I. Market focus
At the beginning of Tuesday’s session, the focus of market participants was on the data on consumer price indices of New Zealand and China that came out at night. Both reports indicated an increase in inflationary pressure, but the New Zealand data exceeded expectations, while the Chinese reading matched economists’ forecast. As a result, the Chinese data did not have a significant impact on market dynamics, while the New Zealand report caused a sharp increase in the New Zealand dollar. Moreover, rising inflationary pressure in New Zealand may force the country’s central bank to start hiking interest rates earlier than planned. Such prospects are a positive factor for the New Zealand currency.
The market continues to monitor the rising political tensions between the United States and Saudi Arabia, following the alleged murder of opposition journalist Jamal Khashoggi. Earlier, the U.S. President Donald Trump said that there would be "severe punishment" for Saudi Arabia if it turns out that Khashoggi was killed in the Saudi consulate in Istanbul. The U.S. Secretary of State Mike Pompeo headed to Riyadh yesterday to clarify the situation. This morning, the media reported the Saudi Arabian government is preparing a plan to admit that missing journalist Jamal Khashoggi was killed in the consulate by rogue operatives in an interrogation gone wrong.
Tuesday’s session will be busy with macroeconomic reports and events, the main of which will be the UK labor market data (08:30 GMT) and the European indices of economic sentiment from ZEW (09:00 GMT).
The stock market participants continue to assess the quarterly reports of companies, as the third-quarter earnings season rolls. Today, their quarterly results will post Goldman Sachs (GS), Johnson & Johnson (JNJ), Morgan Stanley (MS), UnitedHealth (UNH), IBM (IBM) and Netflix (NFLX).
II. The market highlights are:
The report from the New York Federal Reserve showed on Monday that manufacturing activity in the New York region expanded in October at a faster pace than in September. According to the survey, NY Fed Empire State manufacturing index stood at 21.1 this month compared to an unrevised 19.0 in September. Economists had expected the index to stay at 19.0. Anything below zero signals contraction. New orders (+6.0 points to 22.5 in October) and shipments (+12.0 points to 26.3) both picked up noticeably, while labor market indicators pointed to a slowdown in the growth pace of employment (-4.3 points to 9.0) and hours worked (-11.3 points to 0.2). Price increases also slowed somewhat but remained elevated. The prices paid index dropped 4.3 points to 42.0, and the prices received index fell 2 points to 14.3, suggesting ongoing significant increases in both input prices and selling prices.
The Commerce Department reported on Monday that sales at U.S. retailers edged up 0.1 percent m-o-m in September, following a similar advance in August. Economists had expected total sales would increase 0.6 percent m-o-m in September. The September modest reflects a drop in spending at restaurants and bars (-1.8 percent m-o-m), which overshadowed broad increases across most other categories. Excluding auto, retail sales fell 0.1 percent m-o-m after a downwardly revised 0.2 percent m-o-m gain in the previous month (originally a 0.3 percent m-o-m advance), missing economists’ forecast for a 0.4 percent m-o-m advance. Meanwhile, closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, and are used in GDP calculations, rose 0.5 percent m-o-m last month, following a revised flat m-o-m performance in August (originally a 0.1 percent m-o-m increase). In y-o-y terms, the U.S. retail sales climbed 4.7 percent in September, decelerating growth pace from August’s revised increase of 6.5 percent (originally a 6.6 percent surge).
Another report from the Commerce Department showed that business inventories rose 0.5percent m-o-m in August, following an upwardly revised 0.7 percent m-o-m gain in July (originally an increase of 0.6 percent m-o-m). That was in line with economists’ forecast. According to the report, retail (+0.7 percent m-o-m) and wholesale (+1.0 percent m-o-m) inventories increased in August, while manufacturing inventories (-0.1 percent m-o-m) edged down. Motor vehicle inventories surged 1.8 percent m-o-m in August, while retail inventories excluding autos, used in the calculation of GDP, were flat m-o-m.
