Australian dollar bashed as Fed pulls the rug

is off the lows:

DXY

was bashed across the board:

AUD

too. It looks stuffed:

BRENT

Base metals less so but good luck with that if oil breaks:

COPPER

Big miners (NYSE:) are clinging to the wild thing:

RIO

EM stock (NYSE:) rebound done?

EEM

Still hope in junk (NYSE:):

HYG

US curve inversion can’t find a shade of crimson deep enough:

YIELDS

puked:

SPX

The Fed rug pull that had to come arrived with James :

Federal Reserve Bank of St. Louis President James Bullard said financial markets are underestimating the chances that policymakers will need to be more aggressive next year in raising interest rates to curb inflation.

“There is still a heavy degree” of expectations that inflation will go away naturally, Bullard said Monday in a webcast interview with MarketWatch and Barron’s.

…Bullard on Monday reiterated his view that the Fed needs to at least reach the bottom of the 5% to 7% range to meet policymakers’ goal of being restrictive enough to stamp out inflation near a four-decade high.

More:

Federal Reserve Bank of New York president John Williams said interest rates need to rise further and stay high through next year but could be lowered during 2024.

“My baseline view is that we’re going to need to raise rates further from where we are today,” he said during a question-and-answer session following a speech to a virtual event hosted by the Economic Club of New York.

“I do think we’re going to need to keep restrictive policy in place for some time. I would expect that to continue through — at least through — next year.”

Remember that no Fed tightening cycle has ever peaked before the cash rate was above the rate of inflation. The cash rate is 4% and will be 5% by March. By then, annual inflation is likely to still be in the 5-5.5% range provided monthly keeps tanking.

But, the bigger issue is still that CorePCE is not falling at all. Robust wages and services inflation needs greater job losses to cool:

INFLATION

The US terminal rate still appears to be above 5% and perhaps materially.

This is far higher than Australia with its crashing property prices, huge mortgage reset, and 2023 consumption crash.

AUD lower from here.

Weekly Inflation Outlook: Fingers Crossed That Money Growth Continues to Languish

Last week, the Fed reported that the M2 money supply declined, slightly, again. The year-over-year rate of change is now down to a paltry 1.3%.

M2 Money Supply

Source: Bloomberg

Not only that, but the quarter-over-quarter annualized rate of change (I’ve truncated the spike in 2020 when it exceeded 60%, since that messes up the chart!) is negative for only the fourth episode in the last forty years.

MS Annualized Rate of Change

MS Annualized Rate of Change

Sharp-eyed observers will notice that those four episodes correspond to the recession of the early 1990s, the recession post-tech-bubble, the recession after the global financial crisis, and the looming recession post-COVID. This is a wonderful opportunity for debate. Is it the collapse in money growth that causes the recession? Or is it recession that causes the slowdown in money growth?

Frequent readers of this column will know that I have been skeptical that money supply growth would appreciably slow for long. The reason I thought that would be the case is that I figure the elasticity of loan demand was lower than the elasticity of loan supply, and while higher interest rates would dampen loan demand a little it would stimulate loan supply a lot. (This might not be as true when the curve is inverted, to the extent that banks fund long-dated loans with short-dated borrowings.)

In the ‘old days,’ when monetary policy worked through the mechanism of restricting available bank reserves, Fed tightening would lower money growth but in a world where banks are not reserve-constrained the Fed’s raising of interest rates should not have the same impact on bank lending. In any event, though, bank credit is now also slowing noticeably, with a negative 13-week rate of change for the first time since 2011.

Commercial Banks' Credit

Source: Federal Reserve with Enduring Investments calculations

So does this mean greater bank caution than I expected? Or a much more serious drop in loan demand? I wonder if banks, although not reserve-constrained, are more capital-constrained than I thought (if they are mismatched, they have a long-dated loan book that’s under water compared to their short-dated liabilities and the scale of this unrealized loss will be significant in some cases). Or, perhaps, they are being more credit-conscious (at the right point in the cycle to be so) than they typically are.

But in any event, if the money supply can decline meaningfully, it means the ultimate destination for the price level will be lower. While the rate of change of money is zero or negative, the first chart above illustrates that the stock of money remains far above the prior trend—and it’s the stock of money that determines the price level. As it is, the price level is lagging the prior money growth by a lot, which to me signifies inflation momentum in the pipeline. But perhaps there is less momentum than I thought.

