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The U.S. dollar made quite a comeback during the New York session when risk-off flows returned and pulled higher-yielders back down. However, it was the Japanese yen that was the king of pips for the session.

  • Canada’s ADP non-farm employment change down from 42.7K to 28.8K
  • Philly Fed index dipped from 22.9 to 22.2 vs. 19.7 forecast
  • U.S. initial jobless claims at 210K vs. 211K consensus, 215K previous
  • U.S. CB leading index up from 0.4% to 0.5% as expected
  • New Zealand visitor arrivals fell by 1.9% after earlier 2.8% gain
  • FOMC member Quarles: Gradual rate hikes appropriate
  • Fed official Bullard: Weak inflation means Fed shouldn’t hike further
  • Bullard: Current pace of tightening could increase recession risk
  • Chinese data dump coming up

Major Events/Reports:

Another risk-off day

Investors were unable to keep up their positive spirits from the earlier session as financial markets gave in to another round of risk aversion. U.S. equity indices closed more than 1% lower:

  • Dow 30 index is down 327.23 points to 25,379.45 (-1.27%)
  • Nasdaq is down 157.56 points to 7,485.14 (-2.06%)
  • S&P 500 index is down 40.43 points to 2,768.78 (-1.44%)

Gold resumed its climb as the precious metal banked on safe-haven demand while crude oil slid on the internal OPEC report that warned of further declines. U.S. yields were slightly lower as well.

  • Gold rose to $1,225.11 per troy ounce (+0.28%)
  • WTI crude tumbled to $68.70 per barrel (-0.15%)
  • U.S. 5-year yield down to 3.025% (-0.05%)
  • U.S. 10-year yield down to 3.177% (-0.05%)

A number of factors are being blamed for the rout, including brewing tensions with Saudi Arabia, expectations of weaker growth from China, higher U.S. borrowing costs on more Fed tightening, warnings on Italy’s budget, and the lack of progress in Brexit talks. Phew!

Mixed Fed commentary

A couple of Fed officials gave testimonies and shared a bit about their policy bias, with FOMC voting member Quarles supporting the view that gradual hikes are appropriate.

During his speech at the Economic Club of New York luncheon, Quarles noted that the U.S. economy is in a good spot and that there are reasons to be optimistic about an even higher growth rate. When it comes to inflation, he pointed out that it may be a faulty indicator of a broader economic cycle, citing:

“[A] problem does arise if the Fed remains reliant on inflation as our only gauge of the economy’s position relative to its potential.”

Fed official Bullard, on the other hand, wasn’t feeling as chipper about economic prospects as he highlighted weak inflation as a reason that rate hikes should pause. He even warned that keeping up the current pace of tightening could increase the risk of a recession!

Although Bullard isn’t part of the FOMC committee this 2018, note that he will be one of the voting members next year. His latest remarks suggest that he’ll be sitting with the dovish fellas by then.

In his comments to reporters, Bullard reiterated that the Fed’s current policy is “about right” and that higher rates aren’t really necessary to prevent asset bubbles. Furthermore, he mentioned that he’s not seeing evidence of productivity growth that could lead to more upside surprises.

Major Market Mover(s):

USD

The dollar managed to get back on its feet after a downbeat performance in the earlier session, likely getting support from safe-haven demand and positive medium-tier data.

In particular, the initial jobless claims report highlighted progress in the jobs market as the number of first-time claimants fell to its lowest level since 1973.

EUR/USD turned from 1.1523 then fell to 1.1456; GBP/USD retreated from 1.3132 to 1.3022; USD/CHF recovered from .9928 to a high of .9967 but pared most of these gains later on, and AUD/USD fell back to the .7100 handle.

JPY

The lower-yielding yen surged to the top spot, taking advantage of risk-off flows and the dip in U.S. bond yields.

USD/JPY is down from a high of 112.54 to a low of 112.08; EUR/JPY slid from 129.64 to 128.52; GBP/JPY tumbled to a low of 146.11; CAD/JPY dropped from 86.27 to a low of 85.78, and AUD/JPY is down to 79.65.

Watch Out For:

  • 2:00 am GMT: Chinese Q3 GDP (dip from 6.7% to 6.6% expected)
  • 2:00 am GMT: Chinese fixed asset investment (no change from 5.3% expected)
  • 2:00 am GMT: Chinese industrial production (drop from 6.1% to 6.0% expected)
  • 2:00 am GMT: Chinese retail sales (no change from 9.0% expected)
  • 6:30 am GMT: BOJ Governor Kuroda’s testimony