Rates Spark: Feeble Pushback

ING

Economic

Central Bank

Bond

Summary:

Markets are clearly eyeing the turn of the rate cycle, but amid central banks' 'high for longer' messaging and data releases, volatility remains elevated.

Feeble ECB pushback amid a broader sense of improving inflation

Markets are still pricing more than three 25bp cuts over the next year, and more than a 50% chance discounted that the first cut will already come in April. By June, it is already fully priced. We have had pushback over the past few days from European Central Bank (ECB) officials, but aggressive pricing shows it has had limited effect. The hawks were signalling again that hikes are not off the table. More centrist members seemed to downplay these chances but still stressed persistence. Francois Villeroy, for instance, stated that rates should plateau for the next few quarters. More interesting were discussions surrounding ending PEPP reinvestments sooner picking up again.

The minutes of the October ECB meeting confirmed the messaging around the key rate – that hikes are not entirely off the table. But the reality is also that the "disinflation process was proceeding somewhat faster than expected", while the ECB is not as optimistic about the macro backdrop anymore.

Amid all the central bank messaging, we should also note that financial conditions remain relatively tight, at least when measured by real interest rates. The 2Y real OIS is just 10bp shy of this cycle's highest levels. At the longer end, the 10Y is well off the September spike but still higher than any time before that. This is thanks to the market inflation expectations component having come down notably from its highs over the past two months. Overall, it might lessen the need for officials to push back more aggressively, although some would point out the often-cited fragility of inflation expectations.

Yesterday's flash PMIs remained in contractionary territory but notched up a bit and signalled that the downturn is not worsening. For market interest rates yesterday, that was enough to start turning somewhat higher again.

German budget woes highlight downside risks across the supply and macro outlook

As we head into the final months and weeks of the year, bond supply prospects move into focus. But this time around, there is increasing uncertainty surrounding the outlook for issuance of German Bunds after the constitutional court derailed the government's budget plans.

The downside risks are obvious, but we still have to get a clearer picture of what the ultimate impact is – not just in terms of supply but also for fiscal stance and the macro outlook as a whole. The political fallout is brewing, too. Members of the Free Democratic Party (FDP), which currently holds the finance ministry within the government coalition, have successfully petitioned to get a vote on whether to leave the coalition. The outcome would be non-binding for party leadership, though.

Yesterday, the finance minister announced that he wants parliament to retroactively declare an "emergency situation" for the current year, which would also allow for a suspension of the debt brake for the 2023 budget. This prospect gave Bund yields an uplift and retightened the Bund asset swap spread. But this plan is largely an after-the-fact legitimisation of 2023 borrowing given few other viable options and does not mean more debt issuance. The more relevant announcement of the 2024 budget has been postponed.

Today's events and market view

Left to their own US Thanksgiving holidays, 10Y Bund yields climbed over 2.6%, again steepening the curve in the process. Today's calendar mainly features the German Ifo index – seen improving slightly – and public appearances from ECB President Christine Lagarde, Vice President Luis de Guindos and Spain's Pablo Hernández de Cos.

US markets will see an early close today, but we will have data releases from the US in the form of the S&P flash PMIs for November. Both services and manufacturing were just above the 50 threshold that demarks contractionary territory.

Looking into next week, the inflation outlook, which has helped drive the rally, will likely remain the main focus. The eurozone flash CPI could show inflation easing further, with the core rate likely getting into the 3% handle – even if only barely. The easing trend of inflation should also be confirmed in the US by the PCE data, the Fed's preferred inflation measure.

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

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Comments

Add to Favorites

Damon

Forex

The latest nationwide Japan core inflation for October (excluding fresh food) ticked higher for the first time in four months to 2.9% y/y (slightly below the consensus of 3% y/y) from September's 13-month low of 2.8% y/y. Overall, it has stayed above the Bank of Japan (BoJ)'s 2% inflation target for the consecutive 19th month.

