Summary United States: Momentum Continues to Slow This week's data show that while the U.S. economy has remained resilient thus far, tighter monetary policy is certainly starting to impact some key sectors. Industrial production regained its footing in September, but there are signs of slower growth ahead, while regional manufacturing surveys support this loss of momentum. Meanwhile, the real estate sector has been significantly affected by rising interest rates, with total housing starts falling 8.1% in September. Peering ahead, the forward-looking Leading Economic Index points to a recession in the coming year. Next week: New Home Sales (Wed), Q3 Real GDP (Thu), Personal Income & Spending (Fri) International: Robust Consumer Inflation, Subdued Consumer Spending This week saw more evidence on the international front of divergent economic trends—with consumer inflation remaining rapid and consumer spending staying subdued. Inflation surprised to the upside in the United Kingdom, Canada and New Zealand. Meanwhile, retail spending data were subdued in the United Kingdom and Canada. For now, rapid inflation remains a greater concern than slower growth for foreign central banks, and we anticipate further monetary tightening in the weeks and months ahead. Next week: U.K. PMIs (Mon), Bank of Canada (Wed), European Central Bank (Thu) Credit Market Insights: ARMs Make a Comeback as Mortgage Applications Plummet The Mortgage Bankers Association (MBA) reported on Wednesday that mortgage applications for purchase fell 4.5% during the week ended October 14. The long skid has helped push application counts to their lowest level since 1997. With markedly higher financing costs squeezing demand for mortgages, there is one type of home loan that has made a comeback this year, the adjustable rate mortgage (ARM). Topic of the Week: "Modest" Is the Word of the Day in a Mixed Beige Book From employment in New York to overall economic activity in Dallas, "modest" was the word of the day in the newest Beige Book released by the Federal Reserve. Modest growth was broad-based, manufacturing activity improved on net and demand for services remains strong. That said, the outlook continues to worsen. Read the full report here

ECB meeting – 27/10 – at its last meeting in September, it was widely expected that the ECB would raise rates, with the only uncertainty being around whether they would go by 75bps or 50bps. The decision to raise rates by 75bps was dictated by the upgrading of the banks inflation forecasts, which were adjusted higher to 8.1% in 2022 and 5.5% in 2023. These targets now look incredibly dated given that we now have German inflation well above 10% and the EU headline rate also into double figures with core prices at 4.8% and likely to move higher. A growing number of ECB policymakers have been increasingly vocal about the need for much higher rates, despite an acknowledgment that GDP is likely to fall quite sharply. The ECB cut its 2023 and 2024 forecasts, to 0.9% and 1.9% respectively, it raised its forecast for 2022 to 3.1%. These GDP forecasts seem extraordinarily optimistic given the energy backdrop, and perhaps speaks to a certain amount of cognitive dissonance on the part of ECB officials. The ECB said it expects to continue hiking in subsequent meetings, albeit probably at a slower pace than the Federal Reserve, although we’ve heard from a number of governing council members of the need to front load rises and move the headline rate back to 3%. This would be a huge move given where rates are now, at 1.25%. If the ECB does another 75bps this week the effect on countries like Italy could well be problematic and while the governing council of the TPI program there are still many unanswered questions as to how it might work. There is also the added problem that an aggressive tightening is precisely the wrong medicine at a time when demand is cratering and the blocs largest economy, Germany is likely to tip into recession by year end. Bank of Japan – 28/10 – with the Japanese yen set to fall to 32-year lows against the US dollar the focus remains firmly on the Bank of Japan and its apparent unwillingness to alter course on its own monetary policy settings. We’ve already seen the first round of intervention which saw the yen initially strengthen, however until such time as we see some sort of pivot from the Japanese central bank then further weakness towards 150 and 160 looks increasingly likely. The Bank of Japan’s CPI forecast is expected to be pushed up from its current 2.3%, especially given that we’re already at 3%, and an 8 year high, and there is little sign that price pressures are diminishing. US Q3 GDP and Core PCE – 27/10 and 28/10 – with the US economy currently coming off the back of two negative quarters, aka, a technical recession, it seems almost counterintuitive that we can expect to see the economy rebound when the latest Q3 numbers are released later this week. Q3 GDP is expected to show a rebound of 2.2%, with most of the rebound expected to come about on the back of inventory rebuilding. Personal consumption, which showed growth of 2% in Q2 despite the 0.6% contraction is expected to be much weaker at 0.8% given the weaker trend seen in recent retail sales numbers and higher food and energy prices. Core prices have shown in recent weeks to be much stickier than anticipated as services inflation start s to bleed into the economy along with higher wages. Core PCE is expected to show an additional uplift in data released the day after the US Q3 GDP numbers with a jump to 5.2% expected in September, from 4.9% and reinforcing the probability that the Fed will move by another 75bps when they meet next week, as well as increasing the risk that another 75bps could come in December. Bank of Canada meeting – 26/10 – are we near to peak rate hikes for the Bank of Canada. It seems unlikely given the direction of travel from the Federal Reserve. We saw the Bank of Canada raise rates by another 75bps, following on from the 100bps seen in July. There is already increasing evidence that wages are starting to rise in response to this recent inflation surge, however headline CPI does appear to be showing signs of slowing with headline CPI falling to 7% in August, from the June peaks of 8.1%. This suggests we could well see 50bps at this week’s meeting rather than the customary bumper hikes we’ve become used to. The increased focus on core prices appears to be driving the dynamics here and while lower they are much stickier at around 5.7%. UK banks Q3 results - HSBC 25/10 – HSBC shares hit their lowest levels this year earlier this month on the back of the sharp rise in yields cause by the UK mini-budget, as...

