By Simon White, Bloomberg Markets Live reporter and analyst

The dollar’s sharp selloff on Friday, overbought extremes and seasonality point to further downside in the coming weeks.

US jobs data on Friday triggered an aggressive drop in the dollar. The DXY fell 1.8% – that might not sound much, but it’s in the bottom 0.2% of all moves in the DXY going back to 1970. Generally, such moves see follow-through: when the DXY sells off by at least 1.8% in a single day, it goes on to fall an average of 0.2% over the next five days. Over the next 30 days it is approximately flat, but over the next 100 days the average fall is 2.2%.

This accords with breadth data for the DXY, which is at extremes. All currencies that are part of the DXY basket are rising on a six-month basis. As the chart below shows, such extremes almost always mark interim peaks in the dollar.

Moreover, seasonals start to shift against the dollar into year-end. November has a small positive seasonal bias for the DXY, but December sees a large negative bias.

Speculators (according to CoT data) have started to get net long EUR/USD. The euro makes up almost 60% of the DXY basket so sentiment for the common currency is pivotal for the behavior of the DXY.

As the ECB inches up its hawkish rhetoric, European assets are looking more attractive. While the more aggressive Fed hiking cycle has made FX-hedged USTs a losing proposition compared to local debt for Japanese investors, European debt still offers a positive pick-up versus JGBs (even if the pick-up has been falling). Near-term risk for the euro has also eased at it looks like Europe will avoid some of the worst-case scenarios imagined for an energy crisis this winter.

On the other hand, the risk has risen that the Fed now disappoints versus expectations. Last week’s Fed meeting saw the expected peak Fed rate rise, but the bank intimated it will move more slowly to get there. More time means more opportunity for growth to disappoint, or inflation to slow –- as leading indicators anticipate –- leaving markets, including the dollar, more sensitive to a change in Fed’s direction.

With soaring borrowing costs, the Federal Reserve has slammed the brakes on the once-booming used car market. The latest data on wholesale used-vehicle prices show October’s decline on a year-over-year basis was the worst since the financial crisis over a decade ago. 

The Manheim Used Vehicle Value Index for October declined to 200, or about 10.6%, the worst decline since December 2008 when the global economy was melting down (and the 5th largest decline ever)… 

The Fed’s rapid pace of rate hikes this year is slowing demand, as Edmunds data showed the average annual percentage rate on used-car loans was a staggering 10% for some borrowers. 

Average financing rates right now:

New cars: 6.27%

Used cars: 10.33% !!!!

(source: Edmunds)

— CarDealershipGuy (@GuyDealership) November 2, 2022

The index that tracks the price of what car dealerships pay at auto auctions has slid for 8 of the nine months and declined for the 5th straight month. 

Since the Fed hasn’t blinked (yet) and borrowing costs continue to skyrocket, wholesale used-vehicle prices could cool significantly more. 

The slump in wholesale used-vehicle prices could be a harbinger of when the Fed begins to hike interest rates at a slower pace. 

“Used car prices, once considered the barometer of how bad inflation has become, are now moderating. In fact, they have been dropping for a year. As supply-chain shortages moderate, this closely-watched gauge will likely continue to decline, helping curb overall inflation. The move may also support the narrative that the Fed can scale back its rate increases, boosting stocks,” Bloomberg’s MLIV Vincent Cignarella wrote. 

The bad news about sliding wholesale used-vehicle prices is when they crush the retail market, there will be so many new buyers underwater in their vehicle loans. 

Signs of distress are already materializing for consumers with subprime and deep subprime credit scores, according to Mish Talk. 

As delinquencies rise and the layoff cycle begins, the repossession wave has already started.

The Car Market Is Collapsing 🚨 🚨 🚨

🔊sound …🧐 pic.twitter.com/apxRchrNwE

— Wall Street Silver (@WallStreetSilv) November 5, 2022

And the used car bubble could cascade into the structured product segment of the financial market as big banks hold a lot of consumer debt. 

Bullish for CLOs… pic.twitter.com/mrd5XtBjPq

— Wall Street Bearish Bull (@govadm) November 7, 2022

Meanwhile, shares of Carvana crashed 24% Monday after the company missed Wall Street’s top- and bottom-line expectations for the third quarter as the demand for used cars plummeted. 

Last month, the largest US chain of car dealerships, AutoNation, whose CEO, Mike Manley, warned the used car market showed signs of imploding. 

Separately, Hertz Global Holdings reported its third-quarter earnings that showed depreciation costs were rising due to its used car prices at auction fetching lower values. 

Readers may recall it was back in April when we asked a straightforward question: “Are Used Car Prices About To Peak For Real This Time?” 

… and with a little bit of time, we were right. We expect deals, especially in the used car luxury segment, to materialize in 2023. 

Authored by Jonathan Turley,

Below is a slightly expanded version of my Hill column on the widespread claims that democracy is in peril if the GOP prevails in the midterm elections. On the eve of the midterm elections, one would think that our constitutional system has only days to live.

Indeed, on Fox Sunday, House Majority Whip James Clyburn declared:

“I’ve studied history all of my life. I taught history. And I’m telling you, what I see here are parallels to what the history was in this world back in the 1930s in Germany. This country is on track to repeat what happened in Germany when it was the greatest democracy going, when it elected a chancellor that then co-opted the media.”

In other words, the Republicans are like Nazis about to overthrow democracy, an analogy to the rise of Adolph Hitler.

It is notable that Democrats, including President Biden, are now arguing that the media is pro-Trump or coopted by the Republicans.

Here is the column:

If a single moment could sum up the growing hysteria heading into the midterm elections, it was the appearance of historian Michael Beschloss on MSNBC this week when he warned that, if the Republicans prevail, we could see “our children … arrested and conceivably killed.”

In other words, it is not gas prices, the economy or crime that once again are the top polling issues for voters. Instead, it is democracy or death, gas or grandchildren — you choose.

The drum major in this parade of horribles has been President Biden, who was widely criticized for an earlier Philadelphia speech that denounced his political opponents as fascists plotting to overthrow democracy.

Biden returned to this theme in what White House chief of staff Ron Klain called his “final warning” to voters. The president ominously cautioned voters who might be thinking of voting for Republicans that, “make no mistake, democracy is on the ballot for all of us.” In other words, be afraid, be very afraid.

President Biden and others have returned to that theme as Democrats appear to be losing ground even in traditional blue states. Among others, Hillary Clinton warned that the GOP is trying to “steal” the election and that “they’re going after democracy.”

The president’s attacks do not appear to be gaining much traction, with polls showing that most people view him as inciting political unrest. Nevertheless, on almost every network and cable news program, the mantra seems unrelenting: If the GOP prevails in the midterms, democracy could be lost.

Whereas the media once pushed a false Russia collusion claim in the 2016 election, this time it is pushing a claim that the GOP itself represents the threat to our liberties and very lives.

