Australian Business and Consumer Sentiment

Business reported another strong month of sales and profitability, although a dip in new orders and rising costs weighed on sentiment. Whilst consumer-driven demand remains high, National Australian Bank’s chief economist noted that forms appear wary that the current pace of consumption will continue.

PMI survey’s for Australia continue to trend lower with the S&P global composite below 50, with services PMI dragging the composite lower. Manufacturing, services and construction PMI are all below 50 according to another PMI survey by AIG. Put together it makes to wonder if growth for 2023 will have to be revised lower, as consumer spending appears to be propping up the show.

How to Profit From US Inflation: Investment Options

US inflation is expected to soften slightly – as markets have positioned themselves for it to do so. But that also presents opportunities for traders. The inflation prints as a proxy for Fed policy. Another hot report decreases the odds of a slower pace of Fed tightening, likely boosting the dollar whilst weighing on Wall Street, commodities and all other currencies. Whilst a softer inflation report keeps hopes alive that the big hikes are behind us and send dollar lower.

The US dollar index has held above a key support zone around 109.96, which comprises of the October 2002 high, October 2022 low and bullish trend line. A bar bullish reversal has also formed to suggest a swing low is in place, and with it comes the potential to head back to the monthly pivot point just beneath 112. At this stage it is equally open for it to top out, roll over and break trend support as it is breaking back above 112. But for now, the near term bias remains bullish whilst prices hold above this week’s low.

United Kingdom Inflation Rate

The UK GDP revealed that the economy shrank by only 0.2% in 3rd Quarter, which means that a contraction of more than 0.55% may be needed in the last three months of the year for the BoE’s forecast of a 0.75% contraction during H2 2022 to materialize. Yet, investors dragged their rate-path projections lower. The probability for a 50bps hike at the December gathering renamed near 80%, but the implied terminal rate was lowered to 4.47% from 4.6%.

The jobs report is forecast to show that the unemployment rate held steady at 3.5% in September and that the average weekly earnings excluding bonuses have accelerated. With an inflation rate at 10.1% during that month, real wages likely stayed well into the negative territory and disposable incomes at record lows.

Markets Position, The lower-than-expected US inflation

The lower-than-expected US inflation print simply extended with economic data serving as an accelerator. European stocks add a normal 0.6% but US indices open with very solid 0.9-2.5% gains. The US NY Empire manufacturing index surpassed the bar with ease, coming in at 4.5 vs a -6 consensus. But new orders turned negative again and the outlook for six months ahead turned deeper below zero from -1.8 to -6.1. Financial markets definitely also spotted the PPI easing by more than expected.

Headline factory inflation for September was revised lower to 8.4% and slowed to 8% vs 8.3% expected. Core gauges retreated from 7.1% to 6.7% and 5.6% to 5.4%. All of them are still at elevated levels but similar to last Thursday’s CPI, that’s of no importance to markets who just want to see pressure decline, both on prices and on the Fed.

Japan’s Inflation hits the ‘40-year high

Despite the BOJ’s best efforts to contain inflation, prices are indeed rising.

Nationwide inflation rose to its highest levels since 1984 at 3.7% y/y and core inflation is also at 3.6%. If food and energy are excluded, CPI is now 1.4% y/y- which is its highest since 1998 we exclude the pre-emptive buying ahead of 2015’s tax hikes. Services PPI is down to 9.1% but historically high after peaking at 10.2% last month.

At 3.7%, nationwide CPI is nearly twice their 2% target. The BOJ were relatively late to the 2% inflation bandwagon by introducing their 2% target in January 2013. Of the 118 months since it was introduced, only 16.1% of them have been above 2%. There was a 12-month period from April 2014, and more recently inflation has been above 2% since April this year and still rising.

