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Dollar strengthens, gold and crude fall

 

Market Broadly Greener 

European indices trade broadly higher after a solid day on Wall Street, although it still ended the month down. The S&P 500 declined 2.2% for October, its third straight monthly decline - the worst run since 2020. The Nasdaq faded 2.8% as higher yields weighed on tech, whilst lofty valuations and all-your-eggs-in-one-basketing ran into the reality of earnings that haven’t all lived up to it. More mixed in Asia as markets look ahead to today’s Federal Reserve decision. China’s Caixin Manufacturing PMI unexpectedly shrank in October to 49.5 vs f/c 50.8. Fed later and Jolts job opening data. Treasury quarterly funding announcement due up at 13;30pm GMT – how much debt…could be bigger than the Fed decision for bonds. 

  

Liquidity stresses? Dollar Boosts Off Treasury Yields 

Overnight borrowing rates for some Chinese financial institutions ballooned to 50% - month-end scramble for cash being blamed alongside a deluge of fresh issuance and fears about defaults...not a good sign. Liquidity stresses like this may see Beijing do more easing.  

Treasury yields are higher ahead of the Fed with the 10yr back to 4.90%. This is providing a boost to the US dollar as DXY futures trade near the highest in a month. Higher yields + USD weighed on gold a touch as it retreated from the $2,000 area to around $1,977. Crude extended the declines made early on Monday to finish the day down sharply.   

  

Europe Deflates 

Eurozone CPI unexpectedly fell to just 2.9%, below the 3.1% expected. Core inflation fell to 4.2% from 4.5%. ECB Governing Council member Stournaras was out pretty damn quick to say the central bank could cut in the middle of next year should inflation fall sustainably below 3%. Conference Board one-year-ahead inflation expectations jumped to 5.9% - way ahead of where CPI is right now and indicative of the psychological impact of inflation and the entrenching of expectations...which makes it harder to bring down to 2%.  Meanwhile sticky inflation m- albeit not the best gauge - is going higher.  

 

Fed Decision Today  

Expecting some kind of hawkish pause – ready to do more if required, higher for longer message. Powell will leave the door open to a hike in December but it is becoming less clear whether this is required given steady if unspectacular disinflation, which is pushing monetary policy into more restrictive territory. There is no urgency to get more restrictive now. The recent spike in Treasury yields may have also helped to tighten financial conditions a bit, whilst the data has not been so hot as to warrant a further unanticipated hike this month. The Fed will reiterate that it will “proceed carefully” as it looks to next steps.   

Elsewhere 

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Yen extending losses after timid BoJ tweaks to YCC – but top currency man Kanda has been out on the wires overnight to stem the losses. 

Yen extending losses after timid BoJ tweaks

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