Meanwhile, the core-core inflation rate (excluding fresh food & energy) inched lower to 4% y/y (but still its highest level since 1981) in October from September 4.2% y/y, the second consecutive month of softness which indicates that the recent rallies seen in benchmark oil prices from August to September were likely one of the main drivers that contribute to the resurgence of inflationary pressures in October.

Economic activities in the services sector have started to improve slightly in November where the flash Services PMI rose to 51.7 from 51.6 in October but still below its 12-month average of around 53.5.

In contrast, manufacturing activities have continued to be in the doldrums as the flash Manufacturing PMI for November contracted further to 48.1 from 48.7 in October, its sixth consecutive month of contraction and its steepest decline since February 2023.

Potential mounting political pressure on BoJ due to higher imported inflationary pressures

Overall, it's a mixed set of economic readings but the recent months of elevated imported inflation via the lagged effects of higher oil prices that drove up import costs have put Bank of Japan Governor Ueda in a tight spot as he has so far "stubbornly" remained dovish on Japan's monetary policy and adopted a wait & see approach for further evidence on substantial wage increases before embarking on a path of normalization away from negative short-term interest rates.

The current dovish stance from BoJ has led the JPY to plummet to a 33-year low against the US dollar and is the current primary driver of higher import costs, in turn, putting increasing political pressure on BoJ to act fast to negate this knock-on effect on elevated import costs in order to boost consumer and business sentiment as Japanese Prime Minster Kishida's most recent approval ratings declined to the lowest level in his current two-year premiership.

The USD/JPY has staged a rebound of +260 pips since the start of this week after it plummeted to a 10-week low print of 147.15 on Tuesday, 21 November in line with broad-based US dollar weakness seen last week.

The recent rebound is likely due to technical factors as the prior steep decline from its 151.95 major resistance has hit oversold conditions on several short-term (hourly) momentum indicators.

Further shrinkage in the 10-year US Treasury-JGB yield premium may trigger further downside pressure in USD/JPY

Fig 1: JGB yields with US Treasury-JGB yield spreads as of 24 Nov 2023 (Source: TradingView, click to enlarge chart)

The current elevated inflationary pressure in Japan has reinforced a further uptick in the 10-year Japanese government bond (JGB) yield that continued to rise to 0.77% at this time of the writing from an 11-week low of 0.69% printed on Tuesday, 21 November.

Hence, the latest recovery seen in n the 10-year JGB yield is likely to put downside pressure on the declining 10-year US Treasury-JGB yield premium since 19 October 2023 which in turn may undermine the recent 3-day US dollar rebound against the JPY.

Short-term minor corrective rebound in USD/JPY may have reached its terminal point

Fig 2: USD/JPY medium-term trend as of 24 Nov 2023 (Source: TradingView, click to enlarge chart)

Fig 3: USD/JPY minor short-term trend as of 24 Nov 2023 (Source: TradingView, click to enlarge chart)

Technically speaking, the +260 pips rebound seen in the USD/JPY from its 21 November 2023 low of 147.15 has started to show bullish exhaustion signals at its 20 and 50-day moving averages.

The short-term hourly RSI oscillator has continued to exhibit bearish momentum readings after an earlier bearish divergence condition being flashed out at its overbought zone on Wednesday, 22 November.

Watch the 150.20 key short-term pivotal resistance (also the 20-day moving average & close to the 61.8% Fibonacci retracement of the prior minor decline from 13 November 2023 high to 21 November 2023 low) and a break below the near-term support of 148.40 may expose the next intermediate supports of 147.30 and 146.60/20.

However, a clearance above 150.20 invalidates the bearish tone for a squeeze up towards the next intermediate resistance at 151.40 (minor swing high of 16 November 2023).

Source: MarketPulse

Risk Warnings and Disclaimers

Comments

Add to Favorites

ING

Economic

October industrial production up 7.4%

Singapore's string of positive data continues, this time with industrial production beating market consensus to rise 7.4% YoY. Market expectations tipped production to slow for a 13th straight month. Compared to the previous month, industrial production jumped 9.8%, much better than expectations for a 0.4% contraction.

