Overview of Financial Markets in November

The global economy continues to face steep challenges, shaped by lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of living crisis caused by persistent and broadEning inflAtion prEssurEs, AnD thE slowdown in China. – IMF October World Economic Outlook.

The greenback movement…

The US dollar fluctuated over the month with movements driven by investor speculation on the Federal Reserve slowing rate hike considering a lower-than-expected Consumer Price Index, and mid-term election uncertainties.

US inflation cooled in October, offering market spectators hope that the fastest price increases in decades are slowing and giving the Fed room to ease the steep interest rate hikes. The consumer price index was up 7.7% year on year and down from 8.2% in September.

Core prices, which exclude food and energy, and are regarded as a better underlying indicator of inflation, pulled back from a 40-year high, advancing 6.3% year-overyear in October.

The CPI report indicated a deceleration in food costs, while gasoline prices increased alongside a 0.8% increase in shelter costs, the most since 1990.

US producer prices for final demand rose 0.2% in October, up 8% year-on-year, the smallest annual gain in more than a year.

The producer price growth appears to be moderating amid improving supply chains, softer demand, and a weakening in many commodities prices. Excluding food and energy, costs of goods declined, and services prices fell for the first time since 2020.

The tight labor market is showing signs of cooling as jobless claims hit a three-month high in November.

Applications for US unemployment benefits rose to 240,000 amid a wave of layoffs by tech companies, with continuing claims, which include people who have already received unemployment benefits for a week or more, rising by 48,000 to 1.55 million in the week ended Nov.12, the highest since March.

The cooling market is indicative of the effect of the Federal Reserve’s most aggressive tightening campaign since the 1980s, weighing on the greenback to pull lower from October peaks.

At the publishment of this article the US dollar dropped for a second straight day as investors assessed the FOMC meeting minutes.

Federal Reserve officials at their meeting earlier this month concluded it would soon be appropriate to slow the pace of rate increases, signaling the central bank was leaning toward downshifting to a 50 basispoint hike in December.

exhibited volatile …and the yen moved from 32-year lows…

Japan’s core consumer inflation accelerated to a 40-year high in October, driven by currency weakness and imported cost pressures. The nationwide core consumer price index rose 3.6% year on year, the largest jump since February 1982, when a middle east crisis disrupted crude oil supply and triggered a spike in energy prices.

Inflation continued to remain above the Bank of Japan’s goal of 2% for a seventh consecutive month. BOJ Governor Haruhiko Kuroda reiterated a pledge to maintain monetary stimulus to achieve wage growth and sustainable and stable inflation. The central bank is keeping long-term interest rates around zero and short-term rates at minus 0.1%.

Gross domestic product contracted at an annualized pace of 1.2% in the third quarter, slipping into reverse for the first time since last year as weakness in the currency inflated the country’s import bill.

The trade gap grew to 2.16 trillion yen from 2.09 trillion yen the month before. The balance has now been in the negative for 15 straight months, the longest streak since 2015. Imports grew at the fastest pace since 1980 as the yen inflated already elevated commodity prices. The 53.5% gain was led by buying of crude oil, liquid natural gas, and coal.

To ease the hit of higher prices on consumption and fearing another setback in Japan’s recovery as the weak yen drove up energy costs and inflation, Prime Minister Fumio Kishida last month put together an economic stimulus package that includes aid to reduce energy costs and cash handouts for childcare. His cabinet has approved an extra budget of 29.1 trillion yen to partly fund these measures.

The prospect of post-peak US inflation lured investors away from the safety of the greenback to the safehaven of the yen, pushing the currency higher and away from 32-year lows in the later part of November.

…with the pound and sterling gaining some strength…

The European Central Bank VicePresident Luis de Guindos in a statement said that the ECB will keep raising interest rates until it brings inflation down to its 2% midterm goal even though the Eurozone economy appears to be heading towards recession. Manufacturing activity in the Euro-zone declined albeit at a slower place, with the main index rising to 47.3 from 46.4, as soaring energy prices and disrupted supply chains hit output. Activity in the bloc’s dominant services industry declined again, with the headline index matching October’s 20-month low of 48.6.

Inflation in the region has soared due to surging energy prices following Russia’s invasion of Ukraine and disrupted supply chains, reaching 10.6% last month - more than five times the ECB’s 2.0% target. The Euro over the month of November has strengthened to July levels against the dollar and may see to returns above parity by the first quarter of 2023.

