The Morning Hark - 3 Feb 2023
Today’s focus …who let the doves out, did Powell have a heads up on the 3A’s results and over to you NFP.
Prices are at 7.20 GMT/2.20 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude April futures continue to slip in Asia with them currently trading at 82 and 76.20 respectively. The USD rebound didn’t help the overall tone of the oil market, which was still on the backfoot after the recent data pointing to ever larger inventory builds in the US.
EQ - Asia equity futures mixed in Asia with the Nikkei flat at 27,478, the Kospi up smalls at 327 whilst the Hang Seng one percent lower at 21,697.
The Nasdaq and S&P futures continue their slide from late yesterday with them both lower at 12,650 and 4167, respectively. The “Powell push” higher continued in yesterday’s session, helped by the dovish tone of both the ECB and BoE. The Nasdaq was knocking on 13,000 for the first time since August whilst the S&P was nibbling the 4200 level. However, the 3A’s put paid to that with Apple, Alphabet and Amazon all disappointing with their earnings releases which doused the animal spirits. Apple produced its first profit miss since 2016, Amazon’s AWS results disappointed and guidance was on the weak side, whilst Alphabet topped and tailed with misses for revenues and EPS.
Gold - Gold April futures flat in Asia after yesterday’s frustrating session for the gold bulls. The resurgent USD put a dent in any hope for further topside momentum in gold. We currently sit at 1930. Topside now at the recent high around 1975 then further to 2000. Support now at 1920.
FI - US yields in Asia at very similar levels to yesterday’s open with the US2y and US10y trading currently at 4.10% and 3.38% respectively.
European yields closed significantly lower yesterday with the German 10y yields closing at 2.079% and Italian 10y yields at 3.757%. A close to 40bp drop in Italian yields and the biggest drop for German yields in over 10 years. At least the spread is tightening!
UK gilt yields similarly pummelled with a 30bp drop with the 10y closing at 3.003%.
FX - FX quiet after yesterday’s fireworks with the USD holding onto its gains with the USD Index currently sitting at 101.80. The majors all a touch lower with JPY, EUR and GBP currently at 128.55, 1.09 and 1.2211, respectively.
Others - Bitcoin and Ethereum off their recent highs with the risk reversal and currently sitting at 23,494 and 1641 respectively.
ECB Review
The nailed-on 50bp hike came as expected with “hard” forward guidance in the form of the money line:
“in view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy”.
So that’s that sorted then! However, if we look back at the December meeting the indication there was that there would be a further three 50bp hikes, March would only make that two and then the decision becomes data dependent so this was seen as dovish.
Lagarde was as ever clear as:
growth remains weak;
supply constraints are easing;
high inflation and tightening financial conditions dampen spending and productivity;
economy more resilient than expected;
energy prices lower than expected;
risks to inflation more balanced;
in all reasonable scenarios significant rate hikes are needed;
haven’t reached peak in rates yet and we will not reach there in March;
there is a “pretty strong consensus”;
50bps in February and March had “general agreement”;
March 50bps is not irrevocable;
underlying inflationary pressures and fiscal measures all warrant 50bps hike; and
“I can’t think of scenarios where 50bp hike would not happen in March unless they’re quite extreme”.
The market took the dovish tilt that the ECB is close to a pause and German 10y yields had their biggest drop in over 10 years. As ever, ECB sources came to the fore not longer after Lagarde had exited stage left. They suggested that there were at least two more rate hikes with a 25 or 50bps hike in May with terminal rate of 3.5%.
On the APP side of things, it was as had been previously announced. €15bn run off per month from March until June and then reappraise.
BoE Review
Bank of England delivered the 50bps that was widely expected taking rates to 4% for the first time in nearly 15 years. The vote came in at a more reasonable two way split, as opposed to December’s three way. Tenreyro and Dhingra again looked for no change, with the remaining seven opting for 50bps.
The standout however was the all but admission that the BoE is on the cusp of pausing. The statement has deleted “it will respond forcefully” on rates and furthermore “further increases in bank rate may be required” has also been omitted. It tempered this somewhat by leaving the door open “if there were evidence of more persistent pressures, then further tightening of monetary policy would be required”. Who let the doves out!
Some of the soundbites from the “big hitters” added to the dovish tone whilst trying to keep the door open for further hikes.
Bailey:
“we are seeing the first signs that inflation is turning the corner”;
“the BoE’s forecast suggests inflation will come down and fall quite sharply”;
however it “may not fall as forecast and we are in uncharted territory with inflation above 10%”;
“too soon to declare victory just yet, inflationary pressures are still here”; and
when asked if rates have peaked: “we have changed the language we used”.
Ramsden:
“things will be challenging and tough but recession is milder than forecast”.
Broadbent:
“it is not clear whether the next rate move could be in either direction” and
“risks to inflation are still to upside, not obvious that we know we’re at a peak for rates”.
