Daily Market Outlook, November 10, 2021

Overnight Headlines

Fed’s Bullard: Sees Two Hikes Next Year After Tapering
Fed Doves Look To Midsummer For Clarity On Economy
Traders Betting Fed Rates Will Peak Shortly After 2023
Biden, Xi Virtual Meeting Set For As Soon As Next Week
Treasury’s Yellen Still Wants Bipartisan Debt Limit Hike
US Consumer Prices To Surge Fastest Pace In 30 Years
China’s Xi Readies Work With US With ‘Mutual Respect’
China Inflation Risks Build, Producers Pass Higher Costs
China Open Euro Bond After Strong Dollar Debt Offering
Investors Await Evergrande Payment, Debt Woes Grow
ECB’s Schnabel: Aid Rich If Rates Rise Before QE Ends
Bond Market Flashes Mixed Messages As Real Yields Dip

The Day Ahead

Asian equity markets are lower this morning following declines yesterday in Europe and the US. Reports suggest that markets may have been rattled by higher-than-expected China inflation data, which may reduce the room for the authorities to provide more support to the economy. Chinese annual producer price inflation hit a 26-year high of 13.5% in October. Consumer price inflation also accelerated but is still relatively modest at 1.5%.

Today’s US CPI report for October is likely to show a further rise in inflation. Expect higher energy prices to have pushed annual headline CPI from 5.4% to 5.8%, a three decade high. The core CPI (excluding food and energy) is also predicted to rise from 4.0% to 4.3%. Inflation rates look set to stay elevated in the near term but are expected to fall back during 2022 as commodity prices stabilise and pressures from supply chain bottlenecks ease. Consequently, while the US Federal Reserve has said that it is monitoring the situation closely, it still sees little need to tighten monetary policy aggressively at this stage. US weekly jobless claims data will be watched for further indications that the labour market is improving. Over the past month, initial claims have dropped sharply and last week’s data for late October was the lowest since early March 2020. Following the stronger than expected US employment rise in October, the falling claims data point to the possibility of further big gains ahead. That may put pressure on the Fed to consider an earlier than previously expected tightening in US monetary policy.

Bank of England policymaker Svetlana Tenreyro is scheduled to speak about the economic impact of Covid-19 in what is described as a discussion with former US Treasury Secretary Larry Summers. Tenreyro has argued that the recent rise in inflation is likely to prove temporary, whereas Summers has pointed to upside risks and has criticised central banks for not moving aggressively enough to counter these.

UK September GDP data, to be released early Thursday, are forecast to show a monthly increase of 0.5%. Assuming no revisions to prior months, that means a rise of 1.5% for Q3, a significant slowdown from 5.5% in Q2. A moderation in the pace of growth was always expected since the boost from economic reopening would not be repeated, but there is widespread evidence that supply bottlenecks are hampering the ability of many businesses from meeting strong demand, hence exacerbating the slowdown.

Longer dated government yields in both the UK and the US slipped yesterday. However, US Treasury yields have rebounded overnight as Chinese inflation data added to concerns about global inflationary pressures. In currency markets, major cross rates are little changed with sterling just a touch higher against both US dollar and the euro.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1550-55 (1.2BLN), 1.1565-75 (2.1BLN), 1.1580-85 (466M)

1.1600 (1.5BLN), 1.1610-20 (743M)

GBP/USD: 1.3400 (784M), 1.3550 (837M), 1.3595-1.3600 (721M)

1.3640-50 (540M). EUR/GBP: 0.8490-0.8500 (566M), 0.8550 (230M)

AUD/USD: 0.7310 (348M), 0.7345-50 (772M), 0.7375 (662M)

AUD/NZD: 1.0300 (300M), 1.0350 (278M), 1.0450 (300M)

USD/CAD: 1.2450-55 (1BLN), 1.2500 (1.1BLN), 1.2525-35 (1BLN)

USD/JPY: 113.00-05 (1.1BLN), 113.30 (287M), 113.65 (300M), 113.80 (470M)

114.00 (1.4BLN). EUR/JPY: 129.70 (439M), 131.00 (200M)

Beware the big G10 FX option strike expiries this week

(Reuters) – The hedging of FX option strikes can influence FX price action if nearby, and more so when the strikes are large and soon to expire, so it's worth being armed with this information in advance.

EUR/GBP Friday has 429-million euros at 0.8625.

GBP/USD Thursday has 600-million pounds between 1.3530-50, while Friday has 445-million pounds at 1.3320.

EUR/USD Thursday there are 1.2-billion between 1.1550-80, and Friday currently has 1.2-billion euros between 1.1540-50.

USD/JPY Thursday has $500-million at 113.40, $1.5-billion 113.50-60 and $1.4-billion at 113.70. There are $1.5-billion at 114.00 on Friday.

For USD/CAD Friday has $762-million at 1.2450-55, $905-million 1.2465-75, $1.2485-901.1-billion, and $886-million 1.2510-15.

The biggest AUD/USD strikes are Wednesday on A$692-million at 0.7345-50 and 0.7375 on A$662-million, and on Friday between 0.7370-85 on A$1.5-billion.