US retail sales surprised on the upside and US bond yields began to rise, pulling the dollar up along with it. The figure added to market expectations of a strong Q3 GDP figure for the US, in contrast to the anemic Q3 growth figure published for Europe on Friday. (Market consensus for Q3 US GDP is currently 3.2%. The figure will be released on Nov. 25th.) But the impact of the report faded quite quickly. As 10-year yields approached 2.40 (peak = 2.375%), a resistance point recently, the market reversed, because investors can no longer imagine a high inflation rate. Then later in the US day gold started to rise sharply as a poll out of Switzerland showed the “yes” vote getting more support than expected. This hit USD and the dollar began to plunge. EUR/USD traded between 1.2399-1.2546 in four hours or 1.2%, compared to a 1.8% range for the whole month of November up to that point. While all of this was going on in the FX and bond market, equities remained dull; once again the S & P 500 closed almost unchanged.
The 10-year bond finished the US day at 2.32% and this morning in early European trading is quoted at 2.28%, which may explain in part why the dollar is lower against all its G10 counterparts. On the other hand, rate expectations as shown by the Fed funds futures barely budged, so there has not been a major rethink about the short-term course of Fed policy, just the longer-term equilibrium level of interest rates as the outlook for inflation changes.
The G20 meeting had nothing to say about FX rates.
The leaders agreed to plans drawn up by their finance ministers in February, known as the Brisbane Action Plan, to boost their collective GDP growth by at least 2% by 2018. They will do this by increasing “investment, trade and competition.” They said that “the global economy is being held back by a shortfall in demand.” In that case, fiscal policy should be the solution. On that subject they said “(w)e will continue to implement fiscal strategies flexibly, taking into account near-term economic conditions, while putting debt as a share of GDP on a sustainable path.” Something for everyone: the French can point to “flexibly,” while the Germans can point to “sustainable path.” At the end of the day, everyone can do whatever they want. Perhaps the most significant statement was that “(w)e will monitor and hold each other to account for implementing our commitments,” which means there will be plenty of opportunity for finger-pointing in coming months. The fact is, raising global growth has been an aim of the G20 all year and in prior years as well, but growth is still anemic, particularly in Europe. When was the last time you heard a politician stand up and say “we have to do X, Y and Z to meet our G20 commitments?” I can’t remember.
- Speaking of anemic growth, Japan’s Q3 GDP came in at -1.6% qoq SAAR, a big disappointment (market expectation: +2.2%) after the -7.1% qoq SAAR plunge in Q2 following the hike in the consumption tax. This makes it more likely that PM Abe will call a snap election as a referendum on increasing the consumption tax again and will use his re-election as an excuse to delay it. He will reportedly hold a press conference tomorrow to make the announcement. The implications for JPY are negative: a delay should be good for the stock market, which means a higher USD/JPY (weaker yen), and it also means less economy-wide savings, hence a smaller current account surplus.
- During the European day, Eurozone’s trade balance for September and Norway’s trade balance for October are coming out. In Sweden, the official unemployment rate for October is forecast to increase a bit, in line with the recent increase in the PES unemployment rate for the same month.
- From the US, industrial production for October is expected to rise mom but at a slower pace than in September. The Empire State manufacturing PMI for November is expected to improve.
- We have four ECB speakers on Monday’s agenda: Executive Board member Yves Mersch, Executive Board member Peter Praet and the very, very talkative Executive Board member Benoit Coeure. In addition, ECB President Mario Draghi gives his quarterly testimony to the Committee on Economic and Monetary Affairs (ECON) of the European Parliament in Brussels. At the press conference following the latest ECB meeting, Draghi made it clear that the ECB is open to embarking on new measures if needed, so we do not expect any surprises at this event.
Rest of the week
The highlight will be the Fed minutes from its October FOMC policy meeting on Wednesday. The minutes will provide details of the decision to end the QE3 and the improvement in the labor market. Any reference to when the members expect to start raising rates could be USD-bullish.
On Tuesday, we get UK’s CPI for October and the forecast is for the inflation rate to remain unchanged. From Germany we get the ZEW survey for November. On Wednesday, besides the Fed minutes, the Bank of England publishes the minutes of its November policy meeting. As for the indicators, the US housing starts and building permits for October are forecast to increase, suggesting an improved housing sector activity. Wednesday the Bank of Japan holds its policy meeting, but following the surprise increase in its market operations at the end of October, it will probably be some time before there is another change in policy.
Thursday is global PMI day. During the Asian time, we have China’s preliminary HSBC manufacturing PMI for November and during the European day, Eurozone’s preliminary PMIs also for November are released just after the figures from Germany and France are announced. Later in the day, we get the US preliminary Markit manufacturing PMI for November. US CPI for October is forecast to ease somewhat.
Finally on Friday, Canada’s CPI for October is expected to remain unchanged in pace from September. This could prove CAD-supportive.