After a strong tightening of US financial conditions, primarily led by higher real rates and USD, we hear increasing acknowledgement that the markets are doing the heavy lifting of central banks and replacing the need for them to hike policy rates.
That was the message we heard last week from Federal Reserve (Fed) members Daly, Goolsbee and Bostic.
Dollar and US Bond Markets
This suggests that if we get a hot US CPI print this week, then market players will increase exposure to yield curve steepeners trades, with reduced interest to short US 2yr Treasuries.
In turn, this should limit the upside in the USD, given the near-zero correlation between the USD and the 2s v 10s Treasury curve.
With a focus on the US bond market, consider the US Treasury department will be issuing $101bn in 3, 10 and 30-year Treasuries this week and that could move markets around.
JPY, NZD and Latin America FX
Technically, we are seeing that the USD appears to be consolidating, and while it comes with a hefty dose of risk, momentum accounts are again looking at the JPY shorts.
While risk may be impacted by geopolitical news flow, NZDJPY longs look interesting for a potential breakout, especially with China coming back online, where we can see ‘green shoots’ appearing in the economics.
For those whose strategy thrives in higher volatility regimes, then cast their eyes to Latin American FX pairs, where outsized moves in the COP, CLP and MXN have come up on the day trader’s radar.
Central Banks to provide some insight
US CPI aside, it will be a central banker fest this week, where an extensive list of Fed, Bank of England (BoE) and European Central Bank (ECB) officials will be speaking at the NABE (National Association of Business Economics) and IMF conferences.
It feels like the market has made up its mind that the ECB and BoE hiking cycle is over, so Fed officials could move markets more intently.
We also get US Q3 earnings rolling in, with the big money centres in play, and this puts the Dow Jones30 index front and centre for index traders this week.
For the political watchers, the process of finding a new House speaker will evolve and that could have big implications for the next shutdown negotiations from 17 November.
Amid rising geopolitical concerns, crude oil remains front of mind, and we watch the reaction for the futures open, with S&P 500 and Nasdaq100 futures skewed modestly lower on the re-open.
Marquee economic data to navigate:
US CPI (12 October)
Arguably the marquee event risk of the week. The economist’s consensus is we see both headline and core CPI increase 0.3% MoM. This should take the year-on-year clip on headline CPI to 3.6% headline (from 3.7%), and core CPI at 4.1% (4.3%). The market’s pricing of headline CPI (in CPI fixings) is 0.25% MoM and 3.54% YoY.
A 3-handle on core CPI would be welcome news. It would see USD longs cover while the XAUUSD and Nasdaq100 push higher. Above 4.3% could see pricing for the November FOMC increase to around 40% (currently 29%) and see bond yields rise, putting renewed upside into the USD.
US PPI inflation (11 October)
Final demand is expected at 0.3% MoM, with core PPI eyed at 2.3% yoy. The market is less sensitive to PPI than the CPI print, but a big beat/miss to consensus could hold implications for how economists estimate PCE inflation (due 27 October)
China new loans (no set day this week)
While incredibly hard to forecast, the market sees a rebound in credit with new yuan loans eyed at CNY2.5t (1.35t). Above consensus numbers could see China/HK equity build on Friday’s impressive rally and see AUD & NZD outperform.
China CPI/PPI inflation (13 October)
The lowflation regime in China continues but should gently rise to 0.2% (from 0.1%) on consumer prices and -2.4% on producer prices. USDCNH has consolidated through China’s Golden Week holiday, but should we see a trend emerge, the direction of this cross could influence G10 pairs.
China trade data (13 October)
The modest improvement seen in the China economic data flow should continue with exports expected at-7.3% (from -8.8%) and imports at -6% (from -7.3%). Better-than-feared numbers could see China equity push higher.
BoE credit conditions report (12 October)
We get the UK monthly GDP and industrial production and both should remain weak. The BoE’s credit data should also be lowball, notably given what we’ve seen in recent mortgage approval numbers. Traders will be paying attention to BoE speeches this week with swaps pricing essentially pricing the BoE to have finished its hiking cycle.
Mexico CPI (9 October)
The market eyes headline CPI at 4.5% (from 4.64%) & core CPI at 5.75% (6.08%). The MXN finds few friends, largely due to weaker crude prices, but local data could play a greater role this week. USDMXN has found supply into 18.40, but swing traders may look at the 17.90 area to buy pullbacks for another leg higher.
US Q3 earnings this week
This week we get the US big money centres out with earnings. The focus falls on asset quality, loan demand, net interest margins (NIM) and any commentary on the recent tightening of broad financial conditions. Look out for Citi, JP Morgan, Bank of America, Wells Fargo and UnitedHealth
