring energy prices, which also dampen growth. Even though consumer inflation is not a problem in China (0.7% year-over-year in September), Chinese officials still seem reluctant to launch new stimulative fiscal or monetary initiatives. Moreover, new outbreaks of the virus could exacerbate the supply chain disruptions and delays fuel inflation in many countries.  The aggressiveness in which investors are pricing G10 tightening weighed on emerging market currencies in October.  The JP Morgan Emerging Market Currency Index fell by almost 0.8% last month after falling 2.9% in September, the largest decline since March 2020.  The continued politicization of Turkey's monetary policy and the aggressive easing saw the lira tumble nearly 7.5% last month, which brings the year-to-date depreciation to 22.5%.   On the other hand, Brazil's central bank has aggressively hiked rates, and the 150 bp increase in late October brought this year's tightening to 575 bp and lifting the Selic to 7.75%.  Yet, it is still below the inflation rate (10.34% October), and the government has lost the confidence of domestic and international business.  The Brazilian real fell nearly 3.5% last month to bring the year-to-date loss to almost 7.8%.   Our GDP-weighted currency basket, the Bannockburn World Currency Index, snapped a two-month decline and rose by 0.35%.  The rise in the index reflects the outperformance of the currencies against the dollar.  The currencies from the G10 countries, including the dollar, account for about two-thirds of the index, and emerging markets, including China, the other third.  The yen was the weakest of the majors, falling 2.3%.  It has a weighting of 7.5% in the BWCI.   Among the emerging market currencies in our GDP-weighted currency index, the Brazilian real's 3.4% decline was the largest, but its 2.1% weighting minimizes the drag.  It was nearly offset by the Russian rouble's 2.5% advance.  It has a 2.2% weighting in our basket.  The Chinese yuan, which has a 21.8% share, rose by 0.6%.      Dollar:   The market is pricing in very aggressive tightening by the Federal Reserve.  As recently as late September, only half of the Fed officials anticipated a hike in 2022.  The December 2022 Fed funds futures are pricing in a little more than two hikes next year. More than that, the market is discounting the first hike in June next year, implying a transition from completing the bond-buying to raising rates with no time gap.  The disappointing 2% Q3 GDP exaggerated the slowing of the world's largest economy.  We note that the supply-side challenges in vehicle production halved the growth rate.  Growth is likely to re-accelerate in Q4, but we continue to believe that the peak has passed.  While inflation is elevated, the pace of increase slowed in Q3.  Consider that the PCE deflator that the Fed targets rose at an annualized rate of 4.0% in Q3 after a 5.6% pace in Q2.  The core rate slowed to an annualized pace of 3.3% last quarter, half of the speed in the previous three months.  The infrastructure spending plans have been reduced, and some of the proposed tax hikes, including on corporations, appear to be dropped as part of the compromise among the Democratic Party.   Euro:  For most of Q3, the euro has been in a $1.17-$1.19 trading range.  It broke down in late September, and was unable to recapture it in October.  Instead, it recorded a new low for the year near $1.1525.  A convincing break of the $1.1500 area could signal a move toward $1.1300. The single currency drew little support because growth differentials swung in its favor in Q3:  the Eurozone expanded by 2.2% quarter-over-quarter while the US grew 2% at an annualized pace.  The ECB is sticking to its analysis that the rise in inflation is due to transitory factors while recognizing that energy prices may prove more sticky.  That said, news that Gazprom may boost gas sales to Europe after it finishes replenishing Russian inventories after the first week in November, natural gas prices fall at the end of October.  After the Pandemic Emergency Purchase Program ends next March, decisions about the asset purchases next year will be announced at the December ECB meeting along with updated forecasts.   (October indicative closing prices, previous in parentheses)   Spot: $1.1560 ($1.1580) Median Bloomberg One-month Forecast $1.1579 ($1.1660)  One-month forward  $1.1568 ($1.1585)    One-month implied vol  5.1%  (5.1%)         Japanese Yen:  The dollar rose 2.3% against the yen in October to bring the year-to-date gain to nearly 9.5%.  The Bank of Japan will lag behind most high-income countries in the tightening cycle, and the higher US yields are a crucial driver of the greenback's gains against the yen.  Japan's headline inflation and core measure, which only excludes fresh food, may be rising, but they are barely above zero and, in any event, are due to the surge in energy prices. In response to the weakening yen, Japanese investors appear to have boosted their investment in foreign bonds, while foreign investors increased their holdings of Japanese stocks.  The LDP and Komeito maintained a majority in the lower chamber of the Diet. A sizeable stimulus supplemental budget is expected to help strengthen the economic recovery now that the formal emergencies have been lifted.  In Q3, the dollar traded mainly between JPY109 and JPY111.  It traded higher in the second half of September rising to nearly JPY112.00.  The dollar-yen exchange rate often seems to be rangebound, and when it looks like it is trending, it is frequently moving to a new range.  We have suggested the upper end of the new range may initially be the JPY114.50-JPY115.00.  The four-year high set last month was about JPY114.70.  A move above JPY115.60 could target the JPY118.50 area.     Spot: JPY113.95 (JPY111.30)       Median Bloomberg One-month Forecast JPY112.98 (JPY111.00)      One-month forward JPY113.90 (JPY111.25)    One-month implied vol  6.4% (5.6%)   British Pound:  Sterling rallied around 4 1/3 cents from the late September low near $1.34.  The momentum stalled in front of the 200-day moving average (~$1.3850).  After several attempts, the market appeared to give up.  We anticipate a move into the $1.3575-$1.3625 initially, and possibly a return toward the September low. The implied yield of the December 2021 short-sterling interest rate futures rose from 22 bp at the end of September to 47 bp at the end of October as the market.  It was encouraged by Bank of England officials to prepare for a hike at the meeting on November 4, ostensibly while it is still providing support via Gilt purchases.  If there is a surprise here, it could be that, given the unexpected softening of September CPI and the fifth consecutive monthly decline in retail sales, rising Covid cases, that the BOE chooses to take the more orthodox route.  This would entail ending its bond purchases, as two MPC members argued (dissented) at the previous meeting and holding off lifting rates a little longer.        Spot: $1.3682 ($1.3475)    Median Bloomberg One-month Forecast $1.3691 ($1.3630)  One-month forward $1.3680 ($1.3480)   One-month implied vol 6.8% (7.1%)      Canadian Dollar:  The three drivers for the exchange rate moved in the Canadian dollar's favor in October and helped it snap a four-month slide against the US dollar.  First, the general appetite for risk was strong, as illustrated by the strength of global stocks and the record highs in the US.  Second, the premium Canada pays on two-year money more than doubled last month to almost 60 bp from 25 bp at the end of September.  Third, commodity prices in general and oil, in particular, extended their recent gains.  The CRB Index rose 3.8% last month, the 11th monthly increase in the past 12, to reach seven-year highs.  The Bank of Canada unexpectedly stopped its new bond purchases and appeared to signal it would likely raise rates earlier than it had previously indicated.  The swaps market is pricing 125 bp of rate hikes over the next 12 months, with the first move next March or April.  Still, the US dollar's downside momentum stalled near CAD1.2300.  There is scope for a corrective phase that could carry the greenback into the CAD1.2475-CAD1.2500 area.     Spot: CAD1.2388 (CAD 1.2680)  Median Bloomberg One-month Forecast CAD1.2395 (CAD1.2580) One-month forward CAD1.2389 (CAD1.2685)    One-month implied vol 6.2% (6.9%)      Australian Dollar:  The Aussie's 4% gain last month snapped a four-month, roughly 6.5% downdraft.  Despite RBA Governor Lowe's guidance that the central bank does not anticipate that the condition to hike rates will exist before 2024 is being challenged by the market.  Underlying inflation rose above 2% in Q3. The central bank's failure to continue defending the 10 bp target of the April 2024 bond spurred speculation that it would be formally abandoned at the November 2 policy meeting.  The RBA's inaction unsettled the debt market.  The two-year yield soared almost 70 bp last month, and the 10-year yield rose nearly 60 bp.  Although the RBA could have handled the situation better, New Zealand rates jumped even more.  Its two-year yield jumped 80 bp while the 10-year yield surged by 58 bp.  Last month, the Australian dollar's rally took it from around $0.7200 to slightly more than $0.7550, where it seemed to stall, just in front of the 200-day moving average.  We suspect the October rally has run its course and see the Aussie vulnerable to a corrective phase that could push it back toward $0.7370-$0.7400.  The New Zealand dollar has also stalled ($0.7220), and we see potential toward $0.7050.       Spot:  $0.7518 ($0.7230)        Median Bloomberg One-Month Forecast $0.7409 ($0.7290)      One-month forward  $0.7525 ($0.7235)     One-month implied vol 9.1  (9.0%)        Mexican Peso:  The peso eked out a minor gain against the dollar last month.  However, the nearly 0.4% gain understated the swings in the exchange rate last month.  The dollar's recovery seen in the second half of September from almost MXN19.85 to nearly MXN20.40 at the end of the month was extended to a seven-month high around MXN20.90 on October 12.  It then proceeded to fall to almost MXN20.12 before the greenback was bought again.  A move above the MXN20.60 area now would likely signal a test on last month's high and possibly higher. Recall that the dollar peaked this year's peak set in March was near MXN21.6350. The economy unexpectedly contracted in Q3  by 0.2% (quarter-over-quarter).  Nevertheless, with the year-over-year CPI at 6% in September, Banxico will see little choice but to hike rates at the November 11 meeting. The market expects a 25 bp increase.  A 50 bp hike is more likely than standing pat.       Spot: MXN20.56 (MXN20.64)   Median Bloomberg One-Month Forecast  MXN20.42 (MXN20.41)   One-month forward  MXN20.65 (MXN20.74)     One-month implied vol 9.6% (11.0%)      Chinese Yuan: Our starting point is the yuan's exchange rate is closely managed.  The fact that the yuan rose to four-month highs against the dollar and a five-year high against the currency basket (CFETS) that the PBOC tracks imply a tacit acceptance.  While it is tempting for observers to link the appreciation to securing an advantage as it secures energy supplies and other commodities, we note that the yuan's gains are too small (0.6% last month and less than 2% year-to-date) to be impactful.  We suspect that the dollar's recent weakness against the yuan will be unwound shortly.  The US government continues to press its concerns about the risk for investors in Chinese companies listed in the US and American companies operating in China. At the same time, the FTSE Russell flagship benchmark began including mainland bonds for the first time.  China's 10-year government bond is the only one among the large bond markets where the yield has declined so far this year (~16 bp).  On the other hand, Chinese stocks have underperformed.  That said, some investors see this underperformance as a new buying opportunity.  The NASDAQ Golden Dragon Index that tracks Chinese companies listed in the US fell by 30% in Q3 and gained 5% in October, its best month since February.  Lastly, the Central Committee of the Chinese Communist Party meets November 8-11 this year, a prelude to the important National Party Congress in 2022 that is expected to formally signal the third term for President Xi.     Spot: CNY6.4055 (CNY6.4450) Median Bloomberg One-month Forecast  CNY6.4430 (CNY6.4470)  One-month forward CNY6.4230 (CNY6.4725)    One-month implied vol  3.5% (3.4%)    Disclaimer
Danish equities are feeling the heat from interest rates

Danish equities are feeling the heat from interest rates

Peter Garnry Peter Garnry 24.11.2021 14:14
Equities 2021-11-24 13:00 6 minutes to read Summary:  The last two trading days US technology stocks have been impacted by rising interest rates and rising market expectations of Fed rate hikes next year. US technology stocks have interest rate sensitivity due to their high equity valuation, but several other key equity markets such as Netherlands, New Zealand, Singapore, Switzerland, and Denmark are also having high equity valuation and thus high duration. These equity markets would likely underperform next year if the interest rates move considerably higher. In yesterday’s equity note, we showed how Nasdaq 100 and STOXX 600 are the yin and yang of interest rate sensitivity based on equity market reaction this year with Nasdaq 100 underperforming significantly when the US 10-year yield has a large increase. But outside these two major equity indices, investors felt what higher interest rates can do to sentiment. Danish equities were down 3% in its worst day since March 2020 during the panic days of the pandemic and Dutch equities were down 3.1%. What do these two markets have in common? They both have equity valuations that are well above many other markets, which simplistically can be translated into higher duration which means that these equity markets are more sensitive to big changes in interest rates. Why is that? Because high equity valuation implies that a larger part of the present value comes from the terminal value on cash flows (meaning way into the future) and this value is more sensitive to the discount rate. Dutch equities are the most expensive of 26 equity markets in the developed and emerging markets with a 12-month forward EV/EBITDA of 23.3x with Denmark and Switzerland less frothy at 14.3x and 14.7x respectively. If we exclude Australia, India, New Zealand and Singapore from yesterday’s market reaction because of the time delay to the US session then we do observe that equity markets with high equity valuations were hit harder yesterday confirming that we did observe a repricing related to a larger move in interest rates. It is all related to the value vs growth trade which is essentially STOXX 600 vs Nasdaq 100, but which can also be expressed between individual equity indices such as Norway vs Denmark. The main point of yesterday’s equity note and today’s observations is that we have a group of equity markets such as Netherlands, New Zealand, Singapore, USA, Switzerland, and Denmark that are in the high equity valuation group. These markets have higher interest rate sensitivity and would likely underperform in a rising interest rate environment and exacerbated if flows also favour value over growth. In our view the equity market is telling investors that tail risks are rising for high duration equities and in order to mitigate this investors should begin balancing their portfolios better between high valued growth stocks and value stocks such as energy, financials, and mining companies. Appendix: 5-year charts of OMXC25 (Danish equities) and AEX (Dutch equities)
Copper upside remains despite months of inaction

