Euro Rides High After German GDP

The euro was already trading firmly before German GDP surprised to the upside, and
the report helped lift the single currency through $1.17 for the first time ECB meeting in
late October. 
The 0.8% quarterly expansion lifted the workday
adjusted the year-over-year rate to 2.8%
from a revised 2.3% in Q2, which is the fastest in six years.  

Italian Q3 GDP was also firm at 0.5%, matching its best pace in seven
The 1.8% year-over-year pace is also the best since

The euro was also boosted by cross rate
demand after the softer than expected UK and Swedish inflation.
The BOE’s preferred measure, CPIH was unchanged at 2.8%.  Headline and core CPI was also unchanged at
3.0% and 2.7% respectively.  The BOE and the market had expected a small
rise.  The unchanged report means that BOE Governor Carney does not have
to write a letter to the Chancellor to explain the overshoot, which is not more
than 1%.  Although we expect UK inflation to peak here in Q4, it is not
clear with today’s report that this is it.  That fact that food prices
rose 4.2% year-over-year, the most in four years, seems to still reflect the
echo of sterling’s decline from last year.  

Sterling is trading in the lower
end of yesterday’s range and has been confined to about a quarter a cent on
either side of $1.31.
  On the other hand, the euro has pushed a bit
through GBP0.8950 to reach its best level since October 26.  

Sweden also reported softer than expected October inflation. 
The 0.1% decline in October contrasts with expectations for a 0.1%
increase.  This, coupled with the
base effect, saw the year-over-year rate fall to 1.7% from 2.1%.  It is
the slowest pace since June.  The Riksbank has one of the most aggressive
monetary policies, with deeply negative deposit rate (minus 1.25%) and
repo rate (minus 50 bp) and QE.  The euro has rallied to new highs
for the year against the krona (~SEK9.8825).  The euro had tested SEK9.71
on November 9 before staging an upside reversal. Last year’s peak (November 9)
was near SEK10.08.  This seems to be
a bit far, but many short-term traders and medium-term investors may have been caught the wrong way, and the weekly
technicals favor the euro.  

Against the dollar, the euro is extended
the recovery that began last week from
about $1.1555 (the lowest level in four months) and is above the 20-day moving
average (~$1.1685).
  We see risk toward
$1.1745-$1.1760.  We view these euro upticks as corrective in nature and note that the US two-year premium
over Germany continues to widen.  It stands near 2.43% now, up 40 bp in
the past two months.  

The US 10-year yield is hovering around 2.40%.  The initial push
higher in Asia helped extend yesterday’s dollar gains to almost JPY114.00,
before being sold in the European morning back toward the session low near
JPY113.55.  Meanwhile, profit-taking weighed on Japanese shares for the fourth
session.  Some reports suggest that the foreign buying spree may be
ending.  Weekly MOF figures covering last week will be out in a couple of
days.  The Topix and Nikkei gapped higher on November 1.  The attempt
to fill the gaps, which are found near the
20-day moving averages (1770 and 22100, respectively) and the uninspired close
warns that the downdraft may not be complete.  

China’s data showed that the world’s second-largest
economy is slowing. 
October reading of retail sales, industrial
production, and urban fixed-asset
investment also slowed sequentially.  However, the 19th Party Congress may
have had a cooling effect, and it seems
premature to jump to any hard conclusions.  That said, the emphasis on
quality over quantity, the deleveraging efforts, paring excess capacity are all
consistent with moderating activity.  

There ECB conference that hears from Draghi, Yellen, Carney, and Kuroda,
among others is not generating much market response.
  Little new
ground appears to have been broken. 
The event still poses headline risk.  The North American session features
US PPI, which is not a market-sensitive report.  However, economists will
look for clues into tomorrow’s CPI report.  Lower gasoline prices may
weigh on the headline CPI, but the core is expected to be unchanged at 1.7%,
where it has been since May. 

Our calculations put fair value for the December Fed funds contract,
assuming a 25 bp rate hike next month, at 1.295%.
  That is where the
contract settled yesterday. However, fiscal policy, i.e., tax reform is
overshadowing monetary policy at the moment.  The House seems to be moving
toward a vote later this week, even though there may still be some last minute
adjustments.  President Trump is expected to address the House Republicans
before the vote.  Judging from the tweet storm, POTUS wants the bill to
include a repeal of the individual mandate for the Affordable Care Act and
wants to cut the top tax rate. 

Separately, we note that a bipartisan group of Senators appear to have
agreed to the number of US financial
institutions regarded as systemically important from 40 to around 12. 

The regulatory obligations of banks with less than $250 bln in assets will be reduced.  The Senate bill is
co-sponsored by nine Democrats, suggesting the bill will likely secure the
necessary 60 votes.


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