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Overview: 

The US dollar, which was sold last week after the FOMC and soft employment report, remains on the defensive today. The Antipodean currencies and yen are struggling, but the other G10 currencies are firm. The dollar is also lower against most emerging market currencies. Still, given the magnitude of the dollar's pullback, we suspect some consolidation is likely.

Asia Pacific equities rallied, helped by the sharp gains in the US before the weekend. Note that South Korea is banned short sales and the Kospi rallied nearly 5.7% today. The Philippine's allowed short selling for the first time, and its main index rallied 1.5%. Europe's Stoxx 600 is treading water after rallying every day last week. US futures indices are trading with a slightly firmer bias. After falling last week, European and US 10-year benchmark yields have come back higher today. European yields are mostly 6-8 bp higher. The US 10-year yield is up a couple of basis points to about 4.60%. The US quarterly refunding begins tomorrow. Gold is trading slightly softer and is near the middle of its $11 range late in the European morning near $1987. December WTI is also consolidating inside the pre-weekend range but is firmer near $82 a barrel. Saudi Arabia and Russia indicated they supply curbs will persist through the end of the year.

Asia Pacific

One might be forgiven for thinking that with low nominal and even lower real rates, a negative overnight policy rate, and a deeply undervalued yen that the Japanese economy would be doing well, but it ain't. The economy would have contracted in Q2 if it were not for the strength of tourism, for which the cheap yen probably played a role. The economy looks to have contracted in Q3. In fact, given the depreciation of the yen, the Japanese economy may have slipped this year to the fourth largest behind Germany, which has its own economic challenges. The final readings showed that despite the better than preliminary estimate (51.6 from the preliminary 51.1, down from 53.8 in September), the service PMI is still at the low for the year. The composite PMI stands at 50.5 rather than 49.9 initial estimate but that is also the low of the year.

Tomorrow, Japan reports worker earning and household consumption. Real earnings have not risen on a year-over-year basis since March 2022 and the streak most likely did not end in September. The decline in household spending may have accelerated to 2.7% year-over-year from -2.5%. The cabinet approved a new stimulative package last week for JPY21.8 trillion (~$146 bln) in total fiscal spending. It has high hopes for the spending: GDP, saying will be boosted by 1.2 percentage points over the next three years, and inflation will be suppressed by one percentage point. Estimates suggest that as much as JPY13 trillion in new bond issuance will be required, as with the other hand, the central bank tries limit the rise of the 10-year yield. BOJ Governor Ueda seemed to play down the likelihood of raising the overnight target rate (-0.10%) before the end of the year.

The Reserve Bank of Australia announces its rate decision the first thing tomorrow. In Bloomberg's survey 21 of 24 economists surveyed expect a 25 bp rate hike. The futures market is less confident. It shows slightly more than a 50% chance and nearly a 77% chance of a hike before year-end. Recall sentiment swung toward a rate hike based nearly exclusively on the Q3 CPI report that slowed to 5.4% from 6.0%, instead of 5.3%, the median response in Bloomberg's survey. The underling core measures averaged 5.2% down from 5.7% in Q2 but above the 5.0% median forecast. Other data point to a slowing of the Australian economy, including a loss of 40k full-time jobs in September, the most since October 2021. The economy grew by 0.4% in the first two quarters this year and is expected to have slowed to 0.2% in Q3 and Q4.

The dollar has fallen against the yen for the past three sessions, which is the longest pullback in three months. The streak is being challenged today as the greenback stabilizes. It held above the low set on October 31 (~JPY149.00). The dollar has traded up to JPY149.75, with the help of firmer US rates. The JPY150.00 offers nearby resistance, and then JPY150.35. The Australian dollar has advanced eight of the past ten sessions coming into today. The nearly 1.25% rally ahead of the weekend was the largest in nearly four months. It extended the gains marginally to almost $0.6525 before stalling. It remains in a narrow range and has held above $0.6500. Given the dramatic advance that lifted the Aussie to its best level since mid-August and the arguably closeness of tomorrow's RBA call, consolidation is not surprising. Support is likely in the $0.6460-80 area. The dollar fell by nearly 0.55% against the Chinese yuan ahead of the weekend and has edged a little lower today, falling to about CNY7.2650. It is the fourth consecutive session that the greenback has moved lower against the yuan. Despite the yuan's recovery, the PBOC kept the dollar's reference rate nearly steady at CNY7.1780 (CNY7.1796 on Friday), while the average projection in the Bloomberg survey fell to CNY7.2860 (CNY7.3134 Friday). 

