Read on the Trading Floor - 17 Jan 2024
Today’s focus… rolling back the cuts
Macro Themes At Play
Theme 1 - UK CPI: Rolling back the cuts
Theme 2 - US Retail Sales > NY Manufacturing
Theme 3 - Waller "as good as it gets"
Theme 4 - If the average mortgage rate is sub 4%... Does the Fed need to cut?
Theme 5 - ECB stuck on repeat... Yes the next move will be a cut, No we don't know when (#summer2024)
Further reading and listening of note
Theme 1 - UK CPI: Rolling back the cuts
Headline inflation higher at 4% (exp 3.8%), core also 0.2% higher at 5.1% (exp 4.9%). The only good news was the PPI, -2.8% vs consensus -1.9%. Energy disinflation helping the input cost slide which "should" eventually feed into the CPI. However, with the market having started the year with aggressive cutting expectations for the BoE, the result of today's data set was a back-up in the chance of a May BoE cut, from 80% to ~55% with the 2024 cutting cycle selling off 20bps from ~123bps towards 105/100bps.
Theme 2 - US Retail Sales > NY Manufacturing
The goldilocks trade has run out of steam as fixed income sells off with the narrative chasing the price... #1. position squeeze / unwind of the Dec theme, #2. the hard data outperforming the soft prints in the US, #3. expectations that Trump will do more fiscal (but surely Biden has proved that he will as well?) and #4. a coordinated message from global central bankers that Q1 cuts are unlikely. Furthermore, seasonals point to higher yields to start the year as fixed income supply comes hard and fast, 20year UST auction this evening, benchmark corporate deals all week as well as tomorrow's 10y Tips.
Theme 3 - Waller "as good as it gets"
Inflation is slowing towards 2% even though growth and jobs market remain solid but this maybe "as good as it gets". The message from Waller and other DM central banker is that they are worried about declaring victory too early. Williams next on deck this evening at 20:00 GMT.
The 25bps ytd back up in 10years has supported USDJPY drift towards 149.00 as BoJ expectations have also been pushed back to H2 as a result of the quake. Furthermore, the strength of the US consumer (retail sales 0.6% vs exp 0.4%) and underlying economy (Dallas Fed - Weekly Economic Index) has caught the market underweight USD after the Nov/Dec sell off. Furthermore USDJPY drifting higher is a positive carry trade.
USDJPY vs 10s ....
Chart Source: Tradingeconomics.com
Finally, Trump odds rising post Iowa landslide (although they may give some back if Haley becomes the clear number two following next weeks New Hampshire primary), Vix seasonal rally as well as the unwind of the Dec goldilocks trade has USDMXN on the move north.
Chart Source: Tradingeconomics.com
Theme 4 - If the average mortgage rate is sub 4%... Does the Fed need to cut?
Theme 5 - ECB stuck on repeat... Yes the next move will be a cut, No we don't know when (#summer2024)
Simkus summed up the ECB's position well ... "financial markets are not going to make the decision for us. Once we get to April, it gets harder to exclude anything... the probability of a cut won't turn really significant until we're in June. but March no way, unless there is some huge surprise and April is only a little more likely than march".
Lagarde indicated it was too early to “shout victory” over inflation and that "we will see in the summer"...
Econostream - ECB's Knot: Fighting Inflation Both an Economic and a Social Objective
Econostream - ECB’s Šimkus: Probability of Rate Cut to Rise Sharply After April
Reuters - ECB's Panetta says liquidity must be focus of attention
Econostream - ECB’s Villeroy: Must Be Patient to Ensure We Hit Inflation Target
Lagarde - ECB’s Lagarde: Interest Rates at Peak; Must Stay Restrictive for as Long as Necessary
ㅤㅤㅤ
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