Read on the Trading Floor - 04 Dec 2023
Today’s focus… XAU, XBT, how low can rates go, and much more
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Macro Themes At Play
Gold and XBT, one corrects, one doesn’t
How low can US rates go?
RBA Preview
Further reading and listening of note from Harkster.com
Theme 1 - Gold, XBT, ETH
We can't argue with the medium-term theme (CB buying, XAU's outperformance in the face of real rates, liquidity sloshing through the system looking for good assets to purchase), however @HarksterHQ makes a point of not chasing illiquid moves on the weekend / Wellington Open. Gaps always fill and this one didn't even last 24hours which makes tonight's closing level crucial. After the exuberance of the soft landing consensus trade it makes sense to see some give back, some profit taking ahead of key US data. Once again XBT's ability to ignore correlated assets is impressive.
Brent Donnelly am/FX - Paper Hands
Saxo Markets - COT: Speculators add further fuel to gold rally
Gold and XBT.. one corrects, one doesn't...
Source Bloomberg
Theme 2 - How low can rates go?
The market has set a high bar for 2024 with 5 * 25bps. This is pricing more than insurance cuts, it has an added premium for deeper cuts if the economy slows aggressively in Q1 or if something finally breaks, pushing UER > 4% and we hit the Fed put. However, given the elevated expectations of a soft landing, stabilization in the data, one strong labour print and US fixed income can unwind some of the 5 cuts priced into next year. In particular, a wave of tp'ing, closing down books for the year, potentially a WSJ NickiLEAKS article or simply expectations that the dot plot may not be as sanguine as the mkt pricing, as the Fed may not be as comfortable with the path of inflation as the market is currently pricing and we can squeeze back to 3-4 cuts quite quickly. Back to levels we saw just a few weeks ago (as per CME Fed Watch chart below). Fed are now in their blackout period, so we're left with the data to endorse or pushback on what's priced.
Dec 4th = JOLTS, Services ISM (watch employment sub component)
Dec 5th = ADP, Unit Labour Cost,
Dec 6th = Initial Claims
Dec 7th = AHE, NFP (+30k the expect boost from returning UAW workers) and Univ Mich Sentiment (Infl. expectations)
Source: CME Fed Watch
Theme 3 - RBA preview
The Morning Hark - "Like the RBNZ, a near 100% probability of rates remaining at 4.35%. The previous meeting saw them hike 25bps and tweak guidance on further hikes to be data and risk dependent. RBA chatter has been on the hawkish side and Governor Bullock has recently reiterated her concerns surrounding the broad nature of inflation and the fact further tightening may be needed. However, the recent softening in the inflation numbers should see the RBA hold rates steady and then look to reassess in the new year."
Westpac - Hawkish Hold
Stephen Kircher - The RBA gets a new Deputy and a new Act
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Fiscal in 2024... from Brussels to Washington via Kyiv and Gaza
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It strikes me that the fed funds futures market is not really pricing in 125bps of cuts next year, but rather a 60% probability of maybe 25bps or 50bps and a 40% probability of 250bps, or something like that.