Statistics New Zealand announced on Monday that consumers price index (CPI) rose 0.9 percent q-o-q in the third quarter of 2018, following an unrevised 0.4 percent q-o-q gain in the second quarter. Economists had forecast the CPI would rise 0.7 percent in the July-September period. In y-o-y terms, New Zealand’s CPI increased 1.9 percent in the latest quarter, compared with a 1.5 percent surge in the previous three-month period and economists’ expectation for 1.7 percent advance. According to the report, higher petrol prices (+5.5 percent q-o-q and +19.0 percent y-o-y) were the largest contributors to inflation in the reviewed period. When petrol is removed from the CPI, the increase was 0.7 percent q-o-q and 1.2 percent y-o-y.
The Reserve Bank of Australia (RBA) published on Tuesday the minutes from its October 2 policy meeting, at which the benchmark cash rate was expectedly left unchanged at a record-low 1.5 percent. The minutes revealed the members of the Reserve Bank Board viewed the recent modest depreciation of the Australian dollar as helpful for domestic economic growth. According to the RBA, a few central banks, including the Federal Reserve, had increased their policy rates in recent months due to rising global inflationary pressures. Changes in the paths of monetary policy had been reflected in changes to financial market pricing, most notably a broad-based appreciation of the U.S. dollar. The members noted the Australian dollar had depreciated by around 8 percent against the U.S. dollar over 2018. On a trade-weighted basis, the depreciation of the Australian dollar had been more modest. Meanwhile, the RBA signaled that interest rates will remain at the current level for some time. “Members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy,” the minutes said.
The National Bureau of Statistics (NBS) revealed on Tuesday that China’s producer price index (PPI) rose 3.6 percent y-o-y in September, after gaining 4.1 percent y-o-y in the prior month. That was the lowest producer inflation since April. Economists had expected PPI would increase by 3.5 percent y-o-y in September. Compared with a month ago, costs of production materials increased at a slower pace (+4.6 percent y-o-y in September versus +5.2 percent y-o-y in August), while prices of consumer goods grew faster (+0.8 percent y-o-y in September versus +0.7 percent y-o-y in August). The PPI rose 0.6 percent m-o-m in September, following a 0.4 percent advance in August. At the same time, the consumer price index (CPI) increased 2.5 percent y-o-y in September, following a 2.3 percent y-o-y gain in August. That was the highest rate since February and in line with economists’ expectations. The food prices climbed 3.6 percent y-o-y in September after rising 1.7 percent y-o-y in August, while non-food costs increased 2.2 percent y-o-y, following a 2.5 percent y-o-y growth a month ago. On a monthly basis, consumer prices went up 0.7 percent in September, the same pace as in August.
III. Market Situation
The currency pair EUR/USD fell slightly, as the U.S. currency resumed strengthening. In addition, investors were adjusting their positions ahead of the release of the ZEW’s survey of economic sentiment in the Eurozone and the U.S. industrial production data for September. In August, the U.S. industrial production rose 0.4 percent m-o-m, as the output of utilities advanced 1.2 percent m-o-m, mining production increased 0.7 percent m-o-m, and manufacturing output grew 0.2 percent m-o-m. In y-o-y terms, the industrial production surged 4.9 percent in August. That was the strongest annual gain in industrial production since December 2010. It is expected that the U.S. industrial output probably increased 0.2 percent m-o-m in September. Resistance level - $1.1651 (high of September 28). Support level - $1.1432 (low of October 9).
The currency pair GBP/USD traded slightly lower, as investors took a breather after yesterday's fluctuations in the pair, which were caused by Brexit-related news, while awaiting the release of the UK labor market data. It is expected that weekly earnings rose by 2.6% on the year in the three months to August, the unemployment rate remained at 4 percent in August, and the claimant count rose by 7,500 in September. Apart from the data, focus also will be on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3257 (high of October 12). Support level - $1.3003 (low of October 5).
