Capital Markets: "Dollar Jumps to Start New Quarter"

From Marc to Market:

Overview: The US dollar is rising against nearly every currency today as global growth concerns deepen. Japan's Tankan Survey showed large manufacturers confidence is a six-year low. The Reserve Bank of Australia cut 25 bp as widely expected and kept the door open for more. The final EMU PMI ticked up from the flash, but it is still at a seven-year low. The MSCI Asia Pacific Index eked out a small gain, and a weaker yen facilitated a rise in Japanese shares. Europe's Dow Jones Stoxx 600 rose initially but is threatening to end a three-day advance, while US shares are trading firmer. A poor reception to a bond auction in Japan seemed to have a knock-on effect and is lifting benchmark 10-year yields 4-6 bp. Oil is coming back bid after falling for the past five sessions, during which time November WTI tumbled roughly 8%. Gold, on the other hand, is extended its recent losses. It has lost about 3% over the past three sessions to trade near two-month lows (below $1460). The charts warn that the risk may extend toward $1400, where the breakout took place a few months ago.

Asia Pacific
The Tankan Survey results were a little better than expected for the most part but still reflected slowing from the last survey. All-industry capex plans were scaled back more than anticipated (6.6% vs. 7.4% previously and 7.0% forecast). Japanese manufacturers project the dollar to average JPY108.68 in the current fiscal year that ends in March 2020. In the first half of the fiscal year, it has averaged JPY108.64. The September manufacturing PMI was confirmed at 48.9 down from 49.3. It is the fifth consecutive month below the 50 boom/bust level and also suggests the sales tax increase that went into effect today (10% from 8%) may be hitting a weakening economy. While the unemployment rate and jobs-to-applicant ratio were flat (2.2% and 1.59 respectively), new jobs offers fell 5.9%, which may be an early warning sign as well.

Threatening to overshadow the economic data, the BOJ's machinations in the bond market has disturbed what is often a sleepy market. First, the BOJ scaled back its purchases several times last month. Then yesterday it indicated it would reduce the bond it is buying except for the short-term tenors. It took on greater flexibility and suggested it could stop buying bonds with maturities of 25-years and longer.These changes have injected uncertainty into the market and saw the weakest reception at today's 10-year bond sale in a few years. The BOJ is putting more emphasis on the yield curve, and Governor Kuroda has underscored this in recent comments. Not only is the BOJ trying to engineer higher long-term rates, but it is also expected to cut the short-term rate at a meeting at the end of the month. The sell-off in JGBs today appeared to spur the sell-off in US Treasuries.

The Reserve Bank of Australia delivered the widely expected 25 bp rate cut, bringing the cash rate to a record low of 75 bp. It signaled that this is not necessarily the end of the easing cycle. RBA Governor Lowe seemed again to emphasize the labor market's performance going forward. That said, we expect the RBA to pause. The rate cuts and fiscal stimulus are already having an impact. The September PMIs ticked higher, and an index of house prices showed the largest rise since early 2017.

South Korean data illustrates the deflationary pressures in the region. Indeed, its September CPI fell to -0.4% year-over-year, the weakest on record. The core rate fell to 0.6% from 0.9%. Its full month trade figures were in line with the earlier updates. Exports fell 11.7% year-over-year, which is not quite as bad as August's 13.8% drop (revised from -13.6%), while imports are 5.6% lower than a year ago, worse than August's 4.2% decline. The September PMI fell to 48 from 49 and has not been above 50 since April. The central bank is likely to cut rates again later this month....MUCH MORE