Copper upside remains despite months of inaction

Ole Hansen Ole Hansen 01.12.2021 16:26
Commodities 2021-12-01 15:00 Summary:  Industrial metals spent most of November trading sideways with concerns about demand being offset by tight market conditions, especially in aluminum and copper. In fact, the price has during these past few months, when worries about Chinese demand took centerstage, been trading relatively close to the average price seen since April. A behavior which in our view highlights a strong underlying demand for copper, not least considering the prospect for inelastic supply struggling to meet green transformation demand towards electrification. Industrial metals spent most of November trading sideways with concerns about demand being offset by tight market conditions, especially in aluminum and copper. Apart from two failed upside attempts in May and October, copper has since April stayed mostly rangebound not swaying too far away from its average price, at $9550 per tons in London and $4.35 per pound in New York. During the past few months copper has performed relatively well considering heightened worries about the economic outlook for China, and more specifically its property sector which has seen near defaults as well as a slump in home sales. Additional headwinds have been created by the stronger dollar and central banks beginning to focus more on inflation than stimulus. In order to counter Chinese economic growth concerns, Vice Premier Liu He has been out saying growth this year should exceed targets, and the government plans more support for business. High Grade Copper has been averaging $4.35 since April with the current action confined to a range between $4.2 and $4.5 while major support can be found in the $4 area. The lack of momentum in recent months has driven a sharp reduction in the speculative long held by hedge funds, a development that could trigger a significant amount of activity once the technical and/or fundamental picture becomes clearer. Against these mostly demand focused macroeconomic headwinds, we have at the same time been witnessing an unusual synchronised tightness in stock levels monitored by the major futures exchanges in London and Shanghai. Unusual in the sense that price arbitrage between the two exchanges often drive changes in stock levels from one exchange to the other. Recently however we have been witnessing levels fall at both exchanges, with aluminum and copper stockpiles at the LME falling to their lowest levels since 2007 and 2005 respectively. In fact, the six industrial metals traded on the LME are currently all trading in backwardation for the first time since 2007. A condition where spot prices trade higher than futures, and driven by the mentioned drop in inventories in response to a post-pandemic surge in demand as well as supply-chain disruptions. On the subject of supply, especially during the coming years when the green transformation will account for an increased proportion of global copper demand, planned mining taxes in Chile, the worlds biggest producers have raised the alarm bells. Politicians are looking for a bigger share of mining profits to help resolve inequalities exacerbated by the pandemic, and with a potential approval moving closer BHP Group has warned it could derail investments thereby making it harder to meet future demand, especially considering the mentioned need for copper towards electrification. Source: Bloomberg An example of increased copper demand driven by the green transformation are the number of finished and planned subsea interconnectors which are paramount for cutting emissions and boosting the effectiveness of renewable energy production. Increased volatility in the production of power from renewable sources such as wind and solar as opposed to traditional sources like coal and gas will continue to increase the need for large scale transmission capabilities of power between countries and regions. The cable below has been used in the now finished 720 kilometer North Sea Link between Norway and the UK, as well in the under-construction Viking link between Denmark and the UK. It carries as much as 1.45 Gigawatt (about the capacity of a nuclear reactor) with most of the 50 kg/meter weight coming from copper. Several other subsea links are planned over the coming years, and together with the need for increased capacity on the electrical grid to support the roll out of EV’s, demand for copper, the king of green metals, look set to increase over the coming years. Electrification and urbanisation will drive growth in copper wrote my colleague Peter Garnry in this update from November 19. In it he also offered a table of mining companies providing exposure to copper. The table below shows 16 mining companies with exposure to copper with Codelco, the largest copper producer in the world, absent from the list as the Chilean miner is only listed in Chile and thus not investable for our clients. The copper mining industry has delivered a median total return in USD of 132.6% over the past five years beating the global equity up 105% in the same period. The rising copper prices the past year driven by investors positioning themselves in green metals (defined as metals that will play a key role in the green transformation) which in turn has pushed up revenue in the industry by almost 40%. Sell-side analysts are generally bullish on copper miners with a median upside of 16% from current levels. In our view investors should select one or two copper miners to get exposure and avoid the ETFs on the industry as they are too broad-based and lack the pure exposure profile needed to play the copper market. As the table also show, there is no such thing as pure exposure to copper except for futures, options and CFDs on the underlying copper. The miner with the highest revenue exposure to copper is Antofagasta with 84.8% revenue share from copper extraction and refining. Most copper miners also extract gold and silver as part of their copper operations, and out of the 16 copper miners in our list, only 6 of these miners have more than 50% of revenue coming from copper extraction and refining.
Animal Spirits Roar Back

Animal Spirits Roar Back

Marc Chandler Marc Chandler 07.12.2021 16:47
December 07, 2021  $USD, Canada, China, Currency Movement, Germany, Hungary, Japan, Mexico, RBA, Russia, US Overview:  A return of risk appetites can be seen through the capital markets today, arguably encouraged by ideas that Omicron is manageable and China's stimulus.  Led by Hong Kong and Japan, the MSCI Asia Pacific rose by the most in three months, while Europe's Stoxx 600 gapped higher, leaving a potentially bullish island bottom in its wake.  US futures point to a gap higher opening when the local session begins.  The bond market is taking it in stride.  The US 10-year Treasury is slightly firmer at 1.44%, while European yields are 1-3 bp higher.  The dollar-bloc currencies and Norway are leading the move higher among most major currencies.  The yen and euro are softer.  Sterling struggles to sustain upticks. Among emerging markets currencies, the Turkish lira is bouncing, while most central European currencies are being dragged lower by the weaker euros.  The JP Morgan Emerging Market Currency Index is slightly higher after four consecutive losses.  Gold is trading within yesterday's narrow range.  Oil continues to recover, and the January WTI contract is up around 2.5% (after yesterday's 4.9% advance) and is above $71.50 a barrel.  US natgas prices dropped 11.5% yesterday and have come back firmer today, while the European benchmark (Dutch) is up 7% today (~+0.5% yesterday) to near last week's highs.  Iron ore prices jumped 7.7% today after 2.5% yesterday, perhaps encouraged by strong Chinese import figures.  Copper prices are also firm.    Asia Pacific The Reserve Bank of Australia stuck to its stance. It may take two years to reach the 2-3% inflation target, and the uncertainties surrounding the Omicron variant also favor a cautious approach. This was in line with expectations.  The swaps market still has about 75 bp of higher rates discounted next year.   The Australian dollar's gains reflect the risk-on mood.   Japan's economy is on the mend.  Household spending rose 3.4% month-over-month in October.  Paradoxically, outlays on medical care actually fell (-5.7%) year-over-year in October.  Meanwhile, Labor cash earnings rose by 0.2% year-over-year, the same as in September, but less than expected.  Households headed by a worker rose 0.5% year-over-year.   China's trade surplus fell to $71.7 bln in November from $84.5 bln in October.  The US accounted for a little more than 50% of the surplus (~$37 bln).  Exports rose by 22% year-over-year, less than the 27.1% increase in October.  But, what really stood out were China's imports.  They surged, jumping 31.7% from a year ago after a 20.6% increase in October.  Commodity imports were robust.  The 35 mln tons of coal imported was the most this year. Oil imports were at three-month highs.  Iron ore imports reached a 13-month high,  Gas purchases were the highest since January.  Copper imports appear to be a record.  Separately, China reported that the value of its foreign exchange reserves rose by a minor $4.7 bln to $3.222 trillion.  Economists (Bloomberg survey median) had expected around an $11 bln decline.   The dollar has forged what appears to be a solid base now around JPY112.55.  So far, today is the first session since November 26 that the greenback has held above JPY113.00.  It has been confined to a narrow range between JPY113.40 and JPY113.75.  The dollar looks poised to move higher but may stall around JPY114.00, where an option for around $865 mln expires today.  The Australian dollar rose about half of a cent yesterday and is up around another half-cent today to test $0.7100.  An option for A$1.04 bln expires today there ($0.7100).  It is also the (61.8%) retracement objective of last week's drop.  A move above there would target the $0.7130 area and possibly $0.7200.  The reduction in Chinese banks' reserve requirements and the divergence with the direction the Fed appears headed did not deter the yuan from strengthening.  The dollar held CNY6.38 yesterday and is near CNY6.3660 now.  The low for the year was set at the end of May near CNY6.3570.  The dollar's reference rate was set at CNY6.3738, a touch higher than the models (Bloomberg survey) projected of CNY6.3734.   Europe According to the proverb, for want of a nail, a kingdom was lost.  US intelligence warns that Russia is poised to invade Ukraine.  Beijing continues to act as a bully in the South China Sea.  US President Biden is hosting a "Summit for Democracy" December 9-10.   Reportedly 110 countries will be represented, even Taiwan, which the US officially does not recognize as a country.  All of the EU members have been invited but Hungary.  Hungary, like Poland, is in a serious fight with the EC over the rule of law.  It is being fined for failing to comply with the European Court of Justice over its harsh treatment of asylum seekers.  Poland, which is invited to the summit, is also being fined a record 1 mln euros a day for deviations from the EU standards of the rule of law.   Yet Hungary's exclusion is needlessly antagonistic.  Hungary will hold parliamentary elections in April (though possibly May), and the opposition is united behind the center-right Marki-Zay.  Most polls show him ahead of Orban.   It is an insult to the EU, and Orban used his veto to block the EU from formally participating and prevented it from submitting a position paper.  It is a vulnerable position for the US to be the judge and jury about democracy and the rule of law.   Laura Thorton, director of the Alliance for Securing Democracy of the German Marshall Fund of the United States, expressed shock and dismay in a recent Washington Post op-ed over developments in Wisconsin. She wrote, "If this [where the GOP is seeking to replace the bipartisan oversight of elections with just its party's control] occurred in any of the countries where the US provides aid, it would immediately be called out as a threat to democracy.  US diplomats would be writing furious cables, and decision-makers would be threatening to cut off the flow of assistance."  Separately, the US embassy in Tokyo warned Japan about "racially profiling incidents" following the closure of its borders to new foreign entries into the country.   The US response to the Russian aggression in Georgia in 2008 and the annexation of Crimea in 2014 was soft.  Despite bringing NATO to Russia's door in the Baltics, the US recognized by its actions that it is difficult to defend what Russia calls its near-abroad. Ukraine is different.  When Ukraine gave up its nuclear weapons, the Budapest Memorandum  (1994), Russia, the US, and the UK committed to respecting its independence and territorial integrity.  Russia clearly violated the agreement, but the US says it is not legally binding.  Nevertheless, reports indicate that the Biden administration is contemplating new sanctions against Russia and Putin's inner circle.  Reportedly under consideration is removing Russia from the SWIFT payment system and new sanctions of Russia's energy companies, banks, and sovereign debt.  In late April, the European Parliament approved a non-binding resolution to exclude Russia from the SWIFT if it attacked Ukraine.  Russia is a heavy user of SWIFT, as few foreign banks, including the Chinese, are willing to use Russia's own payment system.  After a dismal factory orders report, the market had been prepared for a poor industrial output report today.  Instead, Germany surprised with its strongest gain for the year.  Industrial output surged 2.8% in October.   It is only the third monthly gain this year.  Moreover, September's decline of 1.1% was halved to 0.5%.  It appears auto production (capital goods) may be behind the improvement in activity.  Separately, the ZEW survey was mixed.  The expectations component was stronger than expected, but still, at 29.9, lower than November's 31.7 reading.  The assessment of the current situation deteriorated sharply to -7.4 from 12.5.  It has been declining since September, but this is the lowest since June.  On November 30, the euro spiked higher and has subsequently worked its way lower.  Today, it reached almost $1.1250, its lowest level since November 30, low near $1.1235. The 20-day moving average (~$1.1320) continues to block the upside.  It has not closed above it for a little more than a month.  The low for the year so far was recorded on November 24 near $1.1185.  For its part, sterling remains in its trough. The low for the year was set on November 30, slightly below $1.32.  Before the weekend, it was in a roughly $1.3210-$1.3310 range and remains well within that range yesterday and today.  It has been blocked ahead of $1.3300.  There is an option for about GBP450 mln at $1.3250 that expires today.   America The US is expected to report that productivity fell in Q3 by 4.9% rather than the 5% that was initially reported.  Productivity increased by 2.4% in Q2 and 4.3% in Q1.  It averaged 2.6% last year and 2.3% in 2019.  Unit labor costs are the most holistic measure, including wages, benefits, and output.  Looking at a four-quarter moving average, unit labor costs rose 1.6% in 2018 and 1.45% in 2019.  They jumped to 6.25% last year and fell by an average of 0.85% in H1 21.  The initial estimate for Q3 was an 8.3% surge.   The US also reports the October trade balance.  The preliminary goods balance signaled a likely improvement from the $80.9 bln deficit in September.  The median forecast (Bloomberg) sees a deficit of slightly less than $67 bln.  Through September, the monthly average was nearly $71 bln, up from $53.3 bln in the same period last year and less than a $50 bln average in the first nine months of 2019. Late in the session, the US reports October consumer credit, and another substantial increase is expected.  It jumped almost $30 bln in September.  It has averaged $20.275 bln a month through September.  Last year was too distorted, but in the first three quarters of 2019, consumer credit rose by an average of $15.3 bln a month.    Canada reports its October merchandise trade figures today, ahead of the Bank of Canada meeting tomorrow  The median forecast in Bloomberg's survey call for a C$2.08 bln surplus, which, if accurate, would the be third largest surplus since 2008.  The June surplus was larger at C$2.26, as was the December 2011 surplus of C$2.12 bln.   Canada's goods trade balance through September swung into surplus with an average of C$703 mln.  In the same period in 2020, the monthly deficit averaged C$3.1 bln and  C$1.4 bln in 2019.  The merchandise surplus may be sufficient to lift the current account too.  Canada has been running a current account deficit since 2009.   The OECD forecasts a surplus this year of 0.3% of GDP and projects it to be in balance next year.  Canada and Mexico have expressed concerns about the credits for electric vehicles in the Build Back Better US initiative.  They claim it violates the USMCA.  Europe has expressed similar problems, and the EU Trade Commissioner Dombrovskis has reportedly sent a formal letter warning that the Biden administration's efforts may also violate WTO rules.  Meanwhile, there is talk that the initiative may be blocked this year.  If this is the case, the odds of passage next year seem even slimmer.  On a different front, Mexico's controversial energy reforms, which expand the state sector, over some objections by US energy companies, look to be delayed due to lack of support.  The US dollar posted an outside up day against the Canadian dollar before the weekend, despite Canada's strong employment report.  There was no follow-through yesterday, and the greenback recorded an inside day and settled on its lows.  The US dollar has been sold to around CAD1.2700 today.  Initial support is around CAD1.2675, but the more significant test is near CAD1.2640.  A break would strengthen the conviction that a high is in place.  Meanwhile, the greenback continues to consolidate against the Mexican peso.  It remains within the range set last Wednesday (~MXN21.1180-MXN21.5150).  Thus far today, it is holding above yesterday's low (~MXN21.1720), which was- above the pre-weekend low (~MXN21.1625).            Disclaimer
Ahead Of The US CPI, Speaking Of Crude Oil And Metals - Saxo Market Call