Super interesting to me is the behavior of the hypothetical December 2025 CPI futures (which don’t exist yet, but Enduring Investments calculates them based on the inflation swaps curve). The chart below covers a different time period than the first chart; the left side of this chart picks up basically right after the sharp vertical move on the first chart in mid-2020. Compare what happens to the forward price level indicated by futures when the stock of money levels off. It’s sort of uncanny: when the money stock stops increasing, so does the market-implied forward price level.

CPI Index Futures

CPI Index Futures

Now, I still have quibbles with the implied price level itself. The market pricing implies that the price level will not close the gap with the prior increase in the money stock. Put another way, the market pricing suggests a permanent impairment in money velocity. Velocity plunged alongside the spike in M2, but (to me) there is really no reason to expect that plunge to be permanent. Market pricing, however, disagrees with me.

Even if you also disagree with me, it probably behooves you to take a long position in that forward price level. Because if I’m wrong, the market is already pricing it. And if I’m right, there’s a lot of upside in that forward price level. I am always looking for trades where “heads I win; tails I don’t lose.” The market pricing of inflation right now looks to me like such an opportunity.

Taking a Step Back…

The sourcing on this next chart is a little convoluted. The chart is from @jessefelder, @BW, and @foxjust, using data from the Fed and the BEA. But the screenshot is from an email from The Daily Shot, @SoberLook. I am presenting it this way because the interesting part is the “Hint” that was added in the email.

Cash Held By US Households

Cash Held By US Households

The writer poses the question of what caused the inflation spike and “hints” that it wasn’t the Fed’s QE. But that’s ridiculous. The implication is that the legislature and the President are what caused the inflation, by squirting trillions of dollars into individuals’ accounts. And that’s definitely part of it. But where do they think the government gets the money to do that? The Easter Bunny?

In order to spend more than it takes in, the Treasury needs to borrow money. In normal times, the Treasury gets this money by issuing bonds, which are bought by the population, by pension funds, by businesses, and so on. When that happens, the net amount of cash in the system doesn’t change but only who is spending it. I would have spent money on a new car, but instead, I decided to save for retirement and bought a bond. The money I sent to the government when I bought that bond instead goes to build a bridge, or is distributed to retirees in Social Security payments, etc. But the total amount of cash in the system doesn’t change.

In this case, though, the government issued a bond that was bought by the Fed. The Fed does not need to take cash from its stock of savings; it merely creates that money with a book entry. And that means the total stock of cash increases in direct relation to the amount of reserves the central bank is creating. So, hint: the inflation would not have happened without the monetary stimulus. You may be interested to know that from February 2020, the total amount that the Fed balance sheet expanded was about $4.8 trillion. Interesting how that works, isn’t it?

Disclosure: My company and/or funds and accounts we manage have positions in inflation-indexed bonds and various commodity and financial futures products and ETFs, that may be mentioned from time to time in this column.

Is the Australian dollar rout over?

found some footing Friday night:

DXY

eased:

AUD

Interesting that the bear market rally has not dislodged speculative shorts:

SHORTS

looks ready to break:

BRENT

are stuck:

COPPER

Miners (NYSE:) don’t care:

RIO

EM stocks (NYSE:) are unconvincing:

EEM

Though EM (NYSE:) is closing in on crucial levels:

HYG

The Treasury curve remains mired in a deep red inversion:

YIELDS

faded:

SPX

The AFR says the AUD is done falling:

Before the Fed’s hint of a slowdown, the , which measures the greenback against major currencies, had risen by as much as 18 per cent this year which fed through to prices, especially energy and commodities that are traded in US dollars.

…Analysts predict further gains for the currency. “While a hawkish RBNZ has stoked fresh recession fears, FX markets are sensitive to interest rates and carry, and higher rates here will be a tailwind for the NZD,” ANZ New Zealand chief economist Sharon Zollner says.

“Getting on top of inflation also lessens the need for the nominal exchange rate to trade at a discount to the real exchange rate.”

The local currency’s outlook is not as rosy as the NZ dollar, as China’s COVID-19 outbreaks worsen. The Australian dollar is sensitive to news out of China, Australia’s key export market.

“The recent spike in infections is a real test for Chinese leaders, who have recently signalled a higher degree of tolerance to minimise the economic impact from lockdowns,” says Rodrigo Catril senior FX strategist at NAB. “But its speed may force them to change their mind.”

Maybe. But more likely not. China is locking down harder.

The private sector appears horribly spooked by the virus even as it evades said public lockdowns. In some ways, for good reason. China is not prepared if it rips:

Other jurisdictions are in uproar over lockdowns:

Protests against Covid restrictions spread across China on Sunday as citizens took to the streets and university campuses, venting their anger and frustrations on local officials and the Communist Party.