As Democratic alarm over a GOP win in both houses of Congress has increased with polling in the past two weeks, so has the alarming rhetoric. Beschloss, for instance, warned that not only may democracy have just a few days left but there may be no one allowed to record its fall: “Fifty years from now, if historians are allowed to write in this country and if there are still free publishing houses and a free press — which I’m not certain of, but if that is true — a historian will say what was at stake … was the fact whether we will be a democracy in the future, whether our children will be arrested and conceivably killed.”

The Democratic campaign against GOP candidates as extremists and election deniers is breathtakingly dishonest. Democratic leaders like Rep. Sean Patrick Maloney (D-N.Y.), head of the Democratic Congressional Campaign Committee (DCCC), have been accused of deceptive practices in spending tens of millions to support the most conservative candidates in Republican primaries. Those candidates — now denounced by Democrats as “extremists” — prevailed in their primaries with the Democrats’ support and could now win in states like New Hampshire.

At the same time, Democrats and the House’s Jan. 6 select committee are pursuing those who engaged in similarly inflammatory rhetoric leading up to the Jan. 6, 2021, Capitol riot — just as the airways are filled with Trump-like warnings that the midterm elections are about to be “stolen.” Likewise, just as some on the left claim there may be no more real history books after the midterms, others are campaigning to ban books by figures like Supreme Court Justice Amy Coney Barrett in the name of protecting free speech.

What leaders like President Biden seem to forget is that our Constitution not only was written for times like this, it was written in a time like this. Federalists and Jeffersonians actually — not just figuratively — tried to kill each other with the use of laws like the Alien and Sedition Acts.

But James Madison crafted a Constitution for the worst of times — and the worst of leaders. He famously observed that we needed a system that did not depend on the good intentions or motivations of our rulers: “If men were angels, no government would be necessary.” So he created a system that contains a series of checks and balances to prevent the concentration — and the abuse — of power.

There has been a growing crisis of faith on the left as leaders and pundits  have attacked our Constitution and its institutions, including the Supreme Court. These objections appear to be based not on the Constitution failing to resist extraconstitutional demands but on it failing to yield to such demands. These figures apparently are upset that the democratic process or the Supreme Court have not given them what they demand. Thus, the Constitution or the court must go.

Widespread references to Jan. 6 should inspire greater confidence in our constitutional system and dispel the doubts being voiced by President  Biden and others. The Capitol riot was denounced by most Americans; Republican leaders like Vice President Pence and Senate GOP Leader Mitch McConnell (R-Ky.) carried out their constitutional duties. Federal judges (including many appointed by then-President Trump) uniformly rejected challenges to the election; the Supreme Court, with six conservative justices, repeatedly ruled against Trump — including all three of his appointees.

The Constitution has weathered every storm in our history, including a Civil War and a “war” over civil rights. We’ve tackled everything from a depression to desegregation; we’ve faced periods of violence and vitriol that tore us apart. And yet, we remain.

The U.S. Constitution is not an elegant or poetic document, but it has one thing to commend it: It is designed to survive the worst of times and the worst of leaders, and it has done just that.

The Democrats’ democracy-or-death mantra is not just demagoguery. It is defamation of a constitutional system that has proven itself, time and again, to be up to any challenge. Democrats indeed may be in danger in this midterm — but democracy is not.

Authored by Jesse Felder via TheFelderReport.com,

The following is an excerpt from a recent report featured on The Felder Report PREMIUM.

Despite all the worries over the possibility of a recession in the quarters ahead, the stock market seems to have priced in a “soft landing” for the economy.

The cyclicals-to-defensives ratio has yet to really react even to the slowdown in the economy we have already seen over the past year or so as indicated by the reversal in the ISM Manufacturing PMI. If the latter continues to deteriorate in the months ahead, cyclicals (like the tech and consumer discretionary sectors) could have a great deal of pain still in front of them.

So it’s interesting to note that the rapid rise in the dollar, interest rates and oil prices we have seen over the past two years points to a rapidly deteriorating economy in the months ahead.

In fact, as the chart above suggests, the composite of these three major economic inputs suggests that the decline in ISM Manufacturing PMI is going to accelerate over the next nine months or so, a development that would fly in the face of the soft landing narrative and likely play catalyst for the next phase of the bear market in equities.

Tyson Foods CFO John R. Tyson, son of board chairman John H. Tyson, was arrested early Sunday morning after he got drunk, broke into a random woman’s home, and fell asleep in her bed, Fox16 reports.

According to a preliminary arrest report, at approximately 2:05 a.m. on Sunday, Nov. 6, Tyson, 32, was found asleep in a woman’s bed at her home, located at 445 N Mock Ave. The woman called police when she arrived and found Tyson, whom she did not know.

She told dispatchers that she believes the front door was left unlocked and that is how he gained entry. Upon arrival, police located Tyson in the back bedroom with his clothes in front of the bed and identified him through his driver’s license. -Fox16

When police arrived and tried to wake Tyson up, he could not verbally respond and attempted to fall back asleep after briefly sitting up. 

According to the police report, his breath reeked of alcohol and his movements appeared ‘sluggish and uncoordinated.’

He was arrested for Criminal Trespass and Public Intoxication, and booked into the Washington County Detention Center where he was released Sunday evening.

Tyson was appointed as CFO on Oct. 2, and is also an executive VP.

By Michael Every of Rabobank

It would be so easy at the start of a week like this to just convey to readers that X went up y% on Friday, and A went down b%, and add a schedule for what data will be released today. That might well be what you are looking for – in which case, you are in the wrong place. This Daily says NO to that kind of thing! That’s because lots of others say no to lots of other things.

NO PIVOT

We got another strong US (and Canadian) payrolls report on Friday. This week also sees US CPI, where there is a good risk the print comes in hotter than consensus yet again. Yes, there are real questions about the reliability of both of these data sets, but can we please drop the endless attempts to self-servingly sell an imminent Fed pivot?

Yet I suspect we will still get more pivot messaging – from the Fed itself, or parts of it. If you think ‘pro-MMT’ Brainard, pro-Wall Street others, and ‘New Volcker’ Powell see eye to eye on Fed Funds going over 5%, as is entirely possible if we get hot CPI on top of hot payrolls, then you don’t understand the real world. “A split in the Fed? A politicized Fed? A Fed backing special interests? Surely not!” Yes, this is how central banks operate, especially under duress. The BOE Governor last week had to appear on TV and underline he hadn’t helped carry out a coup vs. his own prime minister(!), ironically demonstrating the extent to which DM now act like EM, and that, as in EM, nothing is considered true until it has been officially denied.

NO REOPENING

Friday saw wild trading and sharp drop in the dollar despite payrolls due to rumours China would soon reopen. This was based on one report from a retired Chinese health official and an anonymous screen shot. People who know something about China were deeply sceptical. And lo and behold, China held a press conference on Saturday and shot down the idea of an end to Covid Zero. That also shoots down the recent bullish trend, and the credibility of many ‘China watchers’; and it shows how susceptible fools are to shills. I also reiterate if China reopens in 2023, then we will get a huge surge in supply-side inflation – in which case the Fed is hiking even more.