Market Quick Take - December 3, 2021

Saxo Bank Saxo Bank 03.12.2021 09:02
Macro 2021-12-03 08:45 6 minutes to read Summary:  Risk sentiment rebounded yesterday in the US session, erasing the rather steep losses of the prior day. Sentiment in Asia is also on the mend, while oil prices recovered all of the lost ground from an intraday plunge in the wake of the OPEC+ meeting yesterday. Today, focus swings to the US November jobs report, with extra focus likely on average hourly earnings data as investors watch for signs of a wage-price spiral developing. What is our trading focus? Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities bounced back yesterday after finding a new low for the current short-term cycle lower with Nasdaq 100 futures trading around the 15,975 level this morning in European trading. Long-term US interest rates are not moving much so we expect a quiet session unless the Nonfarm Payrolls for November throws a curveball at the market. In the medium-term risk in equities will be determined by pricing of interest rates hikes next year and updated information on the new Omicron variant of Covid. Stoxx 50 (EU50.I) - Stoxx 50 futures are stuck in a stabilisation zone between 4,100 and 4,160 with the 100-day moving average at 4,157 which is obviously the key resistance level to watch today should we get risk-on. European equities remain pulled by two opposite forces with the first being that higher expected interest rates are positive for this value market, while the continent has the most to lose short-term from the Omicron variant. If the latter fades over the coming weeks, we expect investors to move back into European equities. USDJPY and JPY crosses – With every day that passes and no follow-through lower unfolds after the recent omicron-variant inspired tumble from the 115.00+ level, the odds of a reversal back higher grow, though as we have mentioned often in this space, this would likely require that US yields lift all along the curve, not just near the front of the curve where Fed expectations operate the most forcefully. A fresh wave of weak global risk sentiment, on the other hand, could bring another wave of JPY strength, particularly in the crosses like AUDJPY and CADJPY, some of which saw their largest single-day moves since the pandemic outbreak early last year. For USDJPY, the downside pivot is now near 112.50. USDCAD – USDCAD has rallied as the market has been adjusting to the more hawkish shift from the Fed, especially after this week’s testimony from Fed Chair Powell. As well, uncertainties and the real threat of a reduction in travel due to the new omicron variant of covid have taken down crude oil prices nearly twenty dollars from their late October peak, around the time USDCAD was bottoming out near 1.2300. Now it trades near 1.2800 and the top of the range (only intraday price spikes from August and September rose above this level) as oil has staged a significant rebound yesterday. If risk sentiment can stabilize and oil prices recover, this important 1.2800+ area resistance could hold. Crude oil (OILUKFEB22 & OILUSJAN21) trades up 8% from yesterday’s low point after the OPEC+ group of producers adopted a flexible approach on supply while at the same time agreeing to maintain the current rate of production increases. The market gripped with omicron angst this past week rallied on the news due to several reasons 1) the market had already priced in a significant and not yet realised reduction in demand, and 2) it the meeting was left “in session” meaning changes can be made before January 4. 3) the move eased political tensions with large consumers, 4) some of the SPR barrels on offer may not leave storage due to lack of demand from refineries, and 5) members with spare capacity wanted to increase production, as the group has not delivered the promised increases due to some struggling to reach their quotas. The next upside level to watch being the 200-day moving average at $72.85. Gold (XAUUSD) slumped to a one-month low at $1762 yesterday, as the dollar strengthened in response to robust economic data, before finding a small bid from recovering crude oil prices. Otherwise, it has been another troubled week, the third in a row, with the yellow metal struggling to put up a defense against the Fed’s changed focus from employment to combatting inflation. In addition, the spreading of the omicron variant and its potential threat to the economic recovery has so far failed to support prices despite driving bond yields sharply lower and the VIX higher. Silver (XAGUSD) has struggled even more given its industrious link with XAUXAG ratio trading near a two-month high. Focus today being the US job report with the first major upside level of interest in gold being $1792 with support at $1760. US Treasuries (IEF, TLT). Today the focus is on the nonfarm payrolls numbers, as a better-than-expected report would confirm the intention of the Federal Reserve to taper at this month's FOMC meeting. The US yield curve continued to bear-flatten yesterday as Fed’s speakers including Bostic, Daly, Quarles, and Barkin commented on the possibility of a faster tapering to open for rate hikes next year. Two-year yields rose by 8 bps, while five-year yields cheapened by 5bps. Long-term yields dropped contributing to an increased flattening of the yield curve in the 2s10s and 5s30s areas. In the meanwhile, Eurodollar futures have started to price rates cut in 2025. We expect the flattening of the yield curve to continue until Covid distortions are eased. Afterward, the long part of the yield curve will need to shift much higher adjusting to interest rate hikes expectations. US junk bonds (HYG, JNK). According to Bloomberg Barclays indexes, junk bonds’ OAS widened by 30bps to 330bps amid last Friday’s selloff reflecting the lack of liquidity in markets. Despite negative real rates continuing to support corporate bond valuations, it’s safe to expect junk bond spreads to widen throughout the end of the year amid poor liquidity. If the volatility in rates remains sustained, the widening of spreads could accelerate, posing a threat also for stocks. German Bunds (IS0L). Rate hikes expectations for the eurozone were pushed to 2023 yesterday amid a slump in tech stocks. German and Italian government bonds more than reversed Wednesday’s losses. In Europe, Covid distortions are keeping bond yields in check. However, when Covid fears ease we can expect yields in the euro area to adjust higher given the inflationary backdrop and the new German government. What is going on? Omicron covid variant cases rise, reinfection risk judged high in one study. South African officials note that the omicron variant of covid is spreading faster than the delta- or any other variant of the virus despite estimates by some that a majority of the South African population was infected with covid in prior waves. National cases were at 11.5k yesterday versus 8.6k on Wednesday and 4.4k on Tuesday. A study there of the reinfection risk suggests that it is some three times higher than prior variants. Omicron variant cases have now been discovered worldwide, including Italy, the US and South Korea. DocuSign shares plunge 30% in extended trading. The company guided Q4 revenue of $557-563mn vs est. $574mn which is a small revenue miss, but enough to spark a massive selloff in extended trading. Investors took clearly little comfort in the fact that the company is consistently improving operating margin hitting 3.1% in Q3 and expected to climb significantly in the coming quarters. China moves to delist Didi from US exchanges. US SEC set to move against Chinese listing. The Chinese ride-sharing and transportation platform company will delist in the US and move to a Hong Kong listing, perhaps in the March time frame. Meanwhile, the US SEC is set to move against a number of Chinese companies listed on US exchanges on charges that their accounting disclosures are not in compliance with US regulations. Another strong US weekly jobless claims number was out yesterday at 222k, lower than expected and near the levels during the strong labor market before the early 2020 pandemic outbreak. The prior week’s number was one of the lowest ever and was revised even lower to 194k, suggesting a very tight labor market. What are we watching next? Study of omicron variant and its virulence. Scientists will work with the provincial government of Gauteng in South Africa, which has the most measured cases of the new omicron variant, to complete a study of the new variant’s virulence as soon as next Tuesday, though results will be released to the public later. A local official there said that hospitalizations and mortality are lower than expected thus far. US November Nonfarm Payrolls Change and Average Hourly Earnings today. With the US economy operating at full capacity according to estimates from CBO, continued strong job gains will add fuel to the “inflation fire”. Wednesday's 534k increase in the November ADP private payroll number suggests that the job market growth remains healthy in the US as we await the official nonfarm payrolls numbers today (expected to show 500k+ jobs added), where strong upward revisions to prior months’ data has been a notable trend this year due to data collection issues. As well, Average Hourly earnings numbers will be closely watched for any budding signs of a wage-price spiral, as a constrained supply of labor could see companies bidding up wages and October showed a strong rise in earnings at a faster pace than at any time from the start of the survey in 2007 to the outbreak of the covid pandemic. The October Average Hourly Earnings number rose to 4.9% year-on-year, and 5.0% is expected for today’s November number. Earnings Watch – today is a quiet day on earnings with only Bank of Montreal reporting earnings. We have also put in next week’s earnings releases. Friday: Bank of Montreal Next week’s earnings: Monday: Sino Pharmaceutical, Acciona Energias, MongoDB, Coupa Software, Gitlab Tuesday: SentinelOne, AutoZone, Ashtead Group Wednesday: Huali Industrial Group, GalaxyCore, Kabel Deutschland, Dollarama, Brown-Forman, UiPath, GameStop, RH, Campbell Soup Thursday: Sekisui House, Hormel Foods, Costco Wholesale, Oracle, Broadcom, Lululemon Athletica, Chewy, Vail Resorts Friday: Carl Zeiss Meditec Economic calendar highlights for today (times GMT) 0815-0900 – Euro Zone final Nov. Services PMI 0900 – Norway Nov. Unemployment Rate 0930 – UK Nov. Final Services PMI 1100 – UK Bank of England’s Saunders to speak 1300 – ECB Chief Economist Philip Lane to speak 1330 – US Nov. Change in Nonfarm Payrolls 1330 – US Nov. Average Hourly Earnings 1330 – US Nov. Unemployment Rate 1330 – Canada Nov. Net Change in Employment 1330 – Canada Nov. Unemployment Rate 1415 – US Fed’s Bullard (voter in 2022) to speak 1500 – US Nov. ISM Services 1500 – US Nov. Factory Orders   Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: Apple Spotify Soundcloud Sticher
Market Quick Take - December 9, 2021

Market Quick Take - December 9, 2021

Saxo Strategy Team Saxo Strategy Team 09.12.2021 09:48
Macro 2021-12-09 08:40 6 minutes to read Summary:  Global markets tried to gin up additional enthusiasm yesterday on the announcement yesterday from Pfizer that three shots of vaccine may offer far more protection from the omicron variant, but the market traded largely sideways as the sharp rally from the prior day was consolidated. The US dollar is showing signs of consolidating lower ahead of arguably the last two major event risks for the year for the currency, the Friday US November CPI data and the FOMC meeting next Wednesday. What is our trading focus? Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities momentum waned a bit yesterday and trading flat in early European trading hours. In Nasdaq 100 futures the 16,420 is the key resistance level to watch in today’s session. While Nasdaq 100 futures are flat this morning, Bitcoin is trading 2% lower which if it continues could spill over into US technology stocks as these pockets of the market are connected in terms of risk-off. Bubble stocks were the biggest gainers yesterday and provide another opportunity for retail investors to reduce exposure in bubble stocks ahead of the new year. EURUSD – The EURUSD rallied sharply yesterday as the US dollar was generally on its back foot, but a solid jump higher in EU sovereign bond yields and the official handover of power to the new German government coalition yesterday may have been elements supporting the rally. The move rose as high as 1.1350, just ahead of tactical resistance near 1.1375, the last hurdle ahead of more major trend resistance near 1.1500. In many past cycles, the calendar roll has proven a major inflection point for EURUSD. The December 15 FOMC meeting and December 16 ECB meeting both look important for the provision of new guidance, with the FOMC already having made a clear hawkish shift, while the ECB will have to deliver revised inflation forecasts and guidance on balance sheet policy after its emergency “PEPP” form of QE is set to end in March. AUDUSD – The Aussie has undergone a significant sentiment shift from one of the weakest G10 currencies to one of the strongest in recent sessions, in part on the reversal in risk sentiment, but also aided by China signaling a willingness to ease policy. Speculative positioning in the US futures market suggest a very heavy short position that, if similar to positioning in the OTC market, could provide significant fuel for a squeeze higher in the currency if the backdrop of improving risk sentiment and a focus on inflation risks further boosts the price action in key commodities like iron ore, coking coal and other metals. At any rate, AUDUSD has reversed up through the first resistance near 0.7100 and is now staring down the next pivotal area into 0.720-7250, needing to blast through this and then some to suggest an attempt to put in a bottom after touching the huge 0.7000 level within the last week. Crude oil (OILUKFEB22 & OILUSJAN22) trades higher for a fourth day as omicron demand concerns continue to ease and speculators accumulate length following last week’s washout. Flare-ups around the world resulting in temporary lockdowns is however likely to prevent the market from returning to pre-omicron levels at this point. The EIA reported a small 240k barrels weekly decline in crude stocks while inventories of fuel rose by a combined 6.6 million barrels. Next level of resistance in Brent being the 21-day moving average at $77.20 followed by $77.60. Gold (XAUUSD) remains stuck below the 200-day moving average, currently at $1793 with the market struggling for direction ahead of Friday’s key US inflation data. Support from a softer dollar continues to be offset by worries that a succession of expected US rate hikes in 2022 will drive up US real yields, thereby reducing a key source of support for gold. Ahead of Friday’s CPI data, the market has priced in three rate hikes next year with the first potentially coming as soon as May. Focus on silver (XAGUSD) which following its recent 13% slump is trying to establish support at $22, thereby supporting a lower XAUXAG ratio has stopped rising after finding resistance above 80 ounces of silver to one ounce of gold. US Treasuries (IEF, TLT). Haven bid for bonds faded as news hit the market that a third vaccine dose gives coverage for the omicron strain. Ten-year US Treasury yields rose above 1.50%, and yesterday’s 10-year US Treasury auction wasn’t as good as the 3-year auction the previous day. It tailed 0.4bps pricing at 1.518%. The bid-to-cover rose to 2.43x, a little lower than the past six auctions average. The yield curve bear steepened. Yet, we expect long-term yields to remain compressed if Covid infections still are an issue and lead to more restrictions. Today, the Treasury is selling 30-year bonds. If the selloff in the long part of the yield curve continues, we might witness a weak auction. What is going on? China PPI falls less than expected in November as it rises 12.9% year-on-year. The PPI number is widely considered a global inflation barometer as China is “the world’s factory”. The rise was higher than the 12.1% year-on-year expected, but lower than October’s 13.5%. The November China CPI number came in slightly cooler than expected at 2.3% year-on-year versus 2.5% expected and 1.5% in October. Pfizer says three shots of its vaccine offer more significant protection against the omicron covid variant. This news from yesterday sounded more promising than the news from just yesterday from a preliminary South African study that patients vaccinated with two shots showed some, but heavily reduced, production of antibodies in patients with the omicron variant. Pfizer found the same, but says that a third shot can bring the antibody response to similar levels as for the prior covid variants. Pfizer also said an omicron-targeted version of its vaccine could be ready in March. Buffett-backed digital lender Nubank to start trading today. The Brazilian-based digital bank Nubank is raising $2.6bn in its IPO becoming of the biggest IPOs this year with shares priced at $9 and first day of trading today on NYSE. This will mark one of the biggest publicly listed fintech companies in the world and provide a glimpse into the feasibility of running a large digital only bank. Bank of Canada upgrades language on inflation, likely set for January rate hike. The new Bank of Canada policy statement dropped a reference from the prior statement on “temporary” inflation forces, though it still maintained the expectation that inflation would drop toward 2 percent in the second half of next year. The strength in the jobs market was noted. Overall, the hawkish language changes were clear, if relatively small relative to rather aggressive market shift in expectations, and Canadian yields eased a few basis points lower at the front part of the yield curve, though a January rate hike from the bank remains likely, according to market expectations. Brazil hikes policy rate 150 basis points, BRL sees sharp gains. The rate hike to 9.25% was in line with expectations, but the central bank delivered hawkish guidance for another hike of the same size at the February meeting as the bank has clearly gone into aggressive inflation fighting mode. The Brazilian real responded strongly, gaining some 1.4% versus the US dollar yesterday. The EU gas and power market went from bad to worse yesterday after an unplanned outage temporarily cut supplies from Norway’s giant Troll field. Coming on top of geopolitical risks related to Ukraine, low winter supplies from Russia, freezing cold weather and rapidly declining stocks, these developments have driven Dutch TTF one month benchmark gas back above €100 per MWh or $34 per MMBtu. With rising demand for coal driving the cost of EU emissions to a fresh record above €90 per tons, the cost of power has surged as well. In Germany the one-year baseload contract reached a record €189 per MWh, or 5 times the long-term average. What are we watching next? WASDE on tap - Ahead of today’s monthly update on world supply and demand, the grains sector has seen a slight drift lower during the past week as the market tried to gauge the impact of the omicron variant. Today’s World Agriculture Supply and Demand report (WASDE) will primarily focus on ending stocks with expectations pointing to a relatively quiet update. US corn stockpiles are expected to have fallen slightly from November while wheat and soybean stocks are both expected to be higher, both in the US and globally. The EU is set to decide by December 22 whether investments in gas and nuclear energy should be labelled climate friendly. The design of the EU green investment classification system is closely watched by investors worldwide and could potentially attract billions of euros in private finance to help the green transition, especially given the need to reduce the usage of coal, the biggest polluter. This week’s earnings: Today’s focus is Oracle which is still struggling to find an attractive growth trajectory in the age of cloud applications, SaaS business models, and more open-source software on databases with flat revenue over the past four fiscal years. Lululemon has been one of the big winners during the pandemic gaining tailwind from home exercising, but generally the company taps into a longer-term trend of personal health. Analysts expect Lululemon to report 29% y/y revenue growth in Q3 (ending 31 October). Thursday: Sekisui House, Hormel Foods, Costco Wholesale, Oracle, Broadcom, Lululemon Athletica, Chewy, Vail Resorts Friday: Carl Zeiss Meditec Economic calendar highlights for today (times GMT) 0830 – Hungary Rate Announcement 1200 – Mexico Nov. CPI 1330 – US Weekly Initial Jobless Claims and Continuing Claims 1530 – EIA Natural Gas Storage Change 1700 – USDA World Agriculture Supply and Demand Report (WASDE) 1800 – US Treasury 30-year T-Bond auction   Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: Apple Spotify Soundcloud Sticher
No Turnaround Tuesday for Equities?

No Turnaround Tuesday for Equities?

