Source: AP

In focus today

Today, in the euro area we receive data on consumer confidence for November. We have seen a strong upward trend the past year, which bodes well for consumption next year if it continues.

In Sweden, we have a speech by Riksbank vice governor Per Jansson at 14:45 about the economic situation. According to the Minutes, Jansson cited a slower-than-anticipated economic recovery as his reason for supporting a 50bp rate cut. He concluded that overall inflation risk is trending downward, although he balanced that by highlighting two upside risks: the krona and food prices, which in the worst case could delay rate cuts or even justify hikes.

In the US, we receive initial jobless claims and the Philly Fed Business index for November, which measures growth in the manufacturing sector, where consensus suggests 8.0.

Several central bank speeches from both ECB and Federal Reserve again today including Knot, Holzman and Lane, where the market will look for clues on monetary policy ahead of December announcements.

Overnight, the Japanese Statistics Bureau publishes inflation data for October. Tokyo data indicates, inflation declined further, but price momentum rhymed with 2% annual inflation. Consensus sees 2.2% with September inflation of 2.4%. This will be the last nationwide print ahead of the December BoJ meeting.

Economic and market news

What happened overnight

In the US, Yesterday’s auction of USD 16bn in the 20Y was very weak with a very high tail and low demand from direct bidders. However, the 20Y segment on the US Treasury curve usually attracts low demand as it is a new segment on the yield curve (was introduced in 2020) similar to what we see on the German curve, where the 15Y-20Y segment also attracts low demand and have to offer an extra premium to investors. Hence, it should not have significant impact on the long end of the Treasury curve.

What happened yesterday

In the euro area, negotiated wage growth increased to 5.4% y/y in Q3 from 3.5% in Q2, influenced by seasonal factors such as bonuses and recent increase in German special payments. Despite this volatility, average negotiated wages have now increased 4.6% y/y, up from 4.4% y/y in 2023, indicating persistently strong wage trends. This sustained wage growth is expected to continue influencing services inflation. However, the ECB’s focus has shifted from inflation concerns to growth, lessening the impact of the data on future policy rate decisions.

In the UK, October’s inflation figures surpassed expectations with headline CPI at 2.3% y/y (cons: 2.2%, prior: 1.7%), and core CPI at 3.3% y/y (cons: 3.1%, prior: 3.2%). The rise in the headline is primarily due to quarterly adjustments in household energy bills. Given this, we therefore caution reading too much into this print given the significant impact of energy costs.

Equities: Global equities were marginally lower yesterday, and it was definitely not the Trump trades outperforming. Health care is finally showing some defensive characteristics after having faced several challenging weeks following the elections. Materials also outperformed on a negative day, a sector which has also been challenged over the last couple of weeks. European stocks once again started the day in the green before ending in the red. This illustrates quite well the investor scepticism, fear, and uncertainty related to geopolitics, German politics, struggling manufacturing sectors, and challenging structural outlooks related to Europe. What seems to be missing is the belief in potential upside surprises in Europe, despite economic surprises currently being positive for the region. In the US yesterday, Dow +0.3%, S&P 500 +0.00%, Nasdaq -0.1%, and Russell 2000 +0.03%. Asian markets are mixed this morning, with South Korea standing out once again, this morning on the positive side. European futures are higher – let’s see if the strength can continue throughout the cash session. US futures are slightly lower but without a massive impact following the Nvidia earnings in the after-hours yesterday.

FI: Geopolitics continued to add downward pressure on global rates through yesterday’s session. The EUR swap curve rose modestly across tenors during the first part of the session, but the move faded quickly as news of another Ukrainian attack on Russian soil reached the wire. The EUR swap curve ended the day marginally higher across tenors, while the Bund ASW-spread move slightly higher to 2-week high of 2.5bp.

FX: USD and CAD gained the most yesterday and NOK and SEK lost out on another relatively quiet day for the FX market. EUR/USD traded in the 1.05-1.06 range, EUR/SEK rose above 11.60 and EUR/NOK climbed towards 11.70.

