Retail Sales, PPI do Little to Move Markets

STOCK INDEX FUTURES

The indexes are mixed, with the Dow and S&P trading flat, while the Nasdaq slipped. Nvidia came under pressure in premarket trading as a report published that Meta is reportedly in talks to spend billions on Google’s AI chips, which have sent shares of Nvidia down around 4%. Markets are also keeping a close eye on any signals from the Fed after a recent string of dovish talk from several Fed officials has led markets to price in nearly an 81% chance of a cut in December.

The delayed release of September’s retail sales figures showed that sales grew 0.2% on the month, the smallest increase in four months. Sales rose the most at miscellaneous store retailers (2.9%) and gasoline stations (2%) but fell for sporting goods, hobby, musical instrument, and book stores (-2.5%)  and clothing retailers (-0.7%). Meanwhile, producer prices rose as expected, with the PPI rising 0.3% in September, a rebound from August’s unexpected 0.1% drop.

Following the report between Meta and Google, increased focus on Nvidia’s potential chip exports to China will take on even greater importance. Reports have circulated  that there are discussions in the White House to allow for the sale of its H200 chips to Beijing. The US had previously approved the sale of Nvidia’s H20; however, China said it would not buy the chip due to security concerns. Nvidia’s CEO Jensen Huang has been lobbying the Trump administration to lower export controls. A relief in export controls of Nvidia’s chips is likely to lift sentiment in the tech sector.

CURRENCY FUTURES

US DOLLAR: The USD index slipped below the 100 level as increased expectations of a rate cut from the Fed in December weighed on the greenback, while the release of delayed data did little to move the currency. Fed Governor Waller on Monday reiterated his call for a 25 bp cut in December though mentioned that the outlook beyond that is unclear. Waller’s comments echoed a similar tone to San Francisco Fed President Mary Daly, who also said she supports lowering rates at the bank’s next meeting. Fed Funds futures are now pricing in nearly an 81% chance of a cut next month, up from 42% a week earlier. The huge swing reflects the challenge of pricing in a cut in the absence of government data while gauging comments from Fed officials on policy signals. Elsewhere in Fedspeak, NY Fed President John Williams on Friday said there was room to lower interest rates as the faltering labor market provides more downside risks than inflation.

EURO: The euro moved higher against the dollar as Germany’s GDP was confirmed at 0.00% growth in the third quarter, marking a year-over-year gain of 0.3%. Meanwhile, French consumer confidence was nearly unchanged. The euro has gained support from renewed expectations of an interest rate cut from the Fed, while recent data out of Europe supports the view that the European Central Bank will hold interest rates steady. PMI data last week showed that eurozone private-sector activity grew strongly in November, just below a two-year high recorded in October and in line with forecasts. It is a heavy week of data in the eurozone, with Germany’s GfK consumer climate due on Thursday, alongside consumer and business confidence surveys from Italy and the eurozone. French consumer spending data for October is due on Friday, while the ECB will release its consumer expectations survey. Initial inflation data for November from France, Spain, Italy, and Germany are also due on Friday, alongside German unemployment figures.

BRITISH POUND: The pound rose ahead of the UK’s autumn budget due on Wednesday at 4:00 a.m. CST, in what has seemingly been its most anticipated budget announcement in decades. Nervousness regarding the budget announcement has been reflected in the options market, where hedging costs have risen 12% overnight from Monday. Uncertainty over fiscal policy has driven volatility in the sterling and in gilt yields over the last several weeks. Markets have questioned the government’s ability to manage self-imposed fiscal rules. If Finance Minister Rachel Reeves offers a well-balanced budget, it could likely offer some support for the sterling and for gilt yields. Any potential downside risks to the economy related to the budget will be closely watched for the sterling, alongside the government’s forecasts for the economy, which could trigger a reaction in the pound. Recent data out of the UK showed that business growth this month was negligible and that retail sales had tumbled in October, while a closely watched gauge of household sentiment also fell. Markets now see an 80% chance of a 25 bp rate cut from the Bank of England in December.

JAPANESE YEN: The yen moved higher, as markets continue to watch for signals of a possible intervention from government officials as the currency approaches levels that previously brought intervention. The 158-162 level likely brings a greater chance of official buying from Tokyo based on previous intervention levels. Thinner liquidity around Thanksgiving could offer government officials a window to step in. However, if the yen hits the 160 level and there is no buying from the government and no signals on buying either, the yen could slide further in reaction. Bank of Japan policy member Asahi Noguchi will speak on Thursday; his comments will be closely watched as markets look for hints on when the next rate hike from the BoJ will come. Tokyo’s November consumer-price index excluding fresh food is expected to rise 2.7% from a year earlier, slightly softer than October’s 2.8% reading. Consumer inflation in Tokyo is considered an early indicator of nationwide trends. Sustained inflation will offer the central bank reason to resume its tightening cycle, although the timing of when the next hike is is still up in the air. Industrial production, retail sales, and employment figures for October are also due Friday.

AUSTRALIAN DOLLAR: The Aussie was little changed ahead of the Australia’s statistics bureau’s will new monthly CPI data on Wednesday to replace the old and partial series. Even though the data is new and the Reserve Bank of Australia is not putting too much weight on it yet. Instead, focus will remain on prices in housing and market services to get a better gauge on inflation trends. Regardless, softer electricity prices should see headline CPI fall. Swaps imply little chance of a rate cut from the RBA until May, when a rate cut is about 50% priced in, after an inflation surge in the last quarter dented hopes for any more policy easing this year.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve as Fed rate cut expectations have lent support to bond prices, while PPI and retail sales data for September did little to move prices. San Francisco Fed President Daly said she supports lowering interest rates at the bank’s meeting next month, as she sees a deterioration in the job market being harder to contain than an increase in inflation. Meanwhile, Fed Governor Waller reiterated his support for a December cut but was reluctant to comment on what the outlook for the Fed is after December. The comments follow NY Fed President Williams’s comments on Friday that had jolted the bonds higher.

September’s PPI inflation data met forecasts, with producer prices rising 0.3% on the month and rising at 2.7% on the year. Factory gate costs rose sharply for food (1.1% vs 0.1% in August) and rebounded for energy (3.5% vs -0.4%), driving goods inflation to rise 0.9% on the month, the highest in over a year. Prices stalled for services, holding the 0.3% drop from August. Core producer prices edged up 0.1% in September, after a 0.1% decrease in August and below forecasts of a 0.2% rise. On a yearly basis, core producer prices rose 2.9% in September, matching August’s revised reading and above analysts’ estimates of 2.7%.

Today’s $70 billion five-year note auction takes place and is likely to see a wave of hedging take place beforehand. Weekly jobless claims data on Wednesday is likely to take on more importance after the BLS announced it will publish the full October nonfarm payrolls report and the November report on December 16, after the Fed’s meeting. The Fed’s Beige Book, or summary of current economic conditions, is also due Wednesday.

The spread between the two- and 10-year yields is little changed at 52.60 bps, while the two-year yield, which reflects short-term interest rate expectations, fell to 3.491%.

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