Thursday Recap in Preparation for Friday

The US dollar fell against most of the major currencies on
Thursday when the US markets were closed
for the Thanksgiving holiday.
  After a firm start to the week, the greenback has traded
with a heavier bias for the third consecutive session.  
With the dollar retreat,
many tried linking it to comments by Fed Chair Yellen on Tuesday evening in NY
and the FOMC minutes released late in the Wednesday session.
seems to be an example about how
the price action generated the stories more than the stories generating the
price action.  
Specifically, if the
markets’ view of the Fed policy had changed, the Fed funds futures (or their
equivalent like overnight index swaps) would reflect it. 
 Next month’s contract was unchanged
for the fourth consecutive session at an implied rate of 1.29%.  We
calculate fair value, assuming a 25 bp rate hike next month at 1.295%. 
 The December 2018 contract finished at an implied yield of 1.7455, up to a basis point since the end of last week,
and up seven basis points since the end of October.  
The US two-year yield rose
5.5 basis points to almost 1.78%, its highest level in nine years on Tuesday
and retreated in North American on Wednesday.
  It settled a little below 1.73% on Wednesday,
largely unchanged on the week.   Neither Yellen nor the FOMC minutes
changed market expectations.  It continues to price a hike next month and
the little more than one hike next
At least seven Fed officials
speak next week, including Yellen before the Joint Economic Committee of
Congress and Powell in his confirmation hearings. 
the US reports the core PCE deflator, the Fed’s targeted measure.  The
decline from 1.91% last October to 1.290% in August is the decline that Yellen
admits is mysterious, but likely results of transitory and idiosyncratic
developments.  It has already begun recovering and was just below 1.33% in
September, and the median expects 1.4% in
There were three
developments in Europe to note.
 First, the flash November PMI was strong, and Markit, who
conducts the surveys, suggest is
consistent with 0.8% growth in Q4 and 0.6% in Q3.   The composite PMI
rose to 57.5 from 56.0 in October.  It is the highest in nearly 16
years.  Manufacturing jumped to 60.0 from 58.5.  The market had expected
a small decline.  The service PMI rose
to 56.2 from 55.0.  Of note, France, who has been a laggard, appears to
have turned the corner.  The composite surged to 60.1 from 57.4, and a separate business confidence survey
was the strongest in almost a decade.   
Second, German politics
continue to draw interest. 
 It seems clear that a Jamaica Coalition is not
possible.  That leaves three possibilities, a Grand Coalition with the
SPD, Merkel heading up a minority government, or new elections.   SPD
leader Schulz, who led his party to the worst showing since WWII, categorically
refused to join a coalition government, is under pressure some centrists to
The compromise he appears to
be offering is support for a minority
has said she prefers new elections to a minority government, may also be under
pressure to compromise.  In any event, the forces lifting the Germany
economy remain intact, evidenced by the PMI,
and this appears to trump the near-term political uncertainty.  
Third, on Tuesday the EC
pushed against next year’s budget proposals by France, Italy, Belgium, Austria,
Portugal, and Slovenia.
  These countries were judged to be
” at risk of non-compliance” with the agreed upon fiscal rules. 
Also, France, Italy, and Belgium additionally seen at risk of falling short of
their debt reduction commitment. European bonds yields were mostly 1-2 bp
higher on Wednesday.   
The Canadian dollar was one
of two major currencies to slip against the US dollar on Thursday.
  The Canadian economy appears to
have slowed dramatically in H2 after a stellar H1.  The disappointing
retail sales report released while US markets were
closed is the latest addition to
the accumulating data.  The median Bloomberg forecast looked for a strong
bounce back from the -0.3 decline in August.  Instead, retail sales rose a slight 0.1%.  A small part of the
story is that August was less poor, and was
revised to -0.1%.  Excluding autos, retail sales were up 0.3%, a
third of what was expected, though here too August was revised up to -0.4% from -0.7%.  
Sterling was the other major
currency to lose ground against the greenback.  Sterling had climbed to the top of its nearly 2.5-month trading range near $1.3340 on
budget did not seem to be the main driver.  There were few
surprises.  The government continues to increase the funds set aside for
costs Brexit and is reportedly on the
verge of doubling its offer to the EU.  The budget put aside GBP3 bln for administrative costs associated with Brexit and earmarked GBP2.8 bln for the
National Health Service.   The OBR forecasts
are sobering and reinforce our
sense that the UK will be smaller and poorer on the other side of
The euro is firm, within a
spitting distance of the mid-November high near $1.1860
  The October high was near $1.1880,
just shy of the 61.8% retracement of euro’s pullback since the year’s high was set in early September close to
$1.21.  A convincing close above the
October high will be seen by some technicians as confirmed head and
shoulders bottom pattern, which projects a little beyond those September highs
and toward the 50% retracement of the decline since mid-2014 (~$1.2170).
The dollar broke down to
nearly JPY111.00, its lowest level in two months.
  It corresponds to the 50%
retracement of the bounce off this year’s low in early September
(~JPY107.30).  The next retracement is seen
near JPY110.15.  A move above JPY111.65-JPY111.80 is needed to stabilize
the tone.  The US 10-year yield and the forces that drive it still seem to
be key for the yen.  
A softer US dollar backdrop
could see sterling push through that $1.3340 nemesis. 
 The next target would be near
$1.3420.  On the other hand, a break back below $1.3260 would signal that
the broad trading range will likely remain intact.    
The Canadian dollar may lag
behind the other majors.
The US dollar finds bids around CAD1.2650 and offers CAD1.2840.  The
Australian dollar posted key upside reversal on Tuesday, and after a slow start
closed firmly on Wednesday and saw additional follow through on Thursday. 
A weekly close above $0.7640 would further lift the technical tone and signal
the potential for another cent in the
The MSCI Asia Pacific index
and the Dow Jones Stoxx 600 eked out minor gains on Thursday. 
 The most significant development was
the large drop in Chinese shares.  The CSI 300 of the largest companies
fell nearly 3%, the largest loss since June 2016.  The intensification of
losses in late dealers also unsettled participants.  Ideas that officials
are putting more emphasis on deleveraging, and curbing what is perceived to be
excess speculation was seen as the
proximate spur to the sell-off.    Unlike in 2015 and early 2016, the
global knock-on effect from the slide in Chinese share prices seemed modest,
but it is something investors will be monitoring. 


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