Electronics picked up to 14.8% YoY, from 12.7% in the previous month. Biomedical and general manufacturing rose 5.1% YoY and 4.3% YoY, respectively. Chemicals remained in contraction (1.0% YoY) but at a less pronounced pace compared than the 13.0% YoY drop of the previous month.

Better IP data today a sign of things to come?

Industrial production had been mired in an extended slump (13 months), tracking the struggles of the export sector. With global demand relatively subdued of late, soft non-oil domestic oil (NODX )orders filtered through to the industrial output numbers.

The improvement in the October NODX report signaled a potential recovery for the industrial sector and we could see this sector string together a decent streak of expansion now that global demand appears to be showing signs of a potential recovery.

Today's industrial production report should contribute well to 4Q GDP numbers which will continue to get a boost from leisure related services. 2023 full year GDP growth of 1% YoY is well within reach.

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

Risk Warnings and Disclaimers

Comments

Add to Favorites

Samantha Luan

Economic

Central Bank

Forex

Trading activity is rather subdued in Asian session today, with most major currency pairs and crosses hovering within yesterday's range.

Yen is showing a slight recovery, albeit in the context of mixed inflation and PMI data. While Japan's core CPI remains persistently above BoJ's target, the latest figures haven't provided a strong impetus for the central bank to shift away from its negative interest rate policy or to alter its yield curve control strategy. BoJ officials have emphasized the importance of a sustainable wage-price spiral, and they are likely to await the results of wage negotiations early next year before making significant policy decisions.

Throughout the week, New Zealand Dollar has emerged as the strongest currency, additionally supported by much better-than-expected retail sales data released today. Australian Dollar and British Pound Sterling are following as the second and third strongest.

On the other end of the spectrum, Euro is the weakest, closely followed by Dollar. However, it's worth noting that Euro's current position appears to be more about consolidating recent gains against Dollar, and EUR/USD maintains near-term bullish outlook. A reversal in Euro and Dollar's positions could occur once this consolidation phase concludes.

Yen, currently positioned as the third weakest, is in a phase of digesting its gains from the previous week. However, there is potential for Yen to ascend in the rankings before the week concludes. Canadian Dollar and Swiss Franc are displaying mixed performances.

From technical analysis standpoint, USD/JPY's recovery from 147.14 is so far still capped by 55 4H EMA. Fall from 151.89 is still in favor to continue, and break of 148.57 minor support will bring retest of 147.14 support first. However, sustained trading above the EMA will retain near term bullishness, and bring a test on 151.89 high. Market watchers will be looking to see if this scenario plays out this week or in the next. Yen Sees Mild Uptick Following Mixed CPI and PMIs, A Signal for Buyers' Return?_1

Yen Sees Mild Uptick Following Mixed CPI and PMIs, A Signal for Buyers' Return?_1

In Asia, Nikkei closed up 0.55%. Hong Kong HSI is down -1.48%. China Shanghai SSE is down -0.63%. Singapore Strait Times is down -0.52%. Japan 10-year JGB yield is up 0.0431 at 0.774.

BoE's Pill stresses persistence in inflation fight

In a Financial Times interview, BoE Chief Economist Huw Pill emphasized the need for the MPC to avoid prematurely "declaring victory" in the fight against inflation, noting that CPI is still considerably above BoE's 2% target, currently at 4.6%.

Pill acknowledged UK's economic slowdown, noting "slower growth in activity and employment." However, he assessed that the current inflation scenario is "more supply-driven rather than demand-driven." Weakening in economic activity is not necessarily leading to a reduction in inflationary pressures, as might typically be expected.

Analyzing recent economic indicators, Pill observed more evidence of "sort of stubborn, high-level rates of inflation" and and growth that are "stronger" than being compatible with 2% inflation over the medium term.

He also argued that if the slowdown in economic activities and employment growth is linked to a decline in the economy's supply performance, rather than a drop in demand, it wouldn't create the necessary slack to ease domestically generated inflation.