Marc Chandler Marc Chandler 14.12.2021 15:01
December 14, 2021  $USD, Canada, Chile, Currency Movement, EMU, Hungary, Japan, Mexico, UK Overview:  Activity in the capital markets is subdued today, ahead of tomorrow's FOMC meeting conclusion and the ECB meeting on Thursday.  The MSCI Asia Pacific equity index fell for the third consecutive session.  European bourses are heavy after the Stoxx 600 posted an outside down day yesterday. Today would be the fifth consecutive decline. Selling pressure on the US futures indices continues after yesterday's losses.  Australia and New Zealand bonds played catch-up to the large drop in US Treasury yields yesterday, while European benchmark yields are edging higher.  The 10-year US Treasury yield is around 1.43%.  The dollar is mixed against the major currencies.  The Canadian and Australian dollars and Norway are softer, while the Swiss franc and euro lead with around a 0.25%-0.35% gain.  Most emerging market currencies are little changed, though the Turkish lira is paring yesterday's intervention-fueled gains.  Led by the Hungarian forint ahead of the outcome of the central meeting, and helped by a firm euro, central European currencies lead the emerging markets.  The JP Morgan Emerging Market Currency Index is off for a second session after breaking a four-week slide last week.  Gold continues to consolidate and is within yesterday's range ($1782-$1791).  Oil is also trading quietly, with the January WTI contract in a $70.50-$72.00 range.  European (Dutch) natural gas is rising for the sixth session of the past seven, during which time it has increased by nearly a third.  US natgas has fallen by almost 30% in the past two weeks and is off for about 4.4% this week already.  Iron ore is paring yesterday's 6.5% gain, while copper is drifting lower and is extending its loss into the fourth consecutive session.   Asia Pacific Year-end pressures are evident in Japan's money markets, and the BOJ responded by arranging an unscheduled repo operation for the second consecutive session.  Yesterday's overnight operation was for JPY2 trillion (~$17.5 bln) after the repo rate rose to two-year highs.  The repo appeared to have been lifted by dealers securing funding for bill purchases.  Today the BOJ offered to buy JPY9 trillion of bonds under the repo agreement.   The US has offered to lift the steel and aluminum tariffs on Japan on similar terms as the deal struck with the EU.   A certain amount, based on some historical market share, can be shipped to the US duty-free, but over that threshold, a levy will be imposed.  Unlike the EU, Tokyo did not impose retaliatory tariffs.  Estimates suggest that Japan shipped around 5% of its steel to the US, though some might have made its way through Mexico.   The regional highlights for the week still lie ahead.  Tomorrow, China reports November retail sales, industrial production, new home prices, investment, and the surveyed jobless rate.  Retail sales are expected to have slowed, while industrial output may have firmed.  Investment in property and fixed assets may have stalled.  Japan has its tertiary index (October) tomorrow, a November trade balance on Thursday (it nearly always deteriorates from October), and the Friday BOJ meeting.  The BOJ is expected to extend some of its emergency facilities.  Australia reports its November jobs data first thing Thursday morning in Canberra.  After three months of job losses, a strong report is expected as social restrictions were lifted.   Today, the dollar is confined to about a quarter of a yen range above JPY113.50.  It has not traded above JPY114.00 this month so far.  Nor has it traded below JPY113.20 since last Monday.  An option for $760 mln at JPY1113.85 rolls off today.  The Australian dollar tested the session high near $0.7135 in the European morning but met a wall of sellers, perhaps, related to the nearly A$600 mln option at $0.7130 that expires today. It has traded down to a five-day low around $0.7090, which is the halfway point of last week's rally.  The next retracement (61.8%) is near $0.7065. The dollar continues to struggle to sustain upticks against the Chinese yuan. It is trading heavily today, its seventh loss in the past eight sessions.   Still, the greenback held above yesterday's low (~CNY6.3580).  It was unable to poke above CNY6.37.   The PBOC's dollar fixing was set at CNY6.3675, while the market (Bloomberg survey) anticipated CNY6.3666.   Europe The UK reported solid employment data.  The November claimant count rate eased to 4.9% from a revised 5.0% (initially 5.1%), representing a nearly 50k decline after the October decline was revised to 58.5k from -14.9k.  The pace of earnings growth slowed to 4.9% from 5.9% (three-month, year-over-year).  Employment rose by nearly 150k (three months) after a 247k increase previously.  Tomorrow, the UK sees November CPI and PPI.  Both are expected to have quickened from October.  Nevertheless, the BOE is now seen on hold until February.   Hungary's central bank is set to hike the base rate today.  A 40 bp increase would follow last month's 30 bp hike.  Today's move would be the sixth in a row.  The base rate began the year at 60 bp, and today's hike would lift it to 2.50%.  On Thursday, Hungary likely hiked the one-week deposit rate.  It has been hiked for the last four weeks.  It had been at 75 bp until June, when it was hiked by 15 bp.  It was lifted by 30 bp in July and again in August.  It reverted to 15 bp increases in September and October.  The one-week deposit rate was raised several times last month to 2.90%.  It is up another 40 bp so far this month, and it is expected to be lifted by another 20 bp this week.   In October, industrial output in the euro area rose 1.1% after a 0.2% decline in September.  The preliminary PMI will be reported on Thursday, ahead of the ECB meeting.  Activity likely slowed. The focus of the ECB meeting is on the guidance about bond-buying next year.  The emergency facility is expected to wind down at the end of Q1, but given that it will still be buying bonds, tapering may not be as necessary or pronounced as, say, with the Federal Reserve.  The ECB staff will also update forecasts, including a sharp upward revision to next year's while extending the projections to 2024.  There is also interest in what the ECB will do about its long-term loans (TLTRO).    The euro has firmed in the European morning but remains mired in a narrow range.  Indeed, the range over the past five sessions is a little less than a cent (~$1.1260-$1.1355). There is an option for nearly 500 mln euros at $1.1330 that expires today.  For the past month, the euro has been in a $1.12-$1.14 trading range, with the notable exception on November 24, when the low for the year was recorded (~$1.1185).   Sterling slipped below $1.32 in late Asian turnover but found bids lurking there, and Europe has extended its recovery toward $1.3235.  Resistance is seen in the $1.3260-$1.3275 area. Sterling has not traded above $1.33 since December 3, yet a move above there is necessary to lift the technical tone.   America The US reports November producer prices today.  The headline rate is expected to push above 9%, while the core rate pokes through 7%.  The market is understandably more sensitive to consumer prices than producer prices.  Tomorrow, ahead of the FOMC statement, the November retail sales (softer than the 1.7% headline increase in October) and the December Empire manufacturing survey will be released.   Although the Senate is expected to maneuver to lift the debt ceiling today, the Treasury is planning a large bill pay down (~$175 bln) to ensure it would have the space to settle the coupon auctions.  That said, the supply of bills is likely to improve through Q1 22, according to estimates.  By most accounts, the Treasury has overfunded itself, and this will allow it to cut back further on new supply, just as the Federal Reserve is expected to accelerate its tapering.   The Bank of Canada was told its inflation target remains 2% but that it can overshoot to support "maximum sustainable employment."  The central bank's language is important.  It said it would "continue" to support the labor market objective, suggesting that yesterday's adjustment to the mandate will have a minor operational impact.  In fact, with inflation (October CPI 4.7%, an 18-year high), Governor Macklem quickly indicated that this was not the situation when it could probe for the maximum sustainable employment.  Still, the new mandate requires that the central bank explain when it is using its new flexibility and how labor market outcomes are incorporated into monetary decisions.  Separately, Canada is proposing alternatives to the US proposed tax incentives for electric vehicles in the Build Back Better initiative.  Canada and Mexico claim that it violated the USMCA and throws a wrench in the 30-year auto integration.  The EU trade commissioner has also expressed concerns about whether the legislation would break the WTO rules too.   Late today, Chile's central bank is expected to deliver a 125 bp rate hike, the same as in October.  The overnight target rate began the year at 50 bp.  It was hiked by 25 bp in July and 75 bp in August.  With today's hike, it will stand at 4%.  More work is needed as November CPI was at 6.7%.  Chile holds the run-off presidential election this weekend.  In the first round last month, the conservative Kast drew 28% support while the left candidate Boris garnered 26%.  Chile's innovation during Covid was to allow people to withdraw funds from their pensions (yes, like a farmer eating their corn seed).  Three withdrawals were granted, but a fourth effort was rebuffed earlier this month.  The World Bank and the IMF expressed concern about the pension fund industry, which had been among the best in the region.  The Chilean peso is among the worst-performing emerging market currencies this year.  It has fallen nearly 15.5% and has only been "bested" by the Argentine peso (~17.3%) and the Turkish lira (-48%).   The Canadian dollar's retreat is being extended for the fifth consecutive session.  The greenback has largely held above CAD1.2800 and is drawing near the high seen after the employment reports on December 3 (~CAD1.2855).  We usually see the exchange rate is driven by 1) general risk appetite, 2) commodity prices, and 3) rate differential.  Here we note that Canada's 2-year premium has fallen from about 60 basis points at the start of last month to around 27 bp now.  Over the same time, the 10-year premium has wholly disappeared.  It was almost 20 bp on November 1 and currently is trading at a four basis point discount.  Meanwhile, the greenback is consolidating against the Mexican peso. For the fifth consecutive session, it has been mainly chopping in a MXN20.85-MXN21.08 range.   On Thursday, Banxico is expected to hike its overnight rate by 25 bp.  We continue to think it is more likely to hike by 50 bp than standpat.  Since June, it has lifted the target rate by 100 bp to 5%.   November CPI stood at 7.37%.     Disclaimer
Why Isn’t Gold Rallying Along With Inflation?

Why Isn’t Gold Rallying Along With Inflation?

Arkadiusz Sieron Arkadiusz Sieron 05.11.2021 16:20
  Inflation is high and doesn’t seem to be going away anytime soon. However, gold is not rising. The question is – what does the Fed have to do with it? Inflation is not merely transitory, and that’s a fact. Why then isn’t gold rallying? Isn’t it an inflation-hedge? Well, it is - but gold is a lazy employee. It shows up at work only when inflation is high and accelerating; otherwise, it refuses to get its golden butt up and do its job. All right, fine, but inflation is relatively high! So, there have to be other reasons why gold remains stuck around $1,800. First of all, central banks are shifting their monetary policy. Global easing has ended, global tightening is coming! Actually, several central banks have already tightened their stance. For example, among developed countries, New Zealand, Norway, and South Korea have raised interest rates. Brazil, the Czech Republic, Hungary, Mexico, Poland, Romania, and Russia are in the club of monetary policy hawks as well. Even the bank of England could hike its policy rate this year, while the Fed has only announced tapering of its asset purchases. So, although central banks will likely maintain their dovish bias and real interest rates will stay negative, the era of epidemic ultra-loose monetary policy is coming to an end. We all know that neither the interest rates nor the central banks’ balance sheets will return to the pre-pandemic level, but the direction is clear: central banks are starting tightening cycles, no matter how gentle and gradual they will be. This means that monetary policy is no longer supportive of gold. The same applies to fiscal policy. It remains historically lax despite fiscal stimulus being pulled back. Even though Uncle Sam ran a fiscal deficit of $2.8 trillion in fiscal year 2021 - almost three times that of fiscal year 2019 ($0.98 trillion) - it was 12% lower than in fiscal year 2020 ($3.1 trillion). This implies that the fiscal policy is also tightening (despite the fact that it remains extravagantly accommodative), which is quite a headwind for gold. Investors should always look at directional changes, not at absolute levels. What’s more, we are still far from stagflation. We still experience both high inflation and fast GDP growth, as well as an improving labor market. As a reminder, the unemployment rate declined from 5.2% in August to 4.8% in September. The fact that the labor market continues to hold up relatively well is the reason why the so-called Misery Index, i.e., the sum of inflation and unemployment rates, remains moderate despite high inflation. It amounted to 10.19 in September, much below the range of 12.5-20 seen during the Great Inflation of the 1970s (see the chart below). So, the dominant narrative is about both inflation and growth. When people got vaccines, markets ceased to worry about coronavirus and started to expect a strong recovery. Commodity and equity prices are rising, as well as real interest rates. These market trends reflect expectations of more growth than inflation – expectations that hurt gold and made it get stuck around $1,800. Having said that, the case for gold is not lost. Gold bulls should be patient. The growth is going to slow down, and when inflation persists for several months, the pace of real growth will decline even further, shifting the market narrative to worrying about inflation’s negative effects and stagflation. Gold should shine then. Wait, when? Soon. The Fed’s tightening cycle could be a turning point. The US central bank has already announced tapering of quantitative easing, which could erase some downward pressure on gold resulting from the anticipation of this event. Additionally, please remember that every notable market correction coincided with the end of QE, and every recession coincided with the Fed’s tightening cycle. Moreover, don’t forget that gold bottomed in December 2015, just when the Fed started hiking the federal funds rate for the first time since the Great Recession, as the chart below shows. However, when it comes to tapering, the situation is more complicated. The previous tapering was announced in December 2013, started in January 2014, and ended in October 2014. As one can see in the chart above, the price of gold initially increased, but it remained in its downward trend until December 2015 when the Fed started hiking interest rates. Hence, if history is any guide, there are high odds that gold may struggle further for a while before starting to rally next year, which could happen even as soon as June 2022, when the markets expect the first hike in interest rates. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Not Only Gold Lacks Energy – We All Do Now

Not Only Gold Lacks Energy – We All Do Now

Arkadiusz Sieron Arkadiusz Sieron 17.12.2021 15:19
  First a pandemic, then inflation, and now an energy crisis. Should you buy gold when preparing for the winter? Brace yourselves, winter is coming! And this time I’m deadly serious, as there is a global energy crisis. Not only does gold lack energy to fuel its rally right now, but people from all over the world lack it to fuel their operations and to heat their houses. Apparently, the coronavirus pandemic wasn’t enough, so we also have to deal with inflation, supply bottlenecks, and the energy crisis. I guess there is nothing else to do now but wait for the frogs to start falling from the sky. But let’s not give the gods ideas and focus on the energy crisis today. What is it about? A picture is worth a thousand words, so please take a look at the chart below, which presents the Dutch Title Transfer Facility, Europe’s leading benchmark for natural gas prices. As you can see, future prices for European natural gas have skyrocketed to a record level in October 2021, surging several times from their low in May 2020. The persistence and global dimension of these price spikes are unprecedented, as natural gas prices have also surged in Asia and America (although to a lesser degree). What caused such a spike? Well, as a trained economist, I cannot resist answering that it’s a matter of demand and supply! Yeah, thank you, Captain Obvious, but could you be a little more specific? Sure, so on the demand side, we have to mention a fast recovery from the epidemic and cold fall that increased the use of energy. Oh, and don’t forget about the ultra-low interest rates and the increase in the money supply that boosted spending on practically everything. The increased demand for energy is hardly surprising in such conditions. On the supply side, there were unpredictable breakdowns of gas infrastructure in Russia and Norway that decreased deliveries. The former country reduced its exports due to political reasons. What’s more, the reduction in the supply of CO2 emission rights and unfavorable weather didn’t help. The windless conditions in Europe generated little wind energy, while drought in Brazil reduced hydropower energy. More fundamentally, the decline in energy prices in response to the economic crisis of 2020 prompted many producers to stop drilling and later supply simply didn’t catch up with surging demand. You can also add here the political decisions to move away from nuclear and carbon energy in some countries. Last but not least, the butterfly’s wings flapped in China. Coal production in that country plunged this year amid a campaign against corruption and floods that deluged some mines. Middle Kingdom therefore began to buy significant amounts of natural gas, sharply increasing its prices. China’s ban on importing coal from Australia, of course, didn’t help here. Great, but what does the energy crisis imply for the global economy and the gold market? First, shortages of energy could be a drag on global GDP. The slowdown in economic growth should be positive for gold, as it would bring us closer to stagflation. Second, the energy crisis could cause discontent among citizens and strengthen the populists. People are already fed up with pandemics and high inflation, and now they have to pay much higher energy bills. Just imagine how they will cheer when blackouts occur. Third, the surge in natural gas prices could support high producer and consumer inflation. We are already observing some ripple effects in the coal and oil markets that could also translate into elevated CPI numbers. Another inflationary factor is power shortages in China, as they will add to the supply disruptions we are currently facing. All this implies more persistent high inflation, which should provide support for the yellow metal as an inflation hedge, although it also increases the odds of a more hawkish Fed, which is rather negative for gold. It’s true that a replay of the 1970s-like energy crisis is remote, as today’s economies are much less energy-consuming and dependent on fossil fuels. However, the worst is possibly yet to come. After all, winter hasn’t arrived yet – and it could be another harsh one, especially given that La Niña is expected to be present for the second year in a row. Meanwhile, gas stocks are unusually low. You can connect the dots. So far, gold has rather ignored the unfolding energy crisis, but we’ve already seen that market narratives can change quickly. It’s therefore possible that prolonged supply disruption and high inflation could change investors’ attitude toward the yellow metal at some point. The weak gold’s reaction stems from the limited energy crisis in the US and from the focus on the Fed’s tightening cycle. But investors’ attention can shift, especially when the Fed starts hiking federal funds rate. Brace yourselves! Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
HK Rallies and PBOC Cuts, US Stocks Stabilize