FOMC Minutes, Fed Hiking Rates slowly

At the November 2nd FOMC meeting, members unanimously agreed to hike the Fed Funds rate by 75bps to bring the key rate to 3.75%-4.0%.The statement from the meeting said members agreed that ongoing rate hikes were necessary until rates were “sufficiently restrictive”. In addition, the statement noted that “in determining the pace of rate hikes, we will consider cumulative tightening, policy lags and economic and financial developments”. However, during the press conference which followed, Fed Chairman Powell stated that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated.

The FOMC Minutes released on Wednesday showed that a substantial majority of officials said a slowing in the pace of rate hikes would be appropriate soon. In addition, participants agreed that a slower pace of rate hikes would allow the FOMC to better assess the progress towards its goal, given the associated lags with monetary policy. However, “various” Fed officials saw rates peaking at a higher level, which concurs what Powell’s comments in the press conference. Since the last meeting, numerous Fed speakers have been hinting that the December rate hike will only be 50bps.

On November 2nd , the DXY initially took the statement to mean that the Fed would be dovish. However, it immediately went higher went higher after Powell noted that the terminal rate would be higher. The DXY closed November 2nd near unchanged at 111.55, with a long lower wick. It continued higher into Friday, reaching a high of 113.15. However, after the markets had more time to digest the comments, the DXY traded 220 pips lower near 110.72. Upon doing so, it broke through the bottom trendline of a symmetrical triangle and the Index hasn’t looked back since. The DXY paused its move lower at the 50% retracement level from the lows of March 31st to highs of September 28th near 106.34.

The target for the break of an ascending wedge is a 100% retracement, which is 105.34. This is also the first support level. Below there, price can fall to horizontal support at the lows of August 10th at 104.64, then the lows of June 16th at 103.42. If the DXY moves highs, the first resistance is at the bottom trendline of the previous ascending wedge near 107.50. Above there, price can move to the highs of the wedge at 107.99, then the 50% retracement from the highs of November 10th to the lows of November 15th at 108.17.

This week’s currency pair, USD/CNH

This week will bring a lot of US macroeconomic data and speech from US Fed Chairman Powell, which should give the markets a clearer direction of where the Fed may be headed next regarding monetary policy. Powell speaks at the Brookings Institute on Wednesday. The topic is the economy and labor market. The statement after the November 2nd FOMC meeting stated that “ in determining the pace of rate hikes, we will consider cumulative tightening, policy lags, and economic and financial developments”. The markets took this to be dovish. However, in the press conference that followed, Powell said that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated. However, the pace of tightening is not as important as the terminal rate. Markets took this to be hawkish, Traders will be looking for Powell to clarify these statements and try to determine if the Fed will hike by 50bps or 75bps at the December meeting. In addition, the US will release the Fed’s favorite measure of inflation, Core PCE. Expectations are for a YoY print of 5% vs a September reading of 5.1%. If this number is stronger, the Fed may feel comfortable leaning towards a 75bps hike in December. The US will also release Non-Farm payrolls on Friday. Expectations are for a print of 200,000 vs a previous reading of 261,000. The Unemployment rate is expected to remain unchanged at 3.7%.

As China’s “zero-covid” restrictions and lockdowns heat up, so are the emotions of many Chinese people. A fire over the weekend in Xinjiang in which 10 people died , angered protestors who said that the fire was made worse by the zero-covid policy. Riots and clashes with police flared up in some areas where the protests were held, such areas as Shanghai and Beijing. Protestors are frustrated with the amount of quarantines and restrictions. However, despite the lockdowns, Beijing reported record levels of covid. This may lead to even more quarantines and restrictions. WTI crude oil has dropped from a high of 82.51 on November 23rd to an intra-day low of 74.02 on Monday as fears of a lack of demand swelled in the markets. Will the zero-covid policy lead to a recession in China ?

USD/CNH has been on the rise since late-February as it became more apparent that the Fed would begin raising in March. On May 13th, price peaked at 6.8375 before consolidating in a symmetrical triangle. However, on August 15th, USD/CNH broke higher out of the triangle and rose in an ascending wedge formation as price peaked on October 25th at 7.3748. This was also the highest level since 2007. Price then pulled back and broke below the bottom trendline of the wedge, reaching the target for the breakdown near 7.0192. Since then, the pair has been bid, and gapped higher on Monday, opening at 7.2308.

