Market Agitation And Sensitivity to Data Shows Uncertainty Still Prevails
Not much was expected this week as the data was light on the economic calendar as we headed into the Christmas period and central banks already delivered the last rate hikes for this year in the previous week. But, there was no rest in the markets, as the volatility continued and we saw some large moves in JPY pairs.
The Bank of Japan (BOJ) was expected to hold the economy unchanged and interest rates at -0.10% as they have been doing throughout the year, while other central banks have been raising rates at the fastest pace on record, although inflation remains quite low in Japan compared to Europe and the US.
The BOJ kept interest rates unchanged indeed, but they changed the yield curve control policy. They also announced an increase in bond purchases to 9 trillion yen per month, up from 7.3 trillion yen. That sent the JPY surging around 7 cents higher before retreating somewhat until the end of the week.
That move was somewhat justified, although the size of it was over the top, which shows that markets are agitated, which in turn indicates that the uncertainty about the near future of central bank policy is uncertain. After that, on Thursday we had the US final GDP report for Q3. This report was revised 3 points higher from 2.9% to 3.2%. That’s a sizeable upward revision, but this is the third reading and it’s almost three months old, and the economic situation has changed since then, so this indicator is not really a market mover.
Nonetheless, we saw a 75 pip jump in the USD, while risk sentiment turned negative and the decline in stock markets was larger. On Friday the US PCE inflation report was released and again we saw a strong market rection to the data.
US November PCE Inflation Report
- Headline PCE +5.5% vs +6.0% prior (revised to 6.1%)
- November PCE core inflation YoY +4.7% vs +4.7% expected
- October PCE core inflation YoY was +5.0%
- PCE core MoM +0.2% vs +0.2% expected
- Prior PCE core MoM +0.2%
- Deflator MoM +0.1% vs +0.3% prior
Consumer spending and income for November:
- Personal income +0.4% vs +0.3% expected. Prior month +0.7%
- Personal spending +0.1% vs +0.2% expected. Prior month +0.8% (revised to +0.9%)
- Real personal spending +0.0% vs +0.5% prior
There was some heavy selling in US equity futures after the economic data and that was coupled with buying the US dollar. It was a strange move given that the PCE data was generally in-line with estimates. The durable goods orders data was soft on the headline but it was entirely due to volatile transportation orders while the core non-defense capital goods orders data was up 0.2% compared to a flat number expected.
The numbers indicate that inflation is cooling off, although the FED will continue to watch closely the wage numbers. These sorts of figures would not shift FED’s views and the steady decline in PCE inflation should be comforting for them.
