Fed pricing shifts & Dollar strengthens as Powell strikes hawkish tone - Newsquawk Europe Market Open

• APAC stocks traded with a predominantly positive bias albeit with gains capped following the uninspiring handover from Wall Street and as participants digested recent earnings releases and mixed Chinese activity data.
• Fed Chair Powell struck a hawkish tone as he stated that the economy is not sending signals that the Fed needs to be in a hurry to lower interest rates; money markets now price in around a 60% chance of a 25bps cut in December versus 80% pre-Powell.
• Chinese Industrial Production disappointed but Retail Sales topped forecasts, while Chinese Home Prices showed a steeper Y/Y drop although the M/M decline moderated.
• Israeli forces push deeper into Lebanon in a widening war campaign, while the expanding ground operation risks protracted conflict but could build leverage for ceasefire talks, according to WSJ.
• European equity futures are indicative of a negative cash open with the Euro Stoxx 50 future -0.5% after the cash market closed higher by 2.0% on Thursday.
• Looking ahead, highlights include German Wholesale Price, UK GDP, Services, US Retail Sales, Capacity Utilisation, BoC SLOS, Speakers include ECB’s Lane & Cipollone, Fed's Collins & Williams, Earnings from BAE Systems & Alibaba.

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US TRADE

EQUITIES

• US stocks finished lower and almost all sectors closed in the red aside from energy and tech with headwinds seen following the firmer-than-expected Y/Y PPI data and with further pressure seen after hawkish comments from Fed Chair Powell who stated that the economy is not sending signals that the Fed needs to be in a hurry to lower interest rates and that the economic strength gives the Fed the ability to approach its decisions carefully. This saw money markets now price in around a 60% chance of a 25bps cut in December versus 80% pre-Powell, while treasuries pared their initial gains and the dollar continued to strengthen on the day.
• SPX -0.60% at 5,949, NDX -0.66% at 20,897, DJIA -0.47% at 43,751, RUT -1.37% at 2,337.
• Click here for a detailed summary.

NOTABLE HEADLINES

• Fed Chair Powell said the economy is not sending signals that the Fed needs to be in a hurry to lower interest rates and they are moving policy over time toward neutral with the policy path not preset. Powell said he expects inflation to continue to come down towards the 2% goal, on a 'sometimes-bumpy' path and the Fed is committed to finishing the job on inflation, while he added economic strength gives the Fed the ability to approach its decisions carefully and noted the total personal consumption expenditures price index likely climbed 2.3% in October from a year earlier (prev. 2.1% in Sept) and core PCE likely climbed 2.8% (vs 2.7% in September).
• Fed Chair Powell said during the Q&A that Fed independence means monetary policy decisions can't be reversed or reviewable and as they make decisions, they are not thinking about the wellbeing of any political party, as well as noted that political factors would be a distraction. Powell said that policy is restrictive and they started the process of cutting rates by moving to neutral, while they need to move patiently and carefully to find neutral. Powell also noted that as they are in the near plausible range of neutral, they may need to slow the pace of what they are doing and if the data lets them go slower, that's a smart thing to do. Furthermore, he said the latest PPI reading was slightly more of an upward bump but he still thinks they are on track for inflation, as well as noted it is not clear how restrictive policy is but added policy is in a good place, while they have space to cut rates if need, and can be careful about cutting rates.
• US Treasury's semi-annual currency report found no major US trading partners manipulated currency to gain unfair trade advantage in four quarters through June 2024 as no major trading partners met all three criteria for enhanced analysis during the review period. However, the monitoring list of trading partners whose currency practices 'merit close attention' includes China, Japan, South Korea, Singapore, Taiwan, Vietnam and Germany.
• US President-elect Trump picked RFK Jr to be Health and Human Services Secretary and said North Dakota Governor Burgum will be the Interior Secretary. It was separately reported that a US private funds group asked Trump to review harmful rules, preserve pro-growth taxes and promote alternative assets, according to a letter cited by Reuters.
• US President-elect Trump's transition teams plans to terminate the USD 7.5k consumer tax credit for EV purchases, according to Reuters sources.

