An Appreciation Of The Implications Of Depreciation

Economic

Summary:

The shift to a more services-based economy increases economy-wide depreciation rates, and so the need to invest. Higher average interest rates – and economy-wide profit shares – are among the likely results.

An important reason for our house view that the global structure of interest rates will be higher going forward than it was pre-pandemic relates to the balance between saving and investment. A range of forces are pointing in the direction of higher investment, without an obvious counterbalance to boost saving at the same time. Among these forces are the energy transition and energy-intensive new technologies, including AI with its high compute requirements.

In a note earlier this week, Westpac Economics Senior Economist Pat Bustamante highlighted that some of that shift to higher investment is already evident in the Australian data. The industries that are most involved in the energy transition and the adoption of leading technologies are already increasing new investment, especially in software and other so-called ‘intangibles’.

As Pat also observed, there are two implications of these transitions that are not immediately obvious. First, the shift to a more services-based economy, away from traditionally capital-intensive industries such as manufacturing, does not necessarily mean that business investment is lower. Second, and relatedly, new investment is increasingly in the types of capital with higher rates of depreciation and obsolescence than traditional physical plant and machinery. Businesses must ‘run harder to stay in place’, lest their capital stock starts to diminish. Industries that are not obviously capital-intensive nonetheless may need to invest intensively. Pat’s note shows that, as an economy, Australia’s depreciation rate is rising, and has been for some decades.

To the extent that new investment adds to the capital stock and improves its quality, we can expect some payoff in the form of higher productivity and output growth. But the investment that is replacing existing capital is simply covering depreciation. While some of the new technologies may fall into the first category of productivity-enhancers, much of the investment into the energy transition is pure replacement of existing capital stock – effectively an accelerated depreciation. In this respect, there is a bigger payoff to investments that make other activities more energy efficient than to those simply replacing existing generation and distribution infrastructure.

Investing to replace depreciated capital or execute the energy transition is still worth doing. The costs of not doing so are large. But if the economy-wide depreciation rate on the capital stock has risen, this has other implications that are perhaps not widely understood.

To the investors go the spoils

If a higher depreciation rate partly occurs because of higher rates of technical obsolescence – as you’d expect with increased usage of software-based innovation, for example – then new investment introduces different types of capital. New skills may be expected of the workers using the newly-installed capital. More generally, if the optimal mix of labour skills and capital changes as new capital replaces old, then a faster rate of technical change and obsolescence means a faster rate of churn in the kinds of jobs available.

We saw the same thing happen in the first wave of the software revolution. The adoption of PCs and later the internet accelerated obsolescence rates, as did the increased integration of software elements into traditional physical capital. The result was increased physical churn in the capital stock, but also in the skills needed of workers. This lowered the bargaining power of workers and shifted some of the share of income from production away from wages towards profits, especially in countries where there were also barriers to entry for new firms.

Or at least, this is one of the possible explanations of the upward trend in the profit share (downward trend in the wage share) seen in a range of industrialised economies from about the mid-1980s to just before the Global Financial Crisis. And nearly two decades after proposing that explanation in a paper I wrote with former RBA colleague Kathryn Smith (partly based on prior work by Hornstein, Krusell and Violante, subsequently published here), it’s still the explanation that I think makes most sense. To be fair, there are other hypotheses that also fit some aspects of the data, but the hypothesis in that paper explains the timing and cross-country pattern in the trends, in a way that some other explanations do not.

In particular, the nexus between capital obsolescence rates, labour market churn and income shares helps make sense of the end of that upward trend in the profit share in the mid-2000s. Across advanced economies, the post-GFC period was one of low private investment, low productivity growth – and little apparent trend in the profit and wage shares. In Australia, for example,

RBA analysis shows that the profit share outside mining has been broadly flat for two decades. This fits in with the idea that the earlier upward trend in the profit share was at least partly explained by the wave of adoption of an earlier generation of IT products, and that by the mid 2000s, this wave had matured.

If we are indeed on the cusp of a period of faster replacement of existing capital, and some of that demands new skills of workers, it’s possible that we will see this trend increase in the profit share (decline in the wage share) resume. That might be good for productivity growth, but it is not guaranteed that real wages growth will keep pace.

At the least, it is a reason to be cautious about wages forecasts and avoid being too bullish. This is especially so in a country like Australia, where wages growth undershot official forecasts for years, even with a flat trend in the share of wages in national income.

