US equity futures are flat ahead of the CPI report that will determine if the Fed cuts rates next week. As of 8:00am, S&P and Nasdaq futures are up 0.1%, with the Mag 7 mostly higher led by NVDA, GOOG and TSLA. Bond yields and the dollar are also higher after a Reuters report that Chinese leaders are considering allowing their currency to weaken as they brace for higher tariffs under a second Donald Trump presidency. In commodities oil is up +1.0%, and gold is trading just shy of $2700. The main macro focus will be CPI at 8.30am ET (see our preview here). We will also have 10y auction at 1pm ET and ADBE earnings after the close.
Among individual stock movers, Walgreens Boots Alliance slipped 3.5% in US premarket trading, ceding some of the previous day’s 28% surge, as analysts questioned the probability of Sycamore Partners acquiring the pharmacy chain. Videogame retailer GameStop was flat after posting a surprise profit. Here are some other notable premarket movers:
One day after we reminded readers that a yuan devaluation is looming...
One day later:
— zerohedge (@zerohedge) December 11, 2024
Yuan Slides on Report China Considering Weaker Currency in 2025: BBG https://t.co/bILDeGQxhJ
... Reuters reported that Chinese leaders are considering allowing their currency to weaken as they brace for higher tariffs under a second Donald Trump presidency, sending the dollar higher. The report saying Beijing could let the yuan depreciate, jolted markets that were in a lull ahead of Wednesday’s US inflation data print and next week’s Federal Reserve meeting. It sent the the offshore yuan as much as 0.5% lower, while Bloomberg’s dollar index gained 0.3% to touch a two-week high. The move spilled over globally, triggering drops in China proxies such as the Australian and New Zealand dollars, as well as in key emerging-market currencies like the South African rand.
“Last time we had the trade war, we saw a big weakening in the yuan,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd. “That made sense at the time, it would make sense again if Trump comes up with tariffs again.”
Hetal Mehta, head of economic research at St James Place Management, said the dollar’s strength - it has risen 5% already this quarter - is unsurprising, given the “anticipation of tariffs, or just the pricing out of some of the rate cuts that people thought the Fed would implement.”
Meanwhile, while swap markets almost fully expect a quarter-point US rate reduction next week, they have trimmed bets on easing by the Fed over this cycle. Mehta also said that after a series of record highs on the S&P 500, traders will likely wait for details of Trump’s agenda before embarking on more significant moves. “Some of the recent strength is related to forthcoming tax cuts and what that would mean for corporate profits, so markets now want to wait and see that delivered,” she said.
European stocks are little changed as retail shares provide a drag after Inditex reported slower sales growth at the outset of the crucial holiday shopping season. US equity futures edge higher. Zalando SE slumped after the German retailer agreed to buy rival About You Holding SE, offering a premium of about 67% to Tuesday’s closing price. Inditex SA, the owner of the Zara fashion brand, fell on slower sales growth. Here are the biggest movers Wednesday:
Earlier in the session, Asian stocks declined, weighed by a slump in Hong Kong and Chinese shares as traders tempered expectations for further stimulus from a key policy meeting. The MSCI Asia Pacific Index fell as much as 0.3%, with TSMC, Meituan and Tencent among the biggest drags on the gauge. The regional benchmark has moved in a tight range of less than 0.5% for the past five sessions. Shares in Hong Kong and mainland China ended the day lower after fluctuations. The moves suggest investors are bracing for potential disappointment from the Central Economic Work Conference, expected this week, despite vows of support made by the Politburo earlier. A major bright spot in the region was South Korea, where stocks extended gains to a second day following a selloff sparked by political turmoil. The impeachment case against President Yoon Suk Yeol could have “a little bit more serious impact to the overall economy” than previous impeachments given current macro weakness, said Ethan Seo, head of global markets at BNP Paribas in Seoul. Still, the South Korean stock market should stabilize if lawmakers pass the impeachment bill this weekend, while a delay would mean the turmoil “even getting worse.”
