Stocks cheered on Tuesday in the largest gain in a year but the response remains lukewarm in FX and bonds. The Canadian dollar was the top performer while the Swiss franc lagged. The focus will be on the Aussie in the hours ahead with the CPI report due.
The S&P 500 has retraced nearly 61.8% of its losses over the past month but USD/JPY has hardly regained 30%. Even after the best day for stocks in 12 months, the dollar failed to make any gains against the yen.
What's the forex market saying?
Part of the story is Treasury yields. The 10-year remains near 2.22% which is an unattractive level for foreign inflows. What's happened is that bonds and FX are weary of the Fed after Bullard's comments last week, while a more-dovish Fed is unambiguously bullish for stocks.
Expect that correlation to unwind next week and the US dollar to play catch-up if the Fed stays the course on the taper – something that's infinitely more likely with stocks rebounding.
At the same time, the ECB opened a new front Tuesday with a report saying they're considering buying corporate bonds late this year or early next. The usual denials even lacked urgency, saying only they weren't “currently” considering buys. If they do it could add rough 600-800 billion euros to the balance sheet.
The euro underperformed and finished near the session low at 1.2716. The leak on corporate bond buying could be aimed a cushioning the blow related to possibly bad news from next week's AQR and stress test.
Looking to the hours ahead, the focus is on the Australian dollar with Q3 inflation data due at 0030 GMT. The consensus is for a 2.3% y/y rise on headline and 2.7% rise on the trimmed mean. I see minimal reason to buy AUD on a higher number because the sequential changes will still be down significantly and much-lower oil prices put disinflationary pressures in the pipeline.
|Consumer Price Index (Q3) (q/q)|
|0.4%||0.5%||Oct 22 0:30|
|RBA trimmed mean CPI (Q3) (q/q)|
|0.5%||0.8%||Oct 22 0:30|
|Consumer Price Index (Q3) (y/y)|
|2.3%||3.0%||Oct 22 0:30|
|RBA trimmed mean CPI (Q3) (y/y)|
|2.7%||2.9%||Oct 22 0:30|
Fed members Rosengren and Fisher – on opposite sides of the hawk/dove spectrum – both underscored a willingness to continue tapering heading into the trading week. That could have boosted the dollar and hurt risk assets. IT giant IBM also warned on profits in a blow to hopes for business investment.
Yet stock markets rallied nearly 1% and the US dollar sagged. We struggle to tie these events to news and instead point to strong weekend sentiment and talk about a bottom in stocks. The Treasury market was much more cautious with yields moving 1-2 bps lower.
There were also signs of strain in the periphery with Portuguese 10-year yields up 14bps, partly on talk of liquidation in Espirito Santo assets.
You could argue the market had a chance to get a better handle on the risks and has shifted worry to Europe. But that doesn't explain how the euro was able to climb against the US dollar throughout the day.
Overall, markets will need some better news in order to continue this rebound or it will quickly be over and the US dollar will resume its rally (excluding versus JPY).The news starts with Chinese Q3 GDP at 0200 GMT. The consensus is for 7.2% y/y growth and anything else would be negative. The question is: Would a miss mean more stimulus? Probably and that could make any dip a worthwhile buy in AUD/USD. Meanwhile, a good number would boost the Aussie on better global growth and continue to help nerves heal.
We doubt it. Periods of extreme swings in sentiment rarely end abruptly. For the moment, Bullard has calmed worries by adding a 'Yellen put' to markets but how much of a delay in the taper is now priced in? Unless some leaks slip from the FOMC that say otherwise, we suspect markets will put about an 80% probability on a taper delay by the time decision day rolls around.
The thing is, if the Fed disappoints, markets could go straight back to kicking and screaming -- perhaps worse.
At the same time, Europe is its own animal now and the economic worries there are real. It means every data point is elevated and AQR rumors will soon be rampant. Eurozone budgets are also in the spotlight with reports that Germany and France are in secret discussions to approve the French budget.
In the immediate term, the yen is slightly weaker in early trading in a sign that Friday's upbeat spirit will continue.Events to watch include speeches from the RBA's Kent at 2300 GMT and the BOJ's Kuroda at 0030 GMT.
Whether the Fed decides to buy another $15 billion in bonds through November is immaterial in dollar terms but it sends an extraordinarily powerful signal. Bullard hinted the Fed could delay ending the taper at the FOMC meeting at month-end. The comment reversed the rout on risk assets .
Bullard said it would be logical for the Fed to delay the taper because metrics of inflation expectations – like 5-year breakevens at 1.47% -- have changed the outlook.
The idea wasn't even circulating in markets before the comment and that it came from a Fed hawk like Bullard was a shock that instantly sent stocks higher, bonds lower and the US dollar down. Over the remainder of the day, the US dollar sagged around a cent on most crosses.
The sudden change re-establishes the idea that the Fed will forever back-up risk assets and tirelessly work to prevent any kind of shakeout or scare. Essentially, it's the Yellen put.
At the same time, evidence continues to show the US economy improving. Initial jobless claims and industrial production both hit post-crisis highs in reportswhile the Philly Fed was a touch stronger than expectations. If anything, soft retail sales report has been the outlier.
The underlying story is that Europe is slowing and once the shakeout is complete, markets will refocus on that theme.
In the meantime, a mini-bomb hit early in Asia-Pacific trading after the RBNZ inadvertently republished the report saying NZD moves are unjustified and unsustainable. The erroneous report sent NZD a half cent lower before it bounced on the retraction. These are volatile days.
Otherwise, the Asia-Pac calendar is quiet.
|Industrial Production (Sep) (m/m)|
|1.0%||0.4%||-0.2%||Oct 16 13:15|
|Continuing Jobless Claims|
|2,389K||2,380K||2,382K||Oct 16 12:30|
|Initial Jobless Claims|
|264K||290K||287K||Oct 16 12:30|
|Jobless Claims 4-Week Avg.|
|283.50K||287.75K||Oct 16 12:30|
|Philly Fed Manufacturing Index|
|20.7||19.9||22.5||Oct 16 14:00|
You know there's something inherently wrong with markets when each of the few recent rallies week was strictly caused by the Fed. Today's remarks fron St Louis Fed's Jim Bullard suggesting the Fed ought to consider delaying the end of QE is not a joke. Greek spreads are back and the yields dwontrend remains intact. Full charts & analysis.