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Brookings Institution

Economic

Over the past two decades, housing costs have outpaced income growth in the United States, increasing the rent burden and heightening barriers to homeownership (Treasury 2024). Policy experts and academics widely agree that these trends reflect a long-run housing supply shortage, which is a key driver of housing unaffordability (Bernstein et al. 2021, Khater, Kiefer, and Yanamandra 2021; Lee, Kemp, and Reina 2022). However, there is less consensus on the scale of the shortage. Recent estimates range from 1.5 to 5.5 million units, with variation driven by a combination of methodological differences in calculating the shortage and different characterizations about what constitutes equilibrium in the housing market. Our calculations show that the U.S. housing market was short 4.9 million housing units in 2023 relative to mid-2000s.

Fixing ideas: Households, housing supply, and housing shortages

A household, as defined by the U.S. Census Bureau, refers to all people who jointly occupy a single housing unit. In 2023, there were roughly 131 million households. Households can be comprised of a single person who lives alone, a family living together, or a group of unrelated individuals occupying a shared space. This definition includes many types of living arrangements, including rented apartments, owned homes, and shared residences. The U.S. Census counts households using a combination of the Decennial Census, the Current Population Survey (CPS), and the American Community Survey (ACS) (McCue, Masnick, and Herbert 2015). Understanding what constitutes a household and how households are accounted for is essential in the context of measuring housing shortages. Figure 1 depicts the total number of households in the U.S. since 1960 together with the total population. Trends in the number of observed households can be driven by population growth, changing social dynamics, and the price of housing.

Make it Count: Measuring Our Housing Supply Shortage_1

Typically, a shortage refers to a market situation where the quantity supplied is less than the quantity demanded at the current market price. Neoclassical economic models predict this outcome; for example, in the case of a minimum wage in the labor market, the demand for labor at the minimum wage is predicted to be less than the quantity of labor supplied. However, when discussing housing, a shortage is more complex than a simple mismatch between supply and demand at prevailing prices. In the housing market, a “shortage” often refers to the inability of supply to meet demand at affordable prices. This, in turn, can distort the number of observed households, as individuals or families may combine into shared housing arrangements, not because of a lack of units but because they cannot afford to live separately. In other words, the prevailing market price of housing influences both the availability of housing units and the observed number of households, creating a disparity between the number of actual households and the number of desired households.

Estimates of the housing shortage generally refer to any gap between the existing stock of housing and the number of housing units needed to accommodate the desired number of households. The U.S. Census Bureau measures the housing stock, either currently habitable or new construction, through the Housing Vacancy Survey and the Survey of Construction. However, measuring the number of housing units needed to satisfy demand, or the “target housing stock,” is more complex and often involves different estimation methods. In some cases, researchers project future housing needs based on historical trends in construction or household formation, and in other cases, researchers directly estimate housing demand based on factors such as population growth or housing affordability. Figure 2, below, illustrates the range of recent housing shortage estimates that emerge from different approaches to determining the target stock.

Make it Count: Measuring Our Housing Supply Shortage_2

Understanding the housing vacancy rate is an important precursor to analyzing different approaches to calculating the supply shortage. Just as the labor market has a natural rate of unemployment to allow for efficient job matching, a healthy housing market requires a certain vacancy rate to align buyer and seller preferences. Therefore, supply shortage estimates must account for some vacancies, making the assumed vacancy rate a critical component in determining the gap between housing stock and demand. Vacancies can be categorized into three main types: units available for sale/rent, those held off the market, and seasonal vacancies. Seasonal vacancies typically reflect the unique needs and patterns of specific regions or market segments, like a vacation or snowbird property, short-term rentals, or property occupied by seasonal workers. Units held off the market may be undergoing renovations, tied up in legal issues, or kept vacant for speculative or personal reasons. Figure 3 illustrates trends in the vacancy rate over the last sixty years, broken down by type. Notably, the overall vacancy rate has been declining since the financial crisis and has remained just below 10% for the past three and a half years.

Make it Count: Measuring Our Housing Supply Shortage_3

The Great Recession marked a turning point in the U.S. housing market. Just before this economic crash, housing production was at a 30-year high and home ownership had risen by nearly 8% during the previous decade (FRED 2024, Federal Reserve History 2013). However, the subsequent economic turmoil caused a sharp decline in new housing construction, with production levels dropping significantly and never fully recovering to pre-recession levels (Council of Economic Advisers 2024). As a result, the early- to mid-2000s are often referenced as the last period when supply was better aligned with demographic needs and trends (Chowdorow-Reich, Guren and McQuade 2022). For these and other technical reasons related to data availability from the ACS, we will utilize 2006 as our base year for estimating the housing shortage.

