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Fragile Calm Returns And Powell's Anti-Inflation Rhetoric Ratchets Up

By Marc ChandlerForexDec 01, 2021 06:26AM ET
Fragile Calm Returns And Powell's Anti-Inflation Rhetoric Ratchets Up
By Marc Chandler   |  Dec 01, 2021 06:26AM ET
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Into the uncertainty over the implications of Omicron, Federal Reserve Chairman injected a particularly hawkish signal into the mix in his testimony before the Senate. These were the two forces that were shaping market developments. Travel restrictions were being tightened, though the new variant was being found in more countries, and it appeared to be like closing the proverbial barn door after the horses have bolted.

Equities were higher. The MSCI Asia Pacific Index, led by South Korea and India, rose for the first time in four sessions, and Europe's Stoxx 600 was recouping more of yesterday's loss. US futures were trading more than 1% higher.

Benchmark yields were higher. The 10-year US Treasury yield was up four basis points though still below 1.50%. European yields were mostly 3-5 bp higher, though Italy's benchmark was 8 bp higher near 1.05%.

The dollar remained the fulcrum of the see-saw, but the funding currencies (yen, Swiss franc, and euro) were lower, and the dollar bloc higher. The dollar was pulling back against the Turkish lira after approaching TRY14 yesterday, even though President Erdogan's rhetoric about pushing for even lower rates seemed to have ratcheted up.

Emerging market currencies more broadly were mixed, but the JP Morgan Emerging Market Currency Index was up for the third consecutive session to match the longest advance in nearly three months.

Gold posted an outside down day yesterday, but there has been no follow-through selling today, and the yellow metal was consolidating inside yesterday's range. January WTI slipped below $65 yesterday and was pushing above $69 today ahead of the OPEC meeting. Dutch natural gas prices were firm, recouping most of yesterday's loss. Iron ore and copper prices were also retracing yesterday's weakness.

Asia Pacific

China's Caixin manufacturing PMI unexpectedly slipped below the 50 boom/bust level, albeit barely (49.9). It was expected to be unchanged at 50.6. It had eased below 50 in August (49.2). Recall that the world's second-largest economy nearly stagnated in Q3 (0.2% quarter-over-quarter), and it appeared to be accelerating here in Q4. Still, many look for the PBOC to provide more stimulus, perhaps in the form of a cut in reserve requirements, as it did this past July. Separately, officials seemed to crack down harder on the "variable interest entity" structure that characterizes offshore listings, especially in the US.

Japan's November manufacturing PMI was revised to 54.5 from 54.2. It stood at 53.2 in October. The world's third-largest economy was recovering. Australia reported Q3 GDP which contracted by 1.9%, less than the 2.7% contraction economists had projected (Bloomberg median). Its economy also has been recovering. The November manufacturing PMI was confirmed at 59.2, up from 58.2 previously.

House prices in Australia and New Zealand rose last month but sequentially at a slower pace. To round out this regional overview, note that South Korea's exports in November were stronger than expected, pointing to robust foreign demand. Exports rose 32.1% year-over-year. Economists (Bloomberg median) expected a 27.2% pace after 24.1% in October. It was the strongest pace since August. Imports jumped 43.6% year-over-year, which was also more than expected, and follows a 37.7% increase previously.

The dollar was firm after being sold to its lowest level against the yen yesterday since Oct. 11 (~JPY112.55). It stalled near JPY113.60 in late Asia, which was slightly lower than the high seen in the US yesterday in response to the Fed's Powell hawkish pivot. However, barring fresh negative impulses, the JPY113 area may offer support again.

The Australian dollar was firm near yesterday's highs after falling to a new low for the year yesterday. That low (~$0.7065) approached the (38.2%) retracement objective of the Aussie's rally from the March 2020 low near $0.5500. A move above $0.7080 would lift the technical tone and target the $0.7120-$0.7150 area.

The greenback initially fell to nearly CNY6.36, just ahead of the year's low recorded in May near CNY6.3570, before recovering to around CNY6.3720. Resistance may be seen in the CNY6.3750-CNY6.3800 area. The PBOC set the dollar's reference rate CNY6.3693. The market (Bloomberg survey) had anticipated CNY6.3682.


COVID was surging in several parts in Europe, including Germany, before the sequencing of the Omicron variant, and things have gotten worse. The economic impact was beginning to be evident. Germany's October retail sales, which economists had expected to recover after falling by 1.9% in September, disappointed with a 0.3% decline. The final November manufacturing PMI was revised to 57.4 from the flash 57.6 (and 57.8 in October). It was the fourth consecutive decline.

