US Stocks: S&P 500 And Nasdaq Decreased Slightly Yesterday Losing 0.33% And 0.09% Respectively

FX: The US Dollar (USD) Is Getting Close To Some Decent Support Levels

US inflation today's main macro risk event - UK Gilts market still troubling. Asia quiet. 

Source: shutterstock
Source: shutterstock

Macro outlook

  • Global Markets: Yesterday’s stock movements are probably as close to a “flat” day as you get these days, with the S&P500 down only 0.33% and the NASDAQ down just 0.09%. Equity futures look modestly positive, which seems a carefree stance just before US CPI data, where upside misses to the consensus view have been more common than risk-positive surprises on the downside. There isn’t all that much action in currency space either. EURUSD remains at the very lower end of 0.97, the AUD is also stuck at about 0.6275 though the JPY has pushed well above 145  to sit at 146.74 currently. There has been some recovery of sterling, and Cable has risen back to 1.1098. Short-dated UK bond yields retreated sharply yesterday as the Bank of England (BoE) bought up GBP4.56bn of bonds. The yield on 2Y gilts fell 20.3bp. At the longer end of the curve, big early losses were mostly, but not wholly erased by the BoE’s intervention. The BoE is still sticking to the line that they will cease supporting the bond market by Friday, however. It almost sounds as if they think they are in control. We will see. US Treasury yields also declined slightly, with the 10Y UST yield dropping to 3.896%, a fall of 5.1bp. Asian FX has been pretty quiet except for the KRW which gained following yesterday’s 50bp BoK hike, despite very vague forward guidance.  
  • G-7 Macro: FOMC minutes released last night showed that members were more worried about doing too little to stamp out inflation than about doing too much. Here, there is a clear divergence between central banks in the APAC region, such as the Reserve Bank of Australia, which is taking the opposite approach. US September CPI tonight is forecast to show the headline inflation rate dipping to 8.1%YoY from 8.3%, but the core rate is expected to rise to 6.5% from 6.3%. There is certainly scope for surprises to this data with market reactions in either direction likely to be large. More weight will probably be given to misses on the core figure than the headline.
  • China: The IMF published a note on China's housing issue, pointing to the lack of cash from sales and bond issuance (stemming from the three red line policy) and therefore is a problem if home sales continue to drop. Our forecast is that home sales could contract 45% in 2022 then another 15% in 2023. That should lead to more cross defaults of property developers’ bonds until potential buyers return to the market again. We have seen some home sales during the Golden Week but are unsure whether this can form a trend. The government is trying to replicate 2014-2017 policies to boost demand for homes, which includes shanty-town redevelopments. This time is complicated by a weaker economy (partly because of Covid measures). Yesterday, the government reiterated that dynamic Covid measures are here to stay.
  • India: Inflation released yesterday evening came in at 7.41%, fractionally above the consensus 7.36%. For more details, see the linked note. The main takeaway is that as inflation should start to dip as soon as next month, the Reserve Bank of India can slow its tightening, and may be able to stop after a further 25bp December hike. 
  • Japan: Pipeline prices in September rose more than expected, mainly due to the weak JPY and the rebound in global commodity prices. Producer price inflation rose 9.7%YoY in September (vs 9.0% in August and 8.9% market consensus). The main driver was commodity-related prices, but the weak yen also expanded price gains. This was confirmed by the sharp rise in import prices in yen terms. Import prices on a yen basis surged 48% YoY (vs 43.2 % in August) while import prices on a contract currency base only rose 21.0% YoY in September and decelerated from 22.3% in August.  We expect that Japan’s CPI inflation will rise further and stay above 3% for a considerable time.

What to look out for: US inflation

  • Japan PPI inflation (13 October)

  • US CPI inflation and initial jobless claims (13 October)

  • China trade balance, CPI and PPI inflation (14 October)

  • Korea unemployment (14 October)

  • US retail sales and University of Michigan sentiment (14 October)

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FX: The US Dollar (USD) Is Getting Close To Some Decent Support Levels

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