Inflation fears flashed on Thursday in a move that sent global bond yields sharply higher. The US dollar was the top performer while the Australian dollar lagged. Japanese CPI is up next. A new tactical GBP trade has been issued in the Premium Insights after Thursday's beat in UK GDP and ahead of next week's key BoE inflation report.
Global sovereign yields moved up 6 to 10 basis points on Thursday in a sign of a market that's growing uneasy. It was tough to see a single catalyst but the combination of central banks increasingly cautious about QE risks and small signs of higher inflation were factors.
It's important to keep in mind how vulnerable the bond market is. If yields move up 50 bps globally, it would undercut years of returns. If the move higher is because of inflation, it would undermine the central bank argument for QE as well in what could develop into a viscious circle.
Everyone in the bond market knows this and is playing a game of chicken. Eventually, there will be a rush to the exits and many episodes of jitters are likely in the interim.
In terms of ECB buying, Nowotny added some clarity. He said the December ECB decision will be about to what extent to prolong QE, not on whether or not to extend it. At minimum, the path forward will be a taper beginning in April.
In terms of economic data, the US dollar continued to defy weak reports. Core durable goods orders fell 1.2% in September compared to -0.1% expected. It's the first decline in three months.
That was the final major release before Friday's first reading on Q3 GDP. Estimates range from 1.3% to 3.6% with the Atlanta Fed tracker at 2.1%. Look for a big market reaction when the numbers hit but keep in mind that it's a series that's almost always revised in a big way.
Before that comes the Japan Sept CPI report at 2330 GMT. The consensus is for a 0.5% y/y drop in the national CPI and +0.1% y/y ex food and energy. It's a reminder that the BOJ hasn't defeated deflation, despite claims otherwise.
It's also a reminder that despite some bond market jitters, we are still a long ways from any kind of runaway inflation.
|BoJ Core CPI (y/y)|
|0.3%||0.4%||Oct 28 5:00|
|Advance GDP (q/q) [P]|
|2.5%||1.4%||Oct 28 12:30|
|Prelim GDP (q/q) [P]|
|0.5%||0.3%||0.7%||Oct 27 8:30|
|Core Durable Goods Orders (m/m)|
|0.2%||0.2%||-0.2%||Oct 27 12:30|
A newswire report said more ECB bond buying after March is a done deal but more broadly the US dollar was solid. GBP was the top performer while the yen lagged. New Zealand trade balance is up next. There are 4 Premium trades in equity indices currently open. The rest are in FX and commodities.
A Reuters report citing central bank sources said the ECB will continue purchases after the March deadline and tweak the rules in order to do so. Whether QE remains at 80 billion euros per month or slows down depends on the interim economic data, the report said.The euro hardly moved on the report and that's a clear indication that the market has priced in a dovish leaning wait-and-see from Draghi. On the day the euro finished slightly higher.
The pound gained for a second day in a row and gained 50 pips to close the gap from Wednesday's sharp decline.
The pound rose despite a theme of general US dollar strength that was driven by upbeat data. The Sept advance goods trade balance was a deficit of $56.1B compared to $60.5B expected; wholesale inventories were up 0.2% compared to 0.1% expected; and the Markit services PMI was at 54.8 vs 52.5 expected.
Those numbers all gave the dollar a modest lift.
Elsewhere, yet another bullish US oil inventory report sent WTI crude immediately 80-cents higher but it faded by the end of the day in a sign that the climb higher in oil might be tired.
Overall, ranges were limited on the day.
Looking ahead, the economic calendar tapers off after New Zealand trade balance early. Exports are forecast at $3.53B and imports at $4.68B. The data is due at 2350 GMT.
|Goods Trade Balance|
|-56.1B||-60.6B||-59.2B||Oct 26 12:30|
|-1125M||-1265M||Oct 26 21:45|
|Flash Services PMI|
|54.8||52.4||52.3||Oct 26 13:45|
A midday reversal lower in the US dollar Wednesday may be an early sign that the buy-the-dips dollar trade is due for a break. The Australian dollar was the top performer and GBP lagged but it was an intraday rollercoaster in New York trading. Australian CPI is up next. A new Premium trades has been opened in a 3rd major equity index.
The US dollar rode high into New York trading but finished near the lows of the day. USD/JPY climbed to 104.85 before falling to 104.20. EUR/USD fell to a session low before reversing to a session high.
Most impressive of all was cable, which crashed 120 pips below 1.2200 and touched the lowest since the flash crash before rebounding nearly all the way back.
In the grand scheme of things, the reversals were small. In the past, we have talked about looking for USD dips to buy and it's been a solid strategy but the speed of the turnaround Wednesday and the impending calendar gives us pause.
The Fed has entered the pre-FOMC blackout period with the market pricing in a 17% chance of a hike next week. That's low but not insignificant. So there is a risk of dollar disappointment on the result.
More importantly, it's the beginning of a series of dollar unknowns. The Oct jobs report is next week and the election is now less than two weeks away. Some of those may turn out to be dollar-positive events but the trade in the interim will be to square positions and with dollar longs in the CFTC report at the most extreme since January, that argues for selling.
In addition, economic data lately has been modest like Tuesday's fall in consumer confidence to 98.6 vs 101.5 expected. Corporates, like economic bellwether Whirlpool also talked about US softness.
Another spot to watch is the Australian dollar. The market is pricing only a 28% chance of a cut through Q1 2017 but that could rise dramatically on today's inflation report. The Q3 data is expected to show the trimmed mean up 0.4% q/q and 1.7% y/y. A miss to the downside would send AUD spiralling lower.
|0.5%||0.4%||Oct 26 0:30|
|CB Consumer Confidence|
|98.6||101.5||103.5||Oct 25 14:00|