There was heavy police presence in some areas where huge crowds gathered in Shanghai, after protesters at one of the locations on Saturday called for President Xi Jinping to step down, a level of national dissent unheard of since he took power a decade ago.

Chaos sounds like the worst-case scenario for economic activity going into winter. See oil.

Moreover, the Fed is not done and every tick-up in the bear market rally only increases its terminal rate. On the Bloomberg financial conditions index, the rally has wiped out the equivalent of more than 200bps of Fed hikes. GDPnow is rampaging at 4%!

Yet CorePCE is still glued at 5% annualised:

No bear market has ever ended before the recession has begun (unless there isn’t one):

On top of this, the RBA may be slowing, but it has already baked-in an immense mortgage rate hock across 2023. And when I say immense, I mean huge:

The broad second derivative Fed rates rally is built on sand. So, therefore, is the recovery in the AUD.

I don’t know if the Battler has bottomed but the odds favour us going materially lower from here before the market regime shifts.

Week Ahead: Markets Hold Breath for Employment and Fedspeak

  • Fed is the only game in town
  • Employment data especially significant at this time
  • Bad economic data should cause a rally

While all four major U.S. indices advanced last week, excepting mega caps, they failed to make new highs. What are investors waiting for?

The week will provide economic data, including for inflation (via the , the Fed’s preferred inflation gauge), manufacturing (, ) and spending (, ). But the most impactful report could be that of . Given that the data matters in the context of monetary policy, a series of Fed speakers could potentially move markets. Chief among them is Federal Reserve Chairman Jerome Powell, who is set to of “the economic outlook and the labor market” at the Brookings Institution on Wednesday.

As the event’s title spells out, the Fed boss is focused on data, which has been prompting him to keep aggressively: For the fourth time in a row, on Nov. 2 the Fed raised by a historically high 0.75%, taking rates to their highest level since 2008. The Fed has faced criticism for seemingly wanting Americans to lose their jobs, but they are not magicians.

When there are almost two job openings for each seeker, it is an employee’s market, with full employment and the highest wages. When people have job security and expect it to stay so, they increase demand for products and services, which inevitably exacerbates inflation. Accordingly, if the Fed is to remain consistent, it will keep raising rates until the jobs market declines. Consensus sees 200,000 new jobs in November, easing from 261,000 in October.

According to from the Nov. 1-2 meeting, published Wednesday, a “substantial majority” of members think it would “likely soon be appropriate” to temper the sharp increases. A change in employment data, due out this Friday, may reinforce this desire or force the Fed to keep accelerating rates. As of now, “just” a half-percentage-point increase at the next Fed meeting on Dec. 13-14.

I am skeptical regarding Powell’s reiterations that he still believes a soft landing is possible. I foresee a hard landing, because the U.S. economy has virtually not expanded, even though we have yet to see the rate hikes’ full impact.

And while growth stalls, the cost of living inflated by 6.2% in September YoY, according to the , and by 5.1% even . A technical recession was already triggered when in the first and second quarters. In the third quarter, GDP rose 2.6%, primarily because of a spike in exports (and this is not necessarily representative).

Since quantitative easing has replaced a natural economy operating on participants’ supply and demand, we have seen investors reacting favorably to poor economic data and selling off when the economy proves resilient. I expect that backward philosophy regarding our artificial economy is even stronger now, as the Fed is the only game in town.

While all four U.S. gauges advanced, utilities outperformed and technology lagged, demonstrating investor caution. We can clearly see that on the chart.

Source: Investing.com

While I included the chart, the following is true for all but the : while the weekly price climbed, it found resistance near last week’s highs. The Dow made a new high in the short-term uptrend, confirming investors are looking not for growth but for preservation.

In the S&P 500, we also see a bearish pattern developing in the short term as it possibly climaxes ahead of the falling channel top, demarcating the medium-term downtrend.

The short-term rally is characterized by a faster ascent of lows, while highs are not keeping up, forming a rising wedge. This pattern is bearish, completed with a downside breakout, as bulls grow tired of the lack of progress and exit positions.

German yield curve: 10-year vs. 2-year bonds

German yield curve: 10-year vs. 2-year bonds

Source: Investing.com

The German yield curve ( vs. bonds) fell to its steepest inversion in three decades, indicating a recession, joining the inverted .

The has declined since its biggest two-day selloff on Nov. 10-11, when consumer inflation (per the ) rose 7.7% YoY in October, its slowest rate since January and lower than 8% estimates. Last week, the dollar sank further, completing a bearish pattern, after Fed minutes revealed a growing consensus to ease its aggressive path to higher rates.

