San Francisco Fed Economists Said US Labor Market Still Adding To Inflationary Pressures

In focus today

Today, in euro area we receive final October HICP inflation data. This will show drivers of inflation and allow us to calculate the “LIMI” indicator of domestic inflation, which has received great attention from the ECB lately.

In Sweden, the day begins with a speech from Riksbank’s Anna Breman at 8.15 CET, focusing on “Current monetary policy and the economic situation”. This follows several notable events since the 6 November decision, such as US election, higher-than-expected inflation for October, and significantly higher electricity prices, presenting various discussion points. At 10.00 CET, the Swedish National Financial Management Authority will present new forecasts on the economy and public finances.

Today, we also have a few ECB speeches as well as some BoE speeches including BoE Governor Baily.

Economic and market news

What happened yesterday

In the euro area, ECBs Lagarde highlighted the critical need for Europe to reverse declining growth to sustain its welfare provisions, increase defence spending and address climate change. Lagarde emphasized the necessity for bold economic policies to generate the required wealth for these purposes. She also focused on the urgency of adapting to a changing geopolitical landscape and regaining competitiveness and innovation. Lagarde also pointed out Europe’s vulnerability to trade wars due to its heavy reliance on trade, which makes up more than half of its economic output.

Equities: Global equities were higher yesterday, with European markets lagging behind the rest. We observed some elements of the Trump trade, though not nearly to the extent we witnessed in the immediate aftermath of the elections. Health care continued to underperform, while the materials sector experienced a slight recovery after several challenging weeks for the China-linked sector.

The VIX was marginally lower and appears to have stabilised around the 15 level, aligning with expectations given the current macroeconomic backdrop.

In the US yesterday, Dow -0.1%, S&P 500 +0.4%, Nasdaq +0.6%, and Russell 2000 +0.1%.

Asian markets were broadly higher, while South Korea underperformed for the second consecutive day. US and European futures are higher this morning.

FI: The EUR swap curve saw some bearish flattening through the Monday session, which was characterized by being very limited on market moving news. The 2Y tenor was up some 5bp throughout the session, while the 10Y point rose 3bp. The Bund ASW-spread at -2.5bp was roughly unchanged, similar to peripheral and EUR credit spreads.

FX: USD sold off against all currencies but the JPY to start the week. Commodity currencies, NOK, AUD and CAD gained the most on Monday. EUR/USD rose towards 1.06, EUR/SEK traded around 11.60 and EUR/NOK around 11.70.

The S&P500 rebounded 0.39%, while Nasdaq added 0.71%, supported by a more than 5.5% jump in Tesla shares on rumours that Trump administration wants to make a federal framework for fully self-driving vehicles one of the Department of Transport’s priorities. And remember, Elon Musk’s robotaxis is one of the company’s priorities for the future development and had helped – earlier this year – revive appetite for Tesla despite the slowing sales of EV sales. So yes, the news couldn’t come at a better time for Tesla.

News were not as good on the Nvidia front though, as Nvidia’s Blackwell chips – you know the next generation chips that see an insane demand according to the CEO Jensen Huang – reportedly overheat, requiring redesign and delay for deliveries. Of course, you can argue that this type of adjustments are standard for such large-scale tech releases, and they should not have a material impact in the long run, but the delay in the short run mean that the big customers like Meta, Google and Microsoft won’t have their chips on time, the latter will extend the payoff period on their investments at a time investors can’t wait to see these investments bear fruit. Nvidia retreated 1.30% yesterday, as the news that the company is now working with Google to design its next generation quantum computing devices helped countering the negative vibes of the overheating Blackwell chips.

The Blackwell news triggered a 3% rally in AMD that also sells high capacity chips for AI applications. ‘The MI325X is expected to begin production by late 2024, while the MI350 series aims for up to 35 times better inference performance compared to its predecessors and is set to launch in 2025’​, according to ChatGPT. Any misstep from Nvidia could help AMD gain market share. For now, investors are focused on the next earnings report from Nvidia that will land on Wednesday, after the closing bell, and will hopefully put a number on how insane the demand for these Blackwell chips, whether they are overheating or not.