NO ENDORSEMENTS

A flurry of economic news over the weekend makes the complete opposite case to China bulls. PBOC Vie-Governor Fan Yifei is under serious disciplinary investigation, which alongside rumours that Governor Yi Gang may soon step down too, would underline Western-trained/friendly technocrats are being replaced. China is reviving its pre-reform state sales and marketing co-operatives. Beijing will establish new central SOEs to service its strategic goals, including in international trade, linking upstream to downstream, and by implication the private sector too. Moreover, the CCP insists “Celebrities should consciously practice socialist core values in their advertising endorsements; activities should confirm to social morals and traditional virtues.” Relatedly, Xi stated: “We need to educate people, especially the youths… that China’s socialism is won by hard work, struggles, and even sacrifice of lives. This was not only true in the past but also true in the new era.”

Even October trade data were weak: imports were -0.7% y-o-y and exports -0.3% to boot.

NO HUGS

‘Military build-up needed to protect China’s overseas interests, officials say’, as the Chinse constitution is revised to insist that the country holds world class armed forces. At the same time, the Washington Post quotes “an American who knows the Chinese leadership well” saying Xi is convinced China and the US are heading towards war. From the US side, its nuclear forces chief says Ukraine is ‘just the warmup’ for a larger crisis; “The big one is coming, and it isn’t going to be very long before we’re going to get tested in ways that we haven’t been tested a long time.”

In Ukraine, Pepe Escobar –a serious analyst in the same manner as Lord Haw-Haw, but a useful an indicator for that– is now shrilling Russia will be forced to move against Odessa by Spring. Which is when the bulls say China will open up: which would rather push commodity prices up; and so Fed Funds. There are also whispers that the US wants Zelensky to negotiate.

Serious US strategists underline that due to military scarcity there needs to be an imminent withdrawal of US forces from Europe and reallocation to the Indo-Pacific, with Europe stepping up to the task at hand. Which the comfortable Western part patting itself on the back that climate change has tempered its energy crisis so far refuses to do; and as German industry needed to do so decamps abroad – including to China; and as Chancellor Scholz pens an op-ed saying Berlin will adapt to a multipolar world, rather than openly supporting the US-backed order it has flourished under. (Meaning sell cars to all sides?)

NO PRODUCTION

Pentagon acquisition chief Bill LaPlante now says Ukraine has helped him understand what really matters: “Production.” That is GDP by supply, not GDP by demand: commodities, industry, and logistics, not services and finance. Who knew?

“We as a country did our best to not do production. We all accepted that just in time was the way to go. That is why the US cannot produce Stinger missiles fast enough: production was shut down in 2008… I challenge all of you to ask about that if somebody give you a really cool liquored up story… – ask them when it’s entering production, ask them about numbers… is it going to work well against China? Don’t tell me it’s got AI and quantum, I don’t care…. The sausage making is still going on…. we need to do multiyear procurements for munitions.” He adds that NATO standards don’t get to the point of “interchangeable,” and an industry executive told him that they would have to force companies to do so because it makes firms less competitive.

I have stressed for some time that you won’t see Western firms forced to do things by the likes of Jeremy Corbyn or Bernie Sanders, but you will by guys like LaPlante, who concludes: “The tech bros aren’t helping us too much.” On which…

NO TWITS?

US payrolls didn’t show it, but up to 1/2 of all the well-paid roles at Twitter are apparently going. (And Meta is following the lead; and others will follow.) This matters, and not just for another stab at the Fed pivot play.

Twitter is the modern Town Square for the Western elite. It’s now been bought by one of their own, who says he will back free speech and make ‘blue tick’ status something anyone can buy rather than earn by propagating the ‘right message’. As a result, corporate advertisers are walking away. The same corporations who deal with noxious global regimes are not prepared to associate with a platform sticking to the US First Amendment right to free speech. Even the UN High Commissioner for Human Rights has stepped in(!) Elon, clearly nobody in power is in favour of free speech; or of free markets; or even free trade if they are the net importer; but they are all interested in free money, which Twitter can no longer rely on.

NO MAJORITY

Tomorrow is the US midterm elections. Market analysts who think reading fivethirtyeight.com gives them political insight, or that polling firms are not as biased as central banks, are waking up to the fact that the Blue bounce in the summer was a mirage and that Republicans are likely to see a Red Tsunami that wipes out the Democrats’ House majority and 50-50 Senate tie. It would also strongly suggest a strong Red base for a presidential win in 2024 with an even larger Congressional majority… and, yes, led by Donald Trump, as potential rivals already start to drop out, and shots are taken across the bows of others.

The implications of this week’s election will be manifold, even if hysterical claims about the end of democracy look as tragicomically wide of the mark as they are with Twitter. They include that President Biden may become a lame (and impeached?) duck that will only leave him foreign policy to focus on for two years. What that implies against the current geopolitical backdrop, and his recent claim that he wishes to see the people of Iran “freed”, is anyone’s guess. We are also likely to see a continued US trend towards populism, and industrial policy, and neo-mercantilism.

What might this mean for fiscal and monetary policy as interest payments on federal debt soars, but the need for an even more powerful military does in tandem? What you are thinking is probably wrong if you try to frame things in a traditional manner.

NO NONSENSE

To summarise the state of flux we are all in, the Financial Times points to the appeal of neo-Marxism in Japan under the new label of “degrowth”; alongside neo-Marxism in China (which may also mean low growth). It also carries a remarkable op-ed from Jajan Ganesh calling for an end to intra-elite sniping –pointing to Rishi Sunak having a go at cosmopolitan “North London”– because if the mob comes, it won’t be able to differentiate between liberal, rich North and conservative, rich West London. He concludes, “There is a non-trivial chance of civil unrest against the haves in the coming years. How sweet to think that you will be spared because you are merely rich, rather than rich and interesting.” And this is in the FT, not the Morning Star!

NO ATTENDANCE

COP27 is taking place in Sham el-Chic. Some fossil fuel fans are skipping. The government leaders who are there are burning more fossil fuels than ever. And Greta is trying to get rich from her book telling us how we need to destroy capitalism.

NO EASY ANSWERS

I am not going to tell you exactly what to buy or sell against this slide into metacrisis, just as I am not going to tell you exactly what went up or down. What I can point out is that there are no easy answers and no easy trades anymore. Anyone who tells you otherwise needs to be told “NO!”

The world’s richest man is likely making no new friends among the liberati and mainstream media this morning after he tweeted a recommendation that “indepedent-minded voters” should vote for a Republican Congress to ensure checdks and balances on the extreme policies on both sides of the political divide in America…

To independent-minded voters:

Shared power curbs the worst excesses of both parties, therefore I recommend voting for a Republican Congress, given that the Presidency is Democratic.

— Elon Musk (@elonmusk) November 7, 2022

Musk added that:

“Hardcore Democrats or Republicans never vote for the other side, so independent voters are the ones who actually decide who’s in charge!”

How long before we hear outrage that a billionaire owner of a giant social media company would utter such obviously political rhetoric.

