THEMES TO WATCH

THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):
Norway Unemployment Rate (0900)
UK Manufacturing PMI (0930)
UK CBI Oct Distributive Trades Report (1100)
US Chhalenger Job Cuts (1130)
US Personal Income and Spending (1230)
US PCE Core (1230)
US ISM Manufacturing (1400)]

Market Comments

Yesterday, we got our highest odds scenario from the FOMC: a 25 bps cut with a change to the statement that reasonably neutralized the forward trajectory of rates. US rates responded sharply to this, with the next EuroDollar STIR contracts on the strip dropping sharply and USD 2-year rates jumping higher on the news. The key differences in the statement were 1) the specific worries expressed about commodity driven inflation: "recent inrease in energy and ommodity prices, among other factors, may put renewed upward pressure on inflation." 2) an expression of the outlook/risks being in balance: "after this action, the upside risks to inflation roughly balance the downside risks to growth." This latter statement is the important addition that effectively gives the Fed maximum flexibility at its next rate setting meeting and future rate cuts are by no means certain. Importantly in the bigger picture - over the past few months, the US data has moved to the background as the obssessive focus was on the credit situation, liquidity problems, and big financial institutions. With this new policy statement, the focus shifts to the data - which is suddenly important again and could trigger at least short-term moves on each new release.
And speaking of incoming data - today we get the ISM manufacturing number and the PCE core and tomorrow the employment report.
We may have seen a key divergence yesterday in terms of the USD and its correlation with the risk aversion/appetite theme. In the recent paradigm, the USD tended to only thrive when risk aversion was high. With a strong batch of GDP data and a more hawkish Fed pushing rates higher, however, the interest rate differentials with the other majors have been reigned in further and make the last leg of USD weakening look unjustified. At the same time, yesterday showed that equity markets are still buoyant and the carry trade seems very much alive. This combined with the still very dovish BoJ and could mean long USDJPY positions would be an interesting way to test a continuation of this theme. USDJPY is breaking higher through the 55-day SMA at 115.50 at which it settled yesterday. USD/CHF could be a possible alternative, as the SNB's Roth's tough talk has failed to put a lid on EUR/CHF and USD/CHF seems to be having a hard time holding the recent lows below 1.1620 - though the technicals are less clear cut there. USD/CAD looks criminally mispriced, but catching a falling knife is always a dangerous occupation.
One interesting data point to notice in the swarm of things going on at present, was the EuroZone CPI estimate, with yesterday's October release suddenly jumping to a 5-year high at 2.6% after being mired below 2.0% for the better part of a year.
The guidance from Norges Bank was very dovish and the pair spiked very shaprly higher, before a 6-dollar (!!) spike in crude oil prices put a lid on the EURNOK situation later in the day. Norges Bank suggested they saw rates at 5.00% in 2010 - a 50 bps downward adjustment from its guidance in June and adjusted inflation forecasts down as well. As long as crude is at these levels, however, the pair is a tough one to buy - there may be room for a move to test the 7.8700 area here, nonetheless, if it stays above 7.7500