Beyond tech, the Dow Jones index was not cheery, yesterday, the index closed the session slightly lower, while small caps were slightly up on lower yields, but the direction of the yields are not encouraging the small cap investors given that these companies have smaller margin to deal with higher borrowing costs. As such, the buyers are seen more crowded in big caps, and even the most bearish of the bears on the Wall Street are busy lifting up their PT for the S&P500. The 6500 is increasingly pronounced for the S&P500, while gold is also among the top picks at Goldman Sachs, apparently, which sees the precious metal top the $3000 per ounce next year. In the short-run, the retreat in the US yields helped throw a floor under the gold’s retreat. We see a beautiful support forming near the minor 23.6% Fibonacci retracement and the 100-DMA – that’s around $2550 level.

In Europe, the Stoxx 600 index was flat, the Chinese stocks are lower as the Chinese authorities gather in Hong Kong to discuss the latest developments in China’s financial sector, while the Japanese Nikkei is under the pressure of a rebound in the Japanese yen against the US dollar, on the back of a broadly softer US dollar – a move that I believe is just a correction of the past few week’s rally on political developments and the hawkish shift in Federal Reserve (Fed) expectations.

The EURUSD tested the 1.06 psychological resistance yesterday, supported by the weak dollar and also the news that Greece will repay 5 billion euros of long-term debt before time. But outlook for the EURUSD remains negative on divergence between the European Central Bank (ECB) and the Fed, Hence, price rallies in the EURUSD will soon create interesting opportunities for the euro bears to come back in and give an other try to breaking the 1.05 offers’ back.

In energy, US crude posted a 3% rally yesterday, but the bulls could find the $70pb offers hard to clear, as the amply global supply / weak global demand outlook remains supportive of the bears. The short-end of the market shifted into contango, another signal that investors price in an oversupplied oil market, which could cap the upside potential of short-term price rallies. Solid resistance is seen between $70/72pb range. The key resistance to the actual negative trend – that has been building since summer – stands at the $72.85pb level – which is the major 38.2% Fibonacci retracement on summer decline.

Source: AP

(Nov 19): Japan’s ruling party named Daishiro Yamagiwa as the new chairman of its group that promotes semiconductors, as it sets up a new mechanism to boost funding for the key industry.

Yamagiwa, who formerly served as economic revitalisation minister, replaces Akira Amari, a Liberal Democratic Party heavyweight who championed Tokyo’s renewed push for chips until he lost his seat in parliament in last month’s national election.

The appointment comes after Prime Minister Shigeru Ishiba pledged more than ¥10 trillion (RM289.17 billion) of fresh public support for Japan’s semiconductor and artificial intelligence sectors. Those outlays are in addition to the roughly ¥4 trillion Japan has secured for the industries in the last three extra budgets, including ¥920 billion for Rapidus Corp in Hokkaido, according to the industry ministry. Rapidus aims to mass produce advanced logic chips by 2027.

“Semiconductors can be a choke point for future industries and we shouldn’t be wondering whether Rapidus will be able to win or not,” Yoshihiro Seki, secretary general of the LDP group, said to reporters on Tuesday. “We have to make it succeed and win no matter what.”

The LDP group is likely to press ahead with legislation needed to enable the new funding mechanism in a regular parliamentary session next year. The LDP and its coalition partner Komeito lost their majority in last month’s election and they now need support from opposition parties to implement their policy measures.

Yamagiwa resigned from his ministerial post in 2022 due to alleged ties to the Unification Church, a group whose influence in Japan came under fire following the assassination of former Prime Minister Shinzo Abe. Yamagiwa’s website says he has severed those ties.