Europe

The final October EMU PMI does not change the general picture. After contracting by 0.1% in Q3, the regional economy appears not to have hit bottom. The median forecast in Bloomberg's monthly survey sees stagnation this quarter but that may be optimistic. There are no growth impulses. The final services PMI was unchanged from the flash reading at 47.8 (48.7 in September). The composite is at 46.5 was also unchanged from the initial reading. (47.2 in September). It has not been above 50 since May. The German composite fell to 45.9 (45.8 flash) from 46.4, while the French composite was revised to 44.6 (from 45.3 preliminary estimate) and from 44.1 in September. Italy's composite fell to 47.0 from 49.2, and Spain's outperformance remains evident (50.0 vs. 50.1 in September). On the other hand, Germany's September factory orders rose by 0.2% and the median forecast in Bloomberg's survey anticipated a 1.5% decline. Still, the August series was revised to show a 1.9% gain rather than 3.9%. Note that the swaps market has about an 80% of a quarter point ECB cut in April 2024 and 34 bp of cuts by the end of H1. Two weeks ago (October 23), it was at 40% and 20 bp, respectively.

Tomorrow's King's Speech in the UK to open the new session of parliament will outline the government's legislative session that will most likely lead to an election late next year.  Today, the market showed little reaction to the construction PMI (45.6 vs. 45.0). At the end of the week, economists (median in Bloomberg's survey) expect the UK to report GDP contracted by 0.1% in Q3. The BOE's downbeat forecasts last week saw the market bring forward rate cuts. The market has discounted about an 80% chance   quarter-point cut by August 2024. As recently as October 18, the swaps market was pricing in about a 30% chance of another hike.

The euro surged by nearly 1.6% last week, the most since it peaked in mid-July. When the euro turns, the move can be unimaginably sharp. Recall that last year, on September 28, the euro recorded a multiyear low near $0.9535 and four sessions later it was near $1.00. It peaked slightly above $1.0745 ahead of the weekend and reached $1.0755 today. Still, given the extent of the move since the FOMC meeting, it looks stretched, which may caution against chasing it. It remains above its upper Bollinger Band (~$1.0715) and has not traded below $1.0720 today. The $1.0765 area is the (38.2%) retracement of the losses from the July high (~$1.1275). Above there, the $1.0800-10 area is the next important chart area. Sterling jumped by a little more than 2% last week, its largest weekly advance of the year. The gains have been extended today to nearly $1.2425. It is approaching the 200-day moving average (~$1.2435), which it has not traded above since mid-September. Sterling is also approaching the (38.2%) retracement of its losses from the year's high set near $1.3140 in mid-July found near $1.2460. It has not traded below $1.2365 today. Sterling is recovering against the euro after trending lower since late August. The euro has fallen through the uptrend ling connecting the August, September, and October lows (found by GBP0.8670 before the weekend)

America

When the 33k strikers are added back into US nonfarm payrolls, October's job growth was in line with expectations. The point is that nearly every other component was disappointing. The job growth of the previous two months was revised lower by 101k. The household survey reported a loss of 348k jobs, and the unemployment rate rose 0.1% to 3.9%. After revisions, the average earnings slowed to 4.1% from 4.3%, year-over-year, and the average work week fell back to its cyclical low of almost 34.2 hours. Aggregate hours fell by 0.26%, the most in two years. The measure of under-employment rose by 0.2% to 7.2%, the highest since early last year. The report is consistent with the slowdown that is widely expected after the heady 4.9% annualized pace in Q3. The early estimates for Q4 GDP appear to be coming in between around 1.0% and 1.5%. This is a light week for important US economic data, but next week will likely see a decline in headline inflation and retail sales.

At recent post-FOMC press conferences, word or phrase seemed to capture the markets' imagination, like "patience" or "caution." Perhaps, this time, the most important word was "persistence" in reference to the threshold of the change in rates impacting the monetary policy. The issue was about whether the increase in market rates was doing of some of the Fed's tightening for it. The Fed Chair recognized that short-term movements are noisy and that what mattered for policy makers were persistent moves. About a month after the FOMC's September FOMC meeting, the 10-year had risen by about 70 bp to 5.0%. Separately, note that today's quarterly Senior Loan Officer Opinion Survey is likely to point to further tightening of financial and credit conditions, which the FOMC statement seemed to recognize. After the employment report, ahead of the weekend, and this week's quarterly refunding, the yield briefly traded at 4.50%. In the past two-and-a-half weeks, the US two-year has fallen from about 5.20% to 4.80%. The implied yield of the December 2024 Fed funds futures settled last week at 4.42%, the least in two months. It was near 4.90% on October 18. Before the weekend, the market was pricing in about 90 bp of cuts by the end next year. It is now pricing in about 85 bp of cuts.

A disappointing Canadian employment report did not stand in the way of the continued recovery of the Canadian dollar. The greenback rose to a new high for the year in the middle of last week a hair's breadth below CAD1.39 and finished the week near CAD1.3660. The US dollar has extended its decline to about CAD1.3630 today. There is a band of support in the CAD1.3570-CAD1.3600 area. On the upside, the greenback has not traded above CAD1.3670 today. The US dollar tumbled to about MXN17.2835 ahead of the weekend, before finding a strong bid that lifted it back to MXN17.48. Still, the peso rose 3.35% last week, bettered only by the Chilean peso (~+3.65%). The dollar's drop met the (61.8%) retracement of its gains off the multiyear low set in July (~MXN16.6260). The dollar is little changed now. Nearby resistance may be seen in the MXN17.50-60 area. 

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