Housing shortage estimates

Back-of-the-envelope

The simplest way to measure the housing supply shortage is to compare the current housing stock to the total number of households, accounting for a natural vacancy rate. We call this a “back of the envelope” housing shortage estimate. At the end of 2023, the total housing stock from the Housing Vacancy Survey was 145.9 million units, and the 2023 American Community Survey recorded 131.3 million households. Using a natural vacancy rate of 12%, the back-of-the-envelope estimated housing shortage was about 1 million housing units in 2023, as shown in Figure 4. While informative, this estimate likely represents the lower bound of the housing shortage, as the number of households itself can be constrained by the housing market. For instance, high housing costs may lead some individuals to delay forming their own households.

Make it Count: Measuring Our Housing Supply Shortage_4

Deviations from historical trends

National Association of Realtors (2021) provides an alternative way to estimate the housing shortage by comparing historical construction rates to current trends. From 1968 to 2000, about 1.5 million new housing units were built each year, but between 2001 and 2020, this rate fell by 18% to about 1.23 million per year. Based on this slower pace, NAR estimates a housing shortage of 5.5 million housing units by the end of 2020. Additionally, the report considers the loss of older homes and the need to meet growth in household formation, which could push the total shortage closer to 6.8 million units. This method focuses on under-building but doesn’t fully account for changes in housing demand, like fewer people forming households due to high prices.

Other methods use trends in household formation to estimate the target housing stock. For example, the number of households increases when a college student moves out of their parents’ home to live with friends or someone decides to live alone for the first time. On the other side of the ledger, when aging parents decide to move in with their adult children or when two individuals move in together the number of households decreases. Household formation declined sharply after the Great Recession, a trend that worsened with the onset of the pandemic (Garcia and Paciorek, 2020). Equilibrium in the housing market might describe the point at which the stock of housing plus new construction equals the demand for housing plus net household formations. Jones (2024) uses this idea to arrive at a shortage estimate of 2.5 million by calculating the cumulative gap between household formation growth and construction starts between 2012 and 2023. However, this estimate fails to account for any housing shortage that may have accumulated prior to 2012. In a similar fashion to Jones (2024), Parrott and Zandi (2021) find an annual construction shortfall of 100,000 by comparing trends in housing construction and household formation and accounting for broader market dynamics such as vacancy rates and economic conditions.

Accounting for pent-up demand

While previously discussed methods center on household formation rates, a more nuanced approach considers how many individuals might form their own households under different market conditions. This unmet demand, often referred to as “pent-up” demand, includes those that are living in shared housing due to high costs. For example, Zillow (2024) estimates a housing supply shortfall of 4.5 million units by focusing on individuals or families living with non-relatives. However, this takes a narrow view of who might otherwise prefer to form their own household. Beyond non-relatives, young adults living with their parents, older parents living with their children, or families in shared households are relevant to pent-up demand but are not the central focus of the Zillow estimate.

Alternatively, Up For Growth (2023) estimates pent-up demand by comparing the share of people who self-report being the head of a household (“headship rates”) by age in 2000 to those in 2021. The difference between the headship rate of each age cohort across years is aggregated to calculate the housing shortage, which Up For Growth estimates to have been 3.9 million units in 2023. However, this estimate does not account for factors that may have contributed to the change in headship rates during this time-period—be it shifting preferences for living arrangements or housing market conditions affecting household formation across different age groups.

Finally, Freddie Mac (2021) uses a statistical method known as a Oaxaca-Blinder decomposition to analyze how much of the observed decline in household formation is due to high housing costs. The Oaxaca- Blinder decomposition is a statistical technique that decomposes the difference in mean outcomes across two groups into shares attributable to difference in magnitude of each group’s characteristics and the difference in the effect of those characteristics. In this case, Freddie Mac estimates how the decline in household formation between 2001 and 2020 relates to differences in housing costs during these two periods—as opposed, for example, to differences in age distribution across the population or changes in income—and characterizes this decline as households that are missing due to pent-up demand. This method stands out as the only one that directly accounts for the relationship between the price of household and household formation. They combine this estimate with the back-of-the-envelope shortage calculation that assumes a 13% vacancy rate to conclude that the U.S. housing market was short 3.8 million units in 2020.