Dollar Index Daily Chart

Source: Investing.com

The dollar formed a rising flag, bearish after the initial 5% plunge within four sessions, whose implied target will put to the test the 103 support of the highs since Jan 2017 (red line).

enjoyed the weakening dollar when its yield role lessened.

Gold Daily Chart

Gold Daily Chart

Source: Investing.com

Gold completed a return move, whose support confirmed the double bottom’s neckline.

Bitcoin Daily Chart

Source: Investing.com

may be forming a descending triangle, a pattern of a range that projects bears overcoming bulls. The downside breakout will imply a $2,000 drop from the point of breakout to $13,600.

As for , strictly speaking, last Monday’s lower low (red circle) confirmed the continued downtrend.

Oil Daily Chart

Oil Daily Chart

Source: Investing.com

However, that day developed a potent bullish hammer. Therefore, wait for a fall below $75 for confirmation.

25.11.22 Macro Morning

Wall Street was closed overnight, while the remained weak against the major currencies on firming expectations of a slower pace of Fed rate rises. remained at a monthly high above the 1.04 level as the advanced but is still shy of the recent weekly high. The action on bond markets was muted with US physical markets closed but futures are indicating Treasury yields will drop to the 3.67% level. The commodity complex saw minimal movement in oil prices as crude remains around the $85USD per barrel level while was steady after playing catchup to the other undollars at the $1755USD per ounce level.

Looking at share markets in Asia from yesterday’s session where mainland Chinese share markets fell slightly after the lunch break with the down 0.2% to close at 3090 points while the Index bounced back somewhat, closing up 0.8% to 17660 points. The daily chart is still showing a small slowdown after having gained nearly 4000 points since testing the 2008 lows with the possibility of a further retracement growing but so far defended at the low moving average area. Its pretty obvious that daily momentum was getting ahead of itself before reaching the magical 20000 point level so watch this retracement to continue to test the recent daily lows below the 18000 point level:

HSI

Japanese stock markets returned from their mid week holiday with the closing nearly 1% higher at 28383 points. As I suggested yesterday a further breakout was brewing here as overhead resistance at the 27500 level is now cleared. However the lack of a lead from Wall Street may hamper further gains into the end of the trading week even as price bounces off the trendline as daily momentum remains overbought. Support is however holding nicely at the 27500 point level to continue this uptrend:

NI225

Australian stocks floated into a scratch session by the close with the closing just 0.1% higher at 7241 points. are up slightly due to the closed sessions and lack of lead on Wall Street overnight, with the daily chart still looking very similar to Japanese stocks, but with more upside potential. Daily momentum remains solidly overbought, with strong support below at 7000 points as the uncle point on any pullback:

AUS200

European markets kept creeping higher overnight, but only across the continent as the Index finishing up 0.4% at 3961 points, this time the UK was dead flat. The daily chart shows how the key point going forward will be clearing overhead resistance at the 3900 point area, with daily momentum having a small pause this looks good to keep going higher with the low moving average a clear uncle point in the uptrend:

EUSTX50

Wall Street was closed for Thanksgiving but futures are suggesting more upside above the 4000 points that could clear the previous weekly highs. The chart picture is still quite different to other stock markets as it continues to battle many more layers of resistance but the August highs are in sight after clearing the October highs and the 4000 point psychological level. Price action had been bunching up nicely here but the lack of a new weekly high was holding the market back – watch for a continued break above trailing ATR resistance and the early November high next:

US500

Currency markets had a pause overnight due to closed US markets with King Dollar still losing ground against all the majors. extended its monthly high while was contained at the recent weekly high at just above the 1.04 handle. A rounding top pattern was forming here on the four hourly chart but has been thwarted with very strong support evident at the mid 1.02s. Watch now for resistance to be tested at the 1.0450 level next:

EURUSD

The pair is still in depression mode, continuing to fall below temporary support and breaking down below the 139 level overnight. This was looking good for a continuation rally that had a lot of upside potential, but four hourly momentum had already retraced to a neutral setting after being overbought, so this is not unexpected. Watch for a possible return to the previous weekly lows next, although short term momentum is being extremely oversold:

USDJPY

The {{%|Australian dollar}} wants to push further as well but just can’t seem to breach the previous weekly highs at just below the 68 handle. Momentum is nicely overbought but is not going anywhere without a lead from US markets next, so I expect a further pause into and through the end of the trading week. Watch for a possible retracement below the low moving average however:

