The dollar index (DXY00) Wednesday fell by -0.86% and posted a 2-week low. Strength in the euro and the yen on Wednesday undercut the dollar. Also, Wednesday’s mixed US economic news pushed T-note yields lower, weakening the dollar’s interest rate differentials.
US Q3 GDP was unrevised at 2.8% (q/q annualized), which was right on expectations, although Q3 personal consumption was revised downward by -0.2 to 3.5% from 3.7%. Also, the Q3 core PCE price index was revised downward by -0.1 to 2.1% from 2.2%.
US Oct capital goods orders nondefense ex-aircraft and parts, a proxy for capital spending, unexpectedly fell -0.2% m/m, weaker than expectations of a +0.1% m/m increase.
US weekly initial unemployment claims unexpectedly fell -2,000 to a 7-month low of 213,000, showing a stronger labor market than expectations of 215,000. However, weekly continuing claims unexpectedly rose +9,000 to a 3-year high of 1.907 million, showing a weaker labor market than expectations of a decline to 1.892 million.
The US Nov MNI Chicago PMI unexpectedly fell -1.4 to 40.2, weaker than expectations of an increase to 45.0 and the steepest pace of contraction in 6 months.
US Oct personal spending rose +0.4% m/m, right on expectations. Oct personal income rose +0.6% m/m, stronger than expectations of +0.3% m/m.
The US Oct core PCE price index, the Fed's preferred inflation gauge, rose +0.3% m/m and +2.8% y/y, right on expectations.
US Oct pending home sales unexpectedly rose +2.0% m/m, stronger than expectations of a -2.0% m/m decline.
The markets are discounting the chances at 70% for a -25 bp rate cut at the December 17-18 FOMC meeting.
EUR/USD (^EURUSD) Wednesday rose by +0.68% and posted a 1-week high. The euro pushed higher Wednesday based on hawkish comments from ECB Executive Board member Schnabel, who warned that the ECB needs to be wary of cutting interest rates too far. Wednesday’s German Dec GfK consumer confidence index report was weaker than expected and was bearish for the euro.
The German Dec GfK consumer confidence index fell -4.9 to a 7-month low of -23.3, weaker than expectations of -18.8.
ECB Executive Board member Schnabel said the ECB needs to be wary of cutting interest rates too far as borrowing costs are already near the neutral threshold, and going lower could backfire.
Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB for the December 12 meeting and at 16% for a -50 bp rate cut at the same meeting.
USD/JPY (^USDJPY) Wednesday fell by -1.25%. The yen on Wednesday extended this week’s rally to a 5-week high against the dollar. The yen found support Wednesday from a decline in T-note yields. Also, central bank divergence is positive for the yen, with the Fed expected to cut interest rates next month while the BOJ is expected to raise rates.
December gold (GCZ24) Wednesday closed up +18.60 (+0.71%), and December silver (SIZ24) closed down -0.294 (-0.97%). Precious metals on Wednesday settled mixed, with silver prices falling to a 1-1/2 week low. Wednesday’s slump in the dollar index to a 2-week low was bullish for metals. Also, Wednesday’s decline in global bond yields supports precious metals. In addition, the recent escalation of the Ukraine-Russia conflict supports safe-haven demand for precious metals.
Gains in precious metals were limited Wednesday due to hawkish comments from ECB Executive Board member Schnabel, who warned that the ECB needs to be wary of cutting interest rates too far. Also, an easing of geopolitical tensions in the Middle East reduced safe-haven demand for precious metals after Israel and Hezbollah agreed on a 60-day suspension of hostilities. Silver prices retreated after US Oct capital goods orders nondefense ex-aircraft and parts, a proxy for capital spending unexpectedly declined, and the Nov MNI Chicago PMI unexpectedly contracted by the most in 6 months, bearish factors for industrial metals demand.