Remember this is very different from Mark Zuckerberg, Jeff Bezos, Bill Gates, Reed Hastings, Marc Benioff, or even Jack Dorsey funding 100s of millions of dollars into the ‘right’ political party, and aggressively censoring any dissenting view.

Who could have seen that coming…

Telling people to vote republican isn’t balanced. Owners of social media platforms shouldn’t be political activists telling people who to vote for with their massive platform

— Tangerine Memez (@Tangerinememez) November 7, 2022

Right now a million virtue-signaling Tesla owners are angrily looking up the Return Policy.

By Jan-Patrick Barnert, Bloomberg Markets Live reporter and analyst

A rebound in Chinese stocks built on flimsy evidence, a Federal Reserve not ready to turn dovish and an unconvincing earnings season. Yet, investors are chasing another bear market rally.

With so much negativity priced in over the past months, and positioning so light, any kind of vaguely positive news seems enough to extend the rebound. Last week’s Fed meeting might have pointed to no imminent turn in rates, but just the idea of the central bank going a touch slower was enough for the market to brush off its initial disappointment.

Since hitting its lowest in almost two years in late September, the Stoxx Europe 600 Index has risen for four weeks in five, rallying about 9% in the process. Even Friday’s data showing a still strong labor market and signaling no end to the Fed’s aggressive hiking path wasn’t enough to halt the rebound.

Momentum certainly favors almost all major benchmarks right now, with Asian markets the latest to join the party last week after a flurry of market-friendly headlines — along with unverified talk of a China reopening — drove risk assets.

While officials at China’s National Health Commission sought to dispel wild rumors of Covid-zero exit over the weekend, the reopening speculation has offered just the excuse that weary traders needed to buy stocks after suffering months of losses, with Hong Kong’s Hang Seng Index up 3.1% on Monday.

A poll of JPMorgan clients from last week showed that equity positioning among investors is neither super bearish nor overly bullish. Among those surveyed, 47% plan to increase equity exposure in coming days and weeks.

The current earnings season has mainly been supportive of the rally, according to JPMorgan analysts led by Marko Kolanovic. In Europe, 62% of Stoxx 600 companies that reported so far have beaten estimates, the firm’s strategists say.

To be sure, investors are fleeing to the safety of cash funds at the fastest pace since the coronavirus pandemic, with inflows of $194 billion since the start of October, according to EPFR Global data cited by Bank of America on Friday.

“Many investors are at risk of being trapped in their under-positioning into year-end,” says Nomura’s Charlie McElligott. Those that don’t begin to cover shorts or buy the dip might have to do so if stocks keep trending higher, he says.

Authored by Michael Pento,

This latest bear-market bounce was predicated on good seasonality, the hopes for a typical mid-term election boost, and the rumors of a Fed pivot.

Wall Street always finds a narrative for rallies in a bear market. But the negative economic and liquidity cycles remain unchanged: The Fed is hiking rates into a recession. Powell may have done his last 75bp rate hike on November 2nd. But another 50bp hike is likely coming in December, and then the regular 25bp variety is coming in February. Meanwhile, $95 billion per month of Quantitative Tightening is rapidly destroying the money supply.

That is what Wall Street wants you to believe is a Pivot. The Fed may indeed downshift to a slower pace of rate hikes come December. However, it will maintain a restrictive Fed Funds Rate (FFR) of nearly 5% for multiple months once that level is achieved. Powell made that point very clear during his latest FOMC press conference. The FFR will be higher than they thought in September. Also, Chair Powell said it is extremely premature to think about any kind of rate-hiking pause.

So, where does this leave the stock market? Stocks do not bottom when equities valuations equal 150% of the overall economy (TMC/GDP). During the 2000 recession, the NASDAQ bottomed at 71% TMC/GDP, down from 142% at the high. The Great Recession saw stocks bottom at 45% TMC/GDP, down from 105%. Even during the Pandemic recession, TMC/GDP fell from 152% to 120%. All those bottoms were associated with a Fed that was rapidly cutting interest rates to 1% or below. And in the case of 2008 & 2020 recessions, the Fed was engaged in the massive money printing scheme known as Quantitative Easing as well. Market bottoms do not occur just because the Fed reduces the pace of rate hikes from 75bp to 50bp increments. Every Recession in the past has been dealt with by massive monetary and fiscal stimuli. But with inflation at close to a record high, it is simply tying the government’s hands.

And, please do not think that government and central banks can automatically boost asset prices at will—no matter how hard they try. For example, China’s Shanghai stock exchange is still down 50% from its 2007 peak; and Japan’s NIKKEI Dow is down 30% from its top reached 33 years ago. Those figures are in nominal terms!

Let us look at some of the latest economic data to affirm that GDP is getting weaker by the day and point to a recession that is going to be brutal: 37% of small companies in the US, which employ half of all workers, can no longer pay their rent. Amazon, the largest online retailer in America, missed on Q3 revenue and warned on 4th Quarter sales, which were guided down to be the slowest growth for the company on record. New Home Mortgage applications fell by 41% year over year, just as mortgage rates are now the highest in 20 years—above 7% and rising. And the ISM Services Sector Business survey showed that even though the economy slowed in October from the previous month, prices are still increasing at a faster rate.

The consumer is faltering, and yet Fed Chair Powell told Wall Street at his latest press conference that he is indeed pivoting…but it is to be more hawkish. There is a steep recession just ahead, and there is nothing the Fed can do to stop it. It is not a choice. If Powell were to undergo a genuine dovish pivot back towards ZIRP and QE at this point, it would cause inflation to run intractable. Hence, long-term interest rates would soon skyrocket and render the government and the economy insolvent. Therefore, after the initial reflexive surge in stock prices upon any such announcement of a rate pause/cut or return to QE, asset prices would soon crash anyway; and the Fed would be left with a much more difficult inflation situation to deal with down the road. Therefore, there will be no such dovish pivot anytime soon, just a freezing of the FFR at a very high level relative to the past 14 years. Along with a record dose of QT.

Given the extent of asset bubbles and level of debt in the economy, a depression is a real possibility. And an equity market collapse from these prices is still in the cards. If the S&P 500 were to just return to a historically-lofty 100% TMC/GDP, it would entail a decline of another 30%. That would be in addition to the losses already suffered. You do not have to tolerate another drubbing like this in your buy-and-hold 60/40 portfolio. Active management has become mandatory in this boom/bust world that is completely controlled by feckless central bankers.

This morning’s price action has a whiff of what happened two weeks ago when a relentless barrage of bad earnings reports by tech giants propelled stocks higher during the latest bear market meltup, amid speculation the worst news is priced in. Well, after last week’s FOMC mauling, risk has once again started to meltup following Friday’s stark divergence between the “good” payrolls number and “catastrophic” employment data, sending stocks sharply higher and the dollar sliding.