AUDUSD

Oil markets are trying to stabilise in the wake of the European energy crisis talks but the lack of open US markets overnight saw some stability with crude holding just above the $85USD per barrel level. Daily momentum was already oversold before this move with the lack of new daily highs and the continued inability of price action to return to the magical $100 level or even clear resistance at the $98 level extremely telling. The next stage is set to test the September lows at $80 or so:

BRENT

is also still and steady but looking a bit weak here after finally playing catchup to the other undollars and getting back to last week’s low. While price action is still well above the October highs (upper horizontal black line) its super apparent that there are no buyers circulating around the $1800 level. Short term momentum is no longer oversold, with building potential for a swing play here to get back to the previous highs or at least get back above trailing support at the $1750 level:

XAUUSD

The Overnight Report: Within Minutes

Break on Through

The had no trouble conquering 7200 yesterday, smashing through from the open and then settling into an otherwise dull session. It was an opening step-up, and that was that, other than a little bit of fade in the afternoon.

Leading the charge was once again cooperation between resources, with up 1.3% and 1.0%, and the , up 0.7%.

chimed in with a 1.3% gain, after Qantas Airways Ltd (ASX:) jumped 5.3% on yet another guidance upgrade, proving that the easiest way to make money is to bend your passengers over and roger them senseless.

actually clocked the highest percentage gain (+1.6%). It seems the two big energy providers are still riding a corporate action wave.

went the other way and dropped -1.1% after Wisetech Global Ltd (ASX:) fell -6.7%. Investors were clearly not impressed with the AGM update.

also bucked the trend -0.3%. There was little to no movement in bond yields but Growthpoint Properties Australia (ASX:) did fall -4.6%, for reasons unclear.

Star Entertainment Group Ltd (ASX:) dropped on its AGM on Tuesday but posted a larger -5.6% drop yesterday. Macquarie downgraded to stock to Neutral, warning potential regulatory change (cashless gambling) may be more disruptive than first thought.

Bummer.

Star held back to a 0.5% gain, and the defensives all had similar sessions – up 0.7%, 0.5% and 0.4%.

Breaking up through 7200 is a strong technical signal and Wall Street is up again overnight, although our are up only 5 points this morning – likely not getting too excited ahead of Wall Street being closed tonight.

We also saw prices particularly weak overnight.

Otherwise, it’s beginning to look like someone might be packing a sleigh.

Whoa There

The of the October Fed meeting released last night revealed a “significant majority” of FOMC members believes it would “soon be appropriate” to slow the pace of rate hikes as recession threat looms.

For the first time, the minutes actually acknowledged the threat of a recession.

Several members said there was an increasing risk that the Fed’s actions “would exceed what was required” to bring inflation down to acceptable levels. There is disagreement about just what the peak rate should end up being before the Fed pauses sometime next year.

Bear in mind the promising October report was released after the Fed meeting.

So, Wall Street is excited. At least, the half dozen people actually at work last night were.

Stock indices closed higher, although faded a bit at the close ahead of tonight’s holiday. The US bond yield fell -5 points to 3.71% and the plunged -1.1%.

Lock in 50 points next month. Except 50 points was already locked in. The focus has now shifted out to 2023, and the question of whether the first hike of the year will be 25, and how many more 25s after that?

A “significant majority” of members want to slow down – now. “Several” are concerned about going too far – next year. Even before the December meeting there’ll be data out for the October PCE, November jobs and the November CPI. As far as 2023 is looking, the FOMC will be, as it has always maintained, data-dependent.

Last night’s data releases showed rose 1.0% in October when 0.5% was forecast. Ex of lumpy transportation, orders still rose 0.5%. But the trend is not expected to last.

Flash estimates of November PMIs showed falling into contraction at 47.6, down from 50.7 in October, and dropping to 46.1 from 47.8. In the post-lockdown economy, US consumers had been lapping up services such as travel, entertainment and dining, which appears now to be running its course. Although a big part of services is healthcare.

The final survey for November showed an increase to 56.8 from 54.7 two weeks ago, suggesting consumers are fans of a deadlocked Congress as well. But that’s down from 59.9 in October, and given is this is 100-neutral index, still way into pessimistic territory.

I reckon Americans are going to go all-out for this year’s Thanksgiving and Christmas after two years of muted celebration and minimal family gathering, like some sort of death row meal, and then batten down the hatches in 2023.

Research has revealed the standard Thanksgiving meal of turkey and all the trimmings will cost 20% more this year than last.