HK Rallies and PBOC Cuts, US Stocks Stabilize

Marc Chandler Marc Chandler 20.01.2022 13:59
January 20, 2022  $USD, Ausrtalia, China, Currency Movement, Japan, Norway, Russia Overview:  Amid inflation fears and the decline in crypto prices, gold was resurrected, rallying the most in three months yesterday to its best level since November.  It is consolidating those gains today, straddling the $1840 level.  Equities are trying to stabilize.  The MSCI Asia Pacific Index snapped a five-day slide with a 1% gain helped by a 3.4% rally in Hong Kong, helped by the mainland's initiatives, which included a small reduction in the loan prime rate and promises of stepped-up support for the property sector.  China's CSI 300 rose almost 1%, its third gain this week.  A rebound in the tech sector also helped lift the Nikkei by 1.1%.   European shares opened higher, but the lack of breadth saw the Stoxx 600 turn lower.  Gains in utilities and communications are not to offset the losses elsewhere, led by energy and financials.  US futures are firm after closing poorly yesterday.  Benchmark 10-year yields are softer.   The US 10-year is off three basis points to near 1.83%.  European yields are 1-3 bp lower.   The US dollar is trading off against most of the major currencies.  The Norwegian krone, where the central bank stood pat, and the Swedish krona are laggards today. A strong employment report is helping lift the Australian dollar by around 0.4% to lead the pack.  Emerging market currencies are mixed, with Russia, Hungary, and Turkey leading the decliners.  The Thai baht and South African rand are the best performers, but the JP Morgan Emerging Market Currency Index is slightly weaker today after posting its best gain in a month yesterday (~0.75%).  Industrial metals are firmer.  Tin and nickel shortages are behind their surge, while iron ore prices are up 2%+ for the third consecutive session and at their best level since last August.  Copper prices are extending yesterday's 2% rally.  Crude is consolidating a three-day rally that lifted March WTI to almost $86.80.  US natgas tumbled almost 5.9% yesterday and is straddling the $4 level today.   The Dutch benchmark is paring initial follow-through after dropping 8.3% yesterday.   Asia Pacific China's loan prime rate was cut.  The one-year rate was cut by 5 bp in December and 10 bp earlier today to stand at 3.7%.  The five-year loan prime rate was cut by only five basis points (to 4.6%).  This was less than expected and is seen as a cautionary signal about the property market.  Still, policymakers are seen taking other efforts to promote stronger growth more broadly.  Further easing by the PBOC is expected.   Japan reported a smaller than expected December trade deficit.  Exports did not pullback as much as expected.  After rising 20.5% year-over-year in November, they slowed to a 17.5% gain in December.  Imports slowed more than expected, to 41.1% from 43.8%.  This is broadly consistent with the seasonal pattern that December often sees improvement from November.  Last year, Japan reported an average monthly trade deficit of JPY122.7 bln.  In 2020, the average monthly trade surplus was JPY32 bln. An average trade shortfall of almost JPY140 bln was recorded in 2019.  Yet, through this period, Japan continued to experience a current account surplus, driven not by trade in goods and services, but by the return on foreign investment.   Despite new social restrictions, Australia's December jobs data was better than expected.  Overall job growth was near 65k (Bloomberg median was for an increase of 60k), and the unemployment rate tumbled to 4.2% from 4.6% (4.5% anticipated).  Three-quarters of the jobs were full-time positions, and the participation rate was steady at 66.1%.  The swaps market has about 40 bp of tightening priced in over the next six months.  The central bank has pushed against such expectations.   It meets again on January 31. The US dollar recorded a new low for the week near JPY114.00, where a $520 mln option expires today.  It has not been able to rise much about JPY114.50.    We suspect the North American market can probe the upside.  A close above JPY114.60 would help stabilize the tone.  The Australian dollar is firm after the employment data pushed it to new highs for the week just shy of $0.7260.  The market does not seem to have the energy to test the $0.7290-$0.7300 area, where options for around A$660 mln lay. The dollar spent the entire mainland session below CNY6.35.  The PBOC set the dollar's reference rate at CNY6.3485, the strongest in three years, and stronger than the Bloomberg survey projected (~CNY6.3478).  Still, state-owned banks (aren't they all?) were seen on the dollar's bid when it approached CNY6.3400.  Europe The economic news stream is light.  The ECB's record of last month's meeting will be published shortly, but it tends not to be a market mover.   The December CPI was revised to show a 5.0% year-over-year increase rather than 4.9%, while the monthly increase remained at 0.4% and the core rate was steady at 2.6%.   The US and Europe agree that a Russian invasion of Ukraine needs to be resisted, but there is still differences on the response.  Biden raised the prospect yesterday of something short of a full invasion, which he acknowledged would complicate the response. Russia has continued to reinforce its troops and artillery.  US Secretary of State Blinken and Russia's Foreign Minister Lavrov are to talk today.  Russia continues to deny plans to invade but demands concessions from NATO that will not be forthcoming.  This hangs over the markets like the sword of Damocles.  Norway's Norges Bank kept rates on hold today, but reaffirmed a hike in March, which would be the first meeting with a new governor, who has yet to be named.  The swaps market sees 85 bp of tightening this year.  Last year, it hiked rates in September and December.   Elsewhere, we note that as widely expected Turkey's central bank left the one-week repo rate unchanged at 14.00%, lending credence to ideas that the easing operations are complete after 500 bp in cuts were delivered in the last four months of 2021.   The euro is trading quietly in less than a 30-pip range below $1.1370. The $1.1380 area is the (38.2%) retracement objective of the decline from last Friday's high near $1.1485.  A break of $1.1340 could see $1.1320 but a close below $1.1300 is needed to lend credence to ideas that a high is in place.  There is a large option (nearly 1.1 bln euros) at $1.1350 that expires today.  Sterling is coiling.  It is inside yesterday's range, which was inside Tuesday's range (~$1.3575-$1.3660).  The consolidative tone may persist today ahead of tomorrow's retail sales, where there could be room for disappointment after a 1.4% gain in November.   America The US reports weekly initial jobless claims, the Philadelphia Fed survey, and existing home sales.   The high frequency data points may pose some headline risk, but the market is focused on policy ahead of next week's FOMC meeting.  That said, the Empire State manufacturing survey, reported earlier this week, was a disappointment, while yesterday's housing starts, and permits were stronger than anticipated. Canada's December headline CPI yesterday was in line with expectations (4.8% vs. 4.7% in November), but the underlying core measures were firmer.  The Bank of Canada meets next week, and the swaps market has a little more than a 2/3 chance of a hike.  Tomorrow, Canada reports November retail sales, which are expected to be robust (1%+). Mexico reports its December unemployment, which is expected to have drifted lower.   The greenback is chopping roughly between CAD1.2450 and CAD1.2550 for the sixth session.   This consolidation phase follows the US dollar's decline from last year's high on December 20 near CAD1.2965.  Without re-kindling the downside momentum, the greenback may be set up for a bounce.  The Slow Stochastic is turning up.  The CAD1.26 area is technically important.  It is the neckline of a head and shoulders pattern.  The dollar's downside momentum faded against the Mexican peso.  Despite repeated attempts, it could not punch below the 200-day moving average (~MXN20.2850) and bounced yesterday to close above MXN20.50 for the first time since January 5.  It is in a narrow range straddling MXN20.50 today. The intraday technicals caution against chasing the dollar higher.  A pullback toward MXN20.40-MXN20.45 looks reasonable.       Disclaimer
Oanda Podcast: US Jobs Report, SVB Financial Fallout And More

US Giving More Manufacturing Jobs This Year But The Production Disappoints

Marc Chandler Marc Chandler 16.08.2022 10:30
After two-quarters of contraction, many still do not accept that the US economy is in a recession  Federal Reserve officials have pushed against it, as has Treasury Secretary Yellen. The nearly 530k rise in July nonfarm rolls, more than twice the median forecast in Bloomberg's survey, and a new cyclical low in unemployment (3.5%) lent credibility to their arguments. If Q3 data point to a growing economy, additional support will likely be found.   While the interest rate-sensitive housing sector may still feel the squeeze, we note that activity is at historically strong levels  Housing starts are expected to have fallen for the third consecutive month in July. That would be the longest decline since the last four months of 2018. However, around 1.5 mln annualized pace, starts are still elevated. Permits, which are leading indicators, are holding up even better. They peaked at the end of last year a little below 1.9 mln and may have fallen to around 1.65 mln in July. Since the Great Financial Crisis, they were above 1.5 mln only once (October 2019). before the surge began in mid-2020. Existing home sales have come off a bit more  They are expected to have fallen for the sixth consecutive month in July. It is the worst streak since 2013. Indeed, they are likely to fall below the 5 mln annualized mark for the first time since January 2019. Elevated mortgage rates are the highest since 2008 and have squeezed buyers while rising inventories have sparked some anecdotes about price cuts. The number of houses for sale rose for the first time in three years, around three months at the current pace of sales. Below five months of inventory is regarded as tight by realtors. Of interest, first-time buyers accounted for almost a third of the sales in June. Cash sales accounted for a quarter of all transactions in June. Houses were on the market for an average of two weeks last month, the shortest for more than a decade. Recall that new home sales are recorded on contract signings, while the existing home sales are counted on closes.   While the housing market is softening, consumption and output appear to have begun Q3 on solid footing  Retail sales, which account for around 40% of consumption, are expected to have edged by 0.1%-0.2% after a 1.0% rise in June. The drop in gasoline prices will likely be seen here and weigh on the retail sales, which are reported in nominal terms. Core retail sales, which excludes auto, gasoline, building materials, and food services, are expected to have risen 0.6% after 0.8% in June. More people working and earning a little bit more (on average), i.e., the income effect should help underpin consumption.   Manufacturers added 30k people to their payrolls in July, the most in three months and matching last year's average pace  The US has added more manufacturing jobs through July than it did in the same period a year ago (273k vs. 161k). Manufacturing output has disappointed. It fell by 0.5% in both May and June. The decline in vehicle and parts output may have been partially reversed in July amid a recovery in auto sales. Higher commodity prices encouraged mining output in May and June (1.2% and 1.7%, respectively). It may have slowed as commodity prices fell in July. The scorching summer and demand for air conditioning likely boosted utility output, which had fallen in June (-1.4%).  On a year-over-year basis, industrial output often contracts into a recession but not always before the start of the recession  Through June, it has risen by almost 4.2%. The capacity utilization rate is expected to have above 80.0% for the fourth consecutive month. That would match the last cyclical peak in 2018, the longest since the Great Financial Crisis. Utilization rates fall sharply during a recession. In two of the last three recessions, capacity usage fell before the downturn was dated. In the Financial Crisis, the peak coincided with the start of the recession. The US also reports the capital flow data for June (TIC on August 15) While a favorite of reporters and analysts, it is not a market mover. Through May, net long-term foreign capital inflows have been a little more than $465 bln., which is about an 8.5% increase from a year ago. Finally, the Empire State Survey August 15) and the Philadelphia Fed surveys (August 18), the first look into August aside for the weekly jobs claims and mortgage applications. The market appears to put more weight on some components of the Philly survey.   Three economic releases from Japan will draw attention  Japan reports its first estimate of Q2 GDP to kick off the week. The world's third-largest economy contracted at an annualized rate of  0.5% in Q1 but is expected to have rebounded to 2.7% in Q2. That translates into a 0.7% quarterly expansion (seasonally adjusted) after shrinking by 0.1% in Q1. Consumption and business investment rebounded. Inventories were likely unwound. After rising 0.5% in Q1, the median forecast in Bloomberg's survey looks for a 0.3% decline. The GDP deflator has been negative for the past five quarters. It was at -0.5% in Q1, but economists (Bloomberg survey) project a decline to -0.8%.  Despite the GDP deflator still showing deflation's grip, the July CPI (August 19) is likely to show inflation continues to rise above the BOJ's target  It targets the CPI, excluding fresh food, at 2.0%. It stood at 2.2% in June and is likely to have ticked up a little in July. The Tokyo CPI has already been reported. The core measure rose to 2.3% from 2.1%. Tokyo's headline rate increased to 2.5% from 2.3%, and the measure excluding food and energy crept up to 1.2% from 1.0%.  July trade figures will be reported on August 17 Japan is experiencing a  massive terms-of-trade shock. In the first half of this year, Japan reported a JPY7.94 trillion (~$59 bln) deficit. In H1 21,  it had a trade surplus of about JPY810 bln (~$6 bln). The problem is not with merchandise exports. In June, they were up almost a fifth from last year, when they were by nearly 50% over 2020. Imports have surged with food and energy prices. Merchandise imports had risen 46% above the year-ago level in June, and that is after an increase by a third from June 2020.   The UK and Canada report July retail sales and CPI  The UK also publishes its latest employment report, while Canada updates housing starts and portfolio flows. The data poses headline risk, but the macroeconomic backdrop is unlikely to change significantly. The Bank of England warns that the economy will enter a protracted recession that will carry into 2024. The Bloomberg survey found that the median forecast assessed a 45% probability of a recession over the next 12 months.   UK's labor market is fairly strong, and the unemployment rate is at 3.8%, having bottomed at 3.7% in March, the lowest level since 1974. Inflation is rising, and the base effect underscores the upside risk. Last July, CPI was unchanged on the month.   While wage growth may be strong, it is insufficient to cover the rising cost of living and this squeezing consumption June was the first month since October 2021 that retail sales, excluding gasoline, rose. However, UK retail sales, reported in volume terms, have fallen an average of 0.5% a month over the past 12 months. If there is going to be relief for the UK household, it will have to come from the new government. The Bank of England has one objective. Bring down inflation. The swaps market has discounted almost an 85% chance of another 50 bp increase to 2.25% at the September 15 meeting. It sees a year-end rate of around 2.80%, implying nearly 75 bp hikes in Q4.   Canada's labor market improvement is stalling, and it looks like the economy is too The monthly GDP downshifted from 0.7-0.8% in February and March to 0.3% in April and flat in May. Retail sales have been strong, flattered by rising prices. Through May, they have increased by an average of 1.5% a month. The average in the first five months of 2021 was 0.6. Canadian inflation accelerated to 8.1% in June and may have slowed in July for the first time since June 2021. Underlying core measures are expected to have stayed firm. Last month, the Bank of Canada surprised the market with a 100 bp hike in the overnight lending rate to 2.50%. The swaps market briefly took the possibility of a 75 bp hike at the September 7 meeting very seriously but now has slightly better than a 40% chance.  In Australia, the labor market is in focus  It added 60k full-time positions on average a month in Q2 after a 50.5k average in Q1. The pace is likely to moderate. The participation rate of 66.8% set in June was a record high. The unemployment rate of 3.5% was also a record low. There are some signs that the overall economy may be losing some momentum. Still, with CPI accelerating from 5.1% in Q1 to 6.1% in Q2, the Reserve Bank of Australia is tightening policy. After delivering the first hike in May of 25 bp, it lifted the cash target rate in 50 bp clips in June through August. Speculation of another 50 bp hike at the September 6 meeting is seen as slightly better than even money.  The Reserve Bank of New Zealand meets on August 17  It will most likely deliver the seventh hike in the cycle that began last October. After three quarter-point moves, it delivered three 50 bp hikes. The cash target rate now stands at 2.50%. With Q2 inflation rising faster than expected (7.3% year-over-year), unemployment low (3.3% in Q2; record low set last December at 3.2%), more forceful action is possible. However, the swaps market judges it unlikely and has about a 90% chance of a 50 bp hike reflected in current prices. The New Zealand dollar is strong, at its best level in two months, but maybe too strong. Although it closed firmly ahead for the weekend, it looks stretched from a technical perspective, perhaps signaling a "buy the rumor, sell the fact" type of activity.  Norway's central bank, Norges Bank, meets on August 18  A few hours after Norway reports Q2 GDP, Norges Bank makes its rate announcement. Typically, it prefers to adjust policy when it updates its economic assessment, similar in this regard to the European Central Bank. However, last week's CPI shock heightens the risk it breaks from the pattern. Headline CPI jumped 1.3% in July, lifting the year-over-year rate to 6.8%. The median forecast (Bloomberg's survey) was for an unchanged 6.3% pace. The underlying rate, which excludes energy and adjusts for tax changes, surged by 1.5%, nearly twice as much as expected. As a result, the year-over-year change was boosted to 4.5% from 3.6%.   The deposit rate stands at 1.25%  Norges Bank began the tightening cycle last September but has raised it by a cumulative 125 bp. However, among the high-income countries in Europe, only the UK's policy rate is higher. Sweden's inflation is higher at 8.5% (July from 8.7% in June), and its policy rate is 50 bp less than Norway. Since June 16, the day after the FOMC meeting that results in the first 75 bp rate hike, the Norwegian krone has been the strongest major currency, gaining 3.9% against the US dollar and 6.8% against the euro. Look for the dollar to correct higher, even if a 50 bp hike is delivered.    Disclaimer   Source: Week Ahead: More Evidence US Consumption and Output are Expanding, and RBNZ and Norges Bank to Hike
Lowest China's Yield Level In 2 Years!? Dollar (USD) Is Disturbing Gold In It's Challenge