APAC TRADE

EQUITIES

• APAC stocks traded with a predominantly positive bias albeit with gains capped following the uninspiring handover from Wall Street and as participants digested recent earnings releases and mixed Chinese activity data.
• ASX 200 was led by outperformance in Utilities and with gains in nearly all sectors aside from Healthcare amid headwinds for the latter following pressure in the industry stateside after US President-elect Trump picked vaccine sceptic RFK Jr as HHS Secretary.
• Nikkei 225 rallied on the back of recent currency weakness and with outperformance seen in some financial names after Japanese megabanks' earnings results, while GDP data was mostly either inline or better than expected.
• Hang Seng and Shanghai Comp saw mixed price action throughout the day after various data releases in which Industrial Production disappointed but Retail Sales topped forecasts, while Chinese Home Prices showed a steeper Y/Y drop although the M/M decline moderated. Participants also digested tech earnings and the PBoC's largest daily liquidity injection via reverse repos in over four years which is meant to counteract factors including maturing MLF loans and tax payments.
• US equity futures remained subdued following the recent US PPI data and hawkish-leaning Fed rhetoric.
• European equity futures are indicative of a negative cash open with the Euro Stoxx 50 future -0.5% after the cash market closed higher by 2.0% on Thursday.

FX

• DXY took a breather after recently notching a five-day win streak and holds on to most of the prior day's spoils which were facilitated by the firmer-than-expected yearly core and headline PPI data, as well as hawkish comments from Fed Chair Powell who noted the "economy is not sending signals that the Fed needs to be in a hurry to lower interest rates".
• EUR/USD regained some composure after yesterday's price swings and brief dip beneath the 1.0500 handle although the rebound was limited and the latest comments from ECB's Schnabel provided very little incrementally.
• GBP/USD traded rangebound following the recent failure to sustain the 1.2700 status and after comments from BoE Governor Bailey did little to shift the dial, while the attention now turns to an upcoming slew of UK data including the latest GDP figures.
• USD/JPY remained afloat after this week's notable advances owing to a stronger dollar and with recent gains also facilitated by US PPI data and rhetoric from Fed Chair Powell, although the pair is off its best levels after mixed Japanese GDP data which mostly matched or topped estimates and with some mild jawboning from Japan's Finance Minister.
• Antipodeans mildly gained to provide some slight reprieve from the recent selling pressure but with price action contained after the mixed activity data from China.
• PBoC set USD/CNY mid-point at 7.1992 vs exp. 7.2482 (prev. 7.1966).
• Mexican Interest Rate (Sep) 10.25% vs. Exp. 10.25% (Prev. 10.50%) with the voting unanimous. Banxico said the balance of risks to the growth of economic activity remained biased to the downside, while actions will be implemented in such a way that the reference rate remains consistent at all times with the trajectory ended to enable an orderly and sustained convergence of headline inflation to the 3% target during the forecast period.

FIXED INCOME

• 10yr UST futures were subdued following yesterday's late retreat with pressure seen after Fed Chair Powell's hawkish tone.
• Bund futures mildly pulled back after the prior day's resurgence and tested the 132.00 level to the downside.
• 10yr JGB futures retreated beneath 143.00 with demand not helped by the mixed GDP data and 5yr JGB auction results.

COMMODITIES

• Crude futures were subdued after yesterday's indecision amid a downbeat tone in the US and a larger-than-expected build in EIA crude inventories, while the latest IEA OMR raised the oil demand growth forecast for 2024 but slightly cut its view for 2025.
• Qatar set January Al-Shaheen crude term price at USD 0.73/bbl above Dubai quotes, according to Reuters sources.
• Spot gold remained afloat but lacked conviction with the upside contained by recent dollar strength.
• Copper futures gradually edged higher but with price action limited as participants digested mixed Chinese activity data.

CRYPTO

• Bitcoin eked mild gains with choppy price action seen on both sides of the USD 88,000 level.