Commodities

There is much confusion around the EU/G7 oil price cap on Russian exports due to come into force on December 5. Last night it was suggested the cap price will be US$65-70/bbl.

The point of the cap is to reduce Russia’s war funding capacity. But currently Russia is selling its oil at US$60/bbl – well above its cost of production — so what’s the point?

The point is the cap applies not to EU/G7 countries, it applies to other countries, such as China and India, who are buying Russian oil.

The EU/G7 will from December 5 ban Russian imports altogether. If you’re wondering why China et al don’t just give Europe the finger, Europe controls some 95% of global maritime services – shipping and insurance – and those services will be sanctioned. In other words unless you comply, you can buy it, but you can’t get it.

Confusion had oil prices down last night, as US$65-70/bbl seemed pointless.

Coincidence? Russia is threatening to reduce Europe’s gas supply through the pipeline that runs via Ukraine from next week, accusing Ukraine of syphoning off gas meant for Moldova. Temperatures in Europe have begun to fall.

Maybe Ukraine is taking some gas, in an agreement with Moldova, given Russia continues to destroy its energy infrastructure. No one believes anything out of Moscow.

Gas prices in Europe are on the rise again, nonetheless. US domestic gas prices also shot up 8% last night as the weather bureau warned of cold ahead.

Otherwise, the big drop in the US dollar did not provide any boost to commodity prices last night. China has moved to increase movement restrictions in Beijing and Shanghai.

The is up 1.3% at US$0.6734.

Today

The SPI Overnight closed up 5 points.

There is another sizeable list of companies holding AGMs today.

Strike Energy Ltd (ASX:) reports earnings and New Hope Corporation Ltd (ASX:) provides a quarterly.

ALS Ltd (ASX:) and Nufarm Ltd (ASX:) go ex.

Wall Street is closed tonight.

The Overnight Report: Within Minutes” was originally published on FNArena.com and was republished with permission.

24.11.22 Macro Morning

Wall Street continued to climb higher overnight, absorbing the latest with aplomb, as the pulled back sharply against the major currencies as a result of the less than hawkish language contained within. The Index built on its breakthrough above the 4000 point barrier on a reversal in risk sentiment while climbed up towards the 1.04 level as the did even better to break through the 67 cent level. The action continued in bond markets with more yield inversion as Treasury yields dropped below the 3.7% level, with softer signalling on the December FOMC meeting. The commodity complex saw sharp drops in oil prices as crude closed below the $85USD per barrel level while was still unsteady but managed to push a little higher up to the $1750USD per ounce level.

Looking at share markets in Asia from yesterday’s session where mainland Chinese share markets did better after the lunch break with the up 0.2% to close at 3098 points while the Index is bouncing back somewhat, closing up 0.5% to 17523 points. The daily chart is showing a small slowdown after having gained nearly 4000 points since testing the 2008 lows with the possibility of a further retracement growing but so far defended at the low moving average area. Its pretty obvious that daily momentum was getting ahead of itself before reaching the magical 20000 point level so watch this retracement to continue to test the recent daily lows below the 18000 point level:

HSI

Japanese stock markets are having yet another holiday, with the chart showing a potential lift on the open playing catchup today. A further breakout maybe brewing as overhead resistance at the 27500 level is cleared and reverted sharply overnight. More upside action on Wall Street should help buying confidence from here as price bounces off the trendline as daily momentum remains overbought with supporting holding nicely at the 27500 point level to continue this uptrend:

NI225

Australian stocks had a very solid session indeed, building on the previous liftoff with the closing nearly 0.7% higher at 7231 points. are dead flat despite the rise on Wall Street overnight, with the daily chart still looking very similar to Japanese stocks, but with more upside potential. Daily momentum remains solidly overbought, with strong support below at 7000 points as the uncle point on any pullback:

AUS200

European markets kept creeping higher overnight across the continent as the Index finishing up 0.4% at 3946 points, although the German was dead flat. The daily chart shows how the key point going forward will be clearing overhead resistance at the 3900 point area, with daily momentum having a small pause this looks good to keep going higher with the low moving average a clear uncle point in the uptrend:

EUSTX50

Wall Street advanced cautiously post the Fed minutes with the having the most gains, up nearly 1%, while the S&P500 lifted 0.6% to 4027 points. The chart picture is still very different to other stock markets as it continues to battle many more layers of resistance but the August highs are in sight after clearing the October highs and the 4000 point psychological level. Price action had been bunching up nicely here but the lack of a new weekly high was holding the market back – watch for a continued break above trailing ATR resistance and the early November high next:

