Intraday Market Thoughts Archives

The surge in risk appetite and copper prices started in Asia on Thursday and there might be a reason for that. The PBOC did issue a statement vowing to support Evergrande, but nothing about cutting the RRR or adding stimulus. GBP is the strongest followed by NZD, while JPY is the weakest. whole US retail sales are due up next, with the control group expected 0.5% from the prev 2.5%

Copper is a particularly notable economic barometer and it's turned sharply higher in the past week, rising to $4.63 from $4.25, and hitting the highest since May. It comes on a broader reflation trade (ex bonds) and improving risk sentiment.

Perhaps that's all there is to it but it's worth keeping a close eye on China at the moment. It's more of a question of 'when' they add more stimulus rather than 'if'. There was chatter of a cut in the RRR or a fresh MLF on Friday and that's been percolating for a few days.

If China turns on the taps, it will add another leg to the commodity currency rally, particularly against the yen. We've highlighted those crosses recently and they continued to break out with CAD/JPY busting an old triple top from 2017, 2018 and 2021 on Thursday in a rally to the best levels in six years.

At the same time, we're gaining confidence daily that covid is in terminal decline. Of course, there's always the chance of another wave and we've not virologists but cases are falling almost everywhere at the moment and vaccination continues to rise.

On Friday, the US reports on September retail sales. We see this as somewhat of a free call option. The consensus is -0.2% m/m and +0.4% on the control group. Those are modest numbers but September was a challenging month for covid. If the data undershoots, it will likely be brushed aside or further push yields down. While if it's stronger it will point to a ready-to-spend consumer ahead of the holidays.

A broadening set of circumstances conspires on USD weakness--from rising real yields (10-yr breakevens hit fresh 5-month highs at 2.54% ad nominal 10s below 1.52%) to a flattening yield curve. Weaker than expected PPI and Wednesday's CPI-FOMC minutes interaction also weighed on the greenback. USD initially rose on signs of wage pressure in the CPI report but relented quickly afterwards and fell further on a strong bond auction. Wednesday's rise in 2-year yields and pullback in 10-year yields triggered chatter of flattening yield curve, implying the US economy cannot handle considerable tightening. The Premium long in DAX hit its final 15450 target for 300-pt gain and the FTSE100 (Mystery chart shown in yesterday's IMT) hit its final target for 130 pts for those who moved their stop. Below are the long calls in GBPJPY and XAUUSD based on the inverted H&S in gold.

US PPI rose 0.5% in September, posting the smallest increase of the year. US CPI was slightly firmer than expected at5.4% y/y compared to the 5.3% consensus but it was the real weekly earnings component that drew attention as it climbed 0.8% m/m compared to 0.2% previously. Initially, that led to a 20-30 pip rise in the US dollar but as the day wore on that faded. That extends a trend of choppiness this week.

Part of the reason for the decline was a surprisingly low yield in a sale of US 30-year bonds as the issue was 1.3 bps below what the market was expecting. With that, US 30s have fallen 13 basis points from Friday's high. It's no surprise that's dragged down the US dollar, at least in the short term.

The Fed minutes didn't inspire much in terms of price action, but did outline a Fed staff scenario of $15B monthly tapers starting in November or December. Both scenarios would take result in and end to the process in the middle of 2022, something Fed officials have flagged in comments.

 

Yen weakness continues to steal the show, we take a look at why.  All currencies are stronger vs the USD except for JPY, which resumes its fall as oil soars and even as yields pause. US November CPI is due up next, with headline seen +5.3% and core at 4.0%. 

Yen weakness continues with multiple crosses breaking key levels. USD/JPY continued to fresh three-year highs, sustaining the bid even as stocks slipped and 30-year yields fell 6 bps.

It's clear that rising global yields and yen crosses move in tandem but a better question is why both are climbing. That two main drivers are rising inflation worries and ongoing supply bottlenecks, which are feeding back into each other. Add in the ongoing energy price shock and there's a strong case for the reflation trade.