In FX, the Bloomberg Dollar Spot Index rose 0.2%, gaining for a fourth session to its highest level in two weeks ahead of US inflation data, boosted by weakness in the Japanese yen and Chinese yuan. The USD/JPY pair climbs 0.5% to 152.65, pushing the yen to a two-week low, after Bloomberg reported BOJ officials see little cost to waiting before raising interest rates. The report also suggested some officials are not against a rate hike at the December meeting if it is proposed. The yuan falls 0.4% on a report that Beijing is considering allowing the currency to weaken next year in response to the threat of a trade war with the US. The USD/CNH gains 0.2% to 7.2733 and Aussie, kiwi dollars follow yuan lower. USD/JPY rallies 0.5% to 152.79 after whipsawing on BOJ report. The loonie was little changed ahead of Bank of Canada decision, USD/CAD steady at 1.4182. Swaps markets pricing some 44bp — or around 80% of a half-point cut — from BOC. The EUR/USD falls 0.2% to 1.0508; GBP/USD down 0.2% to 1.2741
In rates, treasuries are slightly cheaper across the curve, lagging slightly vs core European rates, which are mostly little changed. WTI crude oil futures are up more than 1%, supporting higher Treasury yields ahead of the $39 billion 10-year reopening during US afternoon. US yields are higher by 1bp to 2bp across maturities with curve slightly flatter. 10-year around 4.24% is higher by ~1.5bp, trailing bunds and gilts in the sector by 1.7bp and 0.5bp. The treasury auction cycle continues with 10-year reopening, second of this week’s three coupon sales; Tuesday’s 3-year note tailed slightly, by 0.1bp
In commodities, Brent crude futures rose after a Bloomberg News report that the Biden administration is considering new sanctions on Russia’s oil trade, a move that could tighten the market. WTI oil is up 1% to $69.30 a barrel. Spot gold adds $5. Bitcoin climbs back above $98,000.
The US economic data calendar includes November CPI (8:30am) and Federal budget balance (2pm). Fed officials are in self-imposed quiet period ahead of their Dec. 18 Fed policy announcement
Market Snapshot
Brent Futures up 1.0% to $72.91/bbl
Gold spot down 0.1% to $2,692.86
US Dollar Index up 0.23% to 106.65
Top Overnight News
APAC stocks traded mixed following a soft US handover as participants brace for the US CPI data, although Chinese markets continued to benefit from the easing in China's overall monetary policy stance. ASX 200 was on a softer footing with almost all of its sectors in the red, whilst IT lagged following a similar sectoral performance stateside. Nikkei 225 was subdued but within narrow parameters whilst Japanese PPI topped expectations, with eyes on next week's BoJ. Hang Seng and Shanghai Comp both initially traded firmer in a continuation of the optimism from Politburo on Monday revising its overall monetary policy stance. Upside for the indices however were modest and capped ahead of the Central Economic Work Conference, whilst the China A50 faded earlier gains and dipped into the red and was later joined by the Hang Seng.
Top Asian News
European bourses opened almost entirely in the red, but now display more of a mixed picture as sentiment gradually improves in the complex. Price action has been modest in nature, with traders mindful of the looming US CPI. European sectors opened with a strong negative bias, but sentiment has improved a touch as the morning progressed to display a mixed picture. Optimised Personal Care tops the pile alongside Media. Retail is by far and away the clear underperformer in Europe, hit by a double whammy of losses from Inditex and Zalando. US equity futures are mixed, with the NQ outperforming slightly, attempting to pare back some of the losses seen in the prior session.
Top European News
FX
Fixed Income
Commodities
Geopolitics: Middle-East
Geopolitics: Ukraine
US Event Calendar
DB's Jim Reid concludes the overnight wrap
Today's EMR contains the largest number I think I've ever used in this document. See if you can spot it and try to work out how many zeros in this number without looking it up. That's in a story covering AI which was a potential curveball in both directions in our “Curveballs for 2025” pack earlier this week (link here). Another was that inflation refuses to behave relative to expectations, particularly in the US. Today we’ll see the next installment in this saga with US CPI ahead of an interesting FOMC next week.
If inflation does make a comeback in 2025 and 2026 it may be centred around tax cuts and tariffs so today’s number is well before any of that might happen, but US inflation has been on the stubborn side in recent months in what has been the better half of the year for seasonals.
In terms of what to expect, the general consensus is it’s going to be a stronger one again, and our US economists are looking for a +0.30% monthly print on the headline measure. If realised, that would actually be the highest number in 7 months, and would lift the year-on-year CPI rate up to +2.8%. Moreover, they expect core CPI to come in at a monthly +0.27%, which would be the fourth consecutive month with a core CPI print rounding to +0.3%. So that’s a bit too fast for the Fed to be completely comfortable, although our economists think that the rise in the unemployment rate in last week’s jobs report should still allow them to proceed with a 25bp cut next week. See their full preview here, along with how to sign up for their subsequent webinar.
Markets have lost some ground over the last 24 hours, with the S&P 500 (-0.30%) extending its losses at the start of the week as we await the CPI report. Futures are pricing in a 86% probability that the Fed will cut rates this week but at the same point before the November meeting, a cut was priced as a 95% chance, so there’s more doubt than there was last time, and a strong print today would definitely raise the uncertainty into year-end. And given President-elect Trump’s pledge to introduce more aggressive tariffs, there’s also plenty of potential inflationary pressures still in the pipeline.
