GBP down on polls, CAD up as strike ends; US PCE, Beige Book

Rates as of 06:30 GMT

Market Recap

As usual nowadays, a fairly narrow range.

GBP was the big mover as Ashcroft and YouGov polls show the Conservatives’ lead is narrowing. That’s likely to go back and forth with each new poll. However, I notice that The Economists’ graph of voting intentions hasn’t changed this morning from the version I had in yesterday’s daily, so I’m not sure how big an impact this would have. I suspect people will reconsider the importance of these polls and GBP may recover today.

Ashcroft said,My third general election survey shows the Conservatives still ahead on the fundamentals, but there is some evidence that Labour is managing to firm up its vote among 2017 supporters at the margins, with Labour Leavers showing slightly more reticence about switching to the Tories.

YouGov saidWith the Conservatives having been much more successful in uniting the Leave vote under their banner, coupled with the Brexit Party’s decision to stand down in a swathe of constituencies, the struggle between Labour and the Lib Dems is by far the most vital dynamic in the election at the moment.

The results show that just over a third (37%) of those who currently intend to vote Labour voters say they could end up backing the Lib Dems, while 41% of current Lib Dem voters say they might change to Labour.

You can see the Ashcroft poll at and the YouGov poll at

Reserve Bank of Australia (RBA) Gov. Lowe made his speech about “Unconventional Monetary Policy: Some Lessons from Overseas.” The net result was that people think rate cuts are more likely now in Australia than they thought before the speech.

Lowe said QE may come only if the RBA’s cash rate falls to 0.25%. Westpac for example says it expects the RBA to begin QE in 2H 2020. (I personally don’t expect Australia to start QE at all, but that’s a different matter.) It’s clear some people think it’s a possibility, because the yield on three-year AUD bonds fell 9 bps and 10yr yields fell 7 bps.

However, AUD didn’t fall as much as one might expect, perhaps because of the general “risk on” mood brought on by Trump’s optimistic comments on the US-China trade negotiations. I think the currency’s support in the face of talk like this is fairly bullish for AUD. It suggests people are simply not in a mood to sell it any more.

On the other hand, CAD was the big winner after the Teamsters Canada Rail Conference union reached a tentative deal with Canadian National Railway to end a week-long rail strike. Normal operations will resume today. Looking at the graph of USD/CAD, it looks like someone expected this result, as CAD started appreciating from around midday London time.


Today’s market

Big day today for US indicators!

We start out with the second estimate of US Q3 GDP. As you can see, in recent years the revisions between the first and second estimates have been pretty small – last year it wasn’t revised at all. The market isn’t expecting any revisions this year either. USD neutral

Durable goods orders are likely to be depressed not only by the continuing travails at Boeing, but also the GM strike.

Excluding transportation equipment, the consensus is for a small rebound. However, it’s still pretty weak, considering that orders on this basis have been down two of the last three months. I think this would still be disappointing, especially considering the rebound in the PMIs, which would suggest a much stronger figure. USD negative

I don’t usually comment on weekly data, but the US jobless claims have been absolutely riviting recently! (Some of us don’t get out very much.) Last week the market was expecting claims to fall back into their recent range, but they didn’t. So this week the market is expecting them to fall back within their recent range – just.

At the October FOMC meeting, the Committee discussed whether the recent slowdown in job growth is “the natural consequence of the economy being near full employment” or “indicative of some cooling in labor demand.” No conclusion was reached. This is clearly a key question for the Fed in determining whether they need to make a “material reassessment” of the economy and cut rates again. The jobless claims figure, as one of the most up-to-date data points that they have, is clearly a key component of that decision. If claims do fall back as expected, then that would lean to the “full employment” explanation and would be bullish for the dollar.

Next up is the key indicator today: US personal consumption expenditure (PCE) deflator and its sub-index, the core PCE deflator. This, and not the consumer price index, is the Fed’s preferred inflation gauge. The FOMC stated back in January 2012 that the PCE deflator was “most consistent over the longer run with the Federal Reserve’s statutory mandate.” They didn’t spell out that they focus on the core PCE deflator, but it’s widely assumed. The things to watch here are how the mom rate of change of the PCE deflator and the yoy rate of change of the core deflator come in relative to estimates. The core deflator is more important, but as it doesn’t change very much, the market usually gets it right. In that case, attention will focus on the overall measure and any deviation from expectations there.

In any event, the figures aren’t likely to spark any fireworks. The yoy rate of growth of the headline PCE deflator is expected to slow one tic, which is somewhat disappointing, but the core PCE deflator is expected to continue on its merry way at the same rate of growth at 1.7% yoy, which if this were the ECB, would probably satisfy their requirement that inflation be “close to, but below, 2%.” It’s not the ECB though and it still fits the Fed’s description of “below 2 percent,” which is not good. But as long as the core PCE doesn’t turn down, it’s not bad either. USD neutral

The PCE deflators are part of the US personal income and personal spending data. That’s expected to show incomes growing at the same pace as in the previous month and spending picking up a bit, such as it increases at the same pace as incomes. Nonetheless both are below trend, which isn’t good as every comment I read about the economy seems to assume that the US consumer will come to the rescue as business investment and government spending weaken. USD negative

The Fed releases the “Summary of Commentary on Current Economic Conditions,” aka The Beige Book (which actually looks green to me, at least the version you can buy in the store) as always two weeks before the next FOMC meeting. It’s significant for the market because the first paragraph of the statement following each FOMC meeting tends to mirror the tone of the Beige Book’s characterization of the economy. The book doesn’t have any number attached to it that quantifies its contents, but many research firms do calculate a “Beige Book index” by counting how many times various words appear, such as “uncertain.” In any case, the book is largely anecdotal so you’ll just have to watch the headlines as they come out. Pay particular attention to what they say about the labor market again (see above comments on the weekly jobless claims).


Just FYI, the paragraph on labor in October read in part, “On balance, employment rose slightly amid reports of persistent worker shortages. Labor market tightness across skill levels and occupations was widely cited as a factor restraining hiring…” So it came down pretty firmly in favor of the “the natural consequence of the economy being near full employment” explanation.

There’s no forecast for the ANZ business confidence figure even though it does sometimes move the market. Investors will want to see whether the hopeful signs of stabilization in the global economy allow the slight upturn in October to continue and whether that pushes the activity outlook index back into positive territory.

Finally, Australian capital investment is forecast to be unchanged on a qoq basis. That would actually be a small improvement – over the last year it’s averaged -0.25% qoq. I think the figure could be somewhat of a relief to some investors and be modestly AUD positive, depending of course on what the revised figures for the 2019/20 capex plans show.



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