2023-11-15 11:10

A look at the day ahead in U.S. and global markets from Mike Dolan Relief at the resumption of disinflation triggered the best day for U.S. stocks and bonds since the spring as Fed rate hike bets evaporated, eyes turned to softening retail numbers and a long-feared government shutdown was averted until next year at least. Encouraging the new found optimism overnight was a surprisingly large drop in outlying British inflation too, with forecast-beating Chinese industrial and retail numbers calming nerves about a deflationary bust there just ahead of President Xi Jinping's meeting U.S. President Joe Biden on Wednesday. Wall Street stocks are on course for the best month of the year, with the S&P500 (.SPX) staging its biggest one-day gain since April and pulling the index back up to September levels. Reflecting the disproportionate exposure of smaller firms to higher borrowing costs, the Russell 2000 (.RUT) index of small caps clocked its best day in over a year and rallied 5%. With October retail sales data later in the day expected to show a stalling of red-hot high street activity into the final quarter, the warm glow of ebbing inflation and cresting borrowing costs continued early Wednesday and S&P500 futures were up another 0.25% ahead of the bell. But the real action over the past 24 hours was in rates and bond markets, where 2- and 10-year Treasury yields , plummeted around 20 basis points each in their steepest one-day drops since the regional banking shock in March and sustained most of that move overnight. Much like then, the sheer scale of the yield swoon has stoked bond volatility gauges (.MOVE) too. The positive surprise in sub-forecast U.S. headline and core inflation rates for last month and encouraging momentum on disinflation at large has seen futures market remove virtually all bets on another Federal Reserve rate hike in the cycle. What's more, a quarter point rate cut by May is now 80% priced and 100bps of easing through 2024 is now baked in. Overreaction? The retail and producer price readouts later today will be the first reality check, but so too will be reactions from Fed officials to the latest numbers. The relatively dovish Chicago Fed chief Austan Goolsbee on Tuesday trumpeted the makings of a spectacular soft landing for the economy - highlighting how the economy's on course for the biggest non-war-related one-year drop in inflation in a century and with the jobless rate still below 4%. Wall St banks too seem to be falling into line. Bank of America is the latest to say it no longer sees another hike. And will crude oil prices still on the backfoot and declining at a 10% year-on-year rate, the disinflation cheer spreads out across the world. Catalyzing the biggest two-day gain in UK's FTSE 250 of mid-cap stocks (.FTMC) in more than three years, British inflation cooled more than expected in October as household energy prices dropped from a year ago and lopped more than two percentage points off the headline CPI rate to 4.6%. Gilt yields and sterling dropped back. And although it's clawed back some ground today, not least against sterling, the 1.5% drop in the dollar index (.DXY) on Tuesday was its biggest daily fall of the year. Elsewhere, Chinese stocks climbed in the slipstream of the global markets rally and better October economic news - with 4% spike in Chinese property shares (.HSMPI) spurred by a report that authorities plan to provide at least $137 billion of new funding to prop up the embattled housing market. U.S. corporate news stays on retail later as Target reports earnings, following a beat by Home Depot on Tuesday. In regulatory filings, Berkshire Hathaway (BRKa.N) said on Tuesday it has shed its holdings in General Motors (GM.N) and Procter & Gamble (PG.N) and trimmed its stake in Amazon (AMZN.O) as the conglomerate controlled by billionaire Warren Buffett boosted its cash pile to a record $157.2 billion. Key developments that should provide more direction to U.S. markets later on Wednesday: * U.S. Oct retail sales, producer price inflation; New York Fed's November manufacturing survey; U.S. Sept business and retail inventories * Federal Reserve Vice Chair for Supervision Michael Barr, Richmond Fed President Thomas Barkin both speak. Bank of England policymaker Jonathan Haskel speaks * U.S. President Joe Biden and his Chinese counterpart Xi Jinping meet on sidelines of APEC Summit in San Francisco * U.S. corporate earnings: Target, Cisco Systems, Palo Alto Networks, TJX, Catalent https://www.reuters.com/markets/us/global-markets-view-usa-2023-11-15/