NOTABLE ASIA-PAC HEADLINES

• PBoC injected CNY 981bln via 7-day reverse repos with the rate at 1.50% which was the largest daily cash injection through reverse repos since February 2020, while it stated that Friday's cash injection through reverse repos was meant to counteract factors including maturing MLF loans and tax payments.
• China's stats bureau said domestic demand is still insufficient but noted major economic indicators recovered 'markedly' in October and China's consumer expectations improved, while they will consolidate the trend in economic recovery, step up policy adjustments and expand domestic demand. Furthermore, it stated that recent policies have shown positive effects on the economy and it is increasingly confident of achieving the 2024 economic growth target but noted that consumption growth still faces some constraints.
• US National Security Adviser Sullivan said the US seeks to manage competition with China so it doesn't veer into conflict.
• Japanese Finance Minister Kato said they will take appropriate action against excessive FX moves, while he added that one-sided, sharp moves were seen in the FX market and it is important for FX rates to move stably reflecting fundamentals.

DATA RECAP

• Chinese Industrial Output YY (Oct) 5.3% vs. Exp. 5.6% (Prev. 5.4%)
• Chinese Retail Sales YY (Oct) 4.8% vs. Exp. 3.8% (Prev. 3.2%)
• Chinese Urban Investment (YTD)YY (Oct) 3.4% vs. Exp. 3.5% (Prev. 3.4%)
• Chinese Unemp Rate Urban Area (Oct) 5.0% (Prev. 5.1%)
• Chinese China House Prices MM (Oct) -0.5% (Prev. -0.7%)
• Chinese China House Prices YY (Oct) -5.9% (Prev. -5.8%)
• Japanese GDP QQ (Q3) 0.2% vs. Exp. 0.2% (Prev. 0.7%)
• Japanese GDP QQ Annualised (Q3) 0.9% vs. Exp. 0.7% (Prev. 2.9%)

GEOPOLITICS

MIDDLE EAST

• US ambassador submitted a draft proposal for a Lebanon ceasefire to Lebanon's parliament speaker, according to Reuters citing sources. It was separately reported that a US official stated Israel and Lebanon want to make a deal but it is unclear how willing they are to make concessions, according to Walla's website cited by Al Jazeera.
• Israeli forces push deeper into Lebanon in a widening war campaign, while the expanding ground operation risks protracted conflict but could build leverage for ceasefire talks, according to WSJ.
• Hezbollah said it targeted a military base in Israel's Tel Aviv and targeted a gathering of Israeli enemy forces in the Kiryat Shmona settlement with a barrage of rockets, according to Sky News Arabia.
• Elon Musk and Iran's ambassador reportedly discussed how to ease US and Iran tensions, according to NYT. Iran's ambassador told Musk during the meeting on Monday that sanctions waivers should be obtained from the Treasury Department, while Iranian sources said the meeting was positive, according to Al Arabiya.

OTHER

• US President-elect Trump said they will avoid what happened before with their military in Afghanistan and will deal with the situation in Ukraine better, as well as work to reach a solution to the crisis.
• US President Biden administration official said the US must be prepared to expand its nuclear weapons force, while the decision on expanding US nuclear force will be left to President-elect Trump, according to WSJ.
• US and UK brought into force an amendment to the 1958 agreement between the two countries for cooperation in the uses of atomic energy in defence which will make the agreement enduring in its entirety, according to the US State Department.
• North Korean leader Kim guided a test of attack drones and ordered the mass production of suicide drones.
• Taiwan President Lai is planning to stop in Hawaii and maybe Guam during a visit to Pacific allies in the coming weeks, according to sources cited by Reuters.
• China's Coast Guard said with China’s permission, the Philippines sent a civilian ship to transport supplies to its 'illegally' beached warship at the Second Thomas Shoal.

EU/UK

NOTABLE HEADLINES

• BoE Governor Bailey said the UK must welcome the opportunity to rebuild EU relations and the UK must preserve free trade and the openness of the economy. Furthermore, Bailey endorsed Chancellor Reeves's UK investment plans and noted the UK is not measuring economic intangibles well, while he urged for the UK not to counter protectionism with tariffs.
• ECB's Schnabel said interest rates remain the primary monetary policy tool and that asset purchases are more powerful for stabilising markets than for stimulating the economy.
• French PM Barnier said they will probably bypass a parliament vote for the budget.