Lowest China's Yield Level In 2 Years!? Dollar (USD) Is Disturbing Gold In It's Challenge

Marc Chandler Marc Chandler 16.08.2022 11:44
Overview: Equities were mostly higher in the Asia Pacific region, though Chinese and Hong Kong markets eased, and South Korea and India were closed for national holidays. Despite new Chinese exercises off the coast of Taiwan following another US congressional visit, Taiwan’s Taiex gained almost 0.85%. Europe’s Stoxx 600 is advancing for the fourth consecutive session, while US futures are paring the pre-weekend rally. Following disappointing data and a surprise cut in the one-year medium-term lending facility, China’s 10-year yield fell to 2.66%, its lowest in two years. The US 10-year is soft near 2.83%, while European yields are mostly 2-4 bp lower. Italian bonds are bucking the trend and the 10-year yield is a little higher. The Antipodeans and Norwegian krone are off more than 1%, but all the major currencies are weaker against the greenback, but the Japanese yen, which is practically flat. Most emerging market currencies are lower too. The Hong Kong Dollar, which has been supported by the HKMA, strengthened before the weekend, and is consolidating those gains today. Gold tested the $1800 level again but has been sold in the wake of the stronger dollar and is at a five-day low near $1778. The poor data from China raises questions about demand, and September WTI is off 3.6% after falling 2.4% before the weekend. It is near $88.60, while last week’s five-month lows were set near $87.00. US natgas is almost 2% lower, while Europe’s benchmark is up 2.7% to easily recoup the slippage of the past two sessions. China’s disappointment is weighing on industrial metal prices. Iron ore tumbled 4% and September copper is off nearly 3%. September wheat snapped a four-day advance before the weekend and is off 2.3% today.  Asia Pacific With a set of disappointing of data, China surprised with a 10-bp reduction in the benchmark one-year lending facility rate to 2.75%  It is the first cut since January. It also cut the yield on the seven-day repo rate to 2.0% from 2.1%. The string of poor news began before the weekend with a larger-than-expect in July lending figures. However, those lending figures probably need to be put in the context of the surge seen in June as lenders scramble to meet quota. Today's July data was simply weak. Industrial output and retail sales slowed sequentially year-over-year, whereas economists had projected modest increases. New home prices eased by 0.11%, and residential property sales fell 31.4% year-over-year after 31.8% decline in June. Property investment fell 6.4% year-over-year, year-to-date measures following a 5.4% drop in June. Fix asset investment also slowed. The one exception to the string of disappointment was small slippage in the surveyed unemployment rate to 5.4% from 5.5%. Incongruous, though on the other hand, the jobless rate for 16–24-year-olds rose to a record 19.9%. Japan reported a Q2 GDP that missed estimates, but the revisions lifted Q1 GDP out of contraction  The world's second-largest economy grew by 2.2% at an annualized pace in Q2. While this was a bit disappointing, Q1 was revised from a 0.5% fall in output to a 0.1% expansion. Consumption (1.1%) rebounded (Q1 revised to 0.3% from 0.1%) as did business spending (1.4% vs. -0.3% in Q1, which was originally reported as -0.7%). Net exports were flat after taking 0.5% off Q1 GDP. Inventories, as expected, were unwound. After contributing 0.5% to Q1 GDP, they took 0.4% off Q2 growth. Deflationary forces were ironically still evident. The GDP deflator fell 0.4% year-over-year, almost the same as in Q1 (-0.5%). Separately, Japan reported industrial surged by 9.2% in June, up from the preliminary estimate of 8.9%. It follows a two-month slide (-7.5% in May and -1.5% in April) that seemed to reflect the delayed impact of the lockdowns in China. The US dollar is little changed against the Japanese yen and is trading within the pre-weekend range (~JPY132.90-JPY133.90). It finished last week slightly above JPY133.40 and a higher closer today would be the third gain in a row, the longest advance in over a month. The weakness of Chinese data seemed to take a toll on the Australian dollar, which has been sold to three-day lows in the European morning near $0.7045. It stalled last week near $0.7140 and in front of the 200-day moving average (~$0.7150). A break of $0.7035 could signal a return to $0.7000, and possibly $0.6970. The greenback gapped higher against the Chinese yuan and reached almost CNY6.7690, nearly a two-week high. The pre-weekend high was about CNY6.7465 and today's low is around CNY6.7495. The PBOC set the dollar's reference rate at CNY6.7410, a little above the Bloomberg survey median of CNY6.7399. Note that a new US congressional delegation is visiting Taiwan and China has renewed drills around the island. The Taiwan dollar softened a little and traded at a three-day low. Europe Turkey's sovereign debt rating was cut a notch by Moody's to B3 from B2  That is equivalent to B-, a step below Fitch (B) and two below S&P (B+). Moody's did change its outlook to stable from negative. The rating agency cited the deterioration of the current account, which it now sees around 6% of GDP, three times larger than projected before Russia invaded Ukraine. The Turkish lira is the worst performing currency this year, with a 27.5% decline after last year's 45% depreciation. Turkey's two-year yield fell below 20% today for the first time in nine months, helped ostensibly by Russia's recent cash transfer. The dollar is firm against the lira, bumping against TRY17.97. The water level at an important junction on the Rhine River has fallen below the key 30-centimeter threshold (~12 inches) and could remain low through most of the week, according to reports of the latest German government estimate  Separately, Germany announced that its gas storage facility is 75% full, two weeks ahead of plan. The next target is 85% by October 1 and 95% on November 1. Reports from France show its nuclear reactors were operating at 48% of capacity, down from 50% before the weekend. A couple of reactors were shut down for scheduled maintenance on Saturday.  Ahead of Norway' rate decision on Thursday, the government reported a record trade surplus last month  The NOK229 bln (~$23.8 bln). The volume of natural gas exports surged more than four-times from a year earlier. Mainland exports, led by fish and electricity, rose by more than 20%. The value of Norway's electricity exports increased three-fold from a year ago. With rising price pressures (headline CPI rose to 6.8% in July and the underlying rate stands at 4.5%) and strong demand, the central bank is expected to hike the deposit rate by 50 bp to 1.75%. The euro stalled near $1.0370 last week after the softer than expected US CPI  It was pushed through the lows set that day in the European morning to trade below $1.02 for the first time since last Tuesday. There appears to be little support ahead of $1.0160. However, the retreat has extended the intraday momentum indicators. The $1.0220 area may now offer initial resistance. Sterling peaked last week near $1.2275 and eased for the past two sessions before breaking down to $1.2050 today. The intraday momentum indicators are stretched here too. The $1.2100 area may offer a sufficient cap on a bounce. A break of $1.20 could confirm a double top that would project back to the lows. America The Congressional Budget Office estimates that the Inflation Reduction Act reduces the budget deficit but will have a negligible effect on inflation  Yet, starting with the ISM gauge of prices paid for services, followed by the CPI, PPI, and import/export prices, the last string of data points came in consistently softer than expected. In addition, anecdotal reports suggest the Big Box stores are cutting prices to reduce inventories. Energy is important for the medium-term trajectory of measured inflation, but the core rate will prove sticky unless shelter cost increases begin to slow. While the Democrats scored two legislative victories with the approval of the Chips and Science Act and the Inflation Reduction Act, the impact on the poll ahead of the November midterm election seems minor at best. Even before the search-and-seizure of documents still in former President Trump's residence, PredictIt.Org "wagers" had turned to favor the Democratic Party holding the Senate but losing the House of Representatives. In terms of the Republican nomination for 2024, it has been back-and-forth over the last few months, and recently Florida Governor DeSantis narrowly pulled ahead of Trump. The two new laws may face international pushback aside from the domestic impact  The EU warned last week that the domestic content requirement to earn subsidies for electric vehicles appears to discriminate against European producers. The Inflation Reduction Act offers $7500 for the purchases of electric cars if the battery is built in North America or if the minerals are mined or recycled there. The EU electric vehicle subsidies are available for domestic and foreign producers alike. On the other hand, the Chips and Science Act offers billions of dollars to attract chip production and design to the US. However, it requires that companies drawing the subsidies could help upgrade China's capacity for a decade. Japan and Taiwan will likely go along. It fits into their domestic political agenda. However, South Korea may be a different kettle of fish. Hong Kong and China together accounted for around 60% of South Korea's chip exports last year. Samsung has one overseas memory chip facility. It is in China and produces about 40% of the Galaxy phones' NAND flash output. Pelosi's apparent farewell trip to Asia, including Taiwan, was not well received in South Korea. President Yoon Suk Yeol did not interrupt his staycation in Seoul to meet the US Speaker. Nor was the foreign minister sent. This is not to cast aspersions on South Korea's commitment to regional security, simply that it is not without limits. Today's economic calendar features the August Empire State manufacturing survey  A small decline is expected. The June TIC data is out as the markets close today. Today is also the anniversary of the US ending Bretton Woods by severing the last links between gold and the dollar in 1971. Canada reports manufacturing sales and wholesale trade, but the most market-sensitive data point may be the existing home sales, which are expected to have declined for the fifth consecutive month. Canada reports July CPI tomorrow (Bloomberg survey median forecast sees headline CPI slowing to 7.6% from 8.1% in June).  The Canadian dollar is under pressure  The US dollar has jumped above CAD1.2900 in Europe after finishing last week near CAD1.2780. Last week's high was set near CAD1.2950, where a $655 mln option is set to expire today. A move above CAD1.2920 could target CAD1.2975-CAD1.3000 over the next day or day. A combination of weaker equities, thin markets, and a short-term market leaning the wrong way after the likely drivers today. The greenback posted its lowest close in two months against the Mexican peso before the weekend near MXN19.85. However, it is rebounding today and testing the MXN20.00 area Initial resistance may be encountered around MXN20.05, but we are looking for a move toward MXN20.20 in the coming days. Mexico's economic calendar is light this week, and the highlight is the June retail sales report at the end of the week.    Disclaimer Source: China Disappoints and Surprises with Rate Cut
Norway: Norges Bank Hikes Again! It's Not About 25bp!

Norway: Norges Bank Hikes Again! It's Not About 25bp!

ING Economics ING Economics 18.08.2022 20:07
Norges Bank has hiked the deposit rate by 50bp for the second consecutive meeting, despite having previously signalled it expected to dial back the pace to 25bp increments. Higher-than-expected inflation readings suggest policymakers will now front-load hikes. Expect further 50bp moves in September and November Norway's central bank has taken the deposit rate to 1.75%. Pictured: Oslo   Norway’s central bank has raised interest rates by 50bp, taking the deposit rate to 1.75%. What’s interesting about this decision is that it had explicitly signalled back in June that it expected to hike rates by 25bp at this meeting, despite having hiked by 50bp at the time. The message seemed to be that it wanted to take rates higher by 50bp every quarter but spread across the two meetings that take place in each three-month window. Since then, however, inflation data has come in on the upside again (core inflation jumped to 4.5% in July). Policymakers faced a choice between sticking to their previous guidance, or changing course and acting more forcefully on the basis of the latest data – a similar conundrum that the ECB faced a few weeks ago. In practice, officials have concluded that front-loading hikes in this environment makes more sense. At the June meeting, Norges Bank projected 25bp rate hikes at every forthcoming meeting through to mid-2023, with a terminal rate of roughly 3%. We shouldn’t necessarily infer from today’s decision that Norges Bank will go materially above that, but it does look like 3% will be reached more quickly. We now expect further 50bp rate hikes in September and probably also November, with another one or two 25bp hikes thereafter. Norges Bank is hiking more quickly than it projected in June Source: Macrobond, Norges Bank, ING Read this article on THINK TagsNorway Norges Bank Inflation Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
NOK (Norwegian Krone): Norges Bank Hiked The Interest Rate!

NOK (Norwegian Krone): Norges Bank Hiked The Interest Rate!

