Dollar Sidelined, Krona Stabilizes, Rates Firm

200 Swedish crowns

  • The main developments here in the last full week of October are the sharp rise in bond yields and commodity prices
  • There has been a flurry of economic data released today beginning in Japan
  • France and Spain reported Q3 GDP; Germany, France, and Spain reported October CPI
  • Apple raised the UK price of some of its computers by 20%
  • The US reports Q3 GDP
  • Russia’s central bank is expected to keep rates steady at 10%; Brazil’s fiscal outlook remains weak

The dollar is mixed against the majors. The Swedish krona and the Kiwi are outperforming, while sterling and the Aussie are underperforming. EM currencies are mixed too. The CEE currencies are outperforming while MYR, RUB, and KRW are underperforming. TRY traded at a new all-time low near 3.13 before stabilizing. MSCI Asia Pacific was flat, even with the Nikkei rising 0.6%. MSCI EM is down 0.3%, with Chinese markets falling 0.2%. Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 1.85%. Commodity prices are mixed, with WTI oil down 0.5%, copper up 0.5%, and gold down 0.1%.

The main development here in the last full week of October is the sharp rise in bond yields. US 10-year yields rose 9 bp this week coming into today’s session, which features the first look at Q3 GDP. The 2-year yield is up 4 bp. European 10-year benchmark yields mostly rose 11-17 bp this week. UK Gilts are at the upper end of that range, while its 2-year yields are 3-5 bp higher.

The odds of a Fed hike in December have risen this week. Depending on precise assumptions about where Fed funds will trade, have risen around 5 percentage points to a little over 70%. This does not seem to adequately explain the rising long end yields. We anticipate that a Fed hike would flatten the curve as has often been the case in monetary tightening cycles. This was dubbed the Greenspan conundrum in the last cycle in the early noughts.

Equity markets were fairly resilient to the backing up of interest rates though most major equity markets moved lower over the course of the week. Losses were minor. The UK appears to be the worst of major markets, with the FTSE 250 off a little less than 2% before today’s loss brings it closer to 2.8%. Enjoying a weaker yen, the Nikkei gained 1.5% for the week, with a third coming today. Despite today’s 0.75-0.85% loss, Italy and Spain are eking out minor equity gains.

The US dollar is mostly softer today, but on the week it has edged up against most of the major currencies. The euro is the main exception. At a little over $1.0900, the single currency is up about 0.25% for the week. The yen is the weakest of the majors, off 1.4% this week. After moving above JPY105 yesterday, the dollar remained above it in Asia and Europe today. The Swedish krona has stabilized after yesterday’s (exaggerated?) shellacking. Its 0.5% gain today will leave it off by 1.3% for the week.

Another feature of this week’s activity has been the rise of commodity prices. Iron ore prices rose for the seventh day, the longest streak since 2013. The 10% gain this week is being attributed to Chinese demand amid an increase in steel output (despite the declaratory policy to cut capacity and output). Aluminum prices have also rallied strongly this week, for example, to five-year highs. Oil prices are an important exception. They are off 2.5%.

There has been a flurry of economic data released today beginning in Japan. Headline and core (excluding fresh food) CPI fell 0.5% as expected, while the measure excluding food and energy slipped to 0 from 0.2%. It had been expected to hold up better. The unemployment rate slipped back to 3.0% from 3.1%. Household spending fell 2.1% (year-over-year) improving from a 4.6% decline in August. Although poor, the report was better than the Bloomberg median of a 2.7% decline.

France and Spain reported Q3 GDP figures. France expanded by 0.2%, after contracting 0.1% in Q2. This was still a bit disappointing, and the details show that the swing in inventories accounts for the growth. On the other hand, net exports were a 0.5% drag. Spanish GDP rose 0.7%, in line with expectations and a tad softer than the 0.8% pace seen in Q2. The year-over-year rate was steady at 3.2%. The pace of French growth is about 2/3 less at 1.1%.

Germany, France, and Spain reported October CPI figures. We are waiting for the national figure that will be out shortly, but German states all reported an increase in the year-over-year pace. The national rate is expected to rise to 0.7% from 0.5%. Spain also reported firm CPI figures. The 0.5% year-over-year pace was more than expected (~0.3%) after the flat reading in September. Although still low, Spanish inflation stands at a three-year high. Recall as recently as August; Spain was still in deflation (year-over-year decline in CPI).

French CPI was unchanged at 0.5%. It was a little disappointing as the median expected a tick up. The aggregate figure for EMU will be published Monday. The rise in energy prices will lift the headline, but the underlying rate will still not be satisfying. Many suspect the core rate needs to get closer to 1.25% (from 0.8%) to make the ECB’s leadership more confident.

In terms of prices, a talking point today is news that Apple raised the UK price of some of its computers by 20%. Sterling has fallen 18.3% against the dollar since the referendum. The decline in the pound, which does not look to be over, will boost imported inflation. Given the UK’s trade deficit in goods, this will filter into higher CPI and lower real earnings. Better than expected data this week, including Q3 GDP, failed to give sterling any traction. At $1.2150, it is off 0.7% this week.

The US reports Q3 GDP. That is the highlight before the weekend. Although the Atlanta and NY GDP trackers are closer to 2.0% growth, the market appears to be looking for something closer to 2.5% (Bloomberg median 2.6%). There is some headline risk, but barring a significant surprise, look for the effect to fade. How the economy did in the July-September period has little, if any, impact on what the Fed decides in December (next week’s FOMC meeting will likely produce a statement very much like September).

One of the most important developments this year has been the Federal Reserve’s recognition that trend growth has slowed in the US. It now estimates this at 1.8%. This means that despite what seems like slow growth relative to pre-crisis, trend growth is consistent with the gradual removal of accommodation.

Russia’s central bank is expected to keep rates steady at 10%. It cut rates 50 bp last month, but also signaled that rates were now likely to be kept on hold until 2017. Inflation has eased but at 6.4% y/y in September, it remains above target.

Brazil central government budget deficit came in larger than expected at -BRL25.3 bln. This was not too surprising after weak tax collections were reported. The 12-month total rose to a record high -BRL190.6 bln. Consolidated budget data will be reported Monday, and consensus for the primary balance is at -BRL25.2 bln. If so, the 12-month total would rise to a record high -BRL187 bln (-3.2% of GDP). Overall, we do not think that the weak macro picture justifies current rich levels for Brazil assets.