JPY threatens new low ahead of key US CPI data

JPY: Positive risk appetite curtails dollar demand

After advancing last week to the point of nearly recouping all the losses from the previous week, the US dollar has started this week on the backfoot with some moderate selling ahead of the key US data today – the CPI data for October. The one currency that was weak throughout most of yesterday was the yen but this changed with a sudden advance which prompted speculation of intervention. Finance Minister Suzuki did speak yesterday and expressed the usual concerns over yen weakness but the comments were nothing out of the ordinary and the lack of follow-through on the reversal in USD/JPY once a new intra-day high of 151.91 was recorded underlined the probability that this was not intervention by the Japanese authorities – option-related selling more likely. Yield will continue dominate USD/JPY direction for now and the week-on-week change in USD/JPY remains tightly linked to the week-on-week change in the UST bond 2-year yield as can be seen in the chart below.  

In that context, the US CPI data this afternoon will be crucial on whether USD/JPY breaks back higher and through the high from yesterday and through the current cyclical high recorded in last year at 151.95, a 33-year high. The CPI data is set to show a further decline in the headline CPI rate due to falling gasoline prices with the annual rate falling from 3.7% to 3.3% - that would be the first slowdown in the annual rate since June. The core rate is expected to remain at 4.1% underlining the Fed’s concerns over sticky underlying inflationary pressures.   

However, we need to assess where the upward pressure is coming from before drawing conclusions on possible Fed policy implications. Medical care services is set to drive core CPI higher with the BLS recalculating health insurance which is done annually and then set at that rate for the following year. After being a drag over the last 12mths, the recalculation in today’s data will see that turn to a positive contribution. Shelter-related inflation measures will be important too but should add to slower annual core CPI with the OER m/m base-effects likely helping slow the annual rate given the 0.6% m/m rate a year ago is unlikely to be matched this year.  

The Fed did get some good news yesterday with the New York Fed’s measure of inflation expectations falling 0.1ppt to 2.7% over 5yrs and to 3.6% over 1yr. The 3yr measure was unchanged at 3.0% and the data was very different to the University of Michigan inflation expectations last Friday which jumped sharply. We think it would take a sharp upside surprise to get markets repricing Fed rate hikes and an upside surprise related to medical services inflation will likely be looked through (the same quirk does not happen in the PCE data). Any dollar strength will likely be most prevalent in USD/JPY if option-related resistance at 152.00 gives way.

WEEK-ON-WEEK CHANGE IN USD/JPY AND 2YR UST BOND YIELD

Source: Macrobond 

GBP: Better employment data mildly GBP supportive

The ONS has just released the employment data and given the changes collecting the Labour Force Survey jobs data by the ONS the markets are giving the more timely PAYE jobs data more focus. The PAYE employment in October jumped 33k in contrast to the expected 17k decline. The September data was also revised higher from -11k to +32k. Combined over the two months, that’s 93k more jobs than expected in today’s PAYE data and paints a far better picture of the demand for labour in the UK. The Average Weekly Earnings data showed stronger than expected overall wages which slowed from 7.9% to just 7.7% (expected 7.3%). The PAYE-related wage data also slowed with the median annual growth rate slowing from 6.0% to 5.9%. Momentum is still clearly softening and over the last 6mths, the annualised growth rate in median pay slowed from 4.7% in September to 4.1% in October – that was the slowest rate since August 2020. The number of vacancies in the UK labour market also declined by 58k.

We would argue that there is something in this data for both the doves and the hawks on the MPC. While labour demand is stronger in this report, there remain signs of a trend of softening labour demand in the vacancy data and the moderating wage growth. In the context of the sharp disinflation in CPI that we will likely see tomorrow, the majority of the MPC will likely see enough here to justify the current stance of remaining on hold, especially with around half of the monetary tightening still to hit the real economy. There is not enough in this jobs report to see big FX or rates moves and GBP is likely to remain in a narrow trading range, albeit to the firmer side, ahead of the US CPI this afternoon and the UK CPI data tomorrow.

UK MEDIAN PAY IS SLOWING  

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
US	08:00	FOMC Member Williams Speaks	--	--	--	!!!
EC	08:00	ECB's Lane Speaks	--	--	--	!!!
EC	08:45	ECB's Enria Speaks	--	--	--	!
US	09:00	IEA Monthly Report	--	--	--	!
CA	09:30	BoC Deputy Govr Gravelle Speaks	--	--	--	!!
GE	10:00	German ZEW Current Conditions	Nov	-76.9	-79.9	!!
GE	10:00	German ZEW Economic Sentiment	Nov	5.0	-1.1	!!
EC	10:00	Employment Change (YoY)	--	1.2%	1.3%	!
EC	10:00	Employment Change (QoQ)	--	0.1%	0.2%	!
EC	10:00	GDP (YoY)	Q3	0.1%	0.5%	!!
EC	10:00	GDP (QoQ)	--	-0.1%	0.2%	!!!
EC	10:00	ZEW Economic Sentiment	Nov	6.1	2.3	!!
US	10:30	Fed Governor Jefferson Speaks	--	--	--	!!
US	11:00	NFIB Small Business Optimism	Oct	90.5	90.8	!
UK	12:00	BoE MPC Member Dhingra Speaks	--	--	--	!!
EC	13:15	ECB's Elderson Speaks	--	--	--	!
US	13:30	Core CPI (MoM)	Oct	0.3%	0.3%	!!!!!
US	13:30	Core CPI (YoY)	Oct	4.1%	4.1%	!!!
US	13:30	CPI (YoY)	Oct	3.3%	3.7%	!!!
US	13:30	CPI (MoM)	Oct	0.1%	0.4%	!!!!
US	13:30	Real Earnings (MoM)	Oct	--	-0.2%	!
UK	13:45	BoE MPC Member Pill Speaks	--	--	--	!!!
US	16:00	Cleveland CPI (MoM)	Oct	--	0.5%	!
US	17:45	Fed Goolsbee Speaks	--	--	--	!

Source: Bloomberg