Japan's CPI core rises to 2.9%, above BoJ target for 19th mth, services prices surge

Japan's core CPI, which excludes fresh food prices, rose slightly from 2.8% yoy to 2.9% yoy in October, falling just below expected 3.0% yoy. Notably, this core CPI has stayed above BoJ's target of 2% for the 19th consecutive month, indicating persistent inflationary pressures.

Headline CPI, which includes all items, accelerated from 3.0% yoy to 3.3% yoy. However, core-core CPI, which excludes both food and energy, showed a slight deceleration, dropping from 4.2% yoy to 4.0% yoy. Despite this decrease, core-core CPI has remained above 4.0% for seven consecutive months, highlighting sustained inflation in areas beyond just the volatile items.

Breaking down the details, energy prices saw a significant decrease of -8.5% yoy. In contrast, food prices continued to climb, recording a 7.6% yoy increase. Durable goods also experienced a price rise of 3.2% yoy. Notably, services prices surged by 2.1% yoy, marking the fastest gain since 1993. This sharp increase in services prices underscores the broadening of inflationary pressures within the Japanese economy.

Japan's PMIs: Manufacturing contracts, services slightly improve

Japan's PMI for November shows a continuing contraction in the manufacturing sector and a slight improvement in services.

Manufacturing PMI dropped from 48.7 to 48.1, falling below the expected 48.8 and marking another month below the crucial 50.0 threshold, which separates contraction from expansion. This ongoing contraction has been the trend since June.

Conversely, Services PMI saw a marginal increase, moving up from 51.6 to 51.7, indicating a slight expansion in this sector. However, Composite PMI, which combines both manufacturing and services, edged down from 50.5 to exactly 50.0, highlighting stagnation in overall private sector activity.

Usamah Bhatti, an economist at S&P Global Market Intelligenc said: "Activity at Japanese private sector firms stagnated midway through the fourth quarter of 2023." This stagnation is further reflected in the demand conditions, which Bhatti noted remained "muted in November and were little-changed from October."

New Zealand retail sales volume flat in Q3, value up 1.5% qoq

In New Zealand, Q3 2023 saw retail sales volumes remain unchanged at 0.0% qoq, defying expectations of a -0.8% decline.

However, a contrasting trend emerged in the sales value, which increased by 1.5% qoq, indicating a disparity between the number of goods sold and their monetary value.

On an annual basis, there was a -3.4% yoy decrease in sales volume, whereas sales value saw 1.1% yoy increase.

These divergences should be reflective of inflationary pressures and corresponding shift in consumer purchasing patterns.

Looking ahead

Germany Q3 GDP final and Ifo business climate will be released in European session. Later in the day, Canada retail sales and US PMIs will be featured.

EUR/JPY Daily Outlook

With 162.08 minor support intact, EUR/JPY's rebound from 161.22 could extend further to retest 164.29 high. Firm break there will resume larger up trend. On the downside, however, break of 162.08 will turn bias back to the downside, to resume the fall from 164.29 through 161.22 towards 159.75 resistance turned support. Yen Sees Mild Uptick Following Mixed CPI and PMIs, A Signal for Buyers' Return?_2

Yen Sees Mild Uptick Following Mixed CPI and PMIs, A Signal for Buyers' Return?_2

In the bigger picture, rise from 114.42 (2020 low) is in progress. Next target is 169.96 (2008 high). On the downside, break of 159.75 resistance turned support is needed to be the first sign of medium-term topping. Otherwise, outlook will remain bullish even in case of deep pullback. Yen Sees Mild Uptick Following Mixed CPI and PMIs, A Signal for Buyers' Return?_3

Yen Sees Mild Uptick Following Mixed CPI and PMIs, A Signal for Buyers' Return?_3

Source: ActionForex

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

Risk Warnings and Disclaimers

Comments

Add to Favorites

SAXO

Forex

JPY: More room for weakness

Japan's October inflation was reported this morning, and showed a re-acceleration after three consecutive months of softening. Headline CPI was at 3.3% YoY, higher than last month's 3.0% and core also accelerated to 2.9% YoY from 2.8%, although it was below the expected 3.0%. Core-core measure however showed some signs of cooling but remained high at 4.0% YoY (vs. exp. 4.1% and prev. 4.2%). This continues to question whether inflation is really transitory as Bank of Japan has been saying, given headline inflation has been above the BOJ's 2% target since April 2022. Japan Inflation Rebound Unlikely to Deter Bank of Japan_1