US500

Currency markets saw a reversal in the resurgent USD in the wake of the FOMC minutes with King Dollar losing ground against all the majors. made a new monthly high and Euro almost broke through the 1.04 handle to match its previous weekly highs. A rounding top pattern was forming here on the four hourly chart but has been thwarted with very strong support evident at the mid 1.02s. Watch now for resistance to be tested at the 1.0450 level next:

EURUSD

The pair is back in depression mode after failing to travel any higher from its breakout earlier in the week, flopping below temporary support and breaking down below the 140 level overnight. This was looking good for a continuation rally that had a lot of upside potential, but four hourly momentum had already retraced to a neutral setting after being overbought, so this is not unexpected. Watch for a possible return to the previous weekly lows next:

USDJPY

The had been pulled along meekly in previous sessions but violently broke out overnight with the other majors, pushing through short term resistance around the mid 66 level and breaking into the 67 handle this morning.  This price action shows that traders believe the Fed may not be as hawkish as the RBA so perhaps my contention of weaker upside potential is wrong here. Watch for a ride up to the 68 cent level where very strong resistance lies to test that theory properly:

AUDUSD

Oil markets were unable to stabilise the previous falls across the complex with another night of strong selling sending Brent crude down below the $85USD per barrel level. Daily momentum was already oversold before this move with the lack of new daily highs and the continued inability of price action to return to the magical $100 level or even clear resistance at the $98 level extremely telling. The next stage is set to test the September lows at $80 or so:

BRENT

is still trying really hard to stabilise after falling below short term support last Friday and despite other undollars rallying overnight, the shiny metal was still contained around the $1750USD per ounce level. While price action is still well above the October highs (upper horizontal black line) its super apparent that there are no buyers circulating around the $1800 level. Short term momentum is no longer oversold, with building potential for a swing play here to get back to the previous highs or at least get back above trailing support at the $1750 level:

XAUUSD

Rates Spark: Running on Fumes

We see a case for the bond rally to extend in the near term but we expect the move to run our of steam ahead of the next weeks’ and employment data

Drift lower in yields to continue for a few days but is increasingly running on fumes

We didn’t have a potential OPEC output increase on our list of reasons why bonds should continue to rally this week but it clearly doesn’t hurt. Our reasoning had more to do with classic bond fundamentals. Even if winter has proved mild so far, and this may well change, we expect PMIs’ gradual slide lower to drive home the message that Europe is headed for a recession. What’s more, the Federal Open Market Committee are likely to paint a less hawkish picture than Powell’s press conference did after the meeting. Both would be supportive for bonds, and help them extend their already impressive rally.

The odds of a snapback higher in yields are rising

There is one problem, however. We think this is the wrong macro move and the odds of a snapback higher in yields are rising. For one thing, the all-important batch of employment and inflation releases that starts next week could well trigger a wave of position-squaring from short-term longs. More importantly, volatility in economic releases, and the solid performance of US employment data so far in this cycle, means the bar for a further bond rally is higher and less likely to be met. Finally, as bond real rates drop, the odds of a pushback from central banks increases.

In the case of German Bund, this means any dip below 2% in yields is unlikely to last past the end of this week in our view. In the case of US Treasuries, any test of 3.75% to the downside is likely to set up another jump back towards 4%.

The drop in real rates is a headache for central banks fighting inflation

EUR-USD 10 Yr Real Swap Rate

EUR-USD 10 Yr Real Swap Rate

Source: Refinitiv, ING

Today’s events and market view

Today’s European economic releases consist of the eurozone current account figures, as well as consumer confidence. The latter is expected to edge up slightly after its spectacular fall earlier this year. The UK Office for Budget Responsibility (OBR) testimony will also be closely watched by investors given the controversy surrounding the government’s budget and economic forecasts.

The European Central Bank speakers list features Robert Holzmann, Olli Rehn, and Joachim Nagel.

Germany will make up today’s supply slate with a €3bn sale. The US Treasury will sell $35bn T-notes. The UK will sell inflation-linked gilts.

The US economic calendar brings an update to the Richmond Fed manufacturing index. Fed speakers are likely to have a hawkish tone thanks to Loretta Mester, Esther George, and James Bullard all due to make public comments.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Original Post

Australian dollar bear market bounces

softened last night:

DXY

firmed:

AUD

All of the usual followed with EM (NYSE:), junk (NYSE:)and up:

BRENT

COPPER

RIO

EEM

HYG

But curve inversion got deeper again in the US:

are trading on DXY only:

SPX

There’s some improvement in Fed nowcasted inflation with all measures converging on the CorePCE at around 5% annualised:

INFLATION

As GDPNow booms:

GDPNOW

There’s more headline inflation relief ahead but how the Fed can do anything but keep hiking aggressively with 4% GDP and 5% inflation is not clear to me.

