Super 48 Hours

(early post ahead of start of a new business trip to Europe.  Posts will continue albeit irregularly)

This is it:  The next 48 hours will be
among the busiest of the year.  
The Bank of England meets tomorrow, and it not only gives a
verdict on interest rates but also provides an update of its economic projections (Quarterly Inflation
Report).  And, among the innovations, the MPC minutes will be
released.  Ahead of the Federal Reserve meeting, the market will have the
ADP private-sector job estimate. 
Initially indicated it would be seen
today, the House Ways and Means Committee now says it will reveal its draft
bill on tax reform tomorrow.  Tomorrow is also President Trump is expected
to announce his Fed nomination(s).  
Meanwhile, Asian markets have begun the
new month with aplomb. 
 The MSCI Asia Pacific Index rose nearly 1%, the most since
early June, and that follows a 4.25% gain in October, the most since
January.  The Nikkei led the region with a nearly a 1.9% gain, helped by a
surge (~11%) surge in Sony as executives lifted the profit outlook. 
Talk has again surfaced that Prime
Minister Abe is considering a supplemental budget.
does not strike us as new, or necessarily a commitment of fresh funds, but it
was cited as another driver for Japanese shares as if it
were needed after the 8%+ rally last
month.  US 10-year yields are about three basis points above yesterday’s
low print, which corresponded to chart support, and this may have also helped
the dollar to return to JPY114.00. There is a $910 mln option struck there that
expires today.  There is also another $580 mln
struck at JPY113.75, and $515 mln
struck at JPY113.50 that expire today.  
Foreign investors were buyers of South
Korean equities, despite the mostly disappointing economic data (October trade
data were softer than expected and the manufacturing PMI slipped, while price
pressures eased).
The Kospi rose 1.3%.  The won strengthened against the US dollar for the
third consecutive session.  
China’s Caixin manufacturing PMI came in
unchanged at 51.0. 
 This was a pleasant surprise after the official
measure that was reported earlier this
week showed a decline (51.6 vs. 52.4).  There are concerns among investors
that 1) negative news before and during the 19th Party Congress may have been
held back and 2) that attempts to facilitate deleveraging will
Chinese shares continue to underperform
and posted gains of less than 0.1% today. 
 That said, the Chinese shares that
trade in Hong Kong (Hong Kong Enterprise Index) rose an impressive 1.1%. 
Those shares are up almost 24% year-to-date, while the Shanghai Composite has
advanced almost 9.5%.  
We have been looking for a bottom in the
New Zealand dollar, suspecting the market was overreacting to the new
Labour-New Zealand First government.
  We expect the pro-growth orientation will be rewarded over time.  In recent days,
the downside momentum faded as the Kiwi approached the lows for the year, set
in May near $0.6800.  However, the bias was still to sell into
rallies.  Until today, when the stronger than expected Q3 employment
figures spurred a powerful short squeeze.   
The Kiwi is up more than 1% to trade at
its best levels in a week near $0.6930.
  The bears may try to make a stand, but we anticipate an
upside correction will continue and look for a move toward $0.7000-$0.7050,
even if a modest pullback is seen
first.  At the same time, New Zealand shares were hit by profit-taking
after a strong run, as the Kiwi fell.  The 1.15% loss was the largest
since March.  
Ahead of the Bank of England meeting
tomorrow, sterling is edging higher.
  The manufacturing PMI posted an unexpected gain.  The market
had expected a flat report, but instead, it rose to 56.3 from an upwardly
revised 56.0 (was 55.9).  While expectations of a rate hike tomorrow may be
protecting sterling’s downside,  signals that the UK government may be
preparing to compromise to help reinvigorate Brexit negotiations may also help.  Sterling is approaching the upper
end of its recent trading range near $1.3340.  A convincing move above
there would suggest potential toward $1.3400-$1.3420.  
The demand that lifted the euro from below
$1.1600 has turned hesitant in front of the $1.1660 previous support and now
support is seen near $1.1620.  The
seems to be a lack of near-term conviction.  Meanwhile, the Dow Jones
Stoxx 600 is extending its gains for a fifth consecutive session, led by
information technology and materials.  Nickel and copper are powering the
industrial metals.  
The FOMC meeting is a low-key event.  Four hikes into the cycle and the
Fed has not managed to hike rates outside
of a meeting in which there is a press
conference and updated economic projections.  It is a shame because that
it cuts in half the number of “live” meetings, and denies it greater
flexibility.  There is not going to be a change of rates today, and there
cannot be much of a commitment to hike in December.    If it were a
done deal, as the vernacular would have it, then the Fed would hike rates
We suspect Fed officials have been
pleasantly surprised by the continued strength of the economy, and could, in
its economic assessment, recognize it.
  We would not push
this point too hard though on the grounds that
final domestic sales were rose by an uninspiring
The Fed has finished its first month of
allowing its balance sheet to shrink.
  It may adjust the technical section to reflect this. 
Otherwise, we expect the FOMC statement to be little changed.   We
note that this will be Governor Quarles first meeting.  The market will
wait for December’s meeting to try to tease out his dot on the plot. 
 For the record, assuming no chance of a rate hike today, and making some
allowances for year-end behavior, we estimate that fair value for the December
Fed fund futures contract would imply a 1.295% yield.  It has been fairly
steady at 1.275%.
The ADP jobs estimate and US auto sales
may provide some insight into the economy, but there seems to be an
asymmetrical risk.
 Strong data may spur less of a reaction than weak data because of the response to the storms.  ADP showed a
135k increase in jobs in September while the national figure showed a 33k
loss.  The median Bloomberg survey forecast is for the 200k increase. To put it in some contest, this
year’s average through August was 221k and last year’s  average was around
The key focus for investors is not the
number of jobs being created.
is on earnings and wage growth.  We will write more about it in the weeks ahead, but we suspect
that the Phillip’s Curve has been prematurely buried and will, over the next
few quarters, make itself more visible.  Suffice for the time being to
note the importance of wage pressures as a new Fed takes shape early next year,
and that the employment cost index (0.8% increase in wages in Q3 2.5%
year-over-year) has begun accelerating.  

Auto sales are expected to have slowed
from the storm-inspired pace of 18.47 mln vehicles in September.
  Estimates suggest between the two
storms that struck as many as 700k vehicles were
destroyed.  They all are not going to be immediately replaced, though clearly
some are being replaced.  In the eight months before the storm, the US
sold an average (SAAR) of nearly 16.8 mln vehicles a month.  This jumped to nearly 18.5 mln in
September.  It is expected to slow to 17.5 mln, but the risk seems to be
on the upside.  Note that in October 2016, 17.8 mln vehicles were sold, which was the most last year until December. 

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