An updated estimate

We adapt Freddie Mac’s approach, detailed in the technical appendix, and use the latest survey data to provide an updated estimate of the housing shortage in 2023. This approach is more robust than simply projecting trends in construction and household formation because it captures specific factors that drive household formation. By using the Oaxaca-Blinder decomposition, we can associate part of the decline in household formation to housing costs to provide a more nuanced projection of the number of households that would have formed under more favorable conditions. This approach provides a clearer connection between the shortage and underlying driving factors.

Our Oaxaca-Blinder decomposition compares average household size in 2006 and 2023, using the 2006 and 2023 American Community Survey. We attribute changes in the average household size to housing costs, age, marital status, number of children, labor force participation, income, education, race, citizenship, geographic residence, and the multigenerational nature of the household. The decomposition technique allows us to estimate how the change in average household size (group mean) between 2006 and 2023 can be attributed to the change in housing costs between the two time-periods, holding other factors fixed. We use this parameter to estimate what the average household size would have been in 2023 if housing costs remained at 2006 levels. We adjust this estimate for a natural equilibrium vacancy rate of 12%, reflecting the vacancy rate that was present in the market in our base year. Finally, we combine this estimate with the back-of-the-envelope estimate of the housing shortage in 2023Q4 to arrive at a 2023 housing shortage estimate of 4.9 million units, as illustrated in Figure 5. In the technical appendix, we show that this estimate varies between 3.4 million and 6.4 million units, depending upon the choice of model and vacancy rate.

Make it Count: Measuring Our Housing Supply Shortage_5

There is more work to be done to measure the magnitude of the shortfall at a local level. For example, places like New York City may face more severe shortages compared to less dense cities, suburban areas, or rural areas. Adapting these methodologies to estimate the size of the housing shortage at the local level should be a top priority. Moreover, the housing shortage is likely to be particularly acute in the affordable housing sector. The National Low Income Housing Coalition estimates that in 2022, only 7.1 million rental units were available for the 11 million extremely low-income households nationwide, reflecting a significant supply-demand imbalance (National Low Income Housing Coalition 2024). The shortage of affordable housing is thought to contribute to the fact that over 650,000 people were experiencing homelessness in January 2023 (Department of Housing and Urban Development 2023). Adapting these methodologies to estimate the size of the housing shortage for subpopulations should also be a top priority.

Conclusion

The U.S. housing supply has struggled to meet demand in the last several decades, driving up costs and deepening affordability challenges. Both state and local governments, as well as the federal government, are actively pursuing policies to help boost housing supply as a key strategy to address housing affordability (Council of Economic Advisers 2024). However, effective policy solutions require an accurate understanding of the scope of the housing shortage. As highlighted in this brief, the magnitude of the shortage is not straight-forward to measure. Estimates suggest that the shortage has ranged between 1.5 million and 5.5 million during recent years. Using the latest data available by the 2023 American Community Survey and the Housing Vacancy Survey and following the method employed by Freddie Mac, we estimate the U.S. housing market was short 4.9 million units at the end of 2023.

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Cohen

Economic

Korea's industrial output, retail sales and facility investment dropped from a month earlier in October, data showed Friday, further raising concerns over a potential economic slowdown.

Industrial production went down 0.3 percent last month, marking the second consecutive month of decline, according to the data compiled by Statistics Korea.

Retail sales, a gauge of private spending, also dropped 0.4 percent from a month earlier, marking the second consecutive monthly decline.

Facility investment saw a sharper decline in October, tumbling 5.8 percent from the previous month, largely due to a slump in construction activity.

This marks the first simultaneous decline across all three indicators since May.

"While manufacturing and service sector production remained relatively steady, retail sales showed a decline," said Gong Mi-sook, an official from Statistics Korea. "Facility investment is performing relatively well, but the construction sector is facing significant challenges."

The decline in the output came as the production in the construction sector tumbled 4 percent on-month, and that in the public administration field dropped 3.8 percent.

The output in the construction sector has posted on-month declines for six consecutive months as of October, the longest losing streak since 2008.

In contrast, the service sector posted a 0.3 percent on-month increase, supported by a strong performance in the financial and insurance segments.