The British pound is likely to see another few months of turmoil now that Prime Minister Liz Truss has resigned. During Truss’ reign, which latest a mere 45 days, the shortest tenure in UK prime ministerial history, the pound was rocked by her government’s plan to borrow billions of dollars to fund tax cuts. On the day of the release of the ‘mini-budget’ that contained the tax cut plan, the pound fell from ~$1.12000 to its weakest level ever, with speculation that it could hit and cross parity with the US dollar, a forex reality that had only been explored once in the past, in 1985, when the super-strength of the US dollar decimated the pound (along with every other currency). The pound did recover from this crisis as Truss and her government began to backtrack on the planned tax cuts, with further support added to the GBP from an emergency intervention from the Bank of England that is a story for another day. As it stands, the GBP now has a few major events ahead of it that could kick up some volatility.  GBP/USD 4GH, with RSI The first is whether Boris Johnson, the Prime Minister that was succeeded by Truss, will contest for the leadership of the country's ruling party, and by extension the Prime Ministership. It is anyone's bet how the market will react to this possibility.  The second is whether Rishi Sunak, the UK’s ex finance Minister who was beaten by Truss for the top position in September, will contest for the Prime Ministership. As a known face with a known agenda, Sunak contesting for the job could help provide some stability to currency markets. Sunak had earlier dismissed Truss’ tax cut plans as fantasy economics in favour of a very gradual application of tax over a decade. The GBP/USD is currently priced at $1.1230, -2.3% down from its October peak, and any bias in any direction may emerge in the next few days as the leadership race heats up.

Outlook: To an overload of economic data we need to add worries about so-called stealth intervention from at least two sources, the Bank of Japan and the Swiss National Bank. Experts doubt the BoJ is intervening, despite a warning from FinMin Suzuki: “We cannot tolerate excessive currency moves driven by speculators. We are closely watching currency moves with a sense of urgency.” PM Kishida also said “speculative-driven rapid currency moves [are] problematic.” But the dollar/yen moved to a 32-year high soon afterwards at 149.29 before retreating, and not sedately. Suzuki reminded the press the BoJ had intervened before (about $18 billion) and the government doesn’t always announce intervention. He also denies the primary cause is the BoJ cap on yields, saying lots of other factors are at work. The reports end up making Suzuki looking somewhat weak. Any loss of face is to be corrected and we expect the market to back down periodically ahead of any punishment. As for the SNB conducting stealth intervention, nobody knows and if they do, they are not telling. We are willing to believe it if only one the highly unusual choppy pattern in the dollar/Swiss, even if euro/Swiss is or should be the focus. We have been studying charts for a very long time and choppiness like this in definitely not normal. The most fundamental of the fundamentals is the cost of energy. It’s the central key determinative factor in a wide array of economic outcomes, and not just inflation. The FT has an article today citing the Qatari energy minister, who points out Europe may get through this winter okay but if the Ukraine war keeps going and Russia remains sanctioned, next year and beyond will be a different kettle of fish. Qatar warns that if Russia stops sending gas to Europe, it’s a vast problem because other sources are just not available. Russia supplied about 40% of Europe’s gas--and Qatar, the world’s largest producer, can divert only about 10-15% of its shipments from Asia to Europe. All Qatar’s plans to increase output don’t come online for several years. The FT emphasizes that Qatar has a long-term outlook driven by the need for investment planning and the long time it takes to build facilities and infrastructure. Asians understand this and have signed decades-long contracts, something the Europeans don’t want to do. The FX forecast has to include periodic pullbacks in the dollar, which is what we are seeing now. They are not caused by any particular data point, although they can occur suspiciously around big changes in the S&P, as is happening this time for reasons no one can explain. Still, a pullback is not a reversal and we see nothing on the horizon to cause wavering from the strong dollar outlook. Fun Tidbit: The FT reports a YouGov poll shows 10% of Britons approve of PM Truss. China Tidbit: Amid vast amounts of commentary on the Party congress in China and what it means, the WSJ delivered this chart. We think it’s a stunner. China beat the world in growth and in restructuring society to be a whole lot less poor, but it’s still an “emerging” market. A little less fear, please. Tidbit: If you like economic/financial history, here’s a splendid moving chart of the UK pound through time with triggering events noted. It was posted on Twitter last weekend and as of Monday morning, had been viewed a million times. It was apparently designed by Bloomberg on BoE data but Interactive Investors is named, too. US Political Tidbit: The US midterm elections are only three weeks away but early voting began yesterday in some states. Even top-notch pollsters like 538.com admit that the historical standard could get upended this time, meaning the party out of office that usually wins the midterms may not this time. One important issue is the absurd lack of qualification (and character) of some candidates like the ageing football star in Georgia and the scammy TV doctor in Pennsylvania, not to mention the election-deniers and their followers who declined to watch the Jan 6 Committee hearings. Even so, the Dems may not prevail. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!