With Fed Chairman Powell speaking, US Core PCE and Non-Farm Payrolls, along with the increase in Covid cases and unrest in China, USD/CNH could be volatile this week. Watch for aggressive moves in the pair should Powell’s speech or the data paint a more hawkish picture heading towards the December 14th meeting.

Powell’s Brooking November 2nd FOMC Press Conference

In Fed Chairman Powell’s press conference after the FOMC meeting on 2nd November, he said that incoming data suggests that the ultimate level of rates will be higher than previously anticipated. In addition, he noted that, how high rates rise is more important than the pace of tightening. At the time, the markets took this to be hawkish as it was the first time Powell mentioned rates would be higher than anticipated and that the pace was not as important as the terminal rate.

Inflation and the labor market at the Brookings Institute. Powell repeated many of the same comments from 2nd November, while adding that the time for moderating the pace of rate hike increases may come as soon as the December meeting. This was now seen as dovish, as Powell is basically telling the markets that the FOMC will Only hike by 50bps in December.
This was the unofficial pivot the markets have been waiting for. In addition, Powell added that relying less on forecasts means doing more risk management and slowing down rate rises at this point is a good way to balance the risks of overdoing hikes.

One of the largest beneficiaries of Powell’s dovishness was the Japanese Yen. USD/JPY had been moving lower since the last round of intervention by MOF on October 21st, when price reached a high of 151.95. Since then, the pair has been moving lower, including a one-day selloff of 545 pips on November 10th. However, the move lower stalled at the 38.2% Fibonacci retracement level from the lows of March 4th to the highs of October 21st , near 137.70. Could Powell’s speech be the catalyst that the pair needs to push it lower ?
If the support holds, the first resistance is at the bottom trendline of the upward sloping channel near 141, then the downward sloping channel dating to October 21st near 142.25. If USD/JPY moves above there, the next resistance levels is the lows from October 5th at 143.53.

IS this pivot from the Fed that the markets were looking for ? Based on the market’s reaction, it seems like it. Watch to see if the US Dollar continues to move lower. If so, stocks could move higher and may be headed towards a Santa Claus rally!

Gold Falls Victim to Strong US Data

Gold has sold off thanks to a rebound in US dollar and bond yields. The fact that the yellow metal has turned lower from a key level makes today’s reversal eye-catching as the chart suggests that at least a temporary top may be in for now.

Gold fell along with the major currency pairs today as the dollar found support on the back of some stronger-than-expected US macro data. Factory orders surged by more than expected, rising 1% month-on-month, while the closely-followed ISM services PMI came in at 56.5 compared to 53.3 expected and 54.4 last.

With US data continuing to remain largely positive, some investors are starting to re-question the market pricing of the terminal interest rates in the US, currently priced in at just below 5%. If incoming data continues to remain favorable, then inflation is likely to persist longer and that may encourage the Fed to be even more reluctant to pause its hiking early in the first half of 2023.

The chart of gold showed a potential reversal in the trend with the formation of a bearish engulfing candle on the daily time frame. The fact that this has been printed after gold earlier failed to hold above the key $1800 level makes it even more interesting. The $1800 level was a major support level in the past, which provided plenty of bounces for gold until it finally gave way back in July. It is also where the 200-day moving average comes into play.

Bull’s failure to reclaim the 200 MA will excite the bears. But the bears still have some work to do as there are a few important supports that need to be broken if they are to regain full control of price action again. Among those, $1770 is the first hurdle, where we also have the bullish trend line converging. Next level down is around $1735, the most recent low.

US CPI Preview: CPI To Remain Elevated

On Tuesday, December 13th , the US will release its CPI reading for November. Expectations are for the headline print to come in at 7.6% YoY after a surprisingly lower than expected October print of 7.7% YoY. If the print is in-line with expectations, it would be the fifth monthly decline in a row after peaking in June at 9.1% YoY, as well as, the lowest reading since January! In addition, the Core CPI print for November is expected to be 6.2% YoY vs a previous reading of 6.3% YoY. The result for the Core print was also a surprise in October, as economics expected a reading of 6.5% YoY.