Ahead of the CPI, Treasury yields ticked up, with the 2yr yield (+1.9bps) up to 4.15%, whilst the 10yr yield (+2.5bps) rose to 4.23%. That got support from the NFIB’s small business optimism index, which surged to 101.7 in November (vs. 95.3 expected). Indeed, it was the biggest monthly jump in the index since it began as a monthly series in 1986, and it takes it up to its highest level since June 2021. So it speaks to a big shift in sentiment that we also saw in the NY Fed’s survey yesterday, where the share expecting their household financial situation to improve reached its highest since February 2020. That said, it remains to be seen to what extent this post-election jump in the surveys, many of which have been historically subdued over the past couple of years, will translate into hard activity gains.
Indeed, that positive data didn’t help equities much, with the S&P 500 (-0.30%) retreating for a second session in a row for the first time in three weeks. That was despite a strong gain for the Magnificent 7 (+0.99%), which hit an all-time high that took its YTD gain up to +68.80%. Those gains were led by Alphabet (+5.59%) after Google unveiled its new quantum computing chip, Willow, which is seen as delivering important progress towards building quantum computers with practical applications. According to the company, the chip “performed a computation in under five minutes that would take one of today's fastest supercomputers 10 septillion years” and can reduce errors while scaling up the number of qubits, which is a long-standing challenge in the field. I understand about half of what I've just typed I think.
Several more trade-exposed areas didn’t do so well however, with some putting it down to Trump’s description of Canadian PM Trudeau as “Governor Justin Trudeau of the Great State of Canada.” So investors interpreted that by suggesting Trump was less likely to back down on his tariff threats. And in light of that, the Philadelphia Semiconductor Index (-2.47%) and the NASDAQ Golden Dragon China Index (-4.34%) both had their worst daily performances in nearly a month, with the latter correcting from the +8.54% surge the day before. Equity losses were also seen in Europe, with the Stoxx 600 down -0.52%.
Over in Europe, attention is now turning to the ECB’s policy decision tomorrow, where they’re widely expected to deliver another 25bp rate cut. And ahead of that, bond yields saw modest moves across the Euro Area, with those on 10yr bunds (-0.1bps) essentially unchanged, while OAT (+0.8bps) and BTP (+1.0bps) yields edged slightly higher. The outlier was 10yr gilt yields (+5.3bps), which pushed the UK-German 10yr spread up to 220bps, which is the widest it’s been since September 2022 when Liz Truss was still PM. Bear in mind that the closing peak in the spread was 228bps under Liz Truss, and that hasn’t been exceeded in Bloomberg’s data series back to 1992. So we’re pretty close to a multi-decade record, and the widening interest differential also meant that sterling closed at its strongest level against the Euro since June 2016, the month of the Brexit referendum.
In European political news, French President Macron said that he plans to appoint a new prime minister in the next 48 hours in a meeting with French political leaders. That follows last week’s collapse of the government led by PM Barnier. According to reporting by Bloomberg and others, Macron is seeking to build a coalition of moderates that could last through to the end of his Presidential term in 2027.
Asian equity markets are struggling for direction this morning. As I check my screens, the Nikkei (-0.14%) is losing ground with the S&P/ASX 200 (-0.47%), the CSI (-0.29%) and the Hang Seng (-0.29%) are also lower as a two-day annual economic meeting begins in Beijing today. The meeting comes after China's Politburo on Monday offered its most dovish signals yet on plans to unlock more stimulus and support growth. Elsewhere, the KOSPI (+0.73%) continues to gain ground for the second consecutive session following last week’s short lived martial law event. US futures are fairly flat.
Early morning data showed that Japan’s wholesale inflation rose +3.7% y/y in November (v/s +3.4% expected), accelerating at the fastest pace in 16 months and compared to an upwardly revised gain of +3.6%. Following the stronger data release, the Japanese yen (+0.27%) is gaining ground, trading at 151.57 against the dollar amid growing inflationary pressure in the economy - thus keeping the door open for a possible interest rate hike by the BOJ next week.
There wasn’t too much other data yesterday, although US unit labour cost growth was revised down in Q3. So the previous reading had suggested unit labour costs were up by an annualised +1.9% rate, but the latest print lowered that to +0.8%. So that pointed to weaker inflationary pressures than previously thought. Otherwise in Italy, industrial production was flat in October, in line with expectations.
To the day ahead now, and the main data highlight will be the US CPI report for November. Otherwise, the Bank of Canada will announce their latest policy decision.
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