Markets continued to monitor global inflation trends very closely with an increase in net concerns as PMI cost pressures remained intense.
Markets continued to monitor global inflation trends very closely with an increase in net concerns as PMI cost pressures remained intense. Fed rhetoric confirmed a gradual approach towards a more hawkish policy stance. Despite these inflation concerns, longer-term bond yields moved lower.
Wall Street equites edged lower, but overall global risk appetite held steady as immediate Evergrande fears eased slightly.
The dollar gained some ground after the hawkish Fed comments, but lost ground again on Monday amid negative real yields. EUR/USD retreated to 1.1620 on Friday before a recovery to just above 1.1650 on Monday. The yen regained some ground with caution given the fresh surge in short yen positions.
Sterling was unable to hold intra-day highs with GBP/USD below 1.3800 amid reservations over demand conditions. Commodity currencies also retreated from intra-day highs, but bounced again on Monday.
The Euro-zone PMI manufacturing index retreated marginally to a 8-month low of 58.5 from 58.6 with the services index dipping to a 6-month low of 54.7 from 56.4.There were further strong employment gains while upward pressure on costs remained strong with services-sector selling prices increasing at the fastest rate for close to 20 years. Euro-zone long-term inflation expectations hit 2% for the first time since 2014, maintaining pressure for a slightly more hawkish tone from the ECB, but the Euro was unable to make headway ahead of this week’s policy meeting.
The US PMI manufacturing index dipped to a 7-month low of 59.2 from 60.7 previously with a sharper lowdown for the output index. There were further supply-side difficulties with delivery times increasing by a record amount. The services-sector, however, strengthened to a 3-month high of 58.2 from 54.9 the previous month. Input prices increased at the second-fastest rate on record while output charges increased at the fastest rate on record.
Fed Chair Powell stated that high inflation is likely to abate, but will last well into next year. He confirmed that the central bank is on track for tapering, but not raise rates and also commented that the bank needs to be patient. The overall comments suggested that the central bank is becoming more concerned over inflation pressures and the dollar gained some ground after the rhetoric despite no plans to raise interest rates. Overall, EUR/USD retreated to near 1.1620 before stabilising later in the session.
CFTC data recorded a decline in short Euro positions to 12,000 from 18,000 the previous week. Markets were struggling for sustained direction with the dollar losing ground on Monday as EUR/USD strengthened to 1.1660 given expectations that real rates will remain negative.
Chinese real estate company Evergrande stated that it could not guarantee that financial obligations will continue to be met with little progress in asset disposals.
San Francisco Fed President Daly stated that inflation number are high and have lasted longer than expected. She did, however, also comment that raising rates just on the forecast of higher inflation could cost the economy and jobs. There was a net decline in longer-term bond yields and USD/JPY dipped to lows below the 113.50 level.
CFTC data recorded a further sharp increase in short yen positions to near 103,000 contracts in the latest week from below 77,000 the previous week. This was the largest short yen position for 34 months, maintaining the potential for a sharp shake-out in short positions if there is a shift in sentiment and weaker equities.
US Treasury Secretary Yellen remained confident that inflation would remain under control with a gradual reduction next year.
Risk appetite held steady on Monday amid more positive new from Evergrande with USD/JPY just above 113.50 with EUR/JPY around 132.40.
The UK PMI manufacturing index strengthened to a 2-month high of 57.7 for October from 57.1 previously and above consensus forecasts of 56.1. The services-sector index also strengthened to a 3-month high of 58.0 from 55.4 previously and well above expectations of 54.5 as new orders increased at a faster pace. Manufacturing output was hurt by supply shortages while new orders increased at a faster rate. Manufacturing costs increased at the fastest rate for close to 20-years while services-sector costs increased at the fastest rate since the survey began in 1996. Sterling strengthened after the data, but struggled to sustain any traction.
There were reports that the EU would take a tough stance on Brexit talks which served as an excuse to take profits on long Sterling positions with a GBP/USD dip towards 1.3750 while GBP/EUR dipped from highs of 1.1875.
CFTC data recorded a switch to a small net long Sterling position from a short position of around 12,000 the previous week.
Following the latest Brexit discussions on Northern Ireland, the UK government stated that talks had been constructive, but that substantial differences remain. There were expectations that Chancellor Sunak would make substantial spending commitments and Sterling edged higher on Monday, but GBP/USD was held just below 1.3800 with GBP/EUR around 1.1815.
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