In on-year terms, overall industrial output went up 2.3 percent in October.

Retail sales showed a mixed performance. Sales of home appliances and other durable goods fell 5.8 percent from a month earlier in October, offsetting a 4.1 percent increase in semidurable goods, such as clothing.

In on-year terms, retail sales lost 0.8 percent.

Facility investment weakened, primarily due to a downturn in construction-related investments. Construction orders plunged 11.9 percent from a year earlier in October, the data showed.

The finance ministry said the government plans to make every effort to boost economic vitality amid persistent challenges and uncertainties due to factors, such as the incoming U.S. administration (Yonhap)

Source: Koreatimes

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FOREX.com

Economic

Forex

Overview

An upside inflation surprise, signs of US Treasury yields peaking, thin markets and month-end flows have USD/JPY moving, sending it careening through the important 200-day moving average in Asian trade on Friday. A venture below 150 looks increasingly likely given the price action seen this week.

Tokyo inflation tops, JPY pops

The catalyst to spark the latest unwind was Tokyo’s inflation report for November. Headline inflation rose 2.6% over the year, fourth tenths above expectations. More importantly, prices ex-fresh food gained 2.2%, up from 1.8% in October and two tenths more than forecast. The Bank of Japan (BoJ) targets a 2% level for this measure as part of its monetary policy deliberations.

Excluding fresh food and energy prices, the core-core rate printed at 1.9%, up from 1.8% a month earlier, while services inflation increased 0.9%, up from 0.8% previously. While this is the Tokyo reading, not national survey released in three weeks time, the detail will build confidence among Japanese policymakers that inflationary pressures are stirring.

December BOJ hike firms

With markets split on whether the BoJ would lift interest rates in either next month or February, the upside surprises have seen expectations firm marginally towards a 25-pointer being delivered on December 19. According to swaps pricing, the probability of such an outcome is priced just over 60%, with a full 25-point move fully priced by the bank’s meeting in March.

Along with signs that US 10-year Treasury yields may have peaked near-term, an important development considering how closely correlated USD/JPY has been with them over periods this year, it’s combined with holiday market conditions to deliver a meaningful rally in the yen.

USD/JPY: sub-150 incoming?

With USD/JPY breaking through uptrend support earlier in the week, the price signal has confirmed the bearish momentum picture with MACD and RSI (14) also trending lower. It screens as an sell-on-rallies play right now.

Having sliced through the 200-day moving average, a level often respected in the past, it has generated fresh setups for traders to consider.

If we were to see the price push back towards the 200DMA, shorts could be established beneath with a protective stop above either it or 150.90, another long-running level that has offered support and resistance in the past. The price has so far bottomed at 150, suggesting round numbers have relevance for those considering the setup. Having destroyed so many levels in the rout of July and August, there isn’t a lot of support evident until 147.20. That’s a target to put on the radar.

If the price were to reverse back above the 200DMA/150.90 zone, the bearish bias would be invalidated.

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Alex

Stocks

Economic

(Nov 29): Stocks in Asia are poised to open lower on Friday, while US equity futures gained ahead of markets reopening following the Thanksgiving holiday.

Contracts for Japanese shares fell around 0.2% with those in Australia dropping 0.3% early Friday. Hong Kong futures bucked the trend, drifting slightly higher, after Chinese benchmarks fell in the prior session. Treasury cash trading resumes in Asia following the US holiday.

The yen was steady after weakening slightly Thursday ahead of Tokyo inflation data due later Friday. The gauge is expected to show a slight increase in consumer prices in the monthly year-on-year gauge. Japan may also delay a decision on raising taxes to help cover rising defense spending, a senior ruling coalition official said.

Elsewhere in currency markets, Brazil’s real tumbled to a record low on disappointment over a government plan to cut spending, while Mexico’s peso rallied amid thin trading due to the US holiday.

The Bloomberg Dollar Spot Index was steady but remains on course to break an eight-week winning streak, as traders begin to look past the threat of tariffs that’s boosted the greenback since Trump’s victory. Bitcoin traded below US$96,000 (RM426,055) after a rally on Wednesday.

In Australia, core inflation is “too high” to consider interest-rate cuts in the near term, Reserve Bank Governor Michele Bullock said. Elsewhere in Asia, data set for release includes gross-domestic product for India and so on.