Australia is expected to have created 25,000 new job positions in September. The Reserve Bank of Australia is nowhere near the US Federal Reserve's stance on monetary policy. AUD/USD’s bearish trend is likely to be unaffected by Australia’s employment data. Australia will publish its September employment report on Thursday, October 20. The country is expected to have added 25,000 new jobs, decreasing from the previous 33,500. The Unemployment Rate is expected to remain unchanged at 3.5%, as well as the Participation Rate, currently at 66.6%. Alongside the employment figures, the country will release Q3 NAB’s Business Confidence, foreseen to improve to 7 from 5 in the second quarter of the year. Encouraging data may give AUD/USD a well-needed boost, as the pair trades near the two-year low posted this month at 0.6169, but would it be enough to take it out of its misery? The RBA vs. the Fed The Reserve Bank of Australia decided to hike the cash rate by 25 bps in October, easing quantitative tightening after pulling the trigger by 50 bps for four consecutive months, which took the main rate to 2.6%. The Minutes of the meeting released this week showed that policymakers believe that the effects of the recent hikes have yet to take effect on the economy, somehow justifying the smaller move, despite being convinced inflation is still “too high.” But the real reason behind the latest RBA monetary policy decision is fear. Given that the “cash rate had been increased substantially in a short period of time,” the risk of a recession is greater. Governor Philip Lowe is going slower than its overseas counterparts, as he sees how other economies are rapidly deteriorating as rate hikes have little impact on inflation. The US Federal Reserve has no such concern. The United States central bank is on its way to pushing rates into restrictive levels and keeping them there “for some time,” according to the latest FOMC Meeting Minutes. The Australian central bank is nowhere near a restrictive monetary policy However, AUD/USD may continue to track the negative slope in the 50-Day SMA (0.6684) as the minutes from the RBA’s October meeting reveal that “a smaller increase than that agreed at preceding meetings was warranted given that the cash rate had been increased substantially in a short period of time,” and the comments suggest the central bank is nearing the end of the hiking-cycle as Governor Philip Lowe and Co. show little intentions of carrying out a restrictive policy. AUD/USD possible scenarios Central banks’ imbalance had a negative impact on AUD/USD, and given the current scenario, the pair’s bearish trend will likely prevail. For sure, upbeat figures should mean a temporary recovery, but the pair would need a stronger reason to run north. A relevant resistance level comes at around 0.6345, the 23.6% Fibonacci retracement of the 0.6915/0.6169 slump. Sellers have rejected recovery attempts around it ever since bottoming at fresh 2022 lows in the previous week. The 38.2% retracement is at 0.6452 a level the pair can hardly reach just with the job’s report. In the middle, the 0.6390 price zone stands at a static resistance area. The pair has a near-term support area at 0.6230/40, with a break below the latter favoring a downward extension towards 0.6160. If the year’s low gives up easily, AUD/USD has room to extend its decline toward the 0.6000 psychological threshold in the next few sessions.

COT data is very important for gold as it’s tracked closely by a lot investors and speculators, especially for a longer-term approach. Looking at the Non-Commercials or Large Speculators, we can see that those are still heavily short, but they are approaching similar readings compared to 2013, 2015 and 2018. Notice that all of those extreme levels lead to a reversal, a rise in price, which can be very interesting now as well, especially when adding an Elliott wave count that shows a five wave drop from the high, now in late stages. In fact, there can be an ending diagonal with nice support at 1600/1610. GOLD COT Data At the same time, we have to respect the US yields of course, which are still on the rise and that’s why we see gold coming down as USD trades higher in risk-off environment. So for gold to recover we also have to ask ourselves, what can trigger a turning point? Well, it can be the FED, if they will be forced to slow down the hawkish approach next year, possibly if jobs data gets worse, or if they will be successful fighting the inflation. From an Elliott wave perspective, we see 10 year US yields in late stages of an impulse, so a slow down of a bull run would not be a surprise, since we know that after every five waves market makes a minimum three wave retracement. US10Y Weekly Chart GOLD Daily Chart So, will gold really slow down and turn higher next year? It’s too soon to tell, but so far we have some nice development here, which will be interesting to track from an intraday perspective as well. So if you like gold, silver or dollar, make sure to check our services where we offer Elliott wave updates on a daily basis. Get Full Access To Our Premium Analysis For 14 Days. Click here!