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Key Market News
Ahead of today’s US October CPI report, US Treasury Secretary Yellen played down concerns about inflation and pledged that the Fed would not allow a repeat of the inflationary environment seen in the 1970s. Given that Yellen has early access to the inflation numbers, some interpreted her comments as suggesting there is upside risk to today’s US inflation release at 1330GMT. The consumer price inflation report comes after the release of yesterday’s US PPI report, which showed headline PPI holding steady at elevated levels (YoY at 8.6%).
On the topic of inflation, Chinese October CPI and PPI numbers were released last night. The YoY rate of CPI was a tad higher than expected at 1.5%, but the YoY rate of PPI came in well above expectations at 13.5%, its highest in 26 years. Elsewhere in China, there were renewed concerns about the property sector; Fantasia shares reopened for trading after a six-week hiatus, dropping 50% on the day, with the company having recently missed bond payments and said it may not be able to honour all debt obligations. Investors are also nervous ahead of a $148.5M bond payment that Evergrande is due to pay today. According to Danske Bank, rates on Chinese USD denominated high-yield debt moved above 24% yesterday, a new record high.
Recent reports suggest that US President Biden and Chinese President Xi will speak via videoconference as soon as next week. The meeting comes against a backdrop of escalating US/China tensions regarding Taiwan; US lawmakers visited the island unexpectedly this week to the severe condemnation of Chinese government officials.
Equities
US equity index futures are pointing a little lower in pre-market trade, amid a soft tone to European trade following a mixed/mostly downbeat Asia session. Chinese property developer and inflation concerns are in the spotlight, with markets now very much focused on the upcoming US CPI report in wake of last night’s 26 year high in the YoY rate of Chinese PPI. At present, S&P 500 futures are down about 0.25% to the 4660s, still not much below recent record levels.
Bonds
US yields are up this morning, though the yield curve is a tad flatter, with 2s up 4.4bps to 0.45%, 10s up 2.5bps to 1.47% and 30s up 2bps to 1.84%. That doesn’t go a very long way to unwind the recent sharp drop in yields in recent sessions, which some have said has been triggered by expectations that the Biden administration is going to “remake” the Fed in a more dovish way, with Brainard as the potential next Fed Chair. European yields are flat with the German 10-year close to recent seven-week lows. All eyes are on US inflation data. Société Générale made a good point this morning; “the decoupling of nominal rates (for other reasons than fundamentals) from break evens means that real rates, i.e. financial conditions, have eased at a time when angst over galloping prices is spreading… This is counterintuitive and prompted accusations of authorities committing a policy error”, analysts at the bank said.
Commodities
Crude oil has pulled back from fresh two-week highs, with WTI down just under 50 cents on the day, but still trading close to two-week highs in the upper $83.00s. Analysts said that the latest EIA monthly report, which was closely scrutinised by the Biden administration who are keen to address the rapid rise in energy costs, reduces the risk that the President will order a release of US crude oil reserves. The EIA report forecast a slight decline in gas prices in 2022. Meanwhile, bullish commentary from oil trading giant Vitol Group’s CEO Russell Hardy on Tuesday is also being attributed as supporting the oil complex; he said that demand could exceed 2019 levels in Q1 2022 and that “the possibility of a spike to $100 per barrel is clearly there”. Iron ore prices in China were under pressure, with Dalian futures hitting a one-year low following a 4.6% drop. Analysts said that molten iron production restrictions power is conserved for the heating season and as pollution kept in check ahead of the China Winter Olympics is weighing on prices. Other are citing the liquidity crisis in the Chinese property sector, which accounts for roughly 25% of iron ore demand, is darkening the outlook.
FX
The dollar has picked up and the DXY is back to the north of the 94.00 level as US CPI looms. Indeed, DXY is again eyeing YTD highs in the 94.60s and currently trades around 94.30, boosted amid the market’s somewhat more defensive tone and the modest recovery of US yields. As expected final German CPI metrics for October did little to spur euro price action, with EURUSD slipping under 1.1550 in recent trade. Higher US yields are hurting the yen, with USDJPY up 0.4% and back above 113.00. A negative survey of manufacturer confidence, which fell to a seven-month low last night, may also be weighing on the yen. Japanese markets are now looking ahead to an expected announcement from the Japan PM of fresh fiscal stimulus, with the package expected to be worth about $260B or 5% of Japan’s GDP. GBPUSD is down about 0.4% on the day and probing the 1.3500 level. “Downside risk may emerge for the pound in the coming days as it looks increasingly likely that the UK will unilaterally suspend parts of the Northern Ireland Protocol,” analysts at ING said. Overnight, the Aussie failed to benefit from strong Westpac Consumer Confidence survey. Head of FX strategy at Westpac Richard Franulovich argued the recent pullback in metal prices continues to act as a headwind to the Aussie, pointing out that iron ore (Australia’s biggest export) has pulled back 56% since the mid-year and aluminium prices are down about 20% in just the last three weeks. AUDUSD is down 0.2% this morning to just above 0.7350. NZD meanwhile is feeling the weight of a deterioration in Business Confidence in October according to the latest by ANZ, with NZDUSD down more than half a percent to under 0.7100 again.
Day Ahead
The main event of the day will be the release of the US CPI report at 1330GMT, which is expected to show the YoY rate of headline inflation rising to 5.8% from 5.4% last month, and the core rate of YoY prices rise to 4.3% from 4.0% on September. The latest weekly jobless claims report will also be eyed, with further progress in the labour market a key theme being watched by Fed members right now. Bank of England dove Tenreyro will also speak at 1330GMT. The remainder of the session will be quiter than in previous days with no more Fed or other central bank speakers scheduled. Bond traders will be watching a 30-year auction at 1800GMT.