And while some may have expected the selling to return after Sunday’s latest cut to high end iPhone 14 shipping forecasts, which Apple blamed on China but which appears to have been driven as much by a decline in demand and sent AAPL shares down 2%, this morning US stock futures have reversed earlier losses of more than 1% and looking to extend Friday’s rebound, as investor attention turns to the latest inflation report and the midterm elections later this week. At 7:30am ET, contracts on the Nasdaq 100 were up 0.4% after earlier sliding as much as 1.3% as Chinese officials reiterated their intention to “unswervingly” stick to a Covid Zero approach; S&P 500 futures also reversed early declines to rise 0.4%. The benchmark had snapped a four-day slump on Friday following a mixed jobs report. The dollar reversed earlier gains; while Monday’s partial gains in Treasuries were underpinned by a 4-basis point drop in the 10-year yield. The two-year rate, more sensitive to monetary policy, remained higher around the 4.68% level.

Among individual movers in premarket trading, Facebook parent Meta (which really should change its name back already) rose following a report that it is planning to start cutting thousands of jobs this week, about a week after we said it should do that immediately.

In a normal world METHA would announce 20% layoffs after the close

— zerohedge (@zerohedge) October 27, 2022

As noted above, Apple dropped after the company reduced the outlook for shipments of its latest premium iPhone due to China lockdowns. Chinese stocks listed in the US are on track to extend their rally to a fifth day even even though health authorities repeated their strict adherence to the country’s Covid Zero policies. Alibaba rose 1.3% in premarket trading, JD.com +1.4%, Baidu +2.1%, Li Auto +3.1%, XPeng +5.1%. Here are the other notable premarket movers:

• Peabody Energy shares rise as much a 6% in premarket trading, after the US coal miner and Australia’s Coronado Global Resources ended merger talks.
• Activision Blizzard shares fall 0.8% in US premarket trading after a NY Post report that Microsoft’s takeover of the entertainment software firm was facing heightened scrutiny from regulators, with some Activision insiders fretting that the transaction could crumble.
• Redfin shares slide 8% as Oppenheimer cut the real estate brokerage to underperform, saying its core business model is “fundamentally flawed,” and putting a street-low $1.30 PT on the stock.
• Keep an eye on Estee Lauder (EL US) as the stock was downgraded to hold from buy at Berenberg, which also cuts its price target, saying the cosmetics maker lacks visibility on a potential recovery.
• Keep an eye on Ruth’s Hospitality after the stock was downgraded to market perform from strong buy at Raymond James, with the broker expecting higher inflation to limit earnings per share growth in 2023.

As BBG notes, US equities have tried to recover in the fourth quarter after slumping this year as investors wagered that signs of peaking in inflation would allow the Federal Reserve to slow the pace of rate hikes. The next clue will come on Thursday, with October’s consumer price index report expected to show a slight cooling in prices from the previous month.

“Markets are essentially in a struggle between people who argue the Fed has hiked rates too much and should pivot and the other group that says inflation needs to be fought harder and the Fed needs to hike more,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. Victoria Scholar of Interactive Investor, agreed, saying she expects stock volatility to continue as markets face “an eclectic mix of drivers,” including the midterm elections on Tuesday.

Morgan Stanley’s in house permabear Mike Wilson turned even more bullish on Monday saying investors should stay bullish on equities ahead of the midterms. Polls pointing to Republicans winning at least one chamber of Congress provide a potential catalyst for lower bond yields and higher equity prices, which would be enough to keep the bear-market rally going, they said. Meanwhile, the permabulls at JPMorgan said the same thing they have said since Jan 1 – buy the dip because a potential peak in bond yields and “very downbeat” sentiment may support stocks.

The bout of optimism outweighs, for the moment, the Federal Reserve’s resolute campaign against price surges, signs of stress in US corporate performance and China’s announcement it will “unswervingly” adhere to current Covid Zero policy.  But corporate earnings are casting a dampener on sentiment as margins reel from the impact of high inflation. Goldman Sachs Group Inc. strategists lowered their S&P 500 profit estimates for each year until 2024, saying margin contraction in the third quarter signals more pain ahead.

European stocks and US futures pare earlier declines as dollar extends declines beyond Friday’s lows. Euro Stoxx 50 rises 0.5%. Travel, miners and autos are the strongest performing sectors in Europe. DAX outperforms peers, adding 0.7%, FTSE 100 is flat, underperforming peers. Here are some of the biggest European movers today:

• Telecom Italia rises as much as 8.2% to its highest intraday level since mid August following a report that Vivendi, the biggest shareholder in the phone operator, is open to discussions with the Italian government on creating a single land-line phone network.
• Ryanair shares rise as much as 4.9% as the low-cost airline flagged strong bookings through next summer, shrugging off impact from a potential recession in Europe.
• PostNL rises as much as 5.4% after the company notes that 4Q will be its strongest quarter, as it takes mitigating actions amid a macroeconomic environment that has deteriorated.
• Flutter Entertainment shares rise as much as 5.4% in Dublin after an arbitrator told Fox Corp. that exercising its option to acquire an 18.6% stake in sports-betting giant FanDuel, which is majority owned by Flutter, would cost it at least $3.72b.
• GSK falls as much as 3.3% after its antibody blood cancer drug Blenrep failed its confirmatory phase 3 trial. Citi says the news is likely to result in the drug being taken off the market in the US and the EU, expressing “minimal” expectations for commercial success going ahead.
• Novozymes falls as much as 3.3% as Credit Suisse flags lower earnings and peer multiples for the world’s largest maker of industrial enzymes.
• UniCredit shares declined as much as 4.2% following a FT report on Nov. 6 that the ECB had clashed with the Italian lender over its distribution plans and its Russia presence. Shares were 3% down in early trading Monday, the worst performer on the Stoxx 600 Banks Index.
• Kingfisher falls as much as 3.6% as it was cut to neutral from outperform and PT trimmed to 247p from 305p at Credit Suisse on macro risks facing the DIY retailer.

Earlier in the session, Asia stocks climbed as traders snapped up Chinese stocks in hopes of an eventual reopening and as US bond yields slipped. The MSCI Asia Pacific Index advanced as much as 1.8% to the highest in a month, led by materials and technology stocks. China’s tech shares extended their rally from Friday, which was spurred by reported progress in efforts to prevent the delisting of Chinese companies from US bourses.  Hong Kong topped gains in the region even though Chinese officials stuck to their Covid Zero approach over the weekend, as investors said extreme pessimism had already been priced into Greater China markets. Most gauges across Asia also advanced after 10-year Treasury yields edged lower. Supporting sentiment, the dollar slipped after a bigger-than-expected increase in the US unemployment rate spurred hope the Federal Reserve may eventually slow the pace of rate hikes. Vietnam’s shares, however, fell to their lowest in two years.

Japanese stocks climbed, as strong corporate earnings boosted investor sentiment while the market continued to look for clues on when the Federal Reserve’s monetary tightening may subside. The Topix rose 1% to close at 1,934.09, while the Nikkei advanced 1.2% to 27,527.64. Keyence Corp. contributed the most to the Topix Index gain, increasing 1.9%. Out of 2,165 stocks in the index, 1,520 rose and 558 fell, while 87 were unchanged. “Overall there there are more upward revisions,” said Mamoru Shimode, chief strategist at Resona Asset Management, regarding recent earnings reports. “The market is still looking six months to a year ahead, so the focus is gradually shifting” to results for the next fiscal year.

