Daily Market Pulse

U.S. capitalizes amid the highest inflation since 1990


The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, recorded major gains during yesterday’s trading session following the release of U.S. inflation readings in the U.S. which jumped to its strongest level in more than 30 years. The U.S. Bureau of Labor Statistics revealed that the Consumer Price Index jumped to 6.2% on a yearly basis in October from 5.4% in September, making it the highest print since 1990, while core readings climbed to 4.6% from 4%. The inflationary reading underpinned a pick up in U.S. treasury yields which rose nearly 8% and provided a solid boost to the dollar, settling above 1.5%. Market participants are currently pricing a more than 70% probability of a Fed hike by June 2022. However, inflation fears and tightening expectations weighed heavily on stock markets which have been breaking new all-time highs one after the other. The Nasdaq composite fell more than 1.5%, the S&P 500 lost 0.8% while the Dow Jones Industrial Average fell 0.66% by yesterday’s close. Today markets will be partially open in the U.S. due to Veterans Day Holiday and we could expect thin liquidity conditions. 


The shared currency suffered severe losses against the dollar following the release of U.S. inflation figures hitting a multi-decade high. The monetary policy divergence between the Federal Reserve and the European Central Bank continues to weigh on the EUR as U.S. policymakers have already initiated the withdrawal of stimulus and are pricing rate hikes for June next year, while the ECB remains reluctant to raise the alarm and adjust policy as several factors triggering a surge in prices might be considered transitory. However, as policymakers insist that the current inflation surge would be short-lived, many investors worry that underestimating the price increase could prove to be a costly policy mistake. 


The British Pound endured pressure following the higher than expectations inflation figures in North America which have shaken global markets. Cable sustained pressure during the early hours of today, dropping to fresh year-to-date lows amid disappointing U.K. macro data and Brexit jitters eroding the performance of the Sterling. The U.K. Gross Domestic Product readings showed that the economy expanded by 1.3% during the July-September period, missing expectations at 1.5%. Growth reports revealed a sharp deceleration from the 5.5% growth reported in the previous quarter. Moreover, U.K manufacturing and industrial production figures also fell short of consensus estimates, struggling to find traction through the course of the trading session. The weak reading in combination with worries that the U.K. government will trigger Article 16 of the Northern Ireland Protocol and the Bank of England’s dovish decision last week, makes it challenging for the British Pound to find its footing.  


The Japanese Yen extended losses against the greenback driven by U.S. inflation-led flows. Risk perception improved in the region following the encouraging news from Real estate giant Evergrande complying to pay its USD 148 million coupon payment avoiding formal default, weighing on the safe-haven appeal of the Yen. Chinese and Japanese stocks capitalized during yesterday’s trading session, with Hang Seng closing 1% higher while Nikkei capitalized 0.8%. The risk-on mood, in combination with the highest inflation readings in the U.S. since 1990, pushed U.S treasury yields higher providing further support to the greenback. 


The Loonie remains on the back foot against the greenback, sustaining severe pressure amid a strong follow-through bearish momentum falling 0.6% during the early hours of the trading session. The worrying inflation figures in the U.S. brought forward interest rate hike expectations underpinning the dollar against most of its peers. On the other hand, crude oil prices undermined the commodity-linked Loonie for the pair to sustain its momentum. The West Texas Intermediate, fell 3.77% after hitting the year to date on Thursday, and it currently changes hands at USD 80.82 per barrel. 


The Mexican Peso was the worst-performing Latin American currency on Wednesday against the dollar, falling back 1.57% amid the highest inflation readings in the U.S. in three decades. Following the dismal move during yesterday's trading session, today's market participants stay tuned to the all-important Banxico rate decision. Market participants may be surprised by policymakers with a 50 bps hike amid sustained inflationary pressure also in Mexico. 


The Chinese Renmimbi weakened by the most in three weeks as the dollar jumped on higher than expected U.S. inflation readings. However, encouraging news from China’s Evergrande bolstered market sentiment in the region, after the real estate developer settled its USD 148 million coupon payment this month avoiding default once again underpinning stock indexes in China and Japan. Additionally, Chinese President Xi Jinping is set to deliver the first resolution on Communist Party history in 40 years, giving him the mandate to potentially rule for life as a major summit wraps in Beijing. The virtual meeting between President Joe Biden and his Chinese counterpart was reportedly scheduled for Monday. 


Yesterday, the Real slight drop -0.22%, after the Chamber of Deputies approved, in the second round, the PEC dos Precatórios, which allows a dribble in the spending ceiling and enables "Auxílio Brazil'' national aid program at R$400. Also yesterday, the IBGE (Brazilian Institute of Geography and Statistics) released the inflation figures for the month of October, which came in above market expectations and above that registered in the previous month, at 10.65% against 10.25% in September. In quantitative terms, the monthly change in October (+1.25%) was the highest since 2002. In this scenario, the current Selic is at 7.75%, but a new hike of +150 basis points is already expected for  Brazil's Central Bank meeting in December. The market will assess the risks that a high Selic will bring to economic growth, which, at present, is already showing signs of slowing down.

The current level of the BRL is already seen as a reality by many in the market, with the overpriced discourse remaining in the past. As mentioned above, it is likely that economic growth next year be disappointing, amid a double-digit Selic. Moreover, a third way for the upcoming elections seems quite utopian. Although the PSB's (Brazilian Socialist Party) leadership has once again considered the candidacy of former STF minister Joaquim Barbosa for the presidency, negotiations continue only in the background. Thus, leaving the presidential race for President Bolsonaro and former President Lula.


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