DXY depreciated 0.1% to 106.29, the same level as last Friday. Markets struggled to push the DXY lower after the 4.1% sell-off last week. The Fed pushed back against the dovish bets triggered by US CPI inflation falling to 7.7% YoY in October, its lowest level since January. US stock markets also gave back gains after US retail sales rose 1.3% MoM in October, its fastest pace since February. October was also the month that the S&P surged 8%.
Kansas City Fed President Esther George did not see enough evidence of a deceleration in inflation or a loosening in the labour market to warrant an internal debate of where or when Fed hikes can pause. Fed Governor Christopher Waller backed a smaller 50 bps hike in December but kept the markets guessing if the hikes in 2023 would keep to 50 bps or slow to 25 bps. San Francisco Fed President Mary Daly added that the Fed Funds Rate (FFR) could peak and pause between 4.75% and 5.25%, more than the 5% consensus. Goldman Sachs raised its forecast for the FFR to peak at 5-5.25% in May instead of 4.75-5% in March. Today, let’s see if St Louis Fed President James Bullard, a renowned hawk, signals his intention to pencil in a higher peak at next month’s FOMC.
Fears of more Fed hikes leading to a recession inverted the US Treasury 10Y/2Y yield curve deeper to 66.5 bps, its worst since 1982. The 2Y yield rose 2.1 bps to 4.36%. However, the 10Y yield fell 8 bps to 3.69%, below the FFR range of 3.75-4%. Economists surveyed by Bloomberg project the FFR peaking at 5% in 2023 resulting in a 65% chance of a US recession in the next 12 months and the FFR dropping to 3% in 2024. With Fed hikes seen risking recession again, the incentive to keep selling the greenback has ebbed.
GBP’s rally stalled after briefly testing 1.20 on 15 November. UK recession worries will turn up at the (Budget) Autumn Statement today. Chancellor Jeremy Hunt is set to plug the GBP60bn fiscal hole with spending cuts and tax hikes. The Office for Budget Responsibility (OBR) is expected to join the Bank of England in forecasting a recession throughout 2023. Real GDP contracted 0.2% QoQ sa in 3Q22 and, according to Bloomberg consensus, is expected to remain negative through 2Q22. Unlike the US, UK’s CPI inflation did not slow and soared to 11.1% YoY in October, its highest in 41 years. The Office for National Statistics (ONS) reckoned inflation would have been higher at 13.8% if not for the government’s energy price cap of GBP2500. However, the Chancellor is expected to lift the cap to GBP3000-3100 next April. The Bank of England told lawmakers that today’s Budget was not factored into its monetary policy. Bloomberg consensus projects the BOE bank rate rising from 3% to 4.25% in mid-2023. The futures market is discounting a 50 bps hike to 3.50% at the MPC in mid-December after 75 bps hike on 3 November. We doubt that this is enough to push GBP above 1.20.
Quote of the day
“Excessive sorrow laughs. Excessive joy weeps.”
William Blake
17 November in history
Suez Canal opened in 1869, linking the Mediterranean and Red seas.
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