Overview
Fixed income yields dropped sharply again, Swiss Conf bonds outpacing all others because October CPI is running at a mere +0.3% Y/Y (against their 2.0% stability level and estimates of 1.0% in 2007). Rallies in bonds were caused by a stream of weakish US economic numbers, moves which were reversed in part or in full today (see below). The Reserve Bank of India raised only the key repo rate (not deposit rate) 25 basis points to 7.25% on signs of overheating and growing demand for bank credit (+30% or more for the third year in a row). The Norges Bank raised rates by 25 basis points to 3.25% (and hinted that more were possible) leading to a stronger Krone, +1.6% against the US dollar and +1.1% against the Euro. The Kiwi also did well and it would appear that Japanese demand for high-yielders continues unabated. The Canadian dollar was the worst performer this week because of suggestions that tax breaks on investment trusts may be removed. Stock markets paused, and some retreated marginally, as at last they begin to consider the warning signals flashing from the shape of the yield curve. Exceptions as always, with Australia, Honk Kong and Indonesian indices setting new record highs. Precious metals rallied, spot gold to $626, silver to $12.65 per ounce, and platinum up $146 this week alone to $1213. Soy beans reached their highest in a year, corn (on ethanol demand) and oats (on feed substitution) their highest in a decade. Frozen Concentrated Orange Juice futures, at 200.50 cents per pound, are at their most expensive since April 1990.
Political and Economic Developments
The eagerly awaited US October Non-Farm Payroll numbers were released today. Coming in at +92K, below the mean of a very wide range of estimates, it was eclipsed by revisions to the previous months: from +51K to +148K in September and from +188K to +230K in August. Measuring errors this magnitude are possible only because the total number of US jobs is roughly 114 million. The combined figures pushed unemployment down to 4.4%, the lowest reading since May 2001 (keeping in mind that the 2000 low was 3.8%). Non-Manufacturing ISM released just now was also stronger than estimated. These came after a series of weakish economic numbers from the US including Consumer Confidence, Chicago Purchasing Managers and Manufacturing ISM. More importantly, consensus opinion is tightly clustered generally accepting that world growth will slow next year but that we can all look forward to a ‘soft landing’. We warn against complacency and remind that confidence is a very fragile animal indeed. The average G7 resident is an already embattled creature, struggling for years with costly housing and stagnant wages, more recently with tax hikes and big utility bills, not to mention exploding school fees and now higher food prices.
Underlying Themes
Supposedly politicos in an ex-Soviet Republic are incensed with a UK film on general release yesterday, snappily entitled ‘Borat: Cultural Learnings of America For Make Benefit Glorious Nation of Kazakhstan’. Outrageous, rude and hysterical are some of the labels used so far, and we are never sure whether scenes of American politeness are real or a set-up. More importantly, as so aptly put by the FT’s film critic Nigel Andrews, ‘what distinguishes man from beast is laughter and what distinguishes intelligent man from politically correct man is the ability to laugh about anything.’
What to watch for next week
Sunday the 5th November is ‘Guy Fawkes night’ and Nicaragua holds presidential elections. A mercifully quieter week numbers-wise following last week’s barrage. Monday October Services PMI’s for the different Eurozone countries, UK September Industrial Production, E12 PPI and German Factory Orders. Tuesday E12 September Retail Sales, German Industrial Production, US Consumer Credit and of course, US Congressional mid-term elections. Wednesday the Reserve Bank of Australia decides on interest rates (widely expected +25 basis points to 6.25%), UK Q3 Land Registry statistics, Japan’s September Leading and Coincident Indices, German Trade Balance, and the Bank of England starts a two-day MPC meeting (unanimously expected +25 basis points to 5.00%). Thursday Japanese October Money Supply, Machine Tool Orders, and their Economy Watchers’ Survey. Then UK and US September Trade Balances, US Wholesale Inventories, US October Import Price Index and November University of Michigan Confidence Survey. Friday just Japan September Machine Orders and E12 Leading Index.
Positioning and Technical Analysis
Interest rates will hold within the range set in October, consolidating as traders and investors get used to these new lower yields and a more difficult outlook. It also suggests that a steady move to generalised US dollar weakness may be postponed, for at least a week and maybe a month. Equity indices are likely to consolidate in relatively narrow ranges for another week or more, where some of the Asian and Pacific rim ones should continue to outperform. The energy group is still struggling with its lengthy attempt at forming an interim base; likewise precious metals.
Have a nice weekend!
