FX News Today
European Outlook: Asian stock markets are broadly higher, with Hong Kong outperforming as developers and casinos rebound. Japanese markets are slightly higher after fluctuating through the session as investors mull the U.S. rate outlook and await corporate earnings reports. A disappointing Empire State Index in the U.S. and a weaker Yen helped to underpin Japanese markets, and U.S. and U.K. stock futures are also moving higher. Oil prices are up on the day and the front end WTI future is holding above USD 50 per barrel. The recent uptick in oil prices coupled with a weak Pound are fuelling inflation concerns in the U.K. in particular and contributed to the underperformance of Gilt futures and the concomitant rise in yields that went hand in hand with a steepening of the yield curve. In this context investors will keep a close eye on today’s releases of Sep U.K. inflation data, although pressure especially on retailers not to pass on the rise in import prices at least for now is high. In the Eurozone all eyes are on the ECB’s council meeting on Thursday and today’s latest lending survey is unlikely to shed any light on the immediate outlook.
RBA Meeting’s Minutes: Holding rates steady “at this meeting” consistent with inflation, growth targets, Reasonable prospect of sustaining economic growth, gradual rise in inflation, Considerable uncertainty remained about momentum in labour, housing markets, An appreciating AUD could complicate economic rebalancing. Q3 GDP growth looked to have run at similar pace to Q2, Rising commodity prices likely lifted terms of trade in Q3. Growth in China seemed to have stabilised, but debt a source of concern. AUDUSD rallied to 0.7680 following release of the minutes.
US Data Reports: Revealed some modestly disappointing factory figures, though there is an emerging uptrend for the sector as the inventory and petro-headwind diminishes. For the October Empire State report, we saw a headline drop to a 5-month low of -6.8 from -2.0 in September and -4.2 in August, though this still allowed a slight rise in the ISM-adjusted measure after an outsized September hit, to 46.3 from an 8-month low of 45.1. A 0.1% September industrial production rise matched estimates, though it followed downward revisions that left a slightly bigger August unwind of a slightly smaller June-July spike. Yet, industrial production grew at a 1.8% pace in Q3, and expectations are for a 0.5% rise in Q4 that leaves the first two-quarter rise since 2014.
Fedspeak: VC Fischer – Low rates could threaten financial stability and leave the US economy more vulnerable to adverse shocks. Low rates partly compromise the FOMC’s ability to fight recessions. But he said there is currently no evidence now of heightened instability risks. On the various causes of lower interest rates, he noted lower productivity growth (which implies higher savings and reduced investment), demographic changes weighing on growth, weak investment, and developments. Interestingly, he didn’t include monetary policy per se and said it is “not that simple” for the Fed to influence short and long term rates (hum). Though he did not address the policy stance specifically, the tone of his comments suggest he’d be supportive of a rate hike this year and rather contrary to Mrs. Yellens more dovish tones on Friday.
Main Macro Events Today
- UK Sept. Inflation – CPI to tick up to a new cycle high of 0.9% from 0.6% in August. Core CPI is also seen rising to a new cycle peak, of 1.4% y/y, from 1.3%. Such a rise in inflation will be consistent with BoE projections. Higher oil prices and ongoing Sterling weakness will push up inflation and the question is for how much and how long. In the meantime rising inflation is underpinning a pick up in yields and a steepening of the yield curve, as the BoE signals that it is willing to accommodate a higher inflation trajectory.
- US Sept. CPI – The September headline CPI is expected to grow 0.3%, while the core index rises 0.2%. YoY expected at 1.5%. Forecast risk: upward, as oil prices rebounded slightly in September. Market risk: downward, as inflation undershoots may affect the timing of additional rate hikes.
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