– USD rallied, Asian equities down 0.5-2.4%
– BOE inflation report is likely to support further QE
– US industrial output likely rose in October, but limited impact on risk
What to watch for today
GBP: Leaving the door open. The MPC’s decision to resume quantitative easing in November and the steadily disappointing tone of recent economic data suggest the Bank of England’s Inflation Report will show inflation well below 2% at the two-year horizon, according to our economists. This should be a strong signal that unless economic and financial conditions dramatically improve the MPC is likely to expand its asset purchase program further when the current program ends in February. Furthermore, the labor market statistics should show continued deterioration in labor market dynamics, pushing the unemployment rate to a new high of 8.3%. All these factors would support our bearish stance on sterling.
USD: Industrial output growth robust, CPI flat on the month. Our economists forecast industrial production growth rose to 0.3%mom in October from 0.2% mom in September, below the consensus forecast of 0.4%mom. The October CPI data are likely to print flat on the headline and 0.2% mom on the core, marking the lowest reading in four months. While low inflation data would likely increase the likelihood of the FOMC engaging in further easing, we see limited risk relief as markets have priced out fears of a “double dip” recession.
What happened overnight
The relief rally in NY trading faded during the Asian session, boosting the USD. EURUSD fell to 1.344 from the 1.357 high recorded in early NY trading despite reports that Italian prime minister-designate Mario Monti could name his cabinet as early as today. The antipodeans are leading the sell-off vs the USD, with AUDUSD down more than 1% to 1.007 amid softer than expected Australian data. The Wespac leading index fell 0.3%mom in September while wage costs rose a less than expected 0.7%qoq in Q3.
The KRW and IDR are underperforming amongst Asian currencies. USDKRW and USDIDR traded higher to 1137 and 9055 respectively. The decision by the PBoC to fix USDCNY 73 pips higher to 6.3509 implies a 0.3% depreciation in the CNY NEER weighed on risk sentiment, according to our estimates. Asia equities are weaker, led by the Hang Seng (-2.4%) and Shanghai composite (-1.9%), underperforming the 0.5% rally in US stocks overnight.
INR: Increase in investment limits. The Indian finance minister is reportedly in the final stages of talks with the RBI to increase the limits that foreign investors can invest in INR bonds by the end of the month. This is positive for Indian bonds and the INR. However, the INR remains vulnerable to developments in Europe, in our view.
What to read today
EUR: Growth forecasts downgraded. Our European economic team cuts its 2012 GDP forecast to -0.5%yoy from 1.0%yoy previously. They expect the ECB to cut the repo rate to 0.75% by Q1 2012, but think that the ECB needs to be more assertive in its intervention in bond markets to prevent a longer contraction in growth.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS