China’s CPI Accelerated to 1.5%, US CPI to Approach 6%

Overview: As bond yields slumped yesterday, stocks snapped their advancing streak.  The Stoxx 600 fell for the first time in nine sessions yesterday and is lower today.  The S&P 500 ended a nine-session advance, and the NASDAQ snapped a 12-session rally.  Futures on the indices point to a lower open.  Bonds are paring yesterday’s gain, which saw the US 10-year yield fall below its 200-day moving average (~1.45%) and may explain the soft auction results.  The yield is about three basis points higher, around 1.48% in the European morning, while the local bond yields are also mostly 2-4 bp higher.  Canadian bonds are an exception.  The yield is off nearly four basis points, and that may reflect foreign demand as the Canadian dollar is the best performing major currency, eking out a small gain against the dollar, while the major currencies are nursing modest losses.  Of note, arguably helped by the rise in US yields, the greenback has recovered to around JPY113.20.  Emerging market currencies are also under pressure, led by about a 1% loss in the Turkish lira and a 0.5% fall in the South African rand.  The JP Morgan Emerging Market Currency Index is ending a three-day rally.  Rising yields are sapping demand for gold today after the yellow metal approached the upper end of its five-month range in the $1833-$1835 area.  It is consolidating inside yesterday’s range.  December WTI initially extended yesterday’s gains to almost $85 but has reversed lows and is below $84 near midday in Europe.  Meanwhile, the European benchmark for natural gas is extended yesterday’s nearly 10% decline by another 4% today amid some signs of more supply.  Copper is consolidating inside yesterday’s range.  

Asia Pacific

China’s October inflation measures surged.  Producer prices accelerated to 13.5% above year-ago levels, up from 10.7% in October. Despite officials’ efforts to contain prices by releasing some of its strategic stocks and output curbs, rising commodity prices are the drivers.  The median forecast in the Bloomberg survey was for a 12.3% gain.  Consumer prices pressures were easier for the market to forecast. The 1.4% median projection just missed the 1.5% print after a 0.7% year-over-year increase in September.  The core rate is considerably more stable.  It has risen by 1.2%-1.3% for four consecutive months through October.  Non-food prices have gradually increased and now are 2.4% above year-ago levels.  The decline in food prices has eased.  Pork prices appear past their trough, and vegetable prices jumped nearly 16% year-over-year and boosted the headline CPI by about a third of a percentage point.  Food prices fell 2.4% from a year ago, less than half the 5.2% decline in September.  

Separately, China reported that lending slowed sharply in October, and this may spur a policy response in a way that the inflation readings may not.  New yuan loans, which are bank-generated, were halved from CNY1.66 trillion in September to about CNY826 bln in October.  But the lending from shadow banking fell even more, as seen in the aggregate financing, which tumbled to CNY1.59 trillion from CNY2.90 trillion.  The difference between aggregate financing and new yuan loans is the shadow banking activity.  

Japan’s Prime Minister Kishida is reportedly appointing Hayashi as foreign minister.  Beijing will take note that he part of the parliamentary group seeking to improve relations between the two countries.  Bloomberg continues to insist that there has been an improvement in US-Sino relations, but we are hard-pressed to see much beyond the “prisoner exchange.”  We note that yesterday, US Senators and Representatives flew to Taiwan in a military aircraft, which one cannot help but assume is purposely designed to antagonize China, with little reward.  The Senate is also considering legislation to endorse a greater role for Taiwan in the Inter-Asian Development Bank.  The US is also encouraging a greater role for Taiwan in UN institutions.  So, now comes talk of a “virtual summit”  between Biden and Xi.  Some reports say it could take place as early as next week.  Other accounts see confirmation of the intent to hold it before the end of the year.  How a “virtual summit” differs from a phone call is not clear, but it is supposed to imply a more serious meeting, yet it still seems like a great deal of spin as both countries seem to be posturing.  

The dollar is pushing against JPY113.25 in late morning turnover in Europe.  A move and close above yesterday’s high (~JPY113.30) would lift the technical tone.  Above there, JPY113.60 may attract, but the JPY114.00 will be tough to crack with chunky options struck there today and Friday.  The Australian dollar slipped marginally through $0.7355 to record its lowest level in nearly a month. However, it has steadied in Europe and came back into an area well protected by options as well.  There are options for A$635 mln at $0.7375 that expire today, and almost A$900 mln will pass in the $0.7370-$0.7385 area on Friday.  The $0.7360 area corresponds to a (50%) retracement of last month’s rally.  A convincing break could spur a test on the next retracement target (61.8%) near $0.7315.  The Chinese yuan is little changed.  It is the fourth consecutive session that the exchange rate has a net movement of less than 0.1%.  That said, the greenback is struggling to stay above CNY6.39.  It has not settled below there since October 26. In an unusual development, the PBOC set the dollar’s reference rate softer than the bank models suggested (Bloomberg):  CNY6.3948 vs. CNY6.3952. 