Markets

Geopolitical developments keep hijacking headlines. Risk sentiment improved at the start of yesterday’s trading session on talk that Russian president Putin would be open to talks on a ceasefire deal in Ukraine with the US. The optimism quickly evaporated after the Biden administration decided to give Ukraine antipersonnel mines and after Ukraine deployed first long-term missiles from the UK (Storm Shadow) days after first such arms from the US (ATACMS).

Key European equity benchmarks closed up to 0.50% lower. US stocks treaded water going into Nvidia earnings which brought a tepid reaction. While still beating consensus, they didn’t top highest estimates triggering some pullback in the share in after-trading after the recent run-up. Eco data included higher-than-expected October UK CPI figures and record high EMU wage growth (Q3: +5.4% Y/Y) which failed to really leave a (negative) mark on bond trading.

Daily changes on the German curve were limited to +- 1bp. UK yields were unchanged apart from an underperformance of the (very) long end of the curve: 10y +2.7bps, 30y +5.2 bps). The US yield curve bear flattened with increases between +1.6 bps (30-yr) and +3.4 bps (2-yr) following some hawkish Fed comments. EUR/USD oscillates between 1.05 and 1.06.

US money markets now put the probability of a 25 bps Fed rate cut in December at only 50%. The latest repositioning started last week after Fed Chair Powell said that the economy is not sending any signals that de Fed needs to be in a hurry to lower rates. Boston Fed Collins yesterday suggested that some additional policy easing is needed as policy currently remains at least somewhat restrictive but that the final destination is uncertain. Policy makers should proceed carefully though.

“The policy adjustments made so far enable the FOMC to be careful and deliberate going forward, taking the time to holistically assess implications of the available data for the outlook and the associated balance of risks” Washington-based Fed governor Bowman – who dissented in September in favour of a smaller 25 bps rate cut – sounded equally cautious, citing risks of prematurely fueling demand and reigniting inflationary pressures. Interestingly, she says that we may be closer to a neutral policy stance than we currently think.

Fed governor Cook also didn’t want to frontrun the outcome of the December meeting, hinting that she is ready to respond to a changing outlook. NY Fed Williams was more neutral. His 2025 outlook is one of still solid growth (2.5%), a sideways moving labour market (4%-4.25% unemployment rate) and a continuation of the disinflation process (2.25% for the full year). In this context, he argues that it is appropriate to bring the Fed funds rate down closer to more normal or neutral levels. Today’s eco agenda again fails to inspire, leaving space for more choppy consolidation trading in the run-up to tomorrow’s PMI surveys.

News & Views

Japan’s public broadcaster NHK said the government is considering a new stimulus package worth JPY 13.9tn, or about $90bn, aimed at mitigating the impact of rising prices on households. The package would also contain around JPY 8tn for government investment and lending as well as local government spending, raising the total size to JPY 21.9tn to top last year’s JPY 21.8tn fiscal booster. Japan’s ruling coalition yesterday agreed with a key opposition party on the draft of the package. While these kind of supplementary budgets are not unusual in Japan, their size seem to be ever-increasing. They are also largely debt-funded. The IMF earlier this month warned Japan to fund additional spending plans within its budget rather than issue debt. It urged Japan to get its fiscal house in order as the central bank began raising interest rates. The Japanese yen this morning oscillates around USD/JPY 155.

Advisers to the Chinese government are recommending the country to stick to a 5% growth target for 2025, Reuters reported. Such growth ambitions match those for this year. The advisers push for stronger fiscal stimulus to offset the impact of potential US tariff hikes on Chinese exports. One of them said the budget deficit should “definitely exceed” this year’s planned 3% level of GDP. Another was more conservative, calling solely relying on fiscal stimulus not sustainable in the long run if China does not go ahead with much-needed reforms to address structural imbalances. The advisers will submit their proposals to next month’s annual Central Economic Work Conference, where leaders discuss policies and goals for next year. The growth target will be officially announced at an annual parliament meeting in March.