Australian stocks also extended gains with the S&P/ASX 200 index rising 0.6% to close at 6,933.70, extending gains for a second session, boosted by an advance in mining and energy shares.  The mining sector climbed to the highest in a month, after tracking Friday’s gains in commodity prices as US jobs data, a softer dollar and China reopening hopes boosted materials last week. In New Zealand, the S&P/NZX 50 index rose 0.5% to 11,290.34.

Investors will focus on whether the subtle relaxation of China’s Covid Zero policy will gather momentum in the coming weeks, Saxo Capital Markets strategists wrote in a note. “This will be key not just for mainland and HK markets, but also for commodity markets.” Last week’s rally in Chinese shares, the biggest in years, helped lift Asia’s equity benchmark by more than 6% from an October trough. Whether that trend will continue depends on China’s tone on lockdowns and vaccinations. Investors will also keep an eye on US inflation data expected on Thursday

In FX, the Bloomberg Dollar Spot Index swung to a 0.3% loss after earlier rising by as much as 0.5%, as the greenback fell against most of its Group-of-10 peers. NZD and AUD are the weakest performers in G-10 FX, SEK and GBP outperform.

• The euro rose above parity before paring gains. European bond yields were mostly lower as pricing for central major bank hikes were pared. Bund yields fell by up to 3bps while Italian yields fell by up to 5bps
• The pound led G-10 gains after erasing earlier losses against the dollar. Gilt yields fell on the belly of the curve. The BOE is set to sell medium-maturity gilts held under its asset purchase facility later Monday. UK house prices fell at the sharpest pace in almost two years as rising mortgage rates and a gloomy outlook for the economy depressed demand
• The New Zealand and Australian dollars pared losses after earlier dropping by more than 1% in a possible reflection of disappointment over the prospects of China easing its Covid-Zero stance
• The yen pared losses as the the dollar lost traction in early European trading

In rates, Treasuries are mixed with the curve flatter into early US session as front-end cheapens led by losses in front-end of the German curve. Stocks rally and dollar extends Friday’s slide. 10-year yields are around 4.13%, richer by ~3bp on the day, outperforming bunds and gilts by 1bp and 4bp in the sector; long-end gains flatten 2s10s by 4bp, 5s30s by 3bp. Dollar issuance slate empty so far; desks expect $25b to $30b of new debt this week, front- loaded ahead of CPI and Friday’s market close for US Veterans Day. Bunds, gilts and USTs 10-year yields all decline about 1 basis point as bonds pare losses. Peripheral spreads tighten to Germany with 10y BTP/Bund narrowing 3.1bps to 213.4bps.

In commodities, WTI trades within Friday’s range, falling 0.6% to near $92; WTI and Brent futures have trimmed losses seen in wake of China sticking to its COVID policy over the weekend. Kuwait appointed Ahmed Jaber al-Aydan as the new CEO of Kuwait Oil Company and Wadha al-Khateeb as CEO of Kuwait National Petroleum Company, while new leaders were also appointed for Kuwait Integrated Petroleum Industries Company and other state companies in the energy sector, according to Reuters. Kuwait’s KPC aims to export its first oil product cargo from its 615k Al Zour refinery by mid-November, according to Reuters sources. Spot gold reversed earlier losses and climbed back above USD 1,675/oz after printing a base at around USD 1,665/oz earlier today. Base metals have also trimmed earlier losses amid the improvement in risk appetite and decline in the Buck, with 3M LME copper re-eyeing USD 8,000/t to the upside after forfeiting the level overnight.

Bitcoin is under modest pressure though pivots the mid-point of a sub-USD 1/k range which itself is a similar magnitude above the USD 20k mark.

Market Snapshot

• S&P 500 futures up 0.3% to 3,788.25
• STOXX Europe 600 up 0.4% to 418.47
• MXAP up 1.7% to 142.45
• MXAPJ up 1.8% to 459.88
• Nikkei up 1.2% to 27,527.64
• Topix up 1.0% to 1,934.09
• Hang Seng Index up 2.7% to 16,595.91
• Shanghai Composite up 0.2% to 3,077.82
• Sensex up 0.3% to 61,153.50
• Australia S&P/ASX 200 up 0.6% to 6,933.71
• Kospi up 1.0% to 2,371.79
• German 10Y yield down 0.7% to 2.28%
• Euro up 0.3% to $0.9986
• Brent Futures down 0.3% to $98.24/bbl
• Gold spot down 0.2% to $1,679.09
• U.S. Dollar Index down 0.35% to 110.49

Top Overnight News from Bloomberg

• The Federal Reserve “hasn’t accomplished anything” in loosening the US labor market even after four consecutive 75-basis-point hikes, former New York Fed President Bill Dudley said
• The ECB should keep raising interest rates, even at a reduced pace, until inflation excluding energy and food prices starts to ease, Governing Council member Francois Villeroy de Galhau said
• Chancellor Jeremy Hunt is drawing up plans for tax increases and public spending cuts worth up to £54bn a year to fill the black hole in the UK public finances, according to allies of Britain’s chancellor, the FT reported
• European households are paying more than ever for their electricity and natural gas, even as governments spend billions to shield consumers from the energy crisis
• China’s total debt as a percentage of gross domestic product climbed to new record high of 272.1% in the third quarter, surpassing the previous record of 271% just a quarter ago, data compiled by Bloomberg showed
• The BOJ can end up holding more than 100% of benchmark debt as its ownership doesn’t fall even when it sells the securities to market participants using repurchase agreements
• President Joe Biden’s national security adviser and senior Kremlin aides have held private talks in recent months to reduce the risk of a broader conflict over Ukraine, the Wall Street Journal reported. A peace settlement wasn’t a goal of the discussions, according to the report

APAC stocks mostly gained as investors continued to pile on the reopening bets despite China ‘unswervingly’ maintaining its COVID approach, while the region also shrugged off disappointing Chinese trade data. ASX 200 was higher as strength in the commodity-related and consumer sectors atoned for the weakness in tech and financials with the latter not helped by Westpac’s earnings which showed a decline in cash profit and revenue. Nikkei 225 strengthened from the open and climbed above the 27,500 level with the index unfazed by the weak earnings releases from the likes of Sharp and SoftBank Corp. Hang Seng and Shanghai Comp recovered from opening losses in which the Hong Kong benchmark briefly surged by more than 3% amid strength in property names and a continued tech rally, while the mainland index was less decisive amid disappointing Chinese trade data and after China stuck to its strict COVID policy, as well as reported its largest number of daily infections in 6 months.