2023-11-15 11:00

LONDON, Nov 15 (Reuters) - The scale of the debt market reaction to October's U.S. inflation undershoot partly reflects sheer relief in what's now one of the biggest bond market bets of the century so far. While headline and 'core' annual consumer price inflation rates were just 0.1 percentage point below forecast, at 3.2% and 4.0% respectively, it's enough to re-fire the disinflation story, cement peak Federal Reserve rates here and add a quarter-point rate cut into the futures curve for 2024. With inflation expectations waning in the background and gas prices down almost 20% in two months, economists were quick to point out that ebbing shelter costs and goods prices also meant core CPI is now down to an annualised 2.8% over five months. "The immaculate disinflation continues," said Lazard chief strategist Ronald Temple. "Absent any exogenous shocks, the Fed is increasingly likely to be in a position to cut rates in the second quarter of 2024." A recently edgy bond market gobbled all that up. Stoked by news just before the release that Congress was set to avoid a long-feared government shutdown later this week, two-year Treasury yields fell a whopping 20bp - the biggest one-day drop in almost four months - and 10-year yields fell to their lowest in seven weeks at 4.43%. That's almost 60bps down from 16-year highs set just over 5% on Oct. 23. Earlier in the day, Bank of America's influential global funds survey revealed how more and more asset managers think cresting bond yields offering the best rates in over a decade are now a steal despite three bruising years of capital losses. Reflecting back on an era now famed in literature for "The Big Short", the survey showed global funds had amassed their biggest overweight in bonds since just after the banking crash 15 years ago. Almost two thirds of respondents now think yields will be lower in a year's time - the most in the 20-year survey history - and 80% see lower short rates - the most since 2008. Funds' bonds allocation in November soared 18 points over the month to leave them net 19% overweight - almost 3 standard deviations above long-term averages. Only March 2009 and December 2008 showed larger overweights in bonds. But in perhaps a reflection of how many see 2024 as the year of 60/40 asset funds as much as bonds - given that a boom in bonds sinks long-term borrowing costs too, relieves indebted firms and flatters stock valuations - the BofA survey also clocked a first overweight in global equity since April 2022. And the S&P500 (.SPX) roared ahead after Tuesday's inflation report and bond yield swoon, topping intraday gains of more than 2% for the first time since June. "That print does not see the end of inflation, but is a definitive hint in that direction," said Lombard Odier's Florian Ielpo. It's "supportive of equities, credit and duration - lowering notably the risk that markets feared the most: overtightening." 'MARGIN OF SAFETY' While the doubling down on long-term bond allocations is not exactly a leveraged bet about to hit the jackpot, there are elements of that scenario that may trigger speculative squeezes of sorts. Asset managers' overweight bond positions - or at least those in government bonds and U.S. Treasuries - tends to be mirrored by big short positions in Treasury futures among speculative hedge funds. There are many reasons cited for that - one of which is that asset managers tend to build bond positions via futures before sourcing cash bonds later on and hedge funds on the other side of that trade use short futures trades to arbitrage anomalies between cash and futures prices. CFTC numbers show the scale of that speculative 'Big Short' on the flipside of the mounting 'Big Long' built by regular asset managers. And positive inflation surprise days like this Tuesday may well seed outsize Treasury moves that reflect some scramble on those shorts. Either way, the regular investment world seems happier than ever to load up on bonds even after more than 20% losses on benchmark Treasury exchange traded funds in little over three years. Pointing to elevated yields on corporate, emerging market and even 'safe' Western government bonds, Schroders strategist Duncan Lamont points out the additional 'margin of safety' that bonds now offer - basically how much of a rise in yields that can be absorbed over a 12-month horizon before investors lose money on the capital hit from the countervailing price drop. Lamont points out that U.S. Treasury yields and investment grade corporate debt yields would have to rise about another 100bps for the capital losses to wipe out current yields. What's more, speculative high yield can absorb a rise of as much as 2.4 percentage points and emerging market debt 1.5 points. "It doesn't eliminate risk but it does add a larger safety blanket than at any point for years," he wrote. It's unlikely to be all smooth sailing from here and disinflation may not always be so 'immaculate'. Even if it continues apace, the Fed seems minded not to allow markets to loosen up lending too quickly. "History is littered with examples of inflation aftershocks when central banks prematurely claim victory, cut rates too quickly, and create the conditions for another inflation spike," opines Glenmede strategist Jason Pride. "The Fed will likely be attuned to this risk and keep rates higher for longer to avoid such an outcome." But judging by the increasing confidence of bond bulls, the assumption is that Fed hawkishness is just a rearguard action from here on in and more days like these lie ahead. The opinions expressed here are those of the author, a columnist for Reuters. https://www.reuters.com/markets/boom-last-big-long-bonds-mike-dolan-2023-11-15/