The pace of hikes may be about to slow but they are still 50bps hikes!

Clearly AUD negative.

The Overnight Report: Off The Rails

Death in China

On a comeback close for Wall Street on Friday night, the jumped over 20 points from the open yesterday, but thereafter no one was interested. The index sank quietly all day to a lacklustre close.

News over the weekend was that Chinese covid cases had increased sevenfold in just two weeks and that three deaths had been reported – the first in six months. The manufacturing city of Guangzhou has been locked down and Shijiazhuang is under stay-at-home orders.

Going well, this zero-covid policy.

The sector subsequently closed down -1.5% and energy -0.9% to provide the greatest drag.

bucked the trend (+1.8%) to be the best performing sector by percentage. AGL Energy Ltd (ASX:) led the index yesterday with a 4.2% gain. There was no particular news, but one assumes the bid for Origin Energy Ltd (ASX:), leaving AGL at the altar, and the new-look AGL board, all add up to a possible bid for AGL from elsewhere.

was down -1.5%, led by a -4.3% fall in Block Inc (ASX:) after the government revealed it is considering applying credit card company regulations to BNPL.

Like that was never coming.

The provided the main counter to (+0.5%), with some help from (+0.9%) and (+0.5%).

There is little point in me needlessly waffling on any further. It was a quiet day, and this week will likely bring more of the same with Wall Street not much interested.

That said, I note the has closed down -0.4% and metal prices tanked overnight on China woes, yet our are up 32 points this morning.

Seems ambitious. And you’ll need to find some willing players.

Not Much Difference

Wall Street wasn’t exactly lit with excitement last night either.

Fresh restrictions in China also weighed but in a nod to the seventies and wage-price spirals, one of the two largest US railway unions rejected a White House-brokered labour agreement, raising the possibility of a potential strike by early December, which would suggest further supply-chain issues that would continue to drive inflation.

The good news for Christmas shoppers is that retailers will already be well and truly stocked and ready to go, with this week’s Thanksgiving sales the kick-off, so there should be no impact on supply were there to be a rail strike.

The bad news is that if a deal is not reached, a strike could cost the US economy -US$2bn a day.

Who’s next? The teamsters?

If we really are going to get a seventies Christmas this year, then in Australia we should be expecting strikes from postal workers, airport baggage handlers and brewery workers. Ah those were the days.

The Cleveland Fed president and FOMC voting member Loretta Mester appeared on CNBC last night and all but confirmed the Fed will only go 50 next month, while emphasising that was only her personal opinion. When pushed as to whether a slowing in pace would then lead to 25 point hikes in 2023, Mester refused to be drawn other than to insist the latest data would inform that decision.

The of the November Fed meeting will be released tomorrow night.

There was absolutely no response from Wall Street to Mester’s musings. The market locked in 50 points long ago.

The mood was nonetheless dour on Wall Street last night and the indices slipped towards the close.

The was supported by a 6% gain for Disney (NYSE:), after it was announced the current CEO would be replaced by a new CEO who was actually the previous CEO.

Commodities

The WSJ reported last night that OPEC was prepared to increase production in order to help ease tensions with the Biden administration and provide a cushion as new efforts aimed at curbing Russia’s energy industry kick in on December 6.

prices fell -6%.

The Saudi energy minister then responded with, and I paraphrase, don’t be bloody ridiculous. If anything we will cut production to maintain a stable demand/supply balance.

Oil prices bounced 6%.

Falls in metal prices were all about China but also a resurgent , which jumped 0.9% overnight. This is mainly due to renewed weakness in the , which is 57% of the trade-weighted dollar index.

The is thus down -0.9% at US$0.6603. Here we go again.

Today

The SPI Overnight closed up 32 points or 0.5%.

The will speak today. He’s been in hiding since the release of the RBA’s own review which decided the “no hike before 2024” call was a complete [insert word here]-up.

The US will see .

Technology One Ltd (ASX:) will report earnings, while today’s long list of AGMs includes those of Bluescope Steel Ltd (ASX:), Fortescue Metals Group Ltd (ASX:) and Star Entertainment Group Ltd (ASX:).

Amcor PLC (ASX:) goes ex (quarterly dividend).

The Overnight Report: Off The Rails” was originally published on FNArena.com and was republished with permission.