Not much worth talking about overnight; EU CPI, China PMIs

Rates as of 06:30 GMT


Market Recap

Really, really narrow trading ranges overnight. Don’t be fooled by the graph, which makes it look like GBP plunged; note instead that I had to increase the scale to two decimal places to get any change to show. The moves are barely worth talking about. GBP was the biggest mover, but that was probably just some profit-taking on the previous day’s rally.

On the other hand, there’s a huge rout in EM currencies, particularly Latin American currencies. The Chilean peso and Colombian peso both hit new record lows yesterday. The Brazilian Real strengthened, but remains just above its record low.


Today’s market

The German employment data is forecast to confirm that the employment picture in German has turned. Even if it’s not worsening to any great extent, it’s no longer improving: the unemployment rate is expected to stay at 5.0% for the 7th consecutive month (that would be 11 out of 13 months) while the number of unemployed persons is forecast to rise for the sixth month out of seven. I’m not sure though whether this is good or bad for the euro – I think it could be good for EUR/USD if it starts to put pressure on the German government to step up fiscal spending. But we would probably have to see a more pronounced increase in the unemployment rate before politicians start to get nervous.

The country has in the past been willing to run a deficit when the unemployment rate was higher. Of course, some of that may be involuntary – social assistance kicks in when unemployment rises, and that widens the deficit further.

If we rearrange the data in that graph, it looks like the trigger is over 6% unemployment, so there’s still a ways to go.

The Bank of England’s mortgage approvals are expected to be down 0.8% from the previous month. This compares with the actual outturn from the UK Finance figures released on Tuesday, which were down 2.8%. So the BoE figures, if they come in as expected, would be slightly GBP-positive in theory, but in fact no one cares – this is really minor compared to any polls or stupid comments either of the candidates for PM.

EU-wide core CPI is expected to accelerate slightly, but still nowhere near the ECB’s target of “close to, but below, 2%.” They have the “below” part down pat but it’s the “close to” part that’s troubling them. Yesterday’s German consumer prices were mixed; the mom change came in slightly below estimates, but the yoy rate of change came in above estimates. Is that because of a change in the way of accounting for package holidays, as some explained, or just because of different data sets? On Bloomberg, 20 people forecast the mom rate of change but 31 forecast the yoy rate. In any case it’s the yoy rate of change that matters for the ECB, and a quickening of inflation is to be welcomed, but not really significant yet. EUR neutral

Canada’s GDP growth is expected to slow alarmingly in Q3. This should come as no surprise to anyone, as the country announces monthly GDP figures and those have been pretty sluggish – no growth from the previous month in July and 0.1% mom in August. That means the forecast of a similarly sluggish +0.1% growth in September would add up to not much growth for the quarter.

A large part of the slowing is because of trade: exports were probably unchanged in Q3, while imports seem to have bounced back somewhat. Consumer spending and business investment are likely to be so-so, while residential investment will probably be the bright spot. The report is not likely to change anyone’s view at the Bank of Canada however. Their statement from 30 October said that “Growth in Canada is expected to slow in the second half of this year to a rate below its potential…Business investment and exports are likely to contract before expanding again in 2020 and 2021.” The figures, while not particularly wonderful, are therefore likely to be pretty well discounted and neutral for CAD.

Over the weekend, China announces its purchasing managers’ indices (PMIs). The story they’re forecast to tell is different, depending on whether you pay attention to the official PMIs (compiled by the China Federation of Logistics and Purchasing in collaboration with the National Bureau of Statistics) or the Caixin/Markit surveys. The official one uses a large sample of companies, including more of the large, state-owned companies, while the Caixin/Markit survey not only covers far fewer companies, but most of them are smaller, privately owned firms. Furthermore, the official survey has a fairly even national coverage, while the Caixin surveys are concentrated on the booming East coast. The official figure is therefore probably more representative of the economy as a whole, while the Caixin survey would be more sensitive to exports.

Oddly enough, the Caixin survey has been showing much stronger manufacturing performance recently, while the official figure has been below the 50 “boom or bust” line since May, presumably reflecting the trade war – or perhaps the general malaise of the Chinese economy as it struggles with its debt burden. The official service-sector PMI, while much higher, peaked in June of last year and has been coming down ever since, most sharply in the last few months.

This time around, the official manufacturing PMI is forecast to rise a little bit, but still remain in contractionary territory. The official service sector PMI is also forecast to rise somewhat. So these two tell a story of an improving economy, albeit one where the manufacturing sector is under some pressure.

The Caixin manufacturing PMI however is expected to fall, which would run counter to that narrative. Go figure.



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