Fifth District manufacturing activity expanded moderately in October, according to the results from the most recent survey by the Federal Reserve Bank of Richmond. The composite index fell from 29 in September to 15 in August, as indexes for shipments and new orders dropped, while the third component, employment, rose. However, survey respondents were optimistic, expecting to see positive growth across most measures in the coming months.
The yield on the 10-year Treasury note fell 4.7 basis points to 3.141%, while the 2-year Treasury note yield declined 2.9 basis points to 2.867% and the 30-year Treasury bond yield fell 4.6 basis points to 3.335%. Yields and debt prices move in opposite directions.
Manufacturing new orders fell at the fastest pace in three years in the quarter to October, reflecting falls in both domestic and export orders, according to the latest quarterly CBI Industrial Trends Survey.
The survey of 354 manufacturers showed that output growth was stable at an above-average pace in the three months to October relative to the quarter to September. But output growth is expected to stall in the three months to January 2019 - marking the weakest expectations in around three years. Total new orders are also set to fall a little further in the quarter ahead.
Business optimism tumbled at the fastest pace since the UK's vote to leave the EU, while optimism about export prospects for the year ahead fell at the fastest pace since the Eurozone crisis. Meanwhile, concerns that political and economic conditions were likely to limit export orders over the next three months were the highest since immediately after the EU Referendum.
Chris Beauchamp, Chief Market Analyst at IG wrote:
"European equities are plumbing new depths this morning, while the FTSE 100 is down 60 points in mid-morning trading.
The sell-off has resumed across markets, as yesterday's brief bounce passes quickly into history. As the number of earnings misses rises, investors have continued to flee from European equities. If this was an earlier time, the calls for ECB intervention would probably start around now, but investors are all too aware that the ECB's role of riding to the rescue has come to an end, and the bank seems disinclined to intervene in the Italy budget crisis. All eyes will be on US markets now - a much lower open is on the cards, and we should expect the losses to intensify. Given the corporate and economic backdrop, this is still likely to result in a new move higher, at least for US equities, but we are due some hefty volatility first."
Downgrades Exports Assessment To Almost Flat From Recent Pause
Maintains Economic Assessment For October
Net Easing in Credit Standards Was Stronger Than Expected
Banks Expect Standards for Business Loans to Be Broadly Unchanged in 4Q
Banks Slightly Eased Standards for Loans for House Purchases in 3Q
Banks Expect Net Easing of Credit Standards for Housing Loans in 4Q
Standards for Consumer Credit Remained Broadly Unchanged in 3Q
Net Loan Demand Continued to Increase Across All Categories in 3Q
Resistance levels (open interest**, contracts)
Price at time of writing this review: $1.1456
Support levels (open interest**, contracts):
- Overall open interest on the CALL options and PUT options with the expiration date November, 19 is 83576 contracts (according to data from October, 22) with the maximum number of contracts with strike price $1,1450 (6004);
Resistance levels (open interest**, contracts)
Price at time of writing this review: $1.2973
Support levels (open interest**, contracts):
- Overall open interest on the CALL options with the expiration date November, 19 is 23953 contracts, with the maximum number of contracts with strike price $1,3500 (3235);
- Overall open interest on the PUT options with the expiration date November, 19 is 30446 contracts, with the maximum number of contracts with strike price $1,3000 (3169);
- The ratio of PUT/CALL was 1.27 versus 1.24 from the previous trading day according to data from October, 22
* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.
** - Open interest takes into account the total number of option contracts that are open at the moment.
Trump sees 'many' possible penalties for Saudis
More details expected in 1-2 days
On Friday, Moody's announced that it had lowered Italy's credit rating to Baa3 (from Baa2), moving to a neutral perspective. A press release from Moody's shows that the downgrade had two driving factors: a significant weakening of Italy's fiscal power and negative implications for medium-term growth due to the breakdown of structural economic and fiscal reform plans.
According to Moody's, the planned fiscal stance of the Italian government will stabilize the debt-to-GDP ratio at 130%, rather than decline in the coming years, which will make Italy vulnerable to external shocks. Regarding growth, Moody's believes that the plans of the Italian government could limit the short-term impact on GDP.
On Friday, S & P will publish an update of the sovereign rating of Italy, which is currently at the BBB level with a neutral outlook. As expected, the S & P will change its outlook to negative.
The downgrade does not seem to have affected the Italian government's approach to negotiations with the EU.
The tensions between the EU Commission and the Italian government, following the submission of the Italian draft budget, are developing rapidly.
It is expected that the commission will appeal to the Government of Italy with a request to submit a revised draft. By not allowing a significant acceleration of market pressure on Italian bonds, the government is likely to accept only limited amendments to the current text, perhaps in the direction of the obligation to resume structural adjustment in 2020, rather than in 2022.
With the imminent European elections of 2019, the risk is that the Italian government will maintain a complex attitude towards Europe over the next few months, not taking the attitude to the extreme. This is an environment that will tend to keep volatility in the Italian government bond market high.
In September 2018 the index of producer prices for industrial products rose by 3.2% compared with the corresponding month of the preceding year. In August the annual rate of change all over had been 3.1%, as reported by the Federal Statistical Office (Destatis).
Compared with the preceding month August the overall index rose by 0.5% in September 2018 (+0.3 % in August 2018 and +0.2% in July 2018).
In September 2018 the price indices of the most main industrial groups increased compared with September 2017: Energy prices were up 8.5%, though the development of prices of the different energy carriers diverged. Prices of petroleum products were up 18.5%, whereas prices of electricity increased by 9.0% and prices of natural gas (distribution) rose by 7.0%. Prices of intermediate goods were up 2.5%. Prices of durable consumer goods rose by 1.7% and of capital goods by 1.4%, whereas prices of non-durable consumer goods did not change.
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