After being routed during the US session yesterday, the United States Dollar has steadied a bit this morning and is trading moderately against all major currencies.
The big show came yesterday at 8:30 AM when CPI reports showed inflation in the US did not accelerate at all during the month of October. The core reading showed an increase of just 0.2%, a remarkable decrease from the very hot summer months. As we’ve mentioned before, this is almost exactly what the Federal Reserve is looking for. Though Jerome Powell just last week spooked markets by saying interest rates may not be restrictive enough, yesterday’s release paints a picture in diametric opposition to that statement.
Multiple regional presidents cheered the number, though both Richmond’s barking and Chicago’s Goolsbee re-emphasized that there is much more progress to be made. Of importance over the next few quarters will be inflation in the housing sector, running higher than other figures and much more entrenched. Ironically enough, this is a figure that, should the Fed choose to continue raising interest rates, could continue to increase.Overall, risk sentiment improved dramatically through the session yesterday as traders began to solidify in the view that not just the Fed, but most major central banks are more than likely finished with this tightening cycle. Though the restrictive rates we see now are likely to continue for at least the next couple of quarters, expectations are now set almost in stone that interest rate hikes are a thing of the past. China also helped boost the world’s risk-on attitude, offering an unprecedented $200 billion (equivalent) in one-year loans, substantially more than markets expected. Chinese consumer spending and industrial output also ticked up in October, giving the world’s second-largest economy some much-needed signs of life. US PPI this morning also helped boost some Dollar returns, coming in under expectations but not showing the contraction that some expected. Producer prices rose less than expected across every major industry group – more good news for the Fed. It’s important to note that this month’s release may be impacted by the return of student loan payments during the month of October, paused previously for three years. The Empire Manufacturing Survey, by contrast, posted a surprisingly strong number after once contracting, giving the Dollar further strength as the manufacturing sector comes back to life.
What to Watch Today…
- Philadelphia Fed Business Outlook, Thursday 8:30 AM
- Eurozone CPI, Friday
- Monex USA Online is always open
The Pound Sterling, after running up the score against the USD to the tune of more than a percent yesterday, has retraced nearly half a percent this morning after UK inflation slowed dramatically to its lowest level in two years this morning. The annualized figure of 4.6% is markedly below September’s reading of 6.7%, and as a result interest rate cuts from the Bank of England are expected as soon as spring of next year. The UK this morning also attracted the highest-ever demand for a conventional bond sale as expectations for interest rate cuts become more commonplace.
Japanese Yen was quite the beneficiary of Dollar weakness yesterday as JPY’s 1% gain against the Buck is much more indicative of cooling figures out of the US rather than any economic strength from the island nation. Japan’s Q3 GDP showed a much larger-than-expected contraction, bolstering the case for continued stimulus from the Bank of Japan. Though many had looked toward the possibility of an interest rate hike from the central bank to stop the Yen’s continued slide, this looks increasingly unlikely and JPY has more downside potential to close out the year.