Could these results affect the FOMC’s decision as to how much it should hike rates on Wednesday ? The Fed last met on September 21st. By the time the FOMC meets on December 14th , it will have seen the September, October, and November CPI prints. The October print was much lower than expected. In addition, the Fed has seen Core PCE prints for September and October. The September Core PCE reading was 5.1% YoY vs an expectation of 5.2% YoY and a prior reading of 4.9% YoY. The October print was 5% YoY vs an expectation of 5%. In addition, the Fed still sees the labor market as tight.

During Fed Chairman Powell’s speech as the Brookings Institute on November 30th , he prepared that market for a 50bps rate hike at the December meeting with less hawkish comments, such as “relying less on forecasts means doing more risk management, and slowing down rate rises at this point is a good way to balance the risks of overdoing it”. Armed with lower inflation data since the last FOMC meeting and a solid labor market, the FOMC will probably stick to the script and hike by 50bps to bring the Fed funds rate to 4.5% on December 14th . The risk to the CPI data is that it is much lower then expected. Perhaps it could prompt the Fed to only hike 25bps.

EUR/USD made a 2022 high print on February 10th at 1.1495 and a low print for the year on September 28th at 0.9536. Since then, EUR/USD has retraced 50% of the move to 1.0515. The CPI data on Tuesday or the FOMC decision on Wednesday could be the next catalyst to steer the pair from current levels. If EUR/USD continues to move higher, the first resistance level is the 61.8% Fibonacci retracement from the year’s highs to lows at 1.0747, then horizontal resistance just at 1.0779. Above there the next resistance level is at the highs from March 31st at 1.1185. However, if the EUR/USD moves lower, the first support level is between 1.0349 and 1.0368. Below there, price can fall to the lows of November 21st at 1.0223 then support at the highs of October 27th near 1.0094.

Bank of England’s Monetary Policy Committee Preview

The Bank of England’s Monetary Policy Committee will meet tomorrow to decide on interest rates. The MPC meeting will be sandwiched between FOMC rate decision that will have taken place today, and the ECB rate decision that would follow an hour and a bit later. The GBP/USD, EUR/GBP and FTSE will be among the markets in sharp focus on the day.

The consensus is that the BoE will show the pace of hiking, as we are expected to see with the week’s other major central bank decisions. Economists expect the UK central bank to raise the benchmark interest rate by 50 basis points, which would bring the Official Bank Rate to 3.5%. If correct, this will mean the previous 75 basis point hike was just a one off.

At the previous meeting, the BOE hiked rates by 75bps but warned that the terminal rate will be lower than markets are anticipating due to a current recession, which could last up to 2 years. The pound nonetheless rallied and reached north of $1.24 handle by Tuesday, when a much-weaker-than-expected US inflation report sent the dollar and treasury yields plunging.
It will be interesting to see what the BoE will make of the latest upsurge in inflation. Since their last meeting, UK CPI has risen further, from 10.1% YoY in September to 11.1% YoY in October. It should be noted that the November CPI reading is due out today, the day before the BOE meeting. Expectations are for CPI to fall to 10.9% YoY. If the reading is higher, could the MPC surprise the markets and hike by 75bps ? while that could be a possibility, it is worth pointing out that the UK is facing several other risks too.

The GBP/USD broke above the key 1.2300 resistance level, which had previously capped the gains back in August and more recently at the start of this month. So, the path of least resistance was the upside at current time. However, with the Fed and BoE both set to meet this week, things could look and feel a lot different later in the week. If by tomorrow afternoon the GBP/USD is still holding its own above this 1.2300 level, then the path of least resistance would remain to the downside towards 1.2500, possibly even 1.2750, where the 61.8% Fibonacci level comes into play.