US retail sales surged in October

• US retail sales surged in October jumped 1.7% m/m last month, the largest gain since March, after rising 0.8% m/m in September. It was the third straight monthly advance and beat market expectations for a 1.4% m/m increase. Sales soared 16.3% y/y in October and are 21.4% above their pre-pandemic level.The report from the Commerce Department on Tuesday suggested high inflation was not yet dampening spending, even as worries about the rising cost of living drove down consumer sentiment to a 10-year low in early November. Sales were led by motor vehicles, which advanced 1.8% m/m after gaining 1.2% m/m in September. The rise reflected the first increase in unit sales in six months, as well as higher prices due to the tight supply of automobiles because of the global semiconductor shortage. Sales at service stations increased 3.9% m/m, boosted by more expensive gasoline, online retail sales rebounded 4.0% m/m, sales at building material stores advanced 2.8% m/m.Excluding automobiles, gasoline, building materials and food services, retail sales shot up 1.6% m/m last month after rising 0.5% m/m in September. Core retail sales correspond most closely with the consumer spending component of gross domestic product. Adjusting for inflation, retail sales are almost 5% y/y from Q3.
• US Manufacturing output was up 1.2% m/m last month, reaching its highest level since March 2019, after falling 0.7% m/m in September, according to figures released by the Federal Reserve. Output increased 4.5% y/y. Manufacturing, which accounts for 12% of the U.S. economy, is being underpinned by businesses rebuilding depleted inventories. Production at auto plants rebounded 11.0% m/m last month after declining for two straight months. Excluding autos, manufacturing output rose 0.6% m/m in October. Consumer goods production rebounded 1.4% m/m. While machinery production dropped 1.3% m/m. Capacity utilization for the manufacturing sector, a measure of how fully firms use their resources, increased 0.9% in October to 76.7%, the highest since January 2019. The Fed looks at capacity use measures for signals of how much "slack" remains in the economy. While the figures reflect fading drag from Ida, manufacturing will likely continue to be constrained by shortages of raw materials and labor.
• The number of staff on UK businesses' payrolls in October rose to 0.8% above levels in February 2020, before the coronavirus pandemic hit, and increased by 160,000 on the month. The data published by the ONS showed the unemployment rate fell by more than expected to 4.3% for the three months to September from 4.5% before, its lowest since the three months to July 2020. Employment rose by 247,000 in the July-September period, while the number of unemployed fell by 152,000. Average weekly earnings in the July-September period were 5.8% higher than in the same three months of 2020, the smallest annual increase since April. Excluding bonuses, earnings were 4.9% y/y. Job vacancies hit an all-time high of 1.172 million in the three months to October, almost 400,000 more than before the pandemic, although the pace of growth slowed again. The ONS cautioned it was possible that people made redundant at the end of the furlough scheme would continue to appear as in work in the data for a few further months, while they worked out their notice period. 
• Euro zone GDP rose 2.2% q/q in the Q3 period, confirming previous flash estimates from the European Union's statistics office Eurostat. The data showed growth in the 19-country block was 3.7% higher y/y than in Q3 2020, also in line with the previous estimate, as the economy continued to recover strongly from the pandemic-induced recession in 2020

Today’s economic data and events

• 11:00 GB CPI (YoY) (Oct) Forecast 3.9%  
• 14:00 EU CPI (YoY) (Oct) Forecast 4.1%  
• 17:30 US Building Permits (Oct) Forecast 1.638M                              
• 17:30 CA Core CPI (MoM) (Oct) Forecast 0.3%    
• 19:30 US Crude Oil Inventories Forecast 1.398M
• 22:30 EU ECB President Lagarde Speaks                                

Fixed Income

• US Treasuries extended their losses overnight as the market responded to positive US retail sales and commentary from St Louis Fed President, James Bullard, who noted that the Fed could go in “a more hawkish direction in the next couple of meetings.” Yields on the front-end of the curve rose marginally with 2yr UST yields adding less than 1bps while the 10yr yield gained almost 2bps to settle at 1.6335%.
• Yields rose in the UK as well as the market reacted to positive employment data. Yields on the 2yr gilt gained 4bps to 0.599% in anticipation of a rate hike potentially as early as December while the 10yr gilt yield rose almost 3bps to 0.988%.
• Investors pulled out of emerging market bonds overnight with local currency 10yr benchmarks in South Africa, Turkey and India all falling. Yields in the Turkish market rose 15bps to 18.73%.

FX

• The dollar rallied strongly overnight, spurred on by the positive retail sales and rise in UST yields. The DXY index added more than 0.5% to settle at 95.915 with much of the gains coming from EURUSD which fell 0.4% to 1.1320 and USDJPY which rallied 0.6% to 114.82. GBPUSD managed to hold ground thanks to expectations that the Bank of England could respond to the good labour market numbers.
• Commodity currencies though were weaker. USDCAD added 0.3% to close at 1.2528 and AUD fell 0.6% to 0.7303 and NZD moved back below the 0.70 level, falling almost 0.8% overnight.

Equities

• The strong retail sales data out of the US bolstered local equity markets yesterday, with all three major indices recording gains following the somnolent activity on Monday. The NASDAQ was the biggest gainer, adding 0.8%, followed by the S&P 500 (0.4%) and the Dow Jones (0.2%).
• In Europe, the CAC (0.3%) and the DAX (0.6%) both closed up into new record highs, but the UK’s FTSE dropped -0.3%, despite the positive labour market data released earlier in the day.
• Within the region the DFM continues to climb strongly, adding a further 1.0% yesterday ahead of plans to list major entities. The ADX also added 1.0%, while the Tadawul dropped -0.1%.

Commodities

• Oil markets endured a choppy day of trading, buffeted by bullish commentary coming out from the ADIPEC conference and a more neutral assessment from the IEA. Brent futures closed up 0.46% at USD 82.43/b while WTI fell 0.15% to USD 80.76/b.
• The IEA left its outlook for oil consumption growth in 2021-22 largely unchanged in its latest monthly oil market report, expecting growth of 5.5m b/d for this year and 3.4m b/d next year. The IEA noted improving trends in jet fuel which had been one of the lagging elements of the oil demand complex. For supply, the IEA projects an increase of as much as 6.5m b/d in 2022 if all the OPEC+ cuts are unwound and non-OPEC+ producers recover fully. Much of that recovery will come from the US where the IEA is expecting oil output above pre-covid levels by the end of next year. 
• The API reported a small build in US crude inventories last week, with gains of 655k bbl while gasoline stocks fell almost 2.8m bbl. EIA data will be released later tonight.

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