One unheralded factor is that covid appears to be subsiding globally. Another wave of the virus was baked into global growth projections but optimism is rising that we've seen the final thrust – at least outside of China and the antipodeans which remain at high risk due to limited natural immunity.

Whatever the driver, the charts of yen crosses are increasingly convincing. CAD/JPY on Monday rose to the highest in three years and is now threatening the 2018 high.

Looking ahead, the US CPI report is due out at 1230 GMT and expected to show year-over-year remaining at +5.3% with core remaining at +4.0%. If you recall back to last month, core inflation undershot expectations and it briefly weighed on the US dollar. That victory lap for team transitory didn't last long though as the dollar quickly resumed its climb.

 

Energy prices remain near their cycle highs after a brief Monday retreat, emboldening the growing realization that supply chain bottlenecks and employment shortages won't resolve soon. FX continues to aggressively sell yen on the reflation trade. JOLTS and a 10-year US auction are due up next. Gold is holding up above 1764 as 10-year breakeven inflation is ticking higher, dragging real yields lower. 

Central bank comments are increasingly littered with caveats. On Monday, ECB chief economist Lane tried to lay out how wages could rise in a one-off without leading to inflation. He called price rises 'mostly transitory' but warned they are in the early stages of an energy shock.

In the US on Sunday, the Fed's Daly – an ardent dove – warned that if bottlenecks continue and spending remains high, there will be more inflation. Given that economies continue to reopen and there's a glut of US savings, that's a fair bet.

The FX and rates market is increasingly signaling that team transitory is losing. The latest axis is the yen, which is the traditional low yielder. The implication of strength in yen crosses is that rates divergence is coming. Given the big breakouts, including USD/JPY hitting a seven-year high on Monday, the implications are clear.

It's been a slow transition for the Fed but the doves are now clearly on the backfoot and supply chain problems aren't easing.

A release that's sure to spark more chatter is the August JOLTS report, which could show a record 11 million job openings. There is good reason to be skeptical of this report. Companies have taken to spamming job ads and using algorithms to screen resumes. It's the proliferation of an 'always hiring' policy that's simply a search for low-wage workers. In any case, policymakers still believe in it and so does the market.

The other event to watch will be the 10-year Treasury sale. The cash market is at 1.62% with little standing in the way of a return to the 2021 high of 1.78%.

Markets start the new week on a positive mood as the yen continues its retreat and US crude oil hits $81 for the first time since 2014. US and Canada aren't preventing FX from engaging in the classic carry trade, lifting AUD and NZD at the expense of JPY. DXY is closing in on a tightening wedge, which could set up for 94.90s or 93.50s. The Gold/Brent chart below will be closely watched on whether the weekly RSI will breakdown below 30.  

Lebanon offered a glimpse into the growing global energy crisis on the weekend as the entire country was plunged into darkness for 24 hours on the weekend. It's an increasingly complex situation as the nation struggles to cover and secure diesel for power plants.

Weekend reports also highlighted the growing coal shortage in India as two Northern states suffered rolling blackouts.

Households and companies in both places and elsewhere are frequently turning to diesel-powered generators to supplement or supply power. With natural gas prices at extraordinarily high levels, there is also large scale switching to oil when possible.

As a result, oil demand may be recovering more quickly than anticipated. On Friday, US oil hit $80 for the first time since 2014 and it continued higher early on Monday. Technically, there are blue skies on the chart up to significantly higher levels. The economic knock ons from that are negative and inflationary but for now the beneficiaries are oil-exporting currencies.

Notably, one level to watch is $86.90 in Brent. Unlike WTI, the global oil benchmark hasn't broken the 2018 high and still has $3 to go. A break of that level would confirm (or block) a genuine breakout. Meanwhile, Saudi Arabia is not exactly in a hurry to temper the windfalls of rising oil at a time when it's seeking diverse sources of revenue.

In Monday's broader trade, the trend of yen weakness appears to be gathering steam. It's an acknowledgement of the global reflation trade and rising yields.