Japan Inflation Rebound Unlikely to Deter Bank of Japan_1

While this could spook BOJ pivot bets, JPY hardly reacted to the release. One, there is still an element of one-off drivers in inflation. Much of the acceleration in October was driven by reduction in government subsidies that lifted utility bills, or higher hotel costs as inbound tourism accelerated. Higher import prices due to sustained yen weakness also continued to underpin. However, with the higher cost of living taking a toll on consumer spending, BOJ is unlikely to be convinced that inflation has become entrenched. As such, focus will remain on spring wage negotiations as that could be the only catalyst to prompt any BOJ tweaks next year, even if it remained minor.

That means yen will remain a play of Treasury yields for now, and US PMIs today but more importantly the PCE data next week will be key to watch. USD/JPY has reversed back higher to 149.50 from lows of 147.15 this week. Pair could test 150 or higher as that level has been cleared for BOJ intervention risks earlier in October, while 152 could serve as an intervention risk threshold. Saxo's trade signals also identify 151.86 as a key resistance. Germany's suspension of debt limit serves as a reminder of fiscal dominance and could spark a sell-off in global bonds, which suggests near-term downside for yen. But valuation and positioning suggest a significant room for yen appreciation into 2024. If US PMIs indicate a moderation, USD/JPY could reverse back towards 149.

Market Takeaway: USD/JPY could rise towards 151+ before intervention risks come in play. A drop below 149 is needed to bring bearish trend back in focus.

EUR, GBP: Fiscal dominance back in focus

Eurozone and UK PMIs conveyed a sense of stability and recovery, more pronounced in UK than Eurozone. UK services and composite PMI jumped up to expansion territory of above-50 and manufacturing also improved to 46.7 from 44.8. Eurozone PMIs however remained below 50, although both manufacturing and services showed an improvement. EURUSD came under some pressure on the release, but is sticking to the 1.09 handle for now. GBP/USD rose to highs of 1.2564 before settling in the 1.2540-area. That saw EUR/GBP pushing below 0.87 handle, although the break doesn't look convincing for now and support level of 0.8647 will be on watch.

Japan Inflation Rebound Unlikely to Deter Bank of Japan_2

Fiscal concerns were also back in focus with Germany's suspension of debt limits for a fourth consecutive year raising concerns of additional borrowing and increasing bond supply, which pushed yields higher. Germany Q3 GDP and IFO survey will be on watch today.

Market Takeaway: EUR/GBP could bounce back higher with a series of supports piling below 0.87.

SEK: Riksbank pause a sign of peak rates

The Riksbank left the policy rate unchanged at 4%, but continued to signal peak rate of 4.10% in the beginning of 2024. The press statement says that the board is "is prepared to raise it further if prospects for inflation deteriorate". However, the decision was unanimous, and inflation is seen to be declining inti 2024, indicating that the peak rate may have been reached. The board also indicated an openness to increase the size of the QT programme at its next meeting in January (announcement due Feb 1).

Market Takeaway: EUR/SEK rose higher to 11.44 from a low of 11.35 and the decision may leave SEK more prone to profit taking. Key levels to watch are 11.50 and 11.85.

Risk Warnings and Disclaimers

Comments

Add to Favorites

Owen Li

Energy

Oil prices dipped on Friday but were still on track to record their first weekly gain in five on hopes the OPEC+ alliance of oil producing countries will continue to cap crude output next year to support the market.

Brent, the global benchmark for two thirds of the world's oil, was trading 0.02 per cent lower at $81.40 a barrel at 7.54am UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.82 per cent at $76.47 a barrel.

