Overview: The US dollar, which was sold last week after the FOMC and soft employment report, remains on the defensive today. The Antipodean currencies and yen are struggling, but the other G10 currencies are firm. The dollar is also lower against most emerging market currencies. Still, given the magnitude of the dollar's pullback, we suspect some consolidation is likely.
Asia Pacific equities rallied, helped by the sharp gains in the US before the weekend. Note that South Korea is banned short sales and the Kospi rallied nearly 5.7% today. The Philippine's allowed short selling for the first time, and its main index rallied 1.5%. Europe's Stoxx 600 is treading water after rallying every day last week. US futures indices are trading with a slightly firmer bias. After falling last week, European and US 10-year benchmark yields have come back higher today. European yields are mostly 6-8 bp higher. The US 10-year yield is up a couple of basis points to about 4.60%. The US quarterly refunding begins tomorrow. Gold is trading slightly softer and is near the middle of its $11 range late in the European morning near $1987. December WTI is also consolidating inside the pre-weekend range but is firmer near $82 a barrel. Saudi Arabia and Russia indicated they supply curbs will persist through the end of the year.
Asia Pacific
One might be forgiven for thinking that with low nominal and even lower real rates, a negative overnight policy rate, and a deeply undervalued yen that the Japanese economy would be doing well, but it ain't. The economy would have contracted in Q2 if it were not for the strength of tourism, for which the cheap yen probably played a role. The economy looks to have contracted in Q3. In fact, given the depreciation of the yen, the Japanese economy may have slipped this year to the fourth largest behind Germany, which has its own economic challenges. The final readings showed that despite the better than preliminary estimate (51.6 from the preliminary 51.1, down from 53.8 in September), the service PMI is still at the low for the year. The composite PMI stands at 50.5 rather than 49.9 initial estimate but that is also the low of the year.
Tomorrow, Japan reports worker earning and household consumption. Real earnings have not risen on a year-over-year basis since March 2022 and the streak most likely did not end in September. The decline in household spending may have accelerated to 2.7% year-over-year from -2.5%. The cabinet approved a new stimulative package last week for JPY21.8 trillion (~$146 bln) in total fiscal spending. It has high hopes for the spending: GDP, saying will be boosted by 1.2 percentage points over the next three years, and inflation will be suppressed by one percentage point. Estimates suggest that as much as JPY13 trillion in new bond issuance will be required, as with the other hand, the central bank tries limit the rise of the 10-year yield. BOJ Governor Ueda seemed to play down the likelihood of raising the overnight target rate (-0.10%) before the end of the year.
The Reserve Bank of Australia announces its rate decision the first thing tomorrow. In Bloomberg's survey 21 of 24 economists surveyed expect a 25 bp rate hike. The futures market is less confident. It shows slightly more than a 50% chance and nearly a 77% chance of a hike before year-end. Recall sentiment swung toward a rate hike based nearly exclusively on the Q3 CPI report that slowed to 5.4% from 6.0%, instead of 5.3%, the median response in Bloomberg's survey. The underling core measures averaged 5.2% down from 5.7% in Q2 but above the 5.0% median forecast. Other data point to a slowing of the Australian economy, including a loss of 40k full-time jobs in September, the most since October 2021. The economy grew by 0.4% in the first two quarters this year and is expected to have slowed to 0.2% in Q3 and Q4.
The dollar has fallen against the yen for the past three sessions, which is the longest pullback in three months. The streak is being challenged today as the greenback stabilizes. It held above the low set on October 31 (~JPY149.00). The dollar has traded up to JPY149.75, with the help of firmer US rates. The JPY150.00 offers nearby resistance, and then JPY150.35. The Australian dollar has advanced eight of the past ten sessions coming into today. The nearly 1.25% rally ahead of the weekend was the largest in nearly four months. It extended the gains marginally to almost $0.6525 before stalling. It remains in a narrow range and has held above $0.6500. Given the dramatic advance that lifted the Aussie to its best level since mid-August and the arguably closeness of tomorrow's RBA call, consolidation is not surprising. Support is likely in the $0.6460-80 area. The dollar fell by nearly 0.55% against the Chinese yuan ahead of the weekend and has edged a little lower today, falling to about CNY7.2650. It is the fourth consecutive session that the greenback has moved lower against the yuan. Despite the yuan's recovery, the PBOC kept the dollar's reference rate nearly steady at CNY7.1780 (CNY7.1796 on Friday), while the average projection in the Bloomberg survey fell to CNY7.2860 (CNY7.3134 Friday).