Source: ACTIONFOREX

EUR: Fragile Stability Amid Geopolitical and Economic Uncertainty

DAX Index (Purple) – US10Y (Blue)

EUR PMIs

GBP: Budget Implications Heighten Inflation and Stagflation Concerns

UK CPI

JPY: Safe-Haven Status Reinforced Amid Escalation Fears

USDJPY H1

SINGAPORE/CHICAGO?CANBERRA (Nov 21): Wheat growers in several exporting countries are reluctant to sell their crops with prices near four-year lows, traders, farmers and millers say, leaving flour makers with dwindling supplies and vulnerable to any potential upswing in prices.

Typically grain processors buy wheat three- to four months in advance. But millers in Asia, including Indonesia, the world's No. 2 wheat importer, are currently covered for about two months, and in the Middle East, most grain processors only have up to 45 days of supplies, two millers and a trader said.

The limited supply held by flour makers reduces their buffer against any production shortfalls that would trigger a rally in world prices, with global reserves already projected to reach a nine-year low, and fuel food inflation.

Farmers are hoarding their crop as global wheat prices have slumped to their lowest since 2020, on solid output in Australia and Argentina, and on improved growing conditions in major exporting regions including the US and the Black Sea region.

Wheat sales in Australia, the world's fourth-biggest wheat exporter, are running at half the pace of last year at 500,000 tonnes contracted for November shipment.

At the same time, farmers in the US and parts of the Black Sea region are storing grains gathered earlier this year in silos, hoping for higher prices, industry players said.

"Farmers are not happy with the current price being offered to them," said a grains trader at an international trading firm in Singapore. "Farmer selling is very slow, and it is not just Australia where the harvest is going on; it is the same situation in several exporting countries."

Farmers hold out

In the physical market, Black Sea wheat with 12.5% protein is being offered at US$265 (RM1,183) a metric tonne, including cost and freight (C&F) to Asia, down from US$275 a couple of weeks ago. New-crop Australian Premium White wheat is quoted near US$280 a tonne, C&F, down from US$290.

"Prices have come off pretty dramatically. And personally, yeah, I am not selling any wheat at the current stage," said Cordell Kress, a farmer from Rockland in the northwestern US state of Idaho.

"If you are not needing money right away, it is kind of just store it or hold on to it and hope for better prices, or some other problem in Russia or Australia that will cause our prices to go up here domestically."

Kress grows primarily soft white and hard red spring varieties of wheat.

In Australia, farmers are selling other crops instead.

"You have very strong sales of chickpeas for cash flow, and now, we are getting strong sales of canola into the current prices," said Rod Baker at Australian Crop Forecasters in Perth.

Tight supply ahead

Along with lack of supply from farmers, high interest rates have deterred millers from stocking up on wheat, leaving them exposed if prices rise.

"Lower supply cover does leave us vulnerable, but with high interest rates, it doesn't make sense to hold large stocks," said one Dubai-based purchase manager at a flour mill in the Middle East.

Even with robust southern hemisphere production, global wheat stockpiles are projected by the US Department of Agriculture to shrink to a nine-year low by mid-next year.

"Wheat crops in the northern hemisphere still have to go through crucial development stages; any issues with the weather until harvest in July can trigger a rally in prices, given how tight the inventories are," said Ole Houe, director of advisory services at IKON Commodities in Sydney.

In a slight reprieve for millers, attractive interest rates have prompted Russian farmers, who had been withholding their crops, to change tack and sell crops, so they can deposit money in banks.

But top wheat exporter Russia might be running out of supplies. Moscow's grain export quota, to be in place from February to June, could be nearly three times smaller than the 29 million tonnes a year earlier.

Source: Theedgemarkets