ING Economics ING Economics 22.09.2022 13:52
Norway’s central bank raises rates by 50bp and signals another hike will likely be delivered in November. Somewhat surprisingly, the statement hints at a slower pace of tightening from now on, but we still don't rule out another 50bp hike in November. Like in Sweden, attempts to lift NOK via higher rates should keep failing in the near term Another 50bp hike, but hints of a slower pace of tightening Norges Bank delivered another much-anticipated 50bp rate hike today, bringing the policy rate to 2.25%. The move was fully in line with the Bank’s determination to fight elevated inflation, as firmly reiterated by Governor Ida Wolden Bache in her post-meeting statement. The Bank also released its updated economic and policy rate projections. While the inflation forecast was revised higher, the rate path was nearly unchanged from the June 2022 projections, with a peak expected at 3% in 2023 and remaining around that level into 2024. Perhaps surprisingly, the Bank explicitly mentioned that “monetary policy is starting to have a tightening effect on the Norwegian economy”, which “may suggest a more gradual approach to policy rate setting ahead”. This appears in contrast with other developed central banks which are refraining from diverging from their hawkish rhetoric with the aim of keeping inflation expectations in check. There are two more Norges Bank meetings in 2022, on 3 November and 15 December. Today’s statement suggests that to get to the 3.0% projected terminal rate (so 75bp from the current level) with more gradual tightening, we could see 25bp hikes in November, December, and at the first meeting of 2023. Rate projections unchanged since June Source: Norges Bank, ING We don't rule out a 50bp move in November We had previously forecasted another 50bp hike in November, although the change in tone by Norges Bank does suggest a 25bp move is likely the baseline scenario for the Bank. Still, we would not rule out a half-point move just yet, mainly because for one thing, the statement still points to some flexibility in the rate setting moving forward. Also, inflation may surprise to the upside, and Norges Bank may attempt to lift the krone by surprising markets on the hawkish side. NOK: Monetary policy impact very limited In her statement today, Governor Bache said: “a higher policy rate may also contribute to strengthening the krone exchange rate, which may curb imported goods inflation further out”. In practice, however, the correlation between short-term rate differentials (which absorb monetary policy expectations) and the krone's performance has faded in recent months as it has in many other developed currencies. The example of the neighbouring Riksbank in Sweden is emblematic; earlier this week, a massive 100bp rate hike only seemed to offer an opportunity for SEK bears to sell the currency at more attractive levels, and SEK plunged in the hours after the announcement. The reason the correlation has faded is down to the numerous global and European macro factors along with geopolitical concerns and their impact on global risk sentiment as FX drivers. We think the unstable risk environment should continue to prevent a relinking of high-beta currencies with their rate differentials in the coming weeks.   We still see room for a recovery in NOK in the medium term, potentially starting later this year, and any risk stabilisation should allow the krone to benefit from the attractive commodity picture and high interest rates. We currently forecast a move to 9.80 in EUR/NOK in the first quarter of next year. However, downside risks in the near term remain elevated for NOK, especially considering its relatively low liquidity character which leaves it more exposed to swings in risk sentiment. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
The Bank Of Canada Paused Rates Hiking, The ADP Employment Report Had A 242K Increase In Jobs

Forex: Canadian Dollar (CAD) And Norwegian Krone (NOK) May Go Up Thanks To OPEC+ Cutting Supply

ING Economics ING Economics 03.10.2022 13:33
The pound has reversed back to pre 'fiscal event' levels on news of a policy U-turn. A holiday in China this week might introduce slightly calmer conditions to FX markets, but prospects of another solid US jobs report on Friday should keep the dollar bid on dips USD: FX intervention can only slow, not reverse trends We are focusing on four points this morning. 1) The potential for OPEC+ supply cuts. 2) FX intervention from Japan and possibly China too. 3) The close first round elections result in Brazil and 4) the prospects for Friday's US jobs report. Media reports suggest OPEC+ (meeting Wednesday) will push for a 1mn barrel per day cut in production. Oil experts will have to tell us why the Saudis will want this, but suffice to say it seems President Biden's visit to the region this summer has failed to deliver the desired supply increases. Indeed, it is a strange period when OPEC+ may be looking at a large supply cut while the US is still selling strategic petroleum reserves. The prospects of an OPEC+ supply cut may offer some brief support to the beleaguered Canadian dollar and Norwegian krone, but given a challenging risk environment, we doubt these high beta currencies can hold any near terms gains. Friday saw Japan announce that the central bank had bought close to US$20bn of yen in its intervention late last month. Remember this was the first yen buying since 1998. This will be the start of a campaign from Japanese authorities who can only hope to slow, not reverse the USD/JPY uptrend. Indeed, USD/JPY traded up above 145 again overnight and we should probably expect more intervention around these levels shortly. On the subject of intervention, China may well have intervened above 7.20 in USD/CNY last week. Unlike the Japanese, Chinese authorities do not report FX intervention activity. It is a holiday this week in China, so the 7.20 level may not be challenged again until next week. Sunday's Presidential vote in Brazil saw a much closer vote than expected. A run-off will be held between Lula and Bolsonaro on 30 October. Some are saying that Brazilian assets should rally on the news that Bolsonaro has a better chance of retaining power than initially thought. However, the much closer vote than expected leaves open the prospect of a disputed election outcome. As we have seen in the UK recently, the external environment is very unforgiving at the moment. And with reports of $70bn of portfolio flows having left emerging markets this year, another month of campaigning and the prospects of a close vote could see USD/BRL make a run at 5.60. Finally, the highlight of this week's US data calendar will be Friday's release of the September jobs report. Our team looks for a solid 200k increase in jobs and the unemployment rate staying low at 3.7% - both pointing to another 75bp hike from the Federal Reserve on 2 November.  DXY has corrected around 2.5% from its highs seen last week. We are in the camp favouring stronger levels later this year and feel that this correction under 122 will be short-lived. Chris Turner EUR: PMIs in focus Today will see the final September PMIs for the eurozone, with the manufacturing component expected to remain near 48.5, in contraction territory. News that OPEC+ wants to increase oil prices will not be welcomed across the region. Equally weekend reports suggest that what little remains of Russian gas exports to Europe may dwindle as well - e.g. Italy. As in the UK, the focus in the eurozone is also shifting to the size of fiscal support packages and whether local bond markets can easily digest them. EUR/USD is holding its gains from last week after the Bank of England stepped in to stabilise the Gilt market. One could argue that intervention (both FX from Asian authorities and in the bond market from UK authorities) is delivering this pause in the dollar's bull trend. But the macro factors which are driving it remain firmly in place and 0.9850/9870 could prove the limit to the current EUR/USD bounce. Favour a retest of 0.95 in October. Chris Turner GBP: Policy U-turn As we go to publication, GBP/USD is just enjoying another leg higher on reports that the Liz Truss government will formally reverse its planned abolishment of the 45% income tax bracket. Our UK team feels this move is rather symbolic, being less about the amount of money it will save (low billions) and more about the poor signal it had delivered of ideological (unfunded) tax cuts. The move looks driven by a backlash from her own party and perhaps the threat of a sovereign rating downgrade, where the S&P rating agency on Friday shifted the UK outlook to negative from stable in an unscheduled move. We will not be churlish here and say this will not affect the pound. Yet cable has today returned to levels seen just before Chancellor Kwasi Kwarteng delivered the infamous 'fiscal event' and it would now be hard to argue that cable should be trading much higher than that. But this does alleviate the risk of cable trading to parity in that it shows Downing Street will show greater respect to financial markets when considering policy options. Maybe we see a new cable trading range of something like 1.1000-1.1350. EUR/GBP may find support under 0.8700 now. Chris Turner CEE: Second-round of central bank decisions We start this week with PMIs across the region. In Poland and the Czech Republic, we expect further declines to new record lows since Covid levels. In Hungary, on the other hand, we expect a slight improvement. The Polish and Romanian central banks will meet on Wednesday, following the National Bank of Hungary and Czech National Bank last week. In Poland, we expect a 25bp rate hike to 7.0%, the same pace as in September, in line with surveys. However, inflation released on Friday surprised significantly to the upside and investors moved to the hawkish side of the market. In Romania, we expect a 50bp rate hike to 6.0%, in line with surveys. The central bank already slowed the pace of rate hikes in August, and we expect the same this week. Industrial production and retail sales data for August in the Czech Republic and Hungary will be released on Thursday and Friday. With the exception of Hungarian retail sales, we expect an improvement in year-on-year figures. However, the higher number of working days than last year is playing into the hands of both countries this time. On the FX side, this week we will continue to follow the gas story and the geopolitical situation. However, at the end of last week we saw gas prices fall again, EUR/USD higher and interest rate differentials rise across the region under pressure from weaker FX. Altogether, we think this week should lead to a calming of the situation and erase some of last week's losses. We see the Hungarian forint as the most undervalued at the moment. This week, the NBH will launch the previously introduced measures to withdraw excess liquidity from the market, which we believe will bring calm and the forint should return to 410 EUR/HUF. The Polish zloty from earlier in the week should benefit from the recent increase in rate differentials after Friday's CPI and return closer to 4.80 EUR/PLN. However, Wednesday's National Bank of Poland meeting should bring disappointment to the markets and leave the zloty in the current range. We expect the Czech koruna to return to the 24.60-70 EUR/CZK intervention band after the closing of short positions connected to the CNB meeting last week. In the second half of this week, we should see in the data how much the central bank spent last week when the koruna came under pressure for the first time since the August CNB meeting, which should tell us more about the sustainability of the current FX regime. Frantisek Taborsky Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
ECB's Tenth Consecutive Rate Hike: The Final Move in the Current Cycle

Central Banks (Fed, BoE) Will Decide To Continue To Tightening The Monetary Policy

ING Economics ING Economics 29.10.2022 08:00
A busy week ahead filled with central bank meetings. The Federal Reserve's FOMC meeting is set to result in a 75bp rate hike given that annual rates of core inflation are heading higher. On the other hand, we believe that for the Bank of England, a 50bp rate hike is narrowly more likely than the 75bp most are expecting, due to policy U-turns in recent weeks In this article US: fourth consecutive 75bp hike incoming UK: Bank of England could surprise markets with a smaller rate hike Norway: Norges Bank to deliver one final 50bp rate hike Source: Shutterstock US: fourth consecutive 75bp hike incoming Markets will have a broad range of US data and events to digest over the next couple of weeks. Wednesday’s Federal Reserve FOMC meeting is set to result in the fourth consecutive 75bp rate hike given that annual rates of core inflation are heading higher rather than lower, the economy has returned to growth with a decent third-quarter GDP report, and the labour market remains robust with job vacancies exceeding the number of unemployed Americans by four million. The tone of the press conference and the outcome of next Friday’s jobs report will then help markets firm up expectations for what the Fed may do in December. There have been hints that officials could open the door to a slower pace of rate hikes, and after 375bp of interest rate increases (after next Wednesday) there is a strong argument for taking stock of the situation. Unfortunately, the data hasn’t been moving in the right direction and we would probably need to see a noticeable slowdown in the month-on-month rates of core CPI increases from 0.5/0.6%MoM towards 0.2/0.3% to give the Fed the confidence to moderate the pace meaningfully. At this stage, we just aren’t confident that this will happen in time for the December FOMC meeting so there remains the strong possibility that we get a fifth consecutive 75bp hike versus our current 50bp view. Attention will then switch to the midterm elections that will be held on 8 November. In our preview, we set out different scenarios and potential impacts. The polls seem to be shifting in the direction of a Republican-controlled Congress, which will greatly limit what President Joe Biden can achieve in the second half of his presidential term. This means less government influence on the economy and will put more pressure on the Fed to cut rates in the second half of 2023 to support the economy, as nothing will come from the fiscal side. UK: Bank of England could surprise markets with a smaller rate hike It was unthinkable only a few weeks ago, but we now think a 50bp rate hike is narrowly more likely than the 75bp Bank of England rate hike markets and most economists appear to be expecting. It’s undeniably a close call, and whatever happens, the committee is likely to be heavily divided. But in recent speeches, policymakers have been signalling that markets are overestimating the amount of tightening left to come. Meanwhile, following the various policy U-turns of recent weeks, the expected boost from fiscal policy now looks similar to what was expected before September’s meeting, when it opted against a 75bp move. With the latest data not providing a clear justification for a faster hike, and sterling now stronger than it was before September’s meeting, we think there is a good chance now that the Bank will underdeliver on market/economist expectations. Read our full preview here. Norway: Norges Bank to deliver one final 50bp rate hike Having opted for multiple 50bp rate hikes through the summer, Norway’s central bank hinted it could slow the pace back to 25bp for its final few moves. The question for next week is whether it instead decides to continue to front-load tightening, and we think it will. Higher overseas rate expectations and another massive upside surprise on inflation suggest we should expect another 50bp hike on Thursday. However that would take the central bank close to the end of its hiking cycle, and we are pencilling in one (or perhaps two) more 25bp moves before it pauses. Key events in developed markets next week Source:Refinitiv, ING This article is part of Our view on next week’s key events   View 3 articles TagsUS Norway Bank of England   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Norway: Norges bank announced lower-than-expected Forex purchases. According to ING authorities may want to support NOK

Norway: Norges bank announced lower-than-expected Forex purchases. According to ING authorities may want to support NOK

ING Economics ING Economics 30.11.2022 19:27
For the second consecutive month, Norges Bank announced lower-than-expected daily FX purchases (NOK1.9bn) for the month ahead. This may at least partly denote appetite for a stronger domestic currency, which would help fight inflation as Norges Bank’s room for tightening may be restrained by Norway’s economic woes and vulnerable property market December FX purchases trimmed to NOK1.9bn Norges Bank (NB) announced daily FX purchases data for the month of December today, and for the second consecutive month, surprised on the downside. Daily purchases were trimmed from NOK4.3bn to NOK3.7bn in November, and will be further cut to NOK1.9bn next month. December’s FX operations will be carried out only until the 16th. For context, Norges Bank conducts FX operations on behalf of the Ministry of Finance, converting NOK excess petroleum revenues (after financing the budget deficit) into foreign currency holdings, which are then saved in the Government Pension Fund Global (GPFG). In practice, NB is selling NOK in the market, primarily against USD and EUR. Assessing the FX impact The lower announced FX purchases are probably related to the recent drop in energy prices. However, the reduction in purchases for December was both unexpected and very sizeable, and followed another surprise decrease in November. We think there may be an ulterior motive behind the Finance Ministry and Norges Bank’s move: offering some support to the krone. NOK is the least liquid currency in G10 (left-hand chart below), which means it is extremely sensitive to global risk dynamics and financial conditions. While the deteriorating liquidity and risk environment in 2022 was the primary driver of NOK weakness, Norges Bank’s acceleration in FX purchases in September and October may well have added pressure on the krone. NOK is the best performing currency in G10 today, trading 1.10% higher against the USD and 0.7% against the euro thanks to Norges Bank’s announcement. NOK driven by liquidity and NB purchases Source: BIS, Norges Bank, ING Stronger NOK welcome given limited tightening room In our view, a stronger domestic currency would be welcome in Norway as it would help fight elevated inflation. The most recent CPI reading surprised to the upside once more, revealing an increase in prices to 7.5% in October, significantly higher than the 5.4% average fourth quarter Norges Bank estimates (published in September). As a result of growing economic downside risks, NB has slowed the rate of tightening, raising it only 25bp to 2.50% on November 3rd. Most importantly, its current rate projections only indicate 60bp of additional tightening, which might prove insufficient to bring inflation sustainably lower. However – along with general concerns about the slowdown in the economy – hawks at the NB may be discouraged by the vulnerability of the Norwegian housing market. As shown below, Norway has the largest share (nearly 96%) of variable rates in G10, which is unquestionably an element of concern given rapidly rising rates. Too much tightening risks causing an undesirably rapid contraction in house prices. Norway's property market looks vulnerable Source: OECD, ING In conclusion, Norges Bank and the Finance Ministry may want to offer some support to NOK via lower FX purchases, with the aim of reducing the need for direct monetary policy action (rate hikes) to fight inflation. We could see Norwegian authorities keep FX purchases lower throughout 2023 for this reason, which would be a positive development for NOK. However, FX operations are one variable in the NOK equation, and crucially one with a lower weight compared to external factors that are well beyond Norges Bank’s control: global risk appetite and financial conditions. As discussed in our 2023 FX Outlook, worsening liquidity conditions are likely to pose a challenge to high-beta currencies such as NOK. Our base case is for NOK to appreciate to 9.60 against both EUR and USD by end-2023, but we doubt it will be a smooth ride for the krone. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
NOK (Norwegian Krone): Norges Bank Hiked The Interest Rate!

