Risk appetite was slightly less confident on Thursday due to underlying inflation concerns.

Risk appetite was slightly less confident on Thursday due to underlying inflation concerns. US bond yields strengthened to near 5-month highs.

Overall Wall Street sentiment held firm with the S&P 500 index at a record high. There was some relief that China’s Evergrande made a debt repayment before the grace period ended.

Global equities managed to eke out small gains, but caution prevailed. The US dollar gained some relief amid higher yields and a correction in risk currencies. EUR/USD failed to hold above 1.1650 and drifted lower.

The yen recovered some ground, but failed to hold its best levels with USD/JPY around 114.00. Sterling retreated from intra-day highs as weaker than expected data offset further speculation over a BoE rate hike.

Commodity currencies were subjected to a significant correction after a strong run.

ECB council member Visco stated that supply bottlenecks could last for longer than expected, maintaining the potential for further upward pressure on costs. The Euro overall was held in tight ranges against the dollar with risk trends tending to dominate currency moves.

US initial jobless claims declined slightly to 290,000 in the latest week from a revised 296,000 previously and slightly below consensus forecasts of. 300,000. Continuing claims also declined to 2.48mn from 2.60mn which was below market expectations and the lowest reading since March 2020.

The Philadelphia Fed manufacturing index declined to 23.8 for October from 30.7 previously and slightly below expectations of 25.0. There were stronger rates of growth in new and unfilled orders while shipments continued to increase at a solid rate.

There was a faster rate of growth in employment and a further increase in the workweek. Prices paid increased as a slightly faster rate on the month and prices received also increased at a strong rate, the highest reading since at least 2008. Markets remained optimistic over the outlook, while supply-side difficulties are expected to ease slightly. Existing home sales strengthened to an annual rate of 6.29mn from 5.88mn previously with the data overall underpinning the US dollar.

Fed Governor Waller stated that inflation is the biggest upside risks and that the next five months would be critical in assessing whether inflation is transitory. There was further evidence that the Fed was drifting towards a more hawkish policy stance. The dollar secured limited net support and there was also some demand from a correction in commodity currencies. Overall, EUR/USD traded around 1.1625 against the dollar on Friday as commodity currencies resisted a further correction.

There were reports that the Bank of Japan would phase out pandemic support if covid infections continue to decline, but there were strong expectations that the central bank will maintain a very expansionary monetary policy and the yen moves were influenced strongly by global risk conditions.

Markets were continuing to monitor US fiscal developments with further negotiations to secure a framework deal. Overall risk conditions were less confident at the Wall Street open and the dollar was unable to gain significant support from higher bond yields with a USD/JPY retreat to lows around 113.65 before a limited recovery.

Japan’s PMI manufacturing index strengthened to 53.0 from 51.5 previously and above expectations with the services index at 50.7 from 47.8 previously.

There was some relief that Evergrande paid a $83.5mn coupon payment just ahead of the grace period expiring which helped underpin risk appetite, although there was still an underlying element of caution over the Chinese outlook.

The Chinese authorities also warned over the risk of high yuan volatility which dampened potential buying. Overall, USD/JPY settled close to 114.00 at the European open with EUR/JPY close to 132.50.

The CBI industrial orders index retreated to 9 for October from 22 previously and below consensus forecasts of 18, but companies remained optimistic over the outlook. Supply shortages intensified and there was further upward pressure on costs while domestic price growth recorded the strongest increase since 1980.

Sterling was hampered by a slightly more defensive tone surrounding risk appetite during Thursday. There were still expectations that the Bank of England would push for an early increase in interest rates, but also speculation that this had been priced in to the UK currency.

After the European close, Bank of England chief economist Pill stated that inflation is likely to hit 5% and that the November central bank meeting is live. He also stated that the emergency policy settings are no longer needed with the decision finely balanced, maintaining speculation that there would be a small rate hike next month.

UK consumer confidence retreated to an 8-month low of -17 from -13 previously while inflation expectations hit the highest level since at least 1985. Retail sales declined 0.2% for September, below expectations of a 0.5% increase.

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