Price action in the currency markets looks relatively subdued this morning, with lingering midterm election uncertainties and tomorrow’s critical October inflation report acting to restrain directional position-taking. The dollar is trading slightly higher, Treasuries, gilts, and bunds are moving sideways, and both the euro and pound are stuck in incredibly-tight trading ranges.
Results are still coming in, but it is already clear that no “red wave” materialized in yesterday’s elections. The Republican Party is likely to win the House by a slim margin, enabling it to stymie large-scale legislative changes, block efforts to lift the debt ceiling, and launch investigations into the president and his associates. But the Democrats performed far better than expected and look increasingly likely to retain control of the Senate, with Biden turning in the best midterm performance for an incumbent president since George Bush Jr.‘s temporary post-9/11 electoral bounce.
On balance, this should help lower long-term volatility expectations. Legislative gridlock will make nasty policy surprises less likely in the next two years, and a broad-based repudiation of Donald Trump’s election-disputing coalition might shift the political centre of power in a more moderate direction ahead of the 2024 presidential cycle.
Another major collapse in magic internet money markets left fiat exchange rates largely unmoved yesterday. A run on the FTX “exchange” (more like a brokerage firm in traditional experience-tested finance terms) forced it to ask its rival Binance for a bailout, essentially wiping out a firm that was valued at $36 billion in January. The imaginary-currency market is now worth less than $900 billion in dollar terms, making it equivalent to less than three hours of turnover in the foreign exchange markets, and far less systemically-important.
Chinese consumer inflation rose just 2.1 percent in October from a year earlier, and producer prices fell -1.3 percent month-over-month, suggesting that domestic demand remains extremely weak. Consumers in the West aren’t likely to see a correspondingly-large drop in costs for imported goods – the marketing, design, shipping, and distribution activities that ultimately contribute the most to final price tags are largely conducted outside China.
Today’s economic data agenda looks relatively quiet, with US wholesale inventories seen rising 0.8 percent in September from the prior month. The Richmond Fed’s Thomas Barkin will deliver an economic outlook at 11, and Minneapolis’s Neel Kashkari will do the same via livestream at 8 this evening.
Tomorrow’s inflation report is expected to show year-over-year price growth slowing to 7.9 percent in October from 8.2 percent in August. A higher print could trigger widespread selling as investors brace for a more aggressive tightening in monetary policy settings. A lower-than-expected number could touch off a solid improvement in risk appetite.
Karl Schamotta, Chief Market Strategist