The Government Pension Fund Global Suffers Losses

Kamila Szypuła Kamila Szypuła 31.01.2023 12:53
War in Europe, high inflation and rising interest rates were behind the poor performance of The Government Pension Fund Global. In contrast, the quick service restaurant industry in India has enjoyed a strong track record. In this article: Building a budget Westlife Foodworld Ltd reported good after-tax net profit A record loss Building a budget The year 2022 brought major changes in the main macroeconomic indicators. Overall, inflation has become a sore spot and in an attempt to combat it, the central bank has tightened monetary policy by raising interest rates and restricting liquidity. Entering another fiscal year, many economies face challenges as to how best to allocate their finances. Building a budget is not easy, you should consider whether saving or spending/investing is more important. Countries face an even greater challenge as growing fears of a global recession make it difficult to assess the situation. "In this year’s India budget, government faces a delicate balancing act between expenditure priorities and fiscal prudence.” Read an article by Santanu Sengupta, our India Economist, to know more: https://t.co/YJZvmAoOeN — Goldman Sachs (@GoldmanSachs) January 31, 2023 Read next: Samsung Demand For Semiconductors And Smartphones Remains Weak| FXMAG.COM Westlife Foodworld Ltd reported good after-tax net profit Fast food restaurants as well as the entire service market have been suffering in recent times as a result of growing economic problems, inflation and interest rates, and fears of recession. The fear of low profits was justified. But despite the current economic environment, demand for fast food restaurants has remained solid, especially in India. Westlife Foodworld Ltd- The company, which franchises McDonald's Corp (MCD.N) in West and South India, reported a consolidated after-tax net profit for the December quarter of INR 363.5 million (US$4.43 million) vs. 208.2 million rupees a year earlier. According to analysts, fast food restaurants saw an increase in demand in brick-and-mortar stores and takeaways during the holiday season, especially in October and December. Such positive results are a good signal for this industry. McDonald's India franchisee Westlife's profit soars on dine-in demand https://t.co/4tx7ER9C8O pic.twitter.com/TiqExbSgPN — Reuters Business (@ReutersBiz) January 31, 2023 A record loss The Government Pension Fund Global, one of the world's largest investors, reported a record loss of NOK 1.64 trillion ($164 billion) for the entire 2022 on Tuesday. According to the general director of Norges Bank Investment Management, this situation was influenced by the economic situation, as well as by the Ukrainian state. The $1.3 trillion fund was created in the 1990s to invest excess revenues from the Norwegian oil and gas sector. To date, the fund has invested in over 9,300 companies in 70 countries around the world. The foundation of the fund's wealth is the huge reserves of oil and natural gas in the North Sea. Interestingly, the fund's previous biggest loss was 633 billion crowns in 2008 due to the global financial crisis. Norway's gigantic sovereign wealth fund loses a record $164 billion, citing 'very unusual' year https://t.co/ZotXXO9NXp — CNBC (@CNBC) January 31, 2023
Japan's Prime Minister Tested Covid Positive. Gazprom Confirmed Gas Shipment Would Be Stopped!

Baltic Pipe Is Alternative Energy Source For Poland

Kamila Szypuła Kamila Szypuła 21.02.2023 11:46
In an interview with the IMF, Piotr Naimski explains why the Baltic Pipe is important not only for Poland but for the whole of Europe. In this article: Ant Group and NBA partnership Putin blames West The Baltic Pipe Ant Group and NBA partnership The NBA is one of the most popular cultural exports from the United States to China. Chinese fintech giant Ant Group said on Tuesday that it had entered into a strategic partnership with the NBA in China. Fans in China would be able to access NBA video content on Alipay, the hugely popular payment app owned by Ant Group. Collaboration with the Chinese business arm of the professional basketball league will also cover areas such as joint marketing campaigns and digital collectibles. NBA, Ant Group launch strategic partnership in China https://t.co/3OPNvYdBAE pic.twitter.com/jWr7LUNjRz — Reuters Business (@ReutersBiz) February 21, 2023 Read next: Amazon Will Pay Employees A Lower Salary Due To Lower Stock Prices, Declining Demand For 5G Equipment Will Result In The Loss Of 1,400 Jobs At Ericsson| FXMAG.COM Putin blames West Russia annexed Crimea in 2014 after a fraudulent referendum. The invasion was widely condemned by the international community and resulted in a series of Western sanctions against Russian officials. On February 24, it will be a year since Russia launched a large-scale invasion of Ukraine, starting a ground war in Europe that Putin still calls a "special military operation." Putin on Tuesday discussed the Donbass, saying the Kremlin saw an increase in threats in the disputed region ahead of the February 24 invasion. The US administration on Saturday formally concluded that Moscow had committed "crimes against humanity" Russian President Vladimir Putin on Tuesday used a widely watched speech to deny responsibility for the war in Ukraine and attack his opponents. In a speech lasting more than an hour, Putin stated that Russia was trying to let the citizens of the disputed region of Donbass speak their "own language" and was seeking a peaceful solution. He also cited NATO expansion and new European missile defense systems as provoking Russia 'They started the war': Russia's Putin blames West and Ukraine for provoking conflict https://t.co/deJPZ6uDji — CNBC (@CNBC) February 21, 2023 The Baltic Pipe The countries of Europe, and especially Eastern Europe, were largely dependent on Russia for energy. Russia's aggression against ukraine has caused tensions and the need for independence. Although Poland has coal deposits, they want to leave for ecological reasons and decide to import other energy resources. In order to become independent from Russia, Poland decided to supply supplies from Norway, and for this purpose, The Baltic Pipe was launched. The Baltic Pipe will have a capacity of 10 billion m3 per year. This is roughly half of the Polish demand and will replace 100 percent. Russian supplies. This action is important because Poland will be free from hostile Russian gas manoeuvres. This is especially important today, when Europe has to face the Russian armament of hydrocarbon supplies. .@PiotrNaimski, mastermind behind the Baltic Pipe, is on a mission to find alternative energy sources for Poland. Read his interview in F&D. https://t.co/DvqFkcjRyF pic.twitter.com/kVNC7490Km — IMF (@IMFNews) February 21, 2023
Norway: Krone’s weakness remains central ahead of another rate hike

Norges Bank hikes and signals more tightening in May and beyond

ING Economics ING Economics 23.03.2023 16:10
Norway’s central bank surprised on the hawkish side today, as its well-telegraphed 25bp rate hike to 3.0% was accompanied by a pledge to hike again in May, as policymakers moved to counter the inflationary effect of a weaker krone. Updated rate projections now signal rates will reach 3.50% this summer Policymakers are trying to counter the inflationary effect of a weaker krone A hawkish surprise Norges Bank today hiked rates by 25bp to 3.0%, in line with what had been previously announced. Despite inflation having been slightly slower than previously expected thanks to lower energy prices, the central bank pointed to wage growth and currency weakness as drivers for further price pressures, and ultimately pledged to raise rates again at the next May meeting. In the new set of economic forecasts, Norges Bank signalled at least two more rate hikes before the peak, which should be 3.50% reached during the summer. Despite lower energy prices and higher rates, Norges Bank did not bring forward expectations for a return to sub-3.0% inflation, which is still expected at the end of 2024. New Norges Bank rate projections Source: ING, Norges Bank The aim is to support NOK It appears quite clear – in our view – that the hawkish tilt in the policy message was an attempt to offer support to the krone, whose recent weakness poses (as admitted in the statement) upside risks to inflation. As shown below, the trade-weighted NOK is trading below the late 2020 levels. Read next: Philippines: BSP downshifts to 25bp increase| FXMAG.COM Norwegian krone trade-weighted index Source: ING calculations   This is fully justified by the fact that NOK is the least liquid currency in G10 and was therefore very exposed to the tightening in global financial conditions, market volatility, and lately the turmoil in the banking sector. A hawkish Norges Bank cannot counter those characteristics of the krone, but should European sentiment continue to stabilise, it can offer a breeding ground for recovery that can ultimately help Norges Bank limit imported inflation. Still, we think EUR/NOK will remain highly volatile, and a sustainable return below 11.00 will require a more substantial return of market confidence in the financial system: something that we may not see in the very near term. Read this article on THINK TagsNorges Bank Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Norway: Krone’s weakness remains central ahead of another rate hike

Norway: Krone’s weakness remains central ahead of another rate hike

ING Economics ING Economics 02.05.2023 20:20
Last week’s cut in daily FX purchases by Norges Bank came in short of expectations and added pressure on the battered krone. A well-telegraphed 25bp rate hike this week, and a larger reduction in FX purchases ahead, are necessary moves for the Bank to help NOK, but external factors remain key, and we think a sustained NOK recovery can only be a story for 2H23 The Norwegian krone has been persistently weak since the start of the year An unsurprising 25bp hike this week Norway’s central bank is poised for another 25 basis point rate hike on 4 May, which would take the policy rate up to 3.25%. None of this should come as any surprise, given that’s exactly what policymakers told us they were planning last time. They also expect to do another hike in June, and the March interest rate projections also indicated there was a small chance of another such move later in the year. The motivation is fairly clear. On a trade-weighted basis, the Norwegian krone (NOK) was 7% weaker by the time of the March meeting compared to the start of the year. Coupled with some concerns about recent wage data, that was enough to trigger a material upgrade to Norges Bank's rate projections. Since then, not a lot has changed the "big picture". The Bank creates its interest rate forecasts in a fairly mechanical and transparent way, and the variables that matter haven’t really moved. Trade-weighted NOK is fractionally weaker than the Bank had predicted last time around. Oil is a little higher across the curve, though probably not enough to make a huge difference. Core inflation came in line with Norges Bank’s recent forecasts too. Admittedly, we don’t get any new forecasts this week, and the Bank will probably do little more than signal its intention to hike again in June. Further NOK weakness and additional hawkish re-pricing among major economies could conceivably convince Norges Bank to go one step further later in the year. But with a US recession looming and given our call for significant Fed rate cuts by year-end, we’re comfortable with our call that the tightening cycle is likely to end in June. Norges Bank rate projections Source: Norges Bank, ING Markets expected larger cuts to daily FX purchases... Some factors behind the krone’s weakness are well beyond Norges Bank’s control, in particular the recent market turmoil and reduced liquidity conditions in FX which specifically hit NOK given that it is the most illiquid currency in the G10. At the same time, some of Norges Bank’s tools are arguably holding back NOK’s recovery. Read next: Indonesia: Headline inflation dips again in April| FXMAG.COM Back in November, we made the case for a declining path for daily FX purchases by Norges Bank as a tool to support an already underperforming domestic currency. This has indeed materialised, although at a slower pace than markets would consider as truly supportive of the currency. A case in point was NOK’s sharply negative reaction to last week’s announcement of a further trimming of daily FX purchases from NOK 1.5bn to 1.4bn, which were likely deemed insufficient. Norges Bank daily FX purchases Source: Norges Bank, ING ... but external factors are in the driver's seat In our view, external factors remain the overwhelmingly predominant factor for NOK. Despite disappointing market expectations, the reduction in daily purchases is by itself a supportive factor for NOK, and while a sharper reduction in FX purchases – which may well materialise around a government budget revision in June – would be welcome, it would not be sufficient to compensate for a non-supportive external environment for the krone.   A risk sentiment stabilisation would, in our view, still allow the krone to emerge as an outperformer in the G10 space, thanks to good fundamentals, a more attractive rate profile given the recent Norges Bank's hawkish turn, and undervaluation. Such sentiment stabilisation may, however, only materialise in the second half of the year, when we target a break below 11.00 in EUR/NOK, which remains vulnerable to the upside (up to the 11.90/12.00 area) in the near term, in line with our long-standing call for the krone to remain highly volatile due to its low-liquidity character for the first half of this year. Read this article on THINK TagsNorway Norges Bank Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
GBP: Monitoring Data Outliers Amid Hawkish BoE Expectations

Central Banks Take Center Stage: Rate Hike Debates and Emerging Market Currencies Impact FX Market

ING Economics ING Economics 22.06.2023 09:29
FX Daily: 25, 50 and 1150bp rate hikes on the table today It is a big day for central bank policy meetings around the world. In the G10 space, the debate over whether policy rates get hiked 25 or 50bp is very much alive in the UK, Norway and to a lesser degree Switzerland. And there is much focus on the return of conventional policy and large rate hikes in Turkey. More hawkish policy overseas can keep the dollar offered.   USD: Rest of World catch-up with Fed sends dollar offered Price action in the FX space suggests investors are losing interest in the strong dollar story and are minded to seek out opportunities overseas. The return of portfolio flows to emerging markets is normally a slightly negative one for the dollar and can perhaps explain recent price action where the dollar is slightly offered even though US rates are at their highs and the US yield curve is steeply inverted.  Two such emerging market opportunities are Turkey (which we discuss below) and Brazil. Here, the central bank is resolutely keeping the policy rate at 13.75% (even though CPI is at 4%) and awaiting for longer-term inflation expectations to converge to target. Given that investors are giving Brazil's fiscal policy (long Brazil's Achilles heel) the benefit of the doubt, money looks to be flowing into the Brazilian real and driving one-month implied yields down to 10.88% from 12.50%. Spot USD/BRL looks as if it can drop to the 4.50 area. The only place where the strong dollar story is playing out is in USD/JPY, where a resolutely dovish Bank of Japan means that USD/JPY will be at the forefront of any dollar rally on the back of strong US data. On the calendar today is the second set of congressional testimony from Federal Reserve Chair Jerome Powell, existing home sales and weekly jobless claims. The recent rise in jobless claims is starting to gain some attention and any surprise rise today could knock 0.5% off the dollar. Given lots of rate rises in Europe today and some interest in emerging market currencies, we can see DXY staying gently offered. 101.50/60 would be the next target for DXY on the break of 102.00.
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FX Daily: Fed's Hawkish Hold Spurs Renewed Interest in Carry Trade as Rate Volatility Drops

ING Economics ING Economics 02.11.2023 14:45
FX Daily: Fed pause renews interest in the carry trade Even though it was a hawkish hold, the Fed's decision to leave rates unchanged for a second meeting in a row has seen interest rate volatility drop and high-yielding currencies start to perform well again. This may be an emerging trend, especially if tomorrow's jobs data isn't too hot. The focus today is on rate meetings in the UK, Norway and the Czech Republic.   USD: Investors look set to explore the Fed pause The dollar has been a little weaker over the last 24 hours. Helping the move has likely been the rally in the US bond market, supported by a lower-than-expected quarterly refunding announcement, the soft manufacturing ISM and then the FOMC meeting. Despite the Fed retaining a tightening bias, it seems investors are more interested in reading and trading a Federal Reserve pause. This has seen interest rate volatility drop and triggered renewed demand for high-yielding FX through the carry trade. Calmer market conditions have gone hand in hand with the re-pricing of the medium-term Fed cycle. Recall that last month, the story was very much 'higher for longer' and rather incredibly, the low point for the Fed cycle over the coming years was priced at just 4.50%. That pricing has now adjusted 60bp lower over the last few weeks and has even seen yields at the short end of the US Treasury curve start to move lower, e.g., sub 5% again. It may be too early to expect these short-end rates to go a lot lower just yet, but it does seem as though investors are a little more open to the prospect of weaker data knocking the dollar off its perch. Without that confidence that US growth will decelerate this quarter, the Fed's pause can, however, see further demand for carry. In the EM space, it has been a good week for currencies in Chile, South Africa and Mexico, while in the G10 space, the under-valued Australian dollar is doing well. We continue to see upside potential for AUD/CNH. This would normally be a weak environment for the yen as well, meaning that we cannot rule out USD/JPY retesting 152. US data will determine whether the dollar can generally hold steady in this carry trade environment or whether weaker US data finally triggers a more meaningful and broad-based dollar correction. For today, the focus will be on the weekly jobless claims data – where any decent jump higher can knock the dollar – and the volatile Durable Goods Orders series. Do not expect big moves before tomorrow's US jobs report, but we would say the dollar's downside is vulnerable today. DXY to drift towards 106.00.

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