The Markets
The Japanese Yen remains in the spotlight. BoJ Deputy Governor Himino and his boss Ueda sparked a torrid rally amid rising bets of an imminent policy change (December 19th). USD/JPY fell from an open of 147.31 to an intraday low of 141.71. The pair eventually closed at 144.13, with strong support from the 200dMA (142.33) and 38.2% retracement (142.48) of the 2023 advance proving too tough a nut to crack for the time being. The JPY’s advance against the Euro was equally impressive.
The same technical references (154 and 154.4, respectively) came to the rescue, allowing EUR/JPY to trim 5.5 yen losses to 3 yen, closing at 155.58. The JPY had plenty of momentum at the start of this morning’s Tokyo trading, but the rally ran into the aforementioned resistance levels. Both the USD/JPY and EUR/JPY are still trading slightly weaker than yesterday’s close. Japanese bond yields added another 5.7 basis points at the long end of the curve.
The 10-year tried but failed to break through the 0.80% level. Core markets were uninspired yesterday. German yields whipsawed with small changes on a net daily basis. US yields added a few bps at the long end. As a result, the 10-year yield maintained support between 4.09% and 4.13%. The US dollar took a breather from its recent rally. The trade-weighted index fell from 104.2 to 103.54. The EUR/USD rebounded from 1.0764 to 1.0794. European equities gradually moved lower after the DAX hit a new record high earlier in the week and the EuroStox50 hit a new intraday high for the year on Wednesday. However, U.S. equities were higher, with the Nasdaq (+1.37%) outperforming.
This week’s economic calendar culminates in today’s payrolls report (and to a lesser extent Michigan Consumer Confidence). Along with next week’s November CPI, it’s the last major input to the Fed‘s December 13 meeting. The consensus is for 183k jobs added, with the “unofficial” (whisper) number at a lower 169k. The unemployment rate is seen stabilizing at 3.9% with wage growth a bit lower at 4%.
The recent market positioning has been incredible, but we are cautious about calling it over ahead of important data like today’s. In terms of pricing in a rate cut, there’s theoretically still room for a March start (two in three odds discounted). While this is obviously not our preferred scenario, disappointing payrolls could further cement the idea. Both the 2-year and 10-year US Treasury yields are at critical technical support levels. The former, if it breaks below 4.60% on a sustained basis, offers the prospect of a 20bp move lower. The 4.09/4.13% area in the 10-year must hold to prevent a quick return below 4%.
News and Views
The Reserve Bank of India left its key interest rate unchanged at 6.50% today. The decision was widely expected. The committee maintained its policy focus on “removing accommodation to ensure that inflation gradually converges to the target, while supporting growth”. Since the last meeting, headline inflation has cooled from 7.4% in July to 4.9% in October, with moderation observed across all components of the CPI. However, the MPC sees upside risks to food price inflation in the coming months. Economic activity was buoyant in Q2 (7.6% y/y) on the back of strong domestic demand. The bank raised its growth forecast for fiscal 2023-24 to 7.0% from 6.5%.
It sees growth at 6.4% in Q3 2024-25. CPI inflation is expected to be 5.4% in 2024-25 and decelerate to between 4.0% and 5.2% in the first three quarters of 2024-25. The RBI concludes that the 4.0% target has not yet been reached and that it needs to stay the course, suggesting that interest rates may remain at current levels for a few more meetings. The Indian rupee is trading little changed at 83.7 USD/INR, holding near historic lows against the greenback.
The final reading of Japan’s Q3 GDP provided an unexpected negative surprise as growth was revised sharply lower from a contraction of -0.5% Q/Q to -0.7% Q/Q. The revision was mainly due to a downgrade in private consumption (-0.2% Q/Q from unchanged). Inventories also contributed more negatively than expected and business spending contracted (-0.4% Q/Q). The contribution from net exports was maintained at -0.1 ppt. The Q3 contraction was the largest since the pandemic and could complicate the debate on whether the BoJ should start normalizing policy in the near future. On the other hand, labor cash earnings came in stronger than expected at 1.5% y/y in October. However, real earnings remain negative (-2.3%). Household spending in October was also less negative than feared (-2.5% y/y vs. -2.9% expected). The BoJ meets on December 19th.