2023-11-15 10:11

BRUSSELS, Nov 15 (Reuters) - Euro zone industrial production declined broadly in line with expectations in September, wiping out a rise in August as output of consumer goods dropped sharply in the month. The European Union's statistics office Eurostat said on Wednesday that industrial production in the 20 countries sharing the euro fell by 1.1% month-on-month in September for a 6.9% year-on-year decline. The latter was the steepest drop since June 2020, at the height of the COVID-19 pandemic. Economists polled by Reuters had expected declines of 1.0% month-on-month and 6.3% from a year earlier. The month-on-month fall was chiefly the result of 2.1% decline of durable and non-durable consumer goods, along with a 1.3% drop of energy output. Production of intermediate goods, such as steel or wood, declined by 0.3%, while output of capital goods, such as machinery, rose by 0.3%. Eurostat also published data on euro zone trade, showing that the bloc achieved a 10 billion euro surplus in September, against a 36.6 billion euro deficit a year earlier, when EU countries were forced to pay far higher prices for energy. Adjusted for seasonal swings, the euro zone recorded a trade surplus for the fifth consecutive month - of 9.2 billion euros against 11.1 billion euros in August. For Eurostat release, click on: https://ec.europa.eu/eurostat/web/main/news/euro-indicators https://www.reuters.com/markets/europe/euro-zone-industry-output-slips-trade-surplus-continues-sept-2023-11-15/

2023-11-15 09:51

TOKYO, Nov 15 (Reuters) - A former top Japanese financial official said on Wednesday yen weakness might be caused not only by interest rate differentials between Japan and the United States but also by structural factors such as a worsening fiscal position. Under such circumstances, any currency intervention by authorities would not help turn around the market tide to sustain impacts, although smoothing operations may be acceptable, a former vice finance minister for international affairs, Rintaro Tamaki, told Reuters. "Confidence in Japan's public finances, falling competitiveness, ageing population and dwindling labour force may be depriving Japanese authorities of the will to conduct bold policy," Tamaki said, referring to investor concerns. "I wonder whether overseas investors may be thinking what's in it for investing in Japan." Asked about the possibility of dollar-selling, yen-buying intervention in the foreign exchange market by authorities, Tamaki said a market foray may have psychological impacts but it would not change underlying structural issues. While in office, Tamaki intervened in the market after a March 2011 earthquake and tsunami devastated much of northeastern Japan and triggered the Fukushima nuclear crisis. "We intervened in the market to respond to rapid yen rises in order to regain a sense of stability," Tamaki said. "It was nothing but a smoothing operation. We cannot think of intervention as a means to change currency levels." https://www.reuters.com/markets/currencies/japan-ex-currency-tsar-sees-structural-factors-behind-yen-weakness-2023-11-15/

