Dollar Mixed Amid Risk-On Impulses

The combination of the election outcome and much higher than expected inflation is altering the expected policy mix in Norway and lifting the krone 0.8% against the dollar. It is the strongest of the major currencies today. The Australian dollar has been lifted to almost $0.9300 since, the highest since late July. The risk-on impulses are weighing on the yen, against which the dollar is trying to establish a foothold above JPY100. The other major currencies are mixed.

Meanwhile, the beleaguered Indian rupee and Indonesian rupiah jumped 1.4% and 1.3% respectively, and the MSCI Emerging Market equity index is up almost 1.5% to bring the 10-day advance to 9% and the highest level since mid-June.

China reported August industrial output, retail sales and fixed asset investment. Each rose sequentially and more than expected. This helps solidify the sense that the Chinese economy has stabilized and serves to ease concerns of a head landing. The 10.4% (year-over-year) is the strongest since March 2012. The 13.4% increase in retail sales is the strongest of the year. Fixed asset investment rose 20.3% which is the highest in 3 months.

On the other hand, there appears to have been a resurgence of China's shadow banking sector. Aggregate financing jumped CNY1.57 trillion in August and snaps the downtrend that had been in place since the start of Q2. This was not so much the result of increased yuan loans from Chinese banks. Yuan loans rose CNY711 bln (form CNY700 bln in July). The gap between the new yuan loans and the aggregate financing, a measure of the shadow banking, surged to nearly CNY860 bln from about CNY108 bln in July.

Norway and Sweden surprised but in opposite directions. Sweden's industrial output and orders data were reported well below expectations. Industrial production contracted by 0.4%, whereas the consensus had forecast a 0.5% increase. The 0.3% increase in orders was half of what market expected. Recall that last week Sweden reported a 0.2% decline in service output in July. This is not the kind of news that the Riksbank expected or wanted to see, but it is too early to spur much speculation of a rate cut in Q4.

Norway's surprise came from an firmer inflation figures. Headline CPI slipped 0.1%, not the 0.4% the consensus expected and this saw an unexpected increase in the year-over-year rate to 3.2% from 3.0%. The underlying rate also rose to 2.5% from 1.8%. This not only means that the central bank is firmly on hold at next week's meeting, but also injects risk that the rate path is increased.

France had its own surprise today. The market had expected a 0.5-0.6% increase in July industrial output. Instead, it slumped 0.6%. It is the third consecutive decline and brings the year-over-year rate to -1.8% from 0.1% in June. Manufacturing output contracted by 0.7% (after -0.4% in June). Transportation equipment was especially hard hit, felling 6.7%.

Several other euro area countries have reported industrial output figures. Despite the fact that the July euro area manufacturing PMI rose above 50 in July for the first time in two years, the euro zone's industrial output likely fell in July. Those figures will be reported on Thursday.

Although the euro is marginally lower today, it is holding on to the lion's share of yesterday's gain. Initial support is seen in the $1.3190-$1.3210 area. With Italian Q2 GDP revised to -0.3% from -0.2%, the uncertainty around Monte dei Paschi, and a delay in the Senate panel vote on Berlusconi's public tenure have served to push Italian 10-year bond yields above Spain's for the first time since last March.

There are no market moving US or Canadian data today. The surge in Canadian building permits (July) reported yesterday was highly concentrated in commercial properties suggesting no knock-on effect on today's report of August housing starts.