US Dollar Dips as Powell Speech fails to Move Markets

Forex

Summary:

US Dollar's recovery has slowed after US Federal Reserve Chairman Jerome Powell gave a speech without any comments on monetary policy or guidance. While some big names have been disappointing, some larger retailers have shown increasing profits, indicating that the current high-interest rate environment is straining people's finances. This puts the US at greater risk of falling into a recession than the rest of the world.

Traders are eagerly awaiting the speeches of the Fed members scheduled for later on Wednesday to gain insights into the current concerns of the Fed, especially regarding the possibility of a recession. As far as economic data is concerned, all the significant reports have already been released and analyzed.

The US Dollar remains flat as investors await key data:

• The Mortgage Bankers Association (MBA) has released its weekly Mortgage Applications index. The previous index showed a decrease of 2.1%, but last week it went up by 2.5%.

• The CME Group's FedWatch Tool indicates a 90.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.

• US Federal Reserve Chairman Jerome Powell did not comment on monetary policy or the markets.

• The US Wholesale Inventories came out at 0.2%, a slight increase from the previous figure of 0%.

• Asian equities are currently slightly negative, while Europe and the US are somewhat positive. The negative sentiment is due to better-than-expected earnings from the top three US retail discounters, which suggests that US consumers are looking for cheaper alternatives instead of paying full price for goods and services.

• The US Treasury aims to allocate a 10-year note in the markets at around 18:00 GMT.

• At the end of the US session, two Fed speakers are expected to speak: John Williams from the New York Fed at 18:40 GMT and Philip Jefferson from the Board of Governors of the Fed at 21:45 GMT.

• The benchmark 10-year US Treasury yield is currently at 4.55%, recovering from last week's volatility.

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MarketPulse by OANDA Group

Stocks

We are continuing to see sluggish trade in equity markets on Wednesday, with investors battling hawkish commentary from central banks against downbeat economic expectations and speculation around rate cuts next year.

Even if central banks were of the view that rates could fall next year, it would be unrealistic to expect them to say so at this stage as it would confuse and undermine their message that rates must stay higher for longer.

This is intentionally ambiguous as they can’t say with confidence how high or for how long, only that the topic of rate cuts is not even being considered. Investors think in a different way and the timing and pace of rate cuts are important. They’ve been far too optimistic this past year but it seems that’s going to carry on into 2024.

So while policymakers from the Fed, ECB, and BoE have all been pushing back against such speculation – some more forcefully than others – they haven’t been particularly successful in dampening the mood, even if it wasn’t particularly upbeat to begin with.

Ultimately, for investors as well as policymakers, the data will dictate what comes in the new year and perhaps all of this speculation is simply something to fill the data void we have this week.

A bearish signal after a year of sideways trading?

The UK100 has drifted lower since last Friday, interestingly at the start of that rebounding of a key technical resistance level.

UK100 – Central Bankers Continue to Push Back Without Success_1

That level was around 7,500 where a rising trendline dating back to March 2020 – which it price briefly dipped below in August – coincided with the 50% Fibonacci retracement level.

This could be regarded as a confirmation of the 20 October breakout with the index having seen support on the trendline again earlier that month.

That it occurred around a key Fib level is also interesting and may suggest downward pressure is building after a year in which the index has generally trended sideways.

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Thomas

Economic

Nothing to see here

Let's be very clear about what deflation is and what it isn't. It is a very pernicious situation, where the "general price level" which includes consumer prices, but also other prices such as real and financial assets and money wages decline. And it leads to a sharp slowdown in economic activity as it deters consumer spending and investment.

What China has right now, is a low rate of underlying inflation, which reflects the fact that domestic demand is fairly weak. What today's data show is that it doesn't take much of a negative shock from one of the components to push a low underlying headline inflation rate below zero on a year-on-year basis.

If you want to use any term, "disinflation" would be my preference, but what we are seeing today is mainly the result of a supply excess, rather than a collapse in demand.

Bring on Mordecai Ezekiel

In 1925 (says Wikipedia) the "Hog cycle" was first coined as a term in agricultural economics, by the colourfully named Mordecai Ezekiel. What he noted, was that when pork prices were high, farmers kept back pigs from slaughter to build their herds, which ultimately led to a glut the following season and a collapse in prices which then led to herd shrinkage, which in turn pushed prices back up again, and so on...

It might be nearly 100 years old, but the hog cycle is alive and well in China.

In the chart above, you can see how meat and poultry prices in China rose in 2022 - another bout of swine fever taking its effect and shrinking herds. Prices for pork are now subsiding again as pork supply has increased, dragging the headline inflation rate down. Stripping out food and energy, inflation is currently 0.6% YoY, and down only very slightly over the last few months.

0.6% is still quite a low rate of inflation if we take this to be the underlying rate for China, and it is indeed a reflection of what is still a fairly weak backdrop for domestic demand.