European stocks

In Europe, stocks snapped two days of declines, with technology leading the advance amid hopes that US curbs on chip equipment sales to China may prove lighter than feared. The US is considering measures on sales of semiconductor equipment and AI memory chips to China that would stop short of stricter limits previously under discussion, Bloomberg News reported.

Political turmoil in France weighed on the nation’s stocks and bonds. The yields on benchmark French bonds traded near 3%, briefly on par with those of Greece for the first time on record. The nation’s stocks are set for their worst under-performance against European peers since 2010 as a budget standoff threatens to topple the government.

While French bonds rallied after Finance Minister Antoine Armand said he is prepared to make concessions on the 2025 budget, that did little to shore up months of underperformance.

“The problem with France is it’s one of the largest issuers in Europe and now you’ve got a bit of a buyers’ strike,” Jordan Rochester, head of macro strategy at Mizuho International, said in an interview with Bloomberg TV. “Our head of EGB trading was just in France recently talking to investors, and their interest in buying OATs was extremely low. You’ve got other options, Italy and Spain, and their data’s actually fantastic.”

As trading of treasuries reopens on Friday, investors will be monitoring for any signals on the pace of future Federal Reserve interest rate cuts.

In PCE data released earlier this week, “core services came out quite strong,” said Kevin Thozet, a member of the investment committee at Carmignac. “We are not heading for double-digit inflation but the disinflationary trend is stalling. The result of the US elections could prolong this cycle with tax cuts.”

In commodities, oil held steady as trading thinned during the US holiday, with the market now looking ahead to an upcoming Opec+ meeting that has been delayed until Dec 5. Gold edged higher on Thursday.

Source: Theedgemarkets

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SAXO

Commodity

Economic

Drought and high temperatures, combined with a global reliance on supplies from relatively few regions or countries, are the key drivers behind this year’s top-performing commodities. While the cocoa surge earlier this year garnered significant attention, strong gains have also been seen in orange juice and, more recently, coffee.

Cocoa prices have soared 240% this year due to tightening supplies caused by lower production in West Africa. Similarly, orange juice futures in New York have risen 88%, supported by declining production amid weather concerns in Florida and Brazil, the latter being the world’s top exporter. To this list, we can now add coffee, which has experienced a two-fold rally in recent months. In September, robusta coffee, known for its strong, bitter flavour, reached a record high on the ICE-LIFFE futures exchange in London, and currently trades up 86% on the year. This followed a challenging growing season in Vietnam, the top producer, where dryness during the growing period was followed by heavy rains at harvest time.

Coffee, One of the World’s Most Traded Commodities, Surges to A 47-Year High_1

This week, arabica coffee futures traded in New York and prized for its smoother taste and used in espressos and high-quality products, surged to a 47-year high and is currently up 72% year-to-date. Similar to orange juice, concerns over the 2025 crop in Brazil are the main driver. The country experienced its worst drought in 70 years during August and September, followed by heavy rains in October, raising fears that the flowering crop could fail. Back in June, the USDA forecasted 2024/25 coffee production at 69.9 million (60 kg) bags, comprising 48.2 million bags of arabica and 21.7 million of robusta. However, their latest update this month reduced those figures to 45.4 million and 21 million bags, respectively, with further downgrades expected when Brazil’s National Supply Company (CONAB) releases its next update.

Coffee is one of the world’s most traded commodities and is often considered the second-most traded by volume, after crude oil. It is a staple beverage for billions of people globally, with demand further boosted in recent years by growing consumption in China. However, production has struggled to meet this rising demand. Like cocoa, coffee is grown in a relatively narrow tropical band, with key producers including Brazil, Vietnam, Colombia, and Ethiopia. This concentration makes it particularly vulnerable to adverse weather conditions, especially in Brazil and Vietnam, which together account for approximately 56% of global production.

The rally this week has been driven by several factors, the most important being the risk to supply triggering panic buying from commercial buyers worried about shortages, while front loading of sales to the US ahead of potential tariffs may also play a part. Finally, the looming introduction of the European Union’s contentious deforestation regulation (EUDR) is injecting an additional layer of complexity into the market. The lack of clarity around the official start date for these rules and their eventual impact on supply routes to Europe has left traders and importers grappling with unanswered question. Coffee, One of the World’s Most Traded Commodities, Surges to A 47-Year High_2