Europe

The news stream from Europe is light.  Signs of more Russian gas are a helpful development.  This wave of Covid continues. Yesterday, we noted that the next German finance minister is likely to promote a return to orthodoxy after the pandemic ends, though Germany is experiencing a record number of cases.  Today’s Merkel government’s team of economic advisers did what other economists have done and formally announced a cut in this year’s forecast and lifted next year’s growth forecast.  However, they are clearly becoming more concerned about inflation and encourage the ECB to articulate an exit strategy, warning that inflation risks are entrenched.  

Tomorrow, the UK publishes its first estimate of Q3 GDP and September details.  We suspect the median forecast in Bloomberg’s survey for a 1.5% quarterly expansion risk being too high. Note that in Q2, the monthly prints added up to 4.8%, while the quarterly GDP surged 5.5%.  September’s monthly GDP is expected to have risen by 0.4%, the same as August.  That would sum the monthly GDP figures at 0.7%.  Yes, quarterly GDP runs higher than the month sums suggest due to a somewhat different methodology, but it points to the risk.   

The euro finished last week slightly above $1.1565.  It has been in a range so far this week between about $1.1550 and $1.1610.  It is hovering around the middle of the range now.  There is a 1.5 bln euro option at $1.16 that expires today and another set at $1.1565 for almost 1.1 bln euros.  Friday is more of the same.  Options for 1.4 bln euro at $1.1555 and 655 mln euros at $1.1605 expire.  Sterling was turned back from $1.3600 yesterday, which corresponds to the (50%) retracement objective of the sell-off from October 20 and the (61.8%) retracement target of the sell-off spurred by the Bank of England.  A break of $1.3500 leaves little in the way of a retest on the lows (~$1.3400-$1.3425).  

America

The US reports October consumer prices.  The month-over-month gains are expected to be elevated at 0.6% at the headline and 0.4% core rate.  Due to the base effect, this will translate to an acceleration of inflation. As a result, headline CPI will approach 6% and the core rate 4.3% from 5.4% and 4.0%, respectively.  The greater price pressures, however, do not say anything about the duration or how persistent the transitory issue will be.  Still, it seems clear that US officials want to give it more time, but even Minneapolis Fed President Kashkari, among the most dovish at the Fed, seemed somewhat less confident in remarks yesterday.  

With a federal holiday tomorrow, the US reports weekly jobless claims today.  Note that they have fallen for five consecutive weeks to stand at 269k in the last whole week of October.  For comparison, weekly initial jobless claims were around 218k at the end of 2019.  The holiday is also forcing the US to sell around $85 bln in T-bills today, and there are some early signs that the pending debt ceiling is beginning to impact market preferences.  The Us will also sell $25 bln in 30-year bonds with little concession.  The 30-year bond yields briefly slipped below 1.80% yesterday for the first time in four months.  It is near 1.85% now.  

The Energy Information Agency’s updated short-term outlook reduced the chances of a significant response to OPEC+ reluctance to boost output quicker and sent December WTI 3% higher to approach the upper end of its trading range.  The EIA sees the oil market in oversupply by early next year, though it sees it closely balanced (world demand to average 100.88 mln barrels per day while supply is projected to be at 101.42 mln bpd). Oil is expected to be at $62 a barrel at the of next year, it forecasts,  and for gasoline to below $3 a gallon by February. Biden is in an awkward position.  It looks like it wanted OPEC+ to do something that his own agency says might not be needed after all.  It also toyed with investors by holding out the possibility of tapping the Strategic Petroleum Reserves before knowing all the facts.  The risk (and momentum) are on the upside of prices.  The rise in oil prices is distinct from the other supply chain disruptions.

While the US is on holiday tomorrow, Mexico’s central bank is widely expected to hike the overnight rate from 4.75% to 5.0%.  With inflation accelerating (yesterday’s October CPI rose to 6.24% from 6.0%), there is some risk of a 50 bp move.  The sum of the monthly increases puts CPI up at 5.6% at the headline this year and 4.6% at the core.  However, the economy is fragile, as the 0.2% contraction in Q3 GDP showed.  Before the Banxico move, Mexico will report September industrial output, which is expected to have fallen by 0.2%. 

The US dollar was turned back from testing the 200-day moving average against the Canadian dollar near CAD1.2480 yesterday.  It reversed lower and posted a possible bearish shooting star candlestick.  Follow-through action today has seen the greenback approach CAD1.2410. The CAD1.2450 area now offers resistance and options (~$730 mln today and ~$585 Friday) at CAD1.2455 may reinforce the cap.  On the downside, the CAD1.2370 area offers support.  The dollar fell from MXN20.98 on November 3 to reach a low yesterday near MXN20.25.  The downside momentum faded yesterday, and the greenback is near MXN20.35 in the European morning.  Initial resistance is in the MXN20.40 area. The broader risk appetite seems more the driver now, but some caution is likely ahead of tomorrow’s Banxico meeting.  

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