• October PPI mirrored last week’s CPI; regional Fed manufacturing surveys for November started rolling out; U.S. yields reacted accordingly to the PPI; U.S. yield curve remains inverted
  
• U.K. reported mixed labor market data; BOE tightening expectations are still adjusting; German November ZEW survey came in firm; ECB tightening expectations have been pared back
  
• Japan Q3 GDP unexpectedly contracted; the RBA found that its forward guidance during the pandemic resulted in communication challenges; China reported weak October IP and retail sales data
  

The dollar remains under pressure. DXY is trading at the lowest since mid-August near 105.787 and in on track to test of the August 10 low near 104.636. Similarly, the euro is trading at the highest since early July and is testing the 200-day moving average near $1.0435. Break above would set up a test of the June 27 high near $1.0615. Cable is testing $1.20 and a break above would set up a test of the August 15 high near $1.2150. The 200- day moving average comes in near $1.2250. USD/JPY is trading at the lowest since late August and is on track to test the August 23 low near 135.80.

AMERICAS

October PPI mirrored last week’s CPI. Headline came in at 8.0% vs. 8.3% expected and a revised 8.4% (was 8.5%) in September, while core came in at 6.7% y/y vs. 7.2% expected and actual in September. The PPI data will do nothing to dispel the notion that the Fed is moving closer to a pivot.

Regional Fed manufacturing surveys for November started rolling out. Empire survey kicks things off today and came in at 4.5 vs. -6.0 expected and -9.1 in October. This is the first positive reading here since July’s 11.1. Philly Fed reports Thursday and is expected at -6.0 vs.-8.7 in October. Kansas City Fed also reports Thursday and is expected to remain steady at -7. In between, October IP will be reported tomorrow and is expected at 0.1% m/m vs. 0.4% in September. Overall, the manufacturing sector is slowing but has held up relatively well in the face of Fed tightening.

U.S. yields reacted accordingly to the PPI. The U.S. 2-year yield is trading near 4.34%, just above the recent low near 4.29% last Thursday. The 10-year yield is trading near 3.80%, below the recent low near 3.81% last Thursday. Yields are likely to continue probing the downside this week until the data say otherwise. Equity markets have latched onto the PPI data as confirmation of the CPI data and continue to rally.

U.S. yield curve remains inverted. Our favored curve is the 3-month to 10-yaer and after flirting with inversion the past couple of weeks, it has inverted deeply to the tune of -37 bp and is the most since September 2019. The 2- to 10-year curve has been inverted since July and is currently near -55 bp, just above the cycle low near -57 bp from early November. We await confirmation from the Chicago Fed National Activity Index but it seems that the U.S. economy is likely to go into recession over the next 12 months or so. Should equities really be rallying so much?

Fed speakers this week will be closely watched. Yesterday, Brainard said “I think it will probably be appropriate soon to move to a slower pace of increases. But I think what’s really important to emphasize -- we’ve done a lot, but we have additional work to do both on raising rates and sustaining restraint to bring inflation down to 2% over time.” Harker, Cook, and Barr speak today.

EUROPE/MIDDLE EAST/AFRICA

The U.K. reported mixed labor market data. The unemployment rate rose a tick to 3.6% for the three months ended in September as employment fell a larger than expected -52k, while average weekly earnings slowed a tick to 6.0% y/y. Overall, it appears that the labor market remains tight enough to still generate some wage pressures. October CPI data will be reported tomorrow. Headline is expected at 10.7% vs. 10.1% in September, core is expected at 6.4% y/y vs. 6.5% in September, and CPIH is expected at 9.3% y/y vs. 8.8% in September.

Bank of England tightening expectations are still adjusting. WIRP suggests a 50 bp hike December 15 is priced in, with 45% odds of a larger 75 bp hike, down from over 60% at the start of last week. The swaps market is now pricing in 150 bp of tightening over the next 12 months that would see the policy rate peak near 4.5%, down from 4.75% last week and down sharply from 6.25% right after the mini-budget in late September.

German November ZEW survey came in firm. Expectations came in at -36.7 vs. -51.0 expected and -59.2 in October, while current situation came in at -64.5 vs. -69.3 expected and -72.2 in October. Recent German data have come in on the firm side but this will be hard to sustain. The nation remains the weak link in the eurozone.

ECB tightening expectations have been pared back. WIRP suggests another 75 bp is about 35% priced in for December 15 vs. fully priced in after the October decision, while the swaps market is pricing in a peak policy rate near 3.0% vs. 3.5-3.75% after the October decision. The ECB will update its macro forecasts at the December meeting and are likely to show similar revisions as the EU unveiled last week. 2025 will be added to the ECB’s forecast horizon then. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does. Villeroy and Elderson speak today.

ASIA

Japan Q3 GDP unexpectedly contracted. GDP came in at -1.2% SAAR vs. 1.2% expected and a revised 4.6% (was 3.5%) in Q2. In q/q terms, GDP came in at -0.3% q/q vs. 0.3% expected and a revised 1.1% (was 0.9%) in Q2. This was the first contraction since Q3 2021. Weakness in inventories and net exports were the main drivers. In a nutshell, this is why policymakers are worried about removing stimulus too soon. To us, this is a green light to buy USD/JPY. Next BOJ meeting is December 19-20 and another dovish hold is expected.

The RBA found that its forward guidance during the pandemic resulted in “substantial communication challenges.” It decided it would be more flexible in future, noting “Given inherent uncertainty in the world, forward guidance should be flexible and is not always required. Forward guidance can be used to help inform the public and markets, but it is best to avoid being too prescriptive.” RBA tightening expectations remain subdued. WIRP suggests only 65% odds of a 25 bp hike December 6. The swaps market is pricing in another 100 bp bp of tightening over the next 12 months that would see the policy rate peak near 3.85%.

China reported weak October IP and retail sales data. IP came in at 5.0% y/y vs. 5.2% expected and 6.3% in September, while sales came in at -0.5% y/y vs. 0.7% expected and 2.5% in September. This was the first y/y drop in sales since May. We cautioned against getting too excited about the limit loosening of Covid Zero restrictions and the data support this. Until the policy is eliminated, the recovery is likely to remain spotty. Of note, the PBOC kept its key 1-year MLF rate steady at 2.75%, as expected.