Coffee, One of the World’s Most Traded Commodities, Surges to A 47-Year High_2

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Swissquote

Economic

Appetite on Wednesday was limited on both sides of the Atlantic Ocean. In the US, the crowded economic data came in mostly in line with expectations, confirming that the US economy grew 2.8% in Q3 – mostly explained by a robust 3% growth in sales, price pressures were slightly higher than expected but remained below 2%, as core PCE prices for last quarter decelerated faster than expected. Core PCE prices for October, however, posted a small uptick from 2.7% to 2.8%, parallel to market expectations and the initial jobless claims came in softer than pencilled in. Overall, there was no big surprise in recent data. And the latter gave comfort to investors that the Federal Reserve (Fed) will cut its rates by another 25bp when it meets in December. That probability advanced from around 65% to 68% and the US 2-year yield tipped a toe below the 4.20% level.

But the lower yields, and the first day of ceasefire between Israel and Hezbollah, couldn’t convince investors to buy more US equities into the Thanksgiving holiday. The aggressive reaction from both Mexico and Canada to Trump’s latest tariff threats certainly revived worries of higher business costs and lower profits. As such, the S&P500 closed Wednesday’s session a few points below the 6000 mark, Nasdaq 100 retreated 0.85% as Dow Jones closed in the negative after hitting a fresh record. Microsoft dropped more than 1% on fresh news that the FTC opened a fresh antitrust investigation into the company ‘drilling into everything’ – yes everything they do – while Apple resisted to the news that its iPhone sales barely grew this year as Android-based rivals gained ground in China and in other emerging markets.

Meme news. A drone company called Unusual Machines rallied 110% on news that Donald Trump Jr. – yes Trumps’s eldest son — has joined the company’s advisory board reminding ‘the need for drones is obvious’ and that they must ‘stop buying Chinese drones and Chinese drone parts’. Interestingly, the company warned in a regulatory file that Trump’s proposed tariffs on China could affect its ability to source drones critical to its B2C business.

Le drame

In Europe, things were much less fun – as it is usually the case. The Stoxx 600 extended losses, and not only because of Trump’s tariff threats, but also on the rising unease in French politics, where Marine Le Pen, the far-right leader – who gained ground in the latest elections, remember? – threatened Michel Barnier’s administration – that’s doing its best to control the country’s deteriorating finances and deficit – that she would bring his government down with a no-confidence vote if he doesn’t respect their budget demands.

Needless to say that the spread between the French and German 10-year yields is rising again, even though Germany has its own political problems – mind you – and is preparing to hold a snap election because people, there, are not happy with Scholz’s government either.

Thank God, the growing French headache remains localized, for now. The French CAC40 underperformed its European peers as French bank stocks took a hit on the political chaos, but the EURUSD rebounded well past the 1.05 level – and even advanced near 1.0590 recently following the other majors up against a broadly weakened US dollar. The worsening political scene in France and the widening yield gap between France and Germany, could however limit the single currency’s upside potential along with clashing opinions from the European Central Bank (ECB) members about how fast the bank should cut rates. ECB’s Schnabel said that the borrowing costs are no longer at a level that retrains the economy, while Luis de Guindos said – a day earlier – that more rate cuts were on their way. One thing is clear, though: while German representatives often sound more hawkish than their southern counterparts, Germany’s economy arguably relies on ECB support more than any other in the union at this point.

For now, the EURUSD has potential to extend a recovery following an aggressive selloff in November. Today, Germany and Spain will reveal their November early CPI figures. The figures are expected to print an uptick in price pressures this month. If that’s the case, the ECB doves could lose ground and let the euro bulls gain field. Also note that, the latest rise in European nat gas prices will somehow impact the inflation numbers in the coming months, and Europe is said to be facing the coldest winter since Russia invaded Ukraine and since the continent gave up on Russian energy supplies. The latter means that the gas reserves will decline faster than otherwise, adding a renewed pressure on gas and broader consumer prices. Such situation would limiting ECB’s rate cutting plans and throw a floor under the euro’s weakness. The next important target for the EURUSD recovery stands at 1.0672 – the minor 23.6% Fibonacci retracement on September to now selloff.

Elsewhere, the USDJPY benefited grandly from a broad-based dollar weakness to extend its retreat to 150 level. However, note that, released earlier this week, the Bank of Japan’s (BoJ) core CPI measures eased unexpectedly to 1.5%, a number that doesn’t necessarily back the BoJ normalization bets.

To stay updated on all economic events of today, please check out our Economic calendar

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