Sterling Extends Yesterday’s Recovery; US Data Awaited

The EU’s leading negotiator whipsawed sterling yesterday.  The net effect was to ease fears
that the UK would leave the EU without the
agreement  Initial concerns that the negotiations had stalled sent
sterling to nearly  $1.3120  
The willingness to discuss a
two-year transition period spurred sterling’s recovery. 
 After trading on both sides of
Wednesday’s range, it closed on its highs, and was understood as a bullish technical signal.  There has
been follow-through buying today. 
It is approaching a 50% retracement of the decline since late September. 
It is found near $1.3345, which also
corresponds to the  20-day moving
average. Next week, the UK reports  CPI, retail sale, and September labor report.   The market is pricing
around a 75% chance of a rate hike next
month and next week’s data will impact the expectations.  
Today’s US data will likely
determine if the dollar’s heavy tone this week is more corrective after a
strong September or if this year’s downtrend is resuming.
  We suspect that both retail sales and CPI could surprise on the upside. 
Some of the strength we expect will reflect the headline reports, but the key
to the markets’ reaction will be in the core rate.  The median Bloomberg
forecast is for a 0.2% rise in core CPI.  That would match the August
increase and be the best two month gain.  The year-over-year rate is
expected to move higher for the first time since
The headline retail sales
likely rose sharply.
It will be bolstered by the strong auto
sales and higher gasoline prices. Excluding these two items and building
materials, retail sales may rise 0.4%, which would fully offset the 0.2%
decline seen in August.   As we saw with autos, the storms are
creating a demand shock for some goods, some of whom are in sectors where
inventory levels were tight before the storms.
The December 2017 Fed funds
futures is yield is unchanged from the end of last week at 1.265%.
  Our work suggests fair value,
assuming a 25 bp hike in December is 1.295%.  The December 2018 Fed funds
contract’s implied yields are off 
0.h5% for the week to 1.635%, which
suggests that the market is just shy of discounting a single rate hike next
Turning to Asia, China
reported its September trade figures.
 The overall trade balance fell sharply to $28.5 bln from
almost $42 in August. Both export and imports rose.  Exports rose 8.1%
year-over-year, which was less than expected, though an improvement from the
5.6% in the year through August. 
 Imports rose 18.7%, accelerating from the 13.5% pace in August.  In
addition to the increase in trade, a couple of
details stand out.  China’s bilateral trade surplus with the US rose to a
new record ($28.1 bln).  China’s exports to North Korea fell ($. 
Arguably more important than the slower
exports, China’s imports from North Korea fell nearly 38% from a year
Japan’s Ministry of Finance
confirmed that foreign investors returned to Japanese equities.
  Foreign investors had been selling
Japanese equities since July but were net
buyers in the last week of September (~JPY954 bln).  MOF data showed
foreign investors bought about JPY1.23 trillion of Japanese shares last week,
which appears to be the most on four years.

The dollar slipped to
JPY111.85, which is the lowest level
since September. 
However, the greenback recovered in the European morning as US yields also rose. 
Initial resistance is seen around
JPY112.40.  The US 10-year yield is edging higher for the first time in
three sessions.  The yield peaked a week ago near 2.40%, which capped US
benchmark yield over the past six months.  The dollar-yen exchange rate is
particularly sensitive to US 10-year yields.   There is a $579 mln
option struck at JPY112.50 that will expire
today.  There is also a  513 mln euro option struck at

Ahead of this weekend’s
election in Austria, the equity market has advanced nearly 0.8% today.
  Coming into today’s session is was flat in
the week.  The Dow Jones Stoxx 600 is up about 0.5% on the week.  The
government’s benchmark 10-year bond kept pace with Germany this week.  


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