A more detailed look at global markets courtesy of Newsquawk

• China health commission spokesman said China will not waver in preventing a COVID rebound and in the dynamic clearing of cases as soon as they emerge, while it did not make adjustments to anti-COVID protocols and a China disease control official said they are to guide localities to continue strengthening COVID vaccination of the elderly. Furthermore, a Peking University infectious disease expert said the current prevention strategy is still able to control COVID despite the high transmissibility of variants and asymptomatic carriers, although an Education Ministry official noted that it is necessary to prevent excessive epidemic prevention and not add extra layers of measures, according to Reuters.
• Beijing City is set to improve COVID rules for people entering the city, but vows to stick to COVID-Zero policy, according to a Beijing Official cited by Bloomberg.
• Haizhu district of Guangzhou, China is to extend COVID restrictionsuntil November 11th, via Bloomberg.
•  
• China’s Zhengzhou city is taking steps to improve the precision of epidemic control measures after being criticised for a one size fits all approach and the city government apologised for the problems in the latest COVID fight, while it vowed to implement social management and control measures in a precise manner to avoid simply locking down communities.
• China’s new daily COVID-19 cases were rose to the highest in six months with the country reporting 5,436 new cases on Sunday, according to Bloomberg.
• PBoC Deputy Governor Fan Yifei, who is a key driver of the digital yuan transition, was detained for investigation and is suspected of serious violations of discipline and law, according to SCMP.
• Japan’s government releases a statement on the US inflation Reduction Act in which it stated that the requirement of EV tax credits is not consistent with the US and Japanese governments’ shared policy to work with allies and like-minded partners to build resilient supply chains. Japan added that if the IRA would be implemented as it is to provide discriminatory incentives, it is possible that Japanese automakers will hesitate to make further investments towards the electrification of vehicles, according to Reuters.
• Japan is reportedly to fund its extra budget with bond issuance of JPY 22.9tln, via Bloomberg citing documents.

Top Asian News

Major bourses in Europe kicked off the session with mild losses across the board but the downside faded within the first hour of trade. Sectors are mostly firmer and have experienced a turnaround since the cash open – with defensives now largely towards the bottom of the bunch. US equity futures have also moved into the green after posting mild losses overnight and in the run-up to the European cash open. IATA September update: Total Traffic +57% YY; International Traffic +122% YY. All markets reported strong growth, led by APAC.

Top European News

• UK PM Sunak and Chancellor Hunt are to announce a stealth tax raid on pensions later this month, according to The Telegraph. It was also reported the Chancellor is set to outline GBP 60bln in tax and spending cuts with early drafts of the autumn statement containing plans for up to GBP 35bln of spending cuts and GBP up to GBP 25bln on tax increases, according to The Guardian.
• UK PM Sunak warned that people cannot expect the state to “fix every problem” and vowed to regain the trust of voters by being honest about the scale of the economic difficulties ahead, according to The Times.
• UK PM Sunak is reportedly under pressure regarding bullying claims concerning one of his closest political allies with the opposition Labour party calling for an independent investigation of allegations of bullying by Sir Gavin Williamson who was appointed as Minister of State without Portfolio last month, according to FT.
• UK stamp duty in Q3 rose to a record high of GBP 3.6bln although property market analysts warned the trend will reverse as house prices decline, according to FT.
• UK steel industry warned that it needs state aid to survive a green transition with two large producers calling for the government to match the support offered to suppliers across Europe, according to FT.
• Traders have pointed to a squeeze in the “repo” market and short-dated gilts, according to The Times and The Telegraph.
• ECB and UniCredit (UCG IM) are reported to clash regarding capital plans and Russia presence with tensions building amid the Italian lender’s aggressive strategy to overhaul lending operations, according to FT.
• Germany is to allocate EUR 83.3bln or 42% of a major protection scheme that was launched in October to finance a cap on gas and power prices next year, according to Reuters.
• ECB’s Villeroy said shouldn’t stop rate hikes as long as underlying inflation has not clearly peaked, adds we are not far from the neutral rate, beyond which the hiking pace could be more flexible and slower, according to Irish Times.

FX

• DXY has faded significantly from an initial rebound to 111.28 highs; however, this was shortlived amid renewed China/COVID reopening chatter, in its wake the DXY has slipped to a 110.33 low.
• Despite this, performance for peers is fairly mixed with APAC FX lagging and European FX benefitting from the USD moves.
• At the top-end, Cable has moved to within circa. 30pips of the 1.15 mark with EUR similarly bid, though has failed to sustain brief momentum above parity.
• Antipodeans, CAD and JPY are modestly pressured/narrowly mixed against the USD, and have been fairly choppy within 0.6404-77, 1.3466 to 1.3554 & 147.57-146.58 parameters for the AUD, CAD & JPY respectively.

Fixed Income

• Core counterparts have spent the morning under pressure amid the increasingly constructive risk tone; however, this has eased and USTs are now essentially unchanged.
• In the EZ, Bunds have seemingly derived encouragement from the 136.00 handle holding and have since breached 137.00.
• Gilts have been the slim outperformer; however, as the clock ticks down to the latest QT operation in the medium-term, this has eased to near unchanged around 101.30

Commodities

• WTI and Brent futures have trimmed losses seen in wake of China sticking to its COVID policy over the weekend.
• Kuwait appointed Ahmed Jaber al-Aydan as the new CEO of Kuwait Oil Company and Wadha al-Khateeb as CEO of Kuwait National Petroleum Company, while new leaders were also appointed for Kuwait Integrated Petroleum Industries Company and other state companies in the energy sector, according to Reuters.
• Kuwait’s KPC aims to export its first oil product cargo from its 615k Al Zour refinery by mid-November, according to Reuters sources.
• Spot gold reversed earlier losses and climbed back above USD 1,675/oz after printing a base at around USD 1,665/oz earlier today.
• Base metals have also trimmed earlier losses amid the improvement in risk appetite and decline in the Buck, with 3M LME copper re-eyeing USD 8,000/t to the upside after forfeiting the level overnight.

Geopolitical

• Ukrainian President Zelensky said Russian forces are suffering serious losses in the east and Russia is readying new attacks on Ukrainian infrastructure, particularly energy, according to Reuters. There were also separate reports that Zelensky said Iran lied about sending a limited number of drones to Russia and he noted that Kyiv forces were shooting down at least 10 of them daily.
• Ukrainian authorities in Kyiv have begun planning for a complete blackout which would require the evacuation of 3mln residents and are establishing 1,000 heating centres although it was noted that the situation was currently manageable, according to NYT.
• Ukrainian forces damaged the Russian-held Nova Kakhova dam in a HIMARS strike, according to an emergency services representative cited by TASS.
• US National Security Adviser Sullivan held confidential discussions with Russian counterparts in recent months in an effort to reduce the risk of a broader conflict over Ukraine and to warn about the use of nuclear or other weapons of mass destruction, according to WSJ. On this, the Kremlin declined to comment.
• China’s President Xi to visit Saudi Arabia before end-2022, via WSJ; tentatively scheduled for the second week of December.