On Thursday, Brent settled 0.66 per cent lower at $81.42 a barrel. There was no settlement for WTI due to the Thanksgiving holiday in the US. Oil Set for First Weekly Gain in Five on Hopes Of OPEC+ Supply Cuts_1

Oil Set for First Weekly Gain in Five on Hopes Of OPEC+ Supply Cuts_1

Oil prices slumped as much as 4.9 per cent on Wednesday after OPEC+ surprised the market by postponing its ministerial meeting by four days to November 30.

The meeting is expected to chart the course of crude output cuts next year and discuss any possible changes to the group's long-standing agreement aimed at stabilising the oil market.

“The initial market reaction appeared to suggest traders view this as a lack of unity behind supply cuts going into the new year, but it wasn't long until oil reversed those moves,” said Craig Erlam, senior market analyst at Oanda.

“While there has been more speculation over the day, we may have to wait until the virtual meeting on the 30th to learn just how unified the group remains and whether Saudi Arabia and Russia will need to do any additional heavy lifting."

Oil prices, which surged to nearly $98 in September, are on track for a back-to-back monthly loss amid expectations of a tight crude market in the fourth quarter.

Meanwhile, higher oil production in Iran and loosening of sanctions on Venezuela can ease supply concerns next year.

Iran’s oil production should reach 3.6 million barrels per day by March 20, 2024, Oil Minister Javad Owji was quoted as saying on Tuesday by the Tasnim news agency.

“We aim to reach four million bpd of oil production for next year,” he said.

Source: The National News

Risk Warnings and Disclaimers

Comments

Add to Favorites

Thomas

Palestinian-Israeli conflict

Latest news on the Israeli-Palestinian conflict

0:20

Iraqi Islamic resistance groups attacked the U.S. Ain al-Asad base in western Iraq.

0:30

Iran's foreign minister met with his Qatari counterpart in Doha.

Latest News on the Israeli-Palestinian Conflict (November 24)_1

0:44

"Since Israel launched its ground offensive in Gaza, our fighters have partially or completely destroyed 335 Israeli tanks and armored personnel carriers," Qassam Brigades spokesman Abu Obaida said.

01:35

Israeli forces stepped up attacks on Gaza hours before the ceasefire, causing numerous casualties.

Dozens of Palestinians were killed and hundreds injured as Israeli forces stepped up attacks on Gaza ahead of a truce. Israeli fighter jets struck the Sheikh Nasser neighborhood east of Khan Younis in the southern Gaza Strip, killing at least five people and wounding dozens more.

Among the injured was a photographer, the Wafa state news agency reported. At least 10 people were killed when Israeli forces attacked a home in the Shehradwan neighborhood of northern Gaza. Other attacks were reported in the al-Nuseirat refugee camp in central Gaza. Many of those present had fled their homes in Gaza City.

02:04

The Gaza media office reiterated its call for the Rafah crossing to be opened "around the clock" ahead of a four-day truce, and for the distribution of much-needed medical supplies and aid to "all hospitals" across Gaza.

02:25

Hebrew Media Reporter: The number of Israeli soldiers refusing to serve is increasing, and the Israeli government is enacting strict new laws against these deserters.

02:56

According to reports, during the ceasefire between Hamas and Israel, Lebanese Hezbollah and Iraqi Islamic resistance groups will cease attacks on the United States and Israel.

03:44

On Thanksgiving Day, November 23, pro-Palestinian groups held a protest march at Macy’s Department Store in New York, USA. The march attracted tens of thousands of spectators. Representatives of Native American tribes displayed Palestinian flags to the crowd on a float, many of whom wore shirts that read "Stop Genocide" and unfurled banners with the same words, referring to the racial treatment of Native Americans after Europeans arrived in the Americas. Extermination is linked to the current Israeli attack on Gaza and the deaths of thousands of Palestinians. After a few minutes, police removed the protesters.

Many Native Americans view Thanksgiving as a day to commemorate the deaths of their ancestors and see parallels in what many describe as the ethnic cleansing of the Palestinian people during the Nakba of 1948 and the decades that followed.

Latest News on the Israeli-Palestinian Conflict (November 24)_2