The market very much took this as a supertanker turning and it was almost as if Bailey has washed his hands of the whole affair as inflation seems to have peaked. “That’s me done then”. The UK rates market is pointing to 4.25% as the peak on rates for the UK with one further “small” hike and then a pause.
The new forecasts point to a shorter and shallower recession than what was first thought back in November, but inflation still does not return to target levels until well into 2024.
GDP Growth Forecasts:
2022 GDP 4.0% (prev. 4.25%)
2023 GDP -0.5% (prev.-1.50%)
2024 GDP -0.25% (prev-1.00%)
2025 GDP 0.25%(prev. 0.50%)
Unemployment Rate Forecasts:
2022 Unemployment Rate 3.75% (prev. 3.75%)
2023 Unemployment Rate 4.5% (prev. 5.00%)
2024 Unemployment Rate 4.75% (prev. 5.75%)
2025 Unemployment Rate 5.25% (prev. 6.50%)
CPI Inflation Forecasts:
2022 CPI: 10.75% (prev. 10 75%)
2023 CPI: 4.00% (prev. 5.25%)
2024 CPI: 1.50% (prev. 1 50%)
2025 CPI: 0.50% (prev. 0 00%)
NFP Preview
Post FOMC, the first data print of note comes in the form of January’s US labour report.
Expectations are for a slowing but still trending well 185k NFP print which would be the lowest print in over two years. Elsewhere expectations are for a small uptick to 3.6% for the unemployment rate and a steady 0.3% for the MoM average earnings prints.
The market has been inundated with high profile companies, particularly in the tech sector, announcing layoffs, but as yet those have failed to materialise in the headline number. On the flip side, JOLTS were approaching record highs again. Remember too consensus expectations are on a nine month losing streak as the market anticipates that “inevitable” slowdown in the labour market. Will this be the one? The last 5 months have certainly showed a degree of slowing as the headline slowly drifts towards 200k. As an aside, January is the month with the largest seasonal adjustment of the NFP prints. I also post below a twitter thread from Ben Casselman, from the NYT, which suggests there could actually be a number of anomalies in the print. FYI a tad technical, but nevertheless.
As we said yesterday, going forward, the state of play would seem to be benign inline “goldilocks” type prints is what the market wants to see. Too hot say above 250k+ and a higher earnings print will temper the market’s enthusiasm and encourage the Fed hawks to get twitchy again. A print of 150k and below may get the R word banded about a bit more.
Central Bank Speakers
Couple to highlight. The SNB’s Jordan was banging his usual drum. Further rate hikes cannot be ruled out. Whilst the SNB are ready to act in currency markets as and when necessary.
Similarly, BoJ’s Kuroda did not stray too far from his well worn path with his assessment that the BoJ must maintain their ultra easy monetary policy to support the economy. In addition, due to a tight labour market he sees wages rising “quite significantly”.
Nothing to see here.
The Day Ahead
Australia, Japan and China published their final services PMIs for January overnight. Australia remains in contraction at 48.6, Japan remains comfortably above 50 at 52.3 and China again has shown a sharp rebound from December well back into expansionary territory at 52.9 the country’s first print above 50 since August.
Later in the day we get all the other major economies printing their PMIs.
Main focus on the day is of course the US labour report. Later in the day, we get the US ISM services report for January, where some rebound is expected after last month’s shock decline into contraction territory.
With the central bank meetings out of the way, a couple of speakers start to emerge from the shadows in the shape of messers Pill and Elderson.
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All times in GMT (EST+5 / CEST-1 / JST-9)
Friday
German S&P Global Services PMI Final Jan consensus 50.4 vs previous 49.2 (08.30 GMT)
EU S&P Global Services PMI Final Jan consensus 50.7 vs previous 49.8 (09.00 GMT)
UK S&P Global/CIPS Services PMI Final Jan consensus 48 vs previous 49.9 (09.30 GMT)
US NFP Jan consensus 185k vs previous 223k (13.30 GMT)
US Unemployment Rate Jan consensus 3.6% vs previous 3.5% (13.30 GMT)
US Average Hourly Earnings MoM Jan consensus 0.3% vs previous 0.3% (13.30 GMT)
US S&P Global Services PMI Final Jan consensus 46.6 vs previous 44.7 (14.45 GMT)
US ISM Non Manufacturing PMI Jan consensus 50.4 vs previous 49.6 (15.00 GMT)
US ISM Non Manufacturing Employment Jan previous 49.8 (15.00 GMT)
US ISM Non Manufacturing New Orders Jan previous 45.2 (15.00 GMT)
US ISM Non Manufacturing Prices Jan previous 67.6 (15.00 GMT)
BoE Speakers
Pill (12.15 GMT)
ECB Speakers
Elderson (13.00 GMT)
Good luck and a good weekend to one and all.
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Powell, surprised EVERYONE !!!!!
"who let the doves out ???"......LOL
Seems like the UK and EU Central Banks really have their work cut out for them.
That Inflation in Greater Europe, caused by the Ukraine War/Russian Energy, is a
much tougher problem, than the Inflation in the US ???