Britain’s job shortages showed no signs of easing in the third quarter as more people dropped out of work and wages grew at the fastest pace in over a year, adding to inflationary concerns for the Bank of England. The unemployment rate remained near four-decade lows at 3.6% and employment fell by 52,000, as workers dropped out.

Energy bills drove UK inflation to a 41-year high in October with the Consumer Prices Index up at 11.1%, more than five times the BOE’s 2% target.

Prime Minister Rishi Sunak said getting inflation under control is the primary goal of his government, the latest hint that the Treasury will rapidly rein in its spending even though the economy is headed into recession.

In the absence of a strong greenback the Sterling rose and extended gains to hover near three-month highs.

…and the Australian and New Zealand dollars strengthening from year lows…

The Reserve Bank of Australia in its November 2nd meeting hiked its cash rate target by 25 basis points to 2.85% and indicated to markets that “the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook.”

Wages climbed 1% in the three months through September from the prior quarter, the fastest pace since early 2012, for an annual gain of 3.1%.

Australia’s jobless rate is hovering near a 50-year low, highlighting the tight labor market underpinning wage growth. The unemployment rate slid to 3.4%, the lowest level since 1974, from 3.5% a month earlier. Employment advanced by 32,200 people in October.

The softer USD and the weaker RMB on the back China’s renewed COVID restrictions, took the Aussie slightly stronger to approach 1-month highs.

The Reserve Bank of New Zealand raised its cash rate by a record 75 basis points to 4.25% and signaled much more to come. The RBNZ is concerned that inflationary forces are becoming embedded in the New Zealand economy and forecasts a recession next year.

The central bank is responding to stronger-than-expected inflation and near-record low unemployment, which support the case for it to accelerate the pace of tightening after five straight 50-point hikes. Inflation eased from the June quarter of 7.3% to 7.2% in the September quarter. Whilst the lower rate indicates a peak of inflation, the still strengthening breadth and persistence of price rises remains a factor of worry.

The rate hike saw the Kiwi strengthen to two-month highs with an additional boost from the weaker USD.

…as the Yuan and Canadian fluctuate…

China’s exporters slowed conversion of foreign currency proceeds last month, weakening a key pillar of support for the yuan amid growth headwinds and concerns over a widening policy gap with the US. A net deficit of $730 million was recorded last month in currency deals related to China’s goods trade with overseas corporates, the biggest since February 2016.

Concern over the yuan’s weakness have already dampened global interest in Chinese assets. Foreign investors reduced their holdings of China bonds in the onshore market for a ninth month running in October. Despite the weaker dollar, the Yuan was pulled lower by China’s zero COVID approach, which saw major manufacturing sectors such as Zhengzhou, Apples Inc.’s largest iPhone manufacturing site, go into five-day lockdowns amid a resurgence in COVID-19 cases.

At a meeting with national banks, the People’s Bank of China said it planned to provide 200 billion yuan in interest-free re-lending loans to commercial banks through the end of March 2023 to support them to provide matching funds for stalled property projects, hence providing a boost to a slowing economy. In Canada, inflation appeared to have stabilized as annual price gains stalled at 6.9% in October. But over 85% of 62 subcategories tracked in the consumer price index are still rising by more than the Bank of Canada’s 2% inflation target. That’s the highest proportion since 1991, well above the historical average of 56% and up from 79% in September.

Canada’s economy added more than 100,000 jobs in October, blowing past expectations, with the unemployment rate holding steady at 5.2%.

The Canadian dollar, despite the weaker USD, remained lower as pegged against oil prices weakened.

…and some key commodities whilst others gained.

tumbled

Oil prices traded below USD 90 a barrel as China reported its first deaths from Covid in six months and lockdowns tightened in some cities. Recessionary fears combined with aggressive monetary tightening by central banks and signals for over supply, weighed on crude prices which erased most gains from last month when the OPEC+ slashed production by two million barrels a day.

The European Union’s consideration of a higher-than-expected price cap on Russian crude also lent some weakness to oil prices.

Gold rose for three straight days on the weaker dollar. The precious metal prices have been curbed by the Federal Reserve’s aggressive monetary-tightening policy which has seen bullion prices down 16% from its March peak.

Natural gas prices in Europe posted the biggest weekly gain since August after news that one of the largest natural gas export terminals in the US won’t resume full operations until March. With temperatures across Europe set for a short period of colder weather, markets expect consumer demand to rise.