US Event Calendar

• 15:00: Sept. Consumer Credit, est. $30b, prior $32.2b

Central Banks

• 15:40: Fed’s Collins and Mester Speak at Women in Economics…
• 18:00: Fed’s Barkin Speaks at Event on Inflation

DB’s Jim Reid concludes the overnight wrap

The warm weather here in Europe continues to be great news for energy storage preservation across the continent. However, there has been one big causality. Me! Over the weekend I had horrible hay fever. I’ve no idea what caused it, but I couldn’t stop sneezing in a manner only consistent with an allergy. I usually get it bad from late January to April but this is the first time ever in November. If anyone has had similar experiences, please let me know so we can swap notes and solutions/remedies.

As I splutter into a new week, it feels odd to say that US mid-terms (tomorrow) might be more important than US CPI (Thursday), so I won’t! However, history suggests the mid-terms are a big influence on markets as they always seem to rally once mid-terms (or Presidential elections) are out the way. Although regular readers should be in little doubt that my base case is that 2023 is going to be a bad year for the global economy and risk, in every 12-month period post mid-terms over the last century, the equity market has always gone up with the inflexion point being immediately after mid-terms.

While I think the US recession of 2023 will overpower that historical track record, Tuesday being out the way could be a catalyst for a more positive short-term period. So a big moment. Before we preview these two events in more detail, elsewhere in the US this week the highlight will probably be the University of Michigan survey out on Friday with the latest inflation expectations series. It’s a light week for data outside of that. There is plenty of Fed speak so see that in our day-by-day calendar at the end as usual. You’ll also see from that that Lagarde speaks today.

Other important data releases in other parts of the globe will feature trade balances for key global economies as well as CPI and PPI data for China (Wednesday). Here in Europe, GDP from the UK (Friday) and industrial production data from Germany (today) will be in focus. In earnings, Berkshire Hathaway, Disney, Occidental, adidas and BioNTech will be among the companies reporting. Elsewhere, COP27 kicked off yesterday so we’ll likely see plenty of headlines from that.

Asian equity markets are rallying this morning following the broadly positive cues from global markets on Friday. Across the region, the Hang Seng (+3.42%) is outperforming, after quickly reversing its morning losses, followed by the Nikkei (+1.32%) and the KOSPI (+1.00%). Elsewhere, mainland Chinese equities are gaining traction with the Shanghai Composite (+0.46%) and the CSI (+0.49%) both in the green after trading broadly lower in early trade as Chinese health officials indicated that it would stick to its strict zero-Covid policy (more below). In overnight trading, US stock futures are slightly lower with contracts on the S&P 500 (-0.17%) and NASDAQ 100 (-0.25%) both dipping.

Early morning data showed that China exports as well as imports unexpectedly contracted simultaneously for the first time since May 2020 as elevated inflation and rising interest rates hurt global demand. Outbound shipments declined (-0.3% y/y) in October (v/s +4.5% expected) after a +5.7% increase in September while inbound shipments fell (-0.7% y/y) following a +0.3% gain in the previous month. Meanwhile, the overall trade surplus slightly widened to +$85.15 billion (v/s +$84.74 billion in September, but missing a forecast of $95.97 billion).

Over the weekend, the Chinese government reiterated that they would stick “unswervingly” to their ‘zero-tolerance Covid’ strategy, following several days of speculation to the contrary. Staying on China, Apple has warned that it is anticipating lower shipments of its high-end iPhone 14 models with customers experiencing longer wait times because of Covid-19 restrictions at its primary assembly plant in Zhengzhou, thus dampening the company’s sales outlook for the year-end holiday season. There also seems to be a softer demand element to it too.

Lastly, on overnight stories, the WSJ has reported that the US national security advisor has been having secret talks with senior Kremlin officials in recent months to try to ensure that the conflict doesn’t move up to the next level. There is no suggestion that a route to peace has been discussed but it shows there are high level diplomatic discussions though.

Onto more details of this week now. Looking first at tomorrow’s midterms, our economists’ base case is that Republicans will take the House but Democrats will maintain their slim majority in the Senate, although the latter is a close call. It is highly unlikely that either party will achieve a two-thirds majority in Congress, thus effectively maintaining President Biden’s veto power. Currently, FiveThirtyEight’s model gives the Republicans a 54% chance of winning the Senate and 82% for the House. Their chance of winning both is 53%. See our economist’s midterms preview here. They will be hosting a zoom webinar on Wednesday to review the results and implications for the economic outlook. To register please click here.

With regards to US CPI on Thursday, our economists believe energy will boost the headline (DB forecast at +0.62% vs. +0.39% previously. Consensus +0.6%). Last month core surprised on the upside (+0.6% MoM, vs +0.4% consensus) so this month’s reading will get the most focus (DB at +0.46% vs. +0.58% previously. Consensus +0.5%). In terms of YoY, DB expect headline to dip -0.2pp and core -0.1pp to 8.0% (consensus 7.9%) and 6.5%, respectively.

In terms of corporate earnings, there will be a couple of corporate heavyweights reporting this week even with around 85% of the S&P 500 index having now released Q3 results. The highlights are likely Disney and Occidental (tomorrow) but we also have Activision Blizzard, Lyft (today) and Roblox (Wednesday) in tech and BioNTech (today), adidas (Wednesday), AstraZeneca (Thursday) and SoftBank (Friday) elsewhere.

Recapping last week now and the dovish pivot trade pivoted one way and the other across the week but ultimately Powell’s FOMC press conference put the hawks back in the ascendency.

Treasury yields moved higher and a fresh round of curve flattening materialised. 2yr Treasury yields gained +24.4bps over the week (-5.5bps Friday) while 10yr yields climbed +14.6bps (+1.2bps Friday). Adding evidence to Chair Powell’s main arguments, the employment situation report out of the US on Friday painted a still robust picture of the US labour market, where +261k jobs were added (vs. +193k expected), while average hourly earnings ticked up to +0.4% (vs. +0.3%). Labour force participation tightened, dropping to 62.2% (vs. 62.3%), while unemployment actually increased slightly to a still-tight 3.7% (vs. 3.6%). Elsewhere, the BoE painted a much more dovish outlook as they hiked 75bps, which led to a much different curve shape, as 2yr gilt yields fell -19.1bps (-2.5bps Friday) and 10yr yields were ‘only’ +5.9bps higher (+1.6bps Friday). The bund curve split the difference between the US and UK moves and moved in parallel, with 2yrs climbing +18.9bps (+4.3bps Friday) and 10yrs +19.2bps higher (+5.0bps Friday).

The pivot unwind trade showed up in equity prices, too, where the S&P 500 tumbled -3.34% (+1.36% Friday) and the tech-heavy NASDAQ bore the brunt of a hawkish Chair by falling -5.65% (+1.28% Friday). European equities, meanwhile, managed to finish up over the week, with the STOXX 600 gaining +1.51% (+1.81% Friday) and the DAX +1.63% higher (+2.51% Friday). As you can see, a lot of those gains took place on Friday following headlines that China was considering easing its Covid restrictions, potentially unleashing a major engine of global growth. In turn, Brent crude oil prices also rallied hard to finish the week +3.11% (+4.12% Friday). Over the week, the Shanghai Composite climbed +5.31%, with the Hang Seng +8.73%.