Dollar Starts Week Narrowly Mixed, while Bonds and Stocks Retreat

The US dollar is consolidating in relatively narrow trading ranges. Participants
appear to be waiting for fresh incentives, while the recent rise yields continue and equities have begun the new week
on a soft note. 

The news stream is light with three economic reports of note. 
First, Japan revised lower its initial 1.5% estimate for industrial output in
.  It now stands at 1.3%.  The year-over-year rate was revised to 4.5% from 4.6%.   The
Topix rose 0.4%, led by real estate and materials.  Telecoms and utilities
were the only sectors unable to advance today.  The dollar has been
confined to about half a yen against the Japanese currency today, trading
within the pre-weekend range.   The intraday technicals warn the consolidation tone may persist through the
North American session, and the dollar could pullback toward the
JPY103.60-JPY103.80 area.  

Second, Rightmove’s October house price index rose 0.9% from a 4.2%
year-over-year increase.
It arrests the decline in the year-over-year pace
since the referendum.  While sterling
remains confined to last Tuesday’s trading range ($1.2090-$1.2375), UK assets
remain under pressures.  UK debt instruments are selling off.  The
10-year yield is up nine bp today and briefly poked above 1.20% for the
first time since the referendum.  Recall that the yield finished last
month near 67 bp.  

The FTSE 250 is off 0.8%, with consumer sectors (staples and
discretionary) the hardest hit.
  The precipitous drop in sterling is
expected to squeeze real incomes and compress household demand.  The FTSE
100 is flirting with its 20-day moving average (~6952) and has not closed below
this moving average since mid-September.  

Third, the eurozone confirmed September’s CPI print of 0.4%
year-over-year, with the core rate increasing by 0.8%. 
The euro was unaffected by the report.  The single currency made a
marginal new low a little below $1.0965 to reach an 11-week
extreme.   It found a bid by the middle of the Asian session that
carried it back to $1.10 in the European morning.  The trendline found by
connecting the January, June and July lows that were
last week, is found near $1.1040 today and will now likely act
as resistance if the $1.10 is convincingly retaken.  

The Dow Jones Stoxx 600 is off 0.7%, paring the pre-weekend gains. 
Consumer staples and energy are the largest drags, though no sector is gaining
today.   Of note, Deutsche Bank shares, which have traded higher for
three consecutive weeks has also begun the new week with small gains. 
Italy’s bank index is also slightly higher on the session.  However,
sovereign bond yields are rising. Ten-year benchmark yields are 2-4 bp higher
in Europe, with Italy’s 5.5 bp increase the most in EMU.  

The US reports the October Empire Manufacturing and the September
industrial output figures.
  The inventory cycle has weighed on US
manufacturing, and its recovery is slower than expected.  Nevertheless, it
does appear to be taking place, and it
should be evident in the today’s report.  Industrial output is expected to
have increased 0.2% after a 0.4% fall in August.  Manufacturing itself may
have risen 0.,1% after also recording a 0.4% decline in August.   For the
past three-quarters, and four of the past
five, manufacturing output has averaged no growth.   

Yellen spoke before the weekend, and her explicit willingness to tolerate
higher inflation pushed yields higher, while not deterring expectations for a
hike in December. 
Today, Fischer speaks in New York near midday, and
investors may look for confirmation.    

Canada reports international securities transactions, but the talking
point today is about Belgium possibly blocking the  EU free-trade
agreement (Comprehensive Economic and Trade Agreement–CETA). 
would be the first EU free-trade agreement with a G7 country.  One part of
Belgium, which is needed for the
coalition government, wants to have more safeguards.   Some worry
that the length of time it has taken to negotiate this agreement (~7 years) and
the difficulty does not bode well for the UK.  

Lastly, we note that the US and UK
are considering new sanctions on Russia for its actions in Syria and
particularly the bombing for Aleppo.
In Europe, France and Italy have been reluctant, but German says it is
considering joining the US and the UK
Syria is becoming an increasingly important global flashpoint.  China has
sent military advisors and is sympathetic to the Russian and Syrian
position.  Turkey, which appears to be
, even if for good reasons from the EU, is having a rapprochement
with Russia.    There is an argument in the US press that Russia
may be seeking advantage during this part of the US political cycle to put it
in a better negotiating position with the
next US Administration.    While the US Treasury may have
softened its criticism of China’s currency policy with its report at the end of
last week, US-Russian tensions are rising.


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