The French manufacturing PMI was revised to 55.9 from the preliminary estimate of 54.6 (53.6 in October). It was the first gain since May. Economists hoped that Spain's manufacturing PMI was going to rise after falling for two months through October. Instead, it fell again (51.1 vs. 57.4) to stand at its lowest level since March. Italy was the standout. Its manufacturing PMI was stronger than expected, jumping to 62.8 from 59.7, representing a new cyclical peak. The aggregate for the eurozone as a whole edged up to 58.4 from 58.3 in October, but slower than the 58.6 flash estimate. Still, it managed to eke out its first gain since June. 

The UK's November manufacturing PMI stands at 58.1, down slightly from the preliminary estimate (58.2). It was at 57.8 in October. It was the second consecutive monthly gain after falling from June through September. The UK economy grew by 1.3% in Q3 and was expected to slow to 1.1% this quarter. The implied yield of the December 2021 short sterling interest rate futures fell for eight sessions coming into this week. It has been choppy so far this week, and net-net, the yield was about 1.5 bp higher than at the end of last week. The overnight index swaps implied about a 40% chance of a hike next month.

The euro traded on both sides of Monday's range yesterday and closed above Monday's high. However, there has been no follow-through buying today, and a consolidative tone emerged. A move above $1.1400 was needed to lift the tone, and it most likely won't happen today. A 1.2 bln euro option was struck there that expires today. The focus was on the downside. So far, it had held above $1.13, and support was seen around $1.1290.

Sterling recorded the low for the year yesterday, a little below $1.3200. It stopped shy of our $1.3165 target, the (38.2%) retracement of cable's recovery from the March 2020 low. Its bounce off yesterday's lows fizzled out near $1.3330. Note that there is a GBP600 mln option at $1.33 that expires tomorrow.


We have argued that the US October CPI surprise (6.1%) was a pivot point for Fed officials, even a reputed dove like San Francisco's Daly. We also detected a change in rhetoric, and this point was driven home by Fed Chair Powell yesterday. He clearly brandished his anti-inflation credentials.

Powell declared that the Fed would use its tools to stop inflation from becoming entrenched. At the same time, he recognized that it cannot assess the Omicron now, though it clearly posed a risk. Still, the next FOMC meeting is two weeks away, and by then, more information will be known. Powell confirmed that the Fed would discuss the pace of tapering.

While the Fed will stop referring to inflation as transitory, Powell echoed Yellen's recent assessment that price pressures were projected to ease in H2 22. Of note, the short end of the coupon curve sold off, but the long end remained firm. The 30-year bond yield slipped to its lowest level since January, and the 2-10 year curve flattened 13 bp to below 90 bp, the flattest in 10 months.

The North American economic calendar is jammed today. The US sees ADP's private-sector jobs estimate. Around 525k jobs are expected to have been filled, down from 571 in October. In the last three months, the ADP estimate has undershot the official measures by an average of 23k. Year-to-date, the average under-estimate is a little more than 50k.

November auto sales are expected to have risen for the second consecutive month after falling from May through September. The final manufacturing PMI will also be reported. The flash reading was the first increase since July. The ISM manufacturing survey will also be published. It has been a bit more resilient than the PMI. Late in the session, the Beige Book will be released.

Canada reports October building permits (expected softer after the 4.3% gain in September) and the manufacturing PMI (57.7 in October).

Mexico reports its manufacturing PMI and IMEF surveys. The central bank's inflation report is also due. Mexico reports October worker remittances today. They have averaged $4.15 bln a month this year through September. The average for the same period in 2020 was $3.33 bln, and in 2019 $3.03 bln. Note that the average trade deficit this year (through October) is almost $1.2 bln.

After reaching almost CAD1.2840 yesterday, its highest level since the September FOMC meeting, the greenback came back offered today. It briefly and marginally traded below yesterday's CAD1.2730 low. It needed to convincingly break below CAD1.2720 to be of any technical significance. Initial resistance may be seen near CAD1.2780.

The dollar peaked against the Mexican peso at the end of last week near MXN22.1550. It was moving lower for the third consecutive session, and found initial support around MXN21.27 today. The MXN21.20 area was the halfway mark of last month's range. A move above  MXN21.40 may signal the dollar's downside correction was over. 

Fragile Calm Returns And Powell's Anti-Inflation Rhetoric Ratchets Up

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Fragile Calm Returns And Powell's Anti-Inflation Rhetoric Ratchets Up

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