The silence of the turkeys

Even Hannibal Lecter would be “cutting back” at Thanksgiving this year, with the American Farm Bureau Federation calculating that the average components of Thanksgiving dinner are 15% higher this year than 2020. As Americans head of to a price inflated helping of turkey, cranberry sauce and something called a green bean casserole, inflation was very much in the minds of markets from last night’s pre-holiday US data dump.

FOMC hint at faster tapering

Although Durable Goods disappointed, when automobiles and Boeing aeroplanes are stripped out, the number looked pretty good. Elsewhere, the inflationary signals were more Hannibal and less Clarice. Personal Income and Personal Spending both rose by more than forecast and the PCE Price Index, a Fed favourite, also exceeded expectations, rising to multi-decade highs on a YoY basis. The FOMC minutes suggested the doves are in retreat as well. The committee noted that inflationary expectations in the near term could exceed forecasts and that a faster tapering is not out of the question.

It is probably the last item that weighed on markets the most. Once again, currency markets were the pressure relief valve, with the US dollar spiking once again, helped along by a soggy German IFO, fears of virus lockdowns and ECB officials pouring cold water on rate hikes. Front end yields squeezed higher in response as the FOMC maintained a 2.0% inflation target for the end of 2022. Stock markets ignored the data as investors dipped their toes back into the S&P 500 and Nasdaq waters ahead of the US holiday, unable to resist a cranberry sauce-covered buy-the-dip moment.

Another Turkey that benefited from a Silence of the Turkey was Turkey. President Erdogan managed to talk the Turkish lira 12% lower on Monday, but some silence yesterday saw the lira close 7.0% higher versus the greenback. I rather suspect the stay is temporary though, and that financial markets intend to keep eating the lira with some fava beans and a nice chianti once the Thanksgiving leftovers are consumed.

Another emerging market, perhaps more pertinent to Asia, Mexico, also saw plenty of action. The Fed taper-trade has not been kind to the Mexican peso this week. The peso finished 1.0% lower at 21.4200 after the Mexican President appointed the Deputy Finance Minister, who has zero experience in central banks or monetary policy, as the next central bank Governor. Nothing beats learning on the job, I guess. As a developing market and a major oil producer with a high beta to the US economy, Mexico could well be a template for many parts of ASEAN and the Mexican peso is now 3.0% lower for the week. China, once again, set a weaker yuan fixing today, and with that shield eroding, a taper-trade could be coming to a country near you if you are sitting in Asia.

Two countries that will probably buck that trend in regional Asia are Singapore and South Korea. Singapore is rapidly reopening its economy internationally and recovering domestic demand should outperform the export sector in Q1 2022. The Singapore/Malaysia partial reopening of the land border on 29 November being but one example. Notably, both the Monetary Authority of Singapore and the Bank of Korea have started tightening monetary policy. The MAS tightened via the NEER recently (look this one up readers, like communicating with Mrs Halley, it’s complicated), and the BOK hiked by another 0.25% to 1.0% this morning. The BOK Governor was hawkish in his outlook, and you can be sure the MAS will be at its next biannual policy decision in Q2 2022. For the rest of Asia though, policy settings look set to remain dovish, and if the Fed taper is accelerated at the December meeting, Asian FX could be in for a torrid finish to the year.

Elsewhere, New Zealand’s Balance of Trade and Australia’s Capex has passed without incident. Rising exports flattered the New Zealand Balance of Trade, while Australian Capex was a Q3 print and thus, was eroded by the New South Wales and Victoria lockdowns. Better times will come as Australia reopens. Both the Australian and New Zealand dollars continue to look vulnerable though, in no small part due to their hawkishly dovish fence-sitting central banks. Mostly though, their roles as global risk sentiment barometers leave them at the coal-face of the reality of the Fed taper.

Turning to China, the China Securities Journal is running a story that more fiscal stimulus could be on the way. With the PBOC adding liquidity via the repo today and setting a weaker yuan fix, China markets should have plenty of reasons to be happy. Instead, investors seemed more focused on three other developments. Firstly, indebted property developer Kaisa Group is offering to swap USD 400 million of Singapore Exchange-listed notes for longer maturities. The wording of the offer feels more like playing Russian roulette with 5 bullets in the 6 chambers. Take the offer or we won’t be able to pay the note when it expires on 7 December.

China’s property sector woes haven’t gone away, which leads me to the next point. A group of US Federal Reserve researchers have found substantial downside risks to China’s growth outlook. That won’t bother Beijing, but the banning of 12 more China companies by the US overnight might well do. Finally, spare a thought for JP Morgan overlord, Jamie Dimon, who may be feeling like more Jamie Ma than Jamie Dimon this morning, after joking that a 100-year old JP Morgan would outlast the 100-year old Chinese Communist Party. There’s nothing like being a Dimon in the rough.

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