Wholesale pork prices so far for November continue to fall, but the rate of decline appears to be easing as pork prices near their previous lows. So we may still see a negative drag from food and possibly energy next month (given what is happening to crude prices too), but the drag is likely to be smaller, and thereafter, absent further supply shocks, inflation is likely to start heading higher again.

What's the story?

While negative headlines for Chinese CPI inflation provide the media with a hook to hang a juicy story on, the truth is considerably less tasty. Next week, we get further activity data for China. The most recent figures have shown very slight indications of firming, and we imagine that we will see something similar this time, notwithstanding the disappointing PMI data for October.

If so, then this would be a further set of data that would not be consistent with the deflation story being peddled in some corners, even if we concede that China's macro condition remains fairly soft and vulnerable to negative shocks.

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

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Devin

Economic

The fight against inflation has produced encouraging results: according to the latest reports, core inflation was 4.1 percent in September in the United States (4.8 percent in June), 4.2 percent in October the eurozone (5.5 percent in June) and 6.1 percent in the United Kingdom (6.9 percent in June).

This is the good news. The bad news is that inflation is still high. The 2 percent target will not be reached this year or the next. According to the latest projections from the Organisation for Economic Co-operation and Development, inflation could fall to about 2 percent only in 2025. Central bankers' decision to raise interest rates and rein in monetary policy has paid off, but the outcome has fallen short of expectations. Although recession has been episodic and far from severe, the danger of stagnation is palpable.

Some economists have suggested changing the inflation target. For example, Nobel laureate Paul Krugman advocates raising the current target from 2 percent to 3 percent and thus avoiding the so-called "low-inflation trap." Put simply, it refers to a situation in which current low inflation leads to expectations about low inflation in the future. Fighting Inflation Without a Road Map_1

The mainstream view in economics says that if people expect prices to rise very slowly, it can make it harder for governments to control the economy using interest rates. When investors expect prices to remain flat, low nominal interest rates do not translate into expected low real interest rates. So, even if a government lowers interest rates to encourage spending and borrowing, it may not bring the expected outcome.

This line of reasoning is questionable, to say the least. Suffice to say that a decade of money printing has indeed created inflation – during the three-year period 2021-2023 prices rose some 18 percent in the eurozone and 16 percent in the U.S. – and nobody got caught in the trap: markets revised expectations upward rapidly. Investments do not stagnate because monetary conditions are regarded as tight, but because taxation and regulation are heavy, trade barriers are rising and policymaking is erratic.

By contrast, changing the inflation target from 2 percent to 3 percent would further dent the credibility of the central bankers. Central banking is supposed to guarantee price stability, not to engage in manipulating the rules of the game depending on the circumstances. In this light, therefore, the main Western central bankers deserve credit for sticking to their current 2 percent goal and doing their best to persuade public opinion that this is the right course of action.

However, the drastic fall in the real money supply experienced in the recent past has failed to get rid of inflation in accordance with predictions, and the rise in the cost of financing might soon bring economic growth close to zero. Monetary authorities are not sure what to do next. They have four options, each of which leads to a different scenario.

Less likely scenario: Even tighter monetary policy

One option would be to prioritize the fight against inflation and double down on monetary policy to meet the 2 percent target before the end of 2024. This approach would perhaps hit investments. Still, it would find plenty of supporters in the U.S., where some commentators draw attention to U.S. private consumption not seeming to suffer from the rise in the cost of consumer credit or from fears about future inflation.

According to this view, the benefits of tighter monetary policy would overcompensate the costs in terms of real growth. The picture is different in the eurozone, though, where consumer spending is constant in nominal terms and real gross domestic product (GDP) stagnant. Yet, Europe still abounds with pundits who believe that greater government expenditure can compensate for tighter policy, and who ignore disappointing GDP figures as the outcome of taxation, regulation and fears about public-finance crises.

Doubling down on monetary rigor is unlikely on both sides of the Atlantic. A steady rise in interest rates would make sense if central banks announced intermediate inflation targets and were committed to sharpening their monetary tools when those targets are missed. However, no such time schedule has been announced and raising interest rates until inflation reaches 2 percent would make little sense. It would give the impression that the monetary authorities are panicking. This would weaken their fragile credibility and intensify the consequences of monetary stringency, the effects of which have not yet fully emerged, and possibly deliver a fatal blow to the public-finance conditions of several highly indebted EU countries.

Most likely scenario: Erratic policymaking

The most likely scenario could be defined as tentative policymaking. The big three Western central bankers have more or less clearly declared that they do not know where they stand. They have acknowledged that stopping money printing does affect inflation, but also that they are unsure of the speed and intensity of the transmission mechanisms, from interest-rate manipulation to money supply and to price inflation. They have also added that they might further tighten monetary policy, if inflation does not drop fast enough; or ease off, in case of an unexpected drop. It is unclear what "fast enough" means in this context.

The authorities have once again missed an opportunity to spell out what kind of monetary policy they intend to pursue. At present, long-term interest rates on government bonds are expected to stabilize slightly above 4 percent in the U.S. and between 3.5 percent and 4 percent in the eurozone and the UK. Nobody knows whether these predictions are accurate. But everybody knows that the decades of tampering with monetary aggregates have not come to an end and that central bankers will still decide day by day. In particular, even if price inflation is tamed, stagnation or recession may still trigger a new wave of money printing, perhaps under the umbrella of "new" economic theories.

Least likely scenarios: Stable or lower interest rates

The last, far less likely scenarios are that interest rates remain the same, or are cut back aggressively.

If rates remain the same, this would amount to interest-rate targeting. Regardless of the merits and faults of this strategy, central bankers are usually reluctant to follow a fixed rule and insist on exercising discretionary power. In fact, the political authorities expect them to do so, especially when ailing companies need to be bailed out or unappealing government bonds have a hard time finding buyers.

In the aggressive-cuts scenario, one should note that the nominal money supply has generally stabilized in the U.S. and in the euro area. It could be argued that the current interest rates are more or less what it takes to bring about neutral monetary policy (constant money supply), and that today's price inflation merely reflects the presence of a significant monetary overhang (excess money supply inherited from the past).

In this context, doing nothing would be the best choice, while cutting interest rates would be perceived as a change of tack and a willingness to tolerate inflation. That applies especially to Europe, where core inflation is still high and interest rates are already relatively low (the lending rate net of inflation is still negative despite a steep rise). It would be a loss of face which the European Central Bank and the Federal Reserve Bank can ill afford.

Source: GIS

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

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Damon

Economic

Stocks

Forex

Asian share markets rallied on Thursday and the dollar was weaker after most U.S. stocks edged higher and the S&P 500 recorded its longest winning streak in two years, with investors on high alert for signs that global interest rates have peaked.

MSCI's broadest index of Asia-Pacific shares outside Japan was flat, although up 4.6 per cent so far this month.

The yield on benchmark 10-year Treasury notes reached 4.5059 per cent compared with a U.S. close of 4.523 per cent on Wednesday.

The two-year yield, which rises with traders' expectations of higher Fed fund rates, touched 4.932 per cent compared with a U.S. close of 4.936 per cent.

Australian shares were up 0.44 per cent, and Japan's Nikkei stock index was up 0.85 per cent.

Hong Kong's Hang Seng Index was up 0.11 per cent in early trade while China's bluechip CSI300 Index was 0.2 per cent higher in early trade.

"Markets were relatively calm following recent volatility as participants await the release of next week's October U.S. CPI report and try to ascertain whether last week's moves in U.S. Treasuries, equities and the dollar are corrective or represent a fundamental shift in direction," ANZ economists wrote.

Chinese inflation figures for October published on Thursday showed a 0.1 per cent decline compared to September and a 0.2 per cent fall from one year, according to official statistics.

China's troubled property sector will be closely watched on Thursday after most major stocks rallied one day earlier following a Reuters report that Ping An Insurance Group had been asked by the Chinese authorities to take a controlling stake in Country Garden Holdings.

A spokesperson for Ping An said the company had not been approached by the government and denied the Reuters report that cited four sources familiar with the plan.

In Asian trading, the dollar dropped 0.06 per cent against the yen to 150.88. It remains not far from its high this year of 151.74 on October 31.

The European single currency was up 0.0 per cent on the day at $1.0709, having gained 1.25 per cent in a month. The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was down slightly at 105.52.

The dollar has rebounded from last week's sharp sell-off on rising confidence the Fed has ended raising rates. There is less agreement on whether a rate cut is on the horizon with inflation still above the U.S. Federal Reserve's 2 per cent target.

On Wall Street, the S&P 500 rose 0.10 per cent and the Nasdaq Composite added 0.08 per cent. The Dow Jones Industrial Average fell 0.12 per cent.

The S&P 500 rose for the eighth consecutive day, extending its longest win streak in two years.

The Federal Reserve last week kept the benchmark overnight interest rate in the current 5.25 per cent-5.50 per cent range and the central bank is due to meet again mid next month.

The U.S weekly jobless claims published on Thursday will be closely watched as an indicator of the how the country's labour market is performing. Economists predict claims will reach 219,000 after coming in at 217,000 last week.

Oil prices slid over 2 per cent on Wednesday to their lowest in more than three months on concerns over waning demand in the U.S. and China. In Asia on Thursday, U.S. crude and Brent crude both rose 0.8 per cent following the weak performance in the U.S. session.

Gold was slightly higher. Spot gold was traded at $1950.79 per ounce.

