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Key Market News
The US CPI report for October released yesterday showed inflationary pressures in the US to be significantly higher than expected, with the headline rate coming in at 6.2% YoY/0.9% MoM and the core rate coming in at 4.3% YoY/0.6% MoM, exceeding expectations across the board. The report rocked markets because it delt a severe blow to the Fed’s hopes that inflation will moderate from current levels and begin moving back towards their 2.0% target in the coming quarters without the bank having to lift interest rates. More than 80% of the CPI components saw their YoY rate of inflation move above 2.0%. Used car prices and energy costs led the increase, but food, housing and health care also contributed significantly – price pressures in these areas are far less volatile than food and energy and point to a broadening of price pressures. A solid weekly jobless claims report was subsequently ignored, though shows that the US labour market continues to recover. In response to the inflation data, US President Biden made some seemingly hawkish comments, saying getting inflation under control was a top priority.
Evergrande was reported to have made three bond payments over the last 24 hours, easing concerns about an imminent default. Moreover, it was reported that Chinese authorities are thinking about easing curbs on the property sector in order to help struggling developers offload assets, with officials reportedly worried about rising financial instability risks.
The preliminary estimate of UK Q3 GDP slightly missed expectations, with the economy growing at a pace of 1.3% QoQ (exp. 1.5%). UK Manufacturing and Industrial Production metrics for September were worse than expected also, with the latter posting a small surprise MoM decline. Elsewhere in Europe, concerns about the impact of the current surge in Covid-19 infections in the Eurozone are growing, with German government officials talking about how the country needs more restrictions and government advisors in the Netherlands reportedly advising that a short lockdown is necessary.
The Australia labour market report for October was worse than expected, with the economy shedding 46.3K jobs on the month versus expectations for a 50K rise in employment. The decline was mostly made up of full-time job losses. Worse yet, the unemployment rate surprisingly spiked to 5.2% from 4.6%, versus expectations for a rise to 4.8%, despite a smaller than expected rise in the participation rate to 64.7% from 64.5% (exp 64.9%).
Equities
US stocks saw a sharp pullback yesterday, with the S&P 500 posting its worst day in over a month to close back below 4650 (-0.8%). The latest hot US inflation report has triggered concerns about 1) the economic impact of longer-lasting inflationary pressures, 2) concerns the Fed may be forced to turn hawkish earlier, 3) concerns Fed Chair Powell will not be renominated as the Biden Administration doubts his “transitory” narrative, 4) concerns that Congress won’t pass the Biden Admin’s Build Back Better spending package amid inflation concerns. Still, US futures are a little higher this morning, with ES futures back above 4650 amid a decent tone to the Asia session. Markets there were boosted amid the positive Evergrande/potential easing of curbs on the property sector news. European bourses are also trading a little better than flat at the moment.
Bonds
Yesterday saw big moves in US bond markets, which are now closed today for Veteran’s Day. Yields were up sharply across the board with the biggest move in the 5Y (+14bps). The 2Y closed at 0.52%, 5Y at 1.22% and 10Y at 1.57%. Real yields did not track the sharp move higher, meaning inflation expectations spiked. Inflation was the primary driver of the move higher in yields, though traders also cited a very bad 30-year debt auction. 5-year breakevens went above 3.15% for fresh record highs (they could only start to be calculated in 2004).
Commodities
Gold is benefitting from all the inflation worries. Spot prices are this morning trading above $1860, having surged above key resistance in the $1830s yesterday in response to the data. In terms of bank forecasts, there was a big upgrade for gold prices from Citi, who now see spot prices hitting $1900 within three months. Oil was weighed by the stronger US dollar and downside in US equities and has this morning stabilised around the $81.00 level ahead of the release of OPEC’s monthly oil market report in the early afternoon.
FX
The DXY left above 95.00 to hit fresh YTD highs yesterday in wake of markets upping their Fed rate hike bets post-hot US CPI. That sent EURUSD under 1.1500, GBPUSD to under 1.3400 (though it is consolidating around this level this morning), while USDJPY leap from under 113.00 to around the 114.00 level, aided by the sharp jump in US/Japan rate differentials, though USD/JPY is still a little way off YTD highs. That will probably need the US 10-year to move back above 1.65%. CAD is an underperformer this morning as oil prices pullback, and AUD and NZD aren’t doing great either, with the former not helped by poor Aussie jobs data.
Day Ahead
The day ahead will be comparatively quite amid the absence of most US market participants given the partial market holiday there. Comments from ECB member Schnabel at 1600GMT will be worth watching for euro traders, ahead of remarks from SNB members Maechler and Moser at 1730GMT. EM traders will be watching a rate decision from Mexico’s central bank at 1900GMT.