The currency pair AUD/USD fell moderately, retreating from a two-week high, due to the broad strengthening of the U.S. dollar and the fall in prices for many commodities. Market participants also digested the minutes from the latest meeting of the Reserve Bank of Australia (RBA), which revealed the members of the Reserve Bank Board viewed the recent modest depreciation of the Australian dollar against the U.S. dollar as helpful for domestic economic growth. According to the RBA, a few central banks, including the Federal Reserve, had increased their policy rates in recent months due to rising global inflationary pressures. Changes in the paths of monetary policy had been reflected in changes to financial market pricing, most notably a broad-based appreciation of the U.S. dollar. Meanwhile, the RBA signaled that interest rates will remain at the current level for some time. “Members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy,” the minutes said. Resistance level - AUD0.7240 (high of September 28). Support level - AUD0.7041 (low of October 5).
The currency pair USD/JPY rose noticeably, nearing the previous day’s high, due to the strengthening of the U.S. dollar and partial profit-taking by investors after a significant strengthening of the yen since the beginning of October. Traders also paid attention to the statements of the Japanese Finance Minister Taro Aso, who said that the U.S. government had not spoken to Tokyo about including currency provisions in free trade negotiations. Aso, speaking to reporters, said Japan and the U.S. agreed in February 2017 that any issues related to currency policy would be discussed between Aso and Treasury Secretary Steven Mnuchin, keeping them separate from talks on trade. Resistance level - Y113.37 (high of October 9). Support level - Y111.62 (low of October 15).
U.S. stock indexes closed lower on Monday, weighed down by renewed weakness in the information technology sector and escalating United States-Saudi Arabia tensions following the alleged murder of Jamal Khashoggi, a well-known Saudi Arabian journalist and Washington Post columnist, who was critical of his country’s government. The focus also was on the U.S. retail sales data for September and business inventories for August. The Commerce Department reported that sales at U.S. retailers edged up 0.1 percent m-o-m in September, following a similar advance in August. Economists had expected total sales would increase 0.6 percent m-o-m in September. The September modest reflects a drop in spending at restaurants and bars (-1.8 percent m-o-m), which overshadowed broad increases across most other categories. Meanwhile, closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, and are used in GDP calculations, rose 0.5 percent m-o-m last month, following a revised flat m-o-m performance in August (originally a 0.1 percent m-o-m increase). In y-o-y terms, the U.S. retail sales climbed 4.7 percent in September, decelerating growth pace from August’s revised increase of 6.5 percent (originally a 6.6 percent surge). Another report from the Commerce Department showed that business inventories rose 0.5percent m-o-m in August, following an upwardly revised 0.7 percent m-o-m gain in July (originally an increase of 0.6 percent m-o-m). That was in line with economists’ forecast.
Asian stock indexes closed mixed on Tuesday, following Wall Street’s slide overnight. The focus also was on China’s inflation data for September and increasing tensions between Saudi Arabia and the West. Japan’s Nikkei rose, as the yen weakened against the dollar, supporting the Japanese export-oriented companies.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 3.17% (+1 basis points)
Yields of German 10-year bonds hold at 0.51% (0 basis points)
Yields of UK 10-year gilts hold at 1.47% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded little changed. Crude oil for delivery in November settled at $71.75 (-0.03%). The crude oil prices stabilized amid growing geopolitical tensions caused by the disappearance of a Saudi Arabian journalist in Turkey. However, further growth was limited by the strengthening of the U.S. dollar. In addition, investors were preparing for the release of the data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA).
Gold traded at $1,226.00 (-0.10%). Gold prices fell slightly, due to the strengthening of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.11 percent to 95.17. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
ILO Unemployment Rate
ZEW Economic Sentiment
Trade balance unadjusted
ZEW Survey - Economic Sentiment
Foreign Securities Purchases
MPC Member Cunliffe Speaks
NAHB Housing Market Index
JOLTs Job Openings
Net Long-term TIC Flows
Total Net TIC Flows
FOMC Member Daly Speaks
RBA Assist Gov Debelle Speaks
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