Source: Reuters

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Devin

Economic

Consumer price inflation in Germany slowed further to 3.8 percent in October, the lowest level in more than two years, the Federal Statistical Office (Destatis) said on Wednesday.

Compared to medium and long-term figures, however, the German inflation rate "remains high," Destatis President Ruth Brand said in a statement. "In particular, consumers are still feeling the higher food and energy prices."

Despite weakening further to 6.1 percent, food prices remained the main driver of inflation in Europe's largest economy. According to Destatis, sugar and other confectionery as well as bread and cereal products saw particularly sharp price increases of more than 10 percent.

Energy prices saw their first drop in almost three years in October, falling by 3.2 percent due to sharp declines in natural gas and heating oil prices. Electricity, however, remained 4.7 percent more expensive than a year ago.

In 2024, electricity prices are expected to be driven up by subsidies for the expansion of the German energy grids. According to the comparison company Verivox, grid fees for electricity will rise by 11 percent year-on-year to a new record high at the turn of the year.

Meanwhile, recovery in consumer sentiment remains "a long way off," according to the Nuremberg Institute for Market Decisions (NIM). Due to weak purchasing power, "private consumption will not be able to support the economy this year," NIM expert Rolf Buerkl said in late October.

In the eurozone, consumer prices keep normalizing faster than in Germany. According to provisional figures by Eurostat, the statistical office of the European Union, inflation there slowed to 2.9 percent in October. However, Eurostat based its calculations on the assumption that German inflation would fall more sharply.

In order to push inflation back below its 2 percent target, the European Central Bank (ECB) raised its key interest rate to 4.5 percent before recently deciding to pause. However, further hikes do not seem out of the question, according to insiders.

"We must remain vigilant," Austria's central bank governor and ECB Governing Council member Robert Holzmann warned earlier this week.

Source: ChinaDaily

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ING

Commodity

Energy

Energy - Brent below $80/bbl

The downward pressure in oil continued yesterday with ICE Brent settling more than 2.5% lower, leaving it below US$80/bbl. This is the first time since July that Brent has settled below this level. A lot of support has evaporated after the market broke below the 200-day moving average earlier this week. Timespreads also continue to point towards weakness. The prompt ICE Brent spread is dangerously close to flipping into contango and is trading in a backwardation of just US$0.13/bbl, down from around US$0.60/bbl earlier this month. Meanwhile, for WTI, the prompt spread is in even bigger danger of slipping into contango with the spread trading flat this morning.

The degree of weakness seen in recent days will be a concern for OPEC+, particularly as we move into 1Q24, a period where we see the market returning to surplus in the absence of an extension to Saudi cuts. Noise from the group, particularly Saudi Arabia will likely grow, given that we are now trading below the Saudi's fiscal breakeven level, a level they have been keen to keep oil above. It is looking very likely that both Saudi Arabia and Russia will extend their additional voluntary cuts through into early next year. Although, whether Russia actually sticks to its announced cuts is another story, given that their seaborne crude oil exports have been edging higher in recent months.

The demand side is also becoming a concern, which is evident with the broader weakness seen in refinery margins since the end of the northern hemisphere summer. Weaker margins suggest possibly weaker end-use demand, which ultimately could feed through to weaker crude oil demand from refiners. In addition, there are worries over Chinese demand going into the winter, though for much of the year, while there has been concern about the Chinese economy, oil demand numbers have performed strongly up until this point.

While indicators suggest that the market is not as tight as originally expected, the tightness we see in the market next year (particularly 2H24) and the high likelihood of further intervention from OPEC+ (or at least from some of its members) if needed, suggests that significant further downside in the market is limited. We hold onto our forecast for Brent to average US$90/bbl over 2024.

Turning to the gas market, we are finally starting to see EU gas storage falling, although at a very slow pace. Storage has fallen from 99.63% full on Sunday to 99.61% as of Tuesday. This decline will obviously pick up as we move deeper into the heating season. However, assuming a normal winter, the expectation is that storage will still finish the heating season above the 5-year average. Gas demand from the power sector has been weak this year, and this is likely to remain the case through the winter with spark spreads remaining in negative territory. Weaker demand from the power sector should help the EU balance over the winter months.

Metals – Zinc tightens

LME zinc led gains among industrial metals yesterday with prices trading above $2,600/t amid signs of tightening supply. Recent LME data show that cancelled warrants for zinc rose by 6,125 tonnes to 24,925 tonnes yesterday, the highest since 25 October. Cancelled warrants for zinc have climbed by almost 80% this week. Meanwhile, on-warrant stocks for zinc also reported outflows of 7,800 tonnes and the continuous rise in cancelled warrants might result in potential further outflows. The tightening has seen the cash/3m spread contango narrow to just US$4.25/t compared to around a US$30/t contango back in early October.

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