2023-11-15 08:58

Ueda's rhetoric change reflects inflation overshoot BOJ board also showing hawkish tilt - Oct meeting summary BOJ does not need to wait for wage talks conclusion - sources Ueda has long road in dismantling predecessor's stimulus TOKYO, Nov 15 (Reuters) - The Bank of Japan has stepped up its drum beat of hawkish comments over the past week, in a series of communications that insiders say is priming markets for an end to negative interest rates, which could happen in the first few months of next year. The distinct change in BOJ commentary is a part of Governor Kazuo Ueda's plan to dismantle the controversial monetary stimulus of his dovish predecessor Haruhiko Kuroda, which has been blamed for a host of issues including the yen's sharp declines. The hawkish tilt follows the BOJ's decision last month to relax its cap on long-term rates by tweaking its yield curve control (YCC) policy and contrasts with the rhetoric of Ueda shortly after he took the helm this year, which seemed to call for a continuation of Kuroda-era stimulus. Ueda last week said Japan was making progress in sustainably hitting the BOJ's 2% inflation target, and that it won't necessarily wait until real wages turn positive in phasing out stimulus. Three sources familiar with the bank's thinking say the shift to a less dovish tone was intentional. "The governor's comments on inflation have been gradually changing over the past few months, which give a very good steer on the BOJ's policy direction," one of the sources said. "The BOJ is probably in a phase now where it's looking for the appropriate timing to raise interest rates," another source said, a view echoed by a third source. Ueda's efforts to move Japan away from the extremely accommodative monetary settings of the part decade are complicated by risks that doing so too quickly could hurt a fragile economic recovery and trigger massive market upheaval. However, with inflation continuing to overshoot the BOJ's 2% target, the economic justification for a shift is gradually building. Having watered down YCC at its last policy meeting, the BOJ's next goal is to pull short-term rates out of negative territory early next year, sources have told Reuters. REASONS FOR CHANGE The BOJ has said next year's spring wage talks between business and unions will be key to the timing of an exit. Many big firms typically settle pay around mid-March, which heightens the chance of a policy change in April. But the BOJ does not necessarily need to wait for wage talks to conclude to tweak policy, as long as sustained achievement of its price goal can be foreseen, the sources say. The bank's nine-member board is also tilting more hawkish with some calling for the need to start phasing out massive stimulus and communicate the chance of a future exit from ultra-low rates, a summary of opinions at their October meeting showed. "It's natural to think the BOJ is starting to lay the groundwork for normalising policy," said Mari Iwashita, chief market economist at Daiwa Securities and a veteran BOJ watcher. More imminently, other data points for policy deliberations could come from the bank's "tankan" business sentiment survey due on Dec. 13, a gathering of BOJ regional branch managers in early January, and comments from business and union executives on next year's pay goals. That leaves open the chance of an policy change in January, when the BOJ next reviews its quarterly price forecasts. "It's really a matter of conviction and certainty. In the end, it's a judgment call," one of the sources said. Nearly 60% of economists polled by think tank Japan Center for Economic Research after the October policy tweak expect the BOJ to tighten policy in April, followed by 12% projecting a January move. Most expect an end to both YCC and negative rates. LONG ROAD The BOJ's latest price projections released in October show inflation is expected to remain stubbornly above the bank's target in the fiscal year ending March 2024, casting doubt on its view that recent cost-driven price rises are temporary. Its current projection for "core-core" inflation, which strips away fresh food and fuel, is at 3.8%, up a hefty two percentage points from the January estimate. "It's an awfully big upgrade and shows how the BOJ had made estimates that were way too low," said former BOJ top economist Hideo Hayakawa, who expects negative rates to end in April. There are plenty of risks that could hamper an early exit, such as a U.S. recession. Ueda must also avoid drawing heat from reflationist-minded lawmakers. But the BOJ cannot afford to wait too long. Even if it ends negative rates, nominal short-term borrowing costs will remain well below levels that neither stimulate nor cool the economy - estimated by analysts to stand somewhere near 2%. "Ueda's role is to get rid of the unconventional policies of his predecessor, and revert to a policy targeting short-term rates," said former BOJ board member Takahide Kiuchi. "That's a mission he needs to accomplish during his five-year term." https://www.reuters.com/markets/asia/bojs-hawkish-rhetoric-signals-chance-negative-rates-may-end-soon-2023-11-15/

2023-11-15 07:32

LONDON, Nov 15 (Reuters) - Sterling eased on Wednesday after data showed British inflation cooled more than forecast in October, reinforcing expectations that the Bank of England (BoE) will be cutting interest rates by the middle of next year. The British consumer price index (CPI) rose by 4.6% in the 12 months to October, from September's 6.7% increase, according to the Office for National Statistics. It was the lowest reading in two years and below forecasts for a reading of 4.8%. Sterling was last down 0.2% on the day at $1.2471 by 0724 GMT, compared with $1.2487 shortly before the data. The euro was up 0.1% against the pound at 87.135 pence. Core inflation, which strips out food and energy prices, also rose less than expected, up 5.7% compared with 6.1% in September, and below estimates for a reading of 5.8%. "This is a large fall in the headline CPI, but was widely anticipated due to year-on-year effects and falling energy prices; nevertheless, it is good news which confirms the downward trend in inflation," Richard Garland, chief investment strategist at Omnis Investments, said in a note. "It is likely to mean that the bank is in a good position to begin cutting rates in late 2024, but much depends on the strength of the labour market and the economy," he added. Inflation has been on a downward path since last October's four-decade high of 11%, but it has proven more stubborn in Britain than elsewhere and is still well above the BoE's target rate of 2%. The government of Prime Minister Rishi Sunak pledged this year to halve inflation by the end of 2023, without specifying an outright level. On Wednesday, the finance ministry said it had met that goal. "In January we said we’d halve inflation. Today we’ve done that - inflation is now 4.6%," the government's Treasury department said on the social media platform X. The pound, meanwhile, hit a two-month high the previous day, when it staged its largest one-day rise against the dollar in a year, following U.S. data that showed the smallest annual increase in underlying consumer inflation in two years. The figures reinforced the view that the U.S. Federal Reserve has probably also finished raising interest rates. Money markets show traders believe there is a good chance the BoE could start cutting rates by May next year. But BoE chief economist Huw Pill said on Tuesday that the expected fall in inflation to just under 5% would still leave it "much too high" even if it represented a more than halving in price growth over the past year. The BoE has sought to stress that it is nowhere near cutting interest rates from their 15-year high, even as the economy flat-lines close to a recession. https://www.reuters.com/markets/currencies/sterling-eases-after-cooler-british-inflation-data-2023-11-15/