In addition to the legislative hurdle, Ishiba’s chips pledge is set to rely on a complex mix of funding measures, according to the draft of an economic stimulus package seen by Bloomberg. The government is expected to announce the package later this week. 

A breakdown of the funding methods in the draft:

¥2.2 trillion through transfers from the fiscal investment and loan special account to the energy special account; will also issue special bonds linked to the energy account as needed

¥1.6 trillion by utilising money returned to the national treasury, using leftovers in existing funds for chip support, and selling government-owned shares in Shoko Chukin Bank

¥2.2 trillion by using green transformation bonds and tapping money returned to the national treasury through reviewing existing industry ministry funds

At least ¥4 trillion worth of financial support through investment and guaranteeing private sector loans

As for how the funds will be allocated, about ¥6 trillion will be used for next generation chip development and mass production of power chips, and at least ¥4 trillion will be used to offer financial support via investment or debt guarantees, according to the draft. It also says the government aims to submit new legislation necessary to enable the new framework in a regular parliamentary session next year.

Source: Theedgemarkets

Reviewing the seasonal performance of US equity in December

(Nov 19): A €350 million (RM1.65 billion) program seeking to ease the financial burden of climate disasters for the world’s most vulnerable countries has disbursed only €5.2 million in two years, according to the managers of the fund.

The Global Shield was launched at the United Nations climate talks in Sharm El-Sheikh, Egypt, with the support of the Group of Seven countries, led by Germany, in 2022. Its bespoke approach to designing aid packages that fit a country’s needs is taking years.

“Climate risk management is not only about risk transfer and risk retention; it’s about understanding risk first,” said Astrid Zwick, a co-director of the Global Shield secretariat.

Climate finance is a central part of COP29 talks this week in Azerbaijan, where countries are due to replace an existing annual US$100 billion (RM446.96 billion) finance pledge with one delivering far more to help poorer nations build green economies and resilience to global warming. Already, developing countries have said rich nations have been slow to deliver on past funding promises.

The Global Shield wants to be a complement to a UN-backed fund for loss and damage from climate change, which currently only has about US$700 million in it. That sum is nowhere close to the estimated cost of damages caused by climate change, which some analysts see being as much as hundreds of billions of dollars a year.

The Germany-led fund aims to make disasters less financially devastating for countries by, among other things, helping pay premiums for insurance policies covering climate-related extreme weather events. It also sets aside money for early warning systems, national disaster relief funds and emergency management training.

Since its initial announcement, 17 countries are working toward securing support from the program. So far only one, Ghana, has publicly announced it’s unlocked funding for insurance coverage. The African country purchased its first-ever sovereign drought insurance with US$1 million in financing from the German government and the Global Shield. The policy was issued by African Risk Capacity.

The Global Shield said on Monday it has disbursed the remainder of the €5.2 million to pay for insurance premiums for Pacific island countries.

Pakistan, which had been hit by extreme flooding in 2022, was expected to be the first country to receive funding from the Global Shield, but it’s taken the country nearly two years to do the analysis needed to secure support. Madagascar, which has been hit by 48 cyclones in the last 15 years and has more than a third of its population undernourished, said it needs US$773 million each year for its resilience needs. Insurance programs on their own won’t be enough. “We need to diversify instruments of risk financing,” said Rabevohitra Bako Nirina of Madagascar’s disaster management unit.

The many steps involved with unlocking funds from the Global Shield have raised scepticism about the commitment of developed nations to helping the poorest countries grapple with the impacts of global warming.

Harjeet Singh, engagement director with the Fossil Fuel Non-Proliferation Treaty Initiative, said there should now be a renewed focus on the UN’s loss and damage fund, which is designed to provide immediate assistance in the aftermath of disasters.

“The reluctance of developed nations to provide substantial funding [to loss and damage] has led to significant delays,” he said. “The Global Shield's dismal progress starkly contrasts with the optimistic assurances initially made by developed countries.”

Source: Theedgemarkets