The Morning Hark - 06 Sept 2023
Today’s focus... Will the US data remain exceptional?
Australia GDP showed unexpected resilience, 0.4% vs exp 0.3% MoM, 2.1% vs exp 1.8% YoY. BBG report that the beats are due to exports and areas of the economy less affected by higher rates.
As USDJPY drifts towards 150, authorities have stepped up their verbal intervention. Japan's top currency diplomat Masato Kanda said they won't rule out any options (NikkeiAsia)
Mixed to softer Eurozone Construction PMI data... FRA 42.4 vs prior 42.9, GER 41.5 vs prior 41.0 and ITA 47.7 vs prior 48.0
FX: The greenback is consolidating yesterday's post PMI gains with EURUSD 1.0735, GBPUSD 1.2560 and USDJPY 147.40 little changed from London's closing levels.
Equities: SPX also continues its consolidation around 4500... impressive resilience yesterday in the face of global yields selling off
Those looking for September seasonals to support the USD would have been very happy at yesterday's close. The greenback soared across the board on the back of higher yields as well as disappointing PMI data from China, UK and across the Eurozone. As powerful as the USD move became, it was overall a weird day with correlations breaking down across assets.... higher yields despite the global growth fears, US equities still performing and oil popping towards $90 on the latest supply constraints (WSJ, HFI Research). The back-to-school feel is most certainly there but the erratic price action was hard to explain, especially the duration move in the face of weaker global growth expectations. As a result, @HarksterHQ will leave it to the experts to explain ING: Rates Spark: Dis-inversion from the back end ... "The US curve can't stay inverted forever. So if rates don't get cut, long rates must rise"
Mr Price already knows Germany is in recession and China is managing the deleveraging of their property sector which leaves US as the key global growth engine. Thus, today's ISM data is extremely important (52.5 vs prior 52.7). The consensus will be looking for a downside miss as business activity has been slowing in recent months with higher interest rates, inflation pressures, unwind of savings are all slowly combining to hit household consumption. Reading some of S&P Global research on Harkster.com, their surveys show signs of stagflation in the economy...
The service sector-led acceleration of growth in Q2 has faded
Demand was looking increasingly lethargic in the face of high prices and rising interest rates
Rising wage pressures as well as increased energy prices have meanwhile pushed input cost inflation higher
Can we land in the middle of the USD smile without Chinese fiscal? Is bad news good news for the market? Will assets get spooked by "higher for longer" in the face of slowing demand but sticky inflation? The market and global assets want slowing US data, soft landing vibes that will stop the Fed from hiking more but at the same time provide enough support for global demand. What we don't want to see is the US economy falling off a cliff ... that's the tight rope we walk, how long beta should the market get as the US slows (but doesn’t collapse)... e.g. long AUD or ZAR vs the USD or solely short USD vs other low yielders if cuts / recession appears faster than expected.
BoC consensus is expecting rates to remain unchanged at 5.0% as economic headwinds build. Some economists see the need for further tightening by year end (inflation higher than expected in July and housing market yet to be "tamed") but most expect the BoC to be on hold into Q1 (labour market weakness, GDP below expectations, more inflation/employment data before their Oct meeting). For further reading ING, WSJ and Livesquawk previews
“During a gold rush, sell shovels.” This saying arose following the California gold rush of the mid-19th century when it became clear that few prospectors made money panning for gold while the suppliers who sold them shovels and picks profited nicely. One evolving theme on Harkster.com is the input chain from commodities through to charging networks that surrounds EV's. For example, in their latest piece Saxo break down the EV ecosystem and potential benefactors. They're "constructive on industrial metals such as nickel, lithium, and copper on the manufacturing input, and positive on EV charging networks and battery recycling in the EV ecosystem." For some further reading on this theme....
FT: Why the electric vehicle battery race needs a recycling revolution
WSJ: Investors Flock to Battery Recyclers in Hunt for Climate Law Winners
WSJ: Electric Cars Power China's Economic Hopes as Internet Titans Take a Back Seat
FT: China’s battery plant rush raises fears of global squeeze
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Scotiabank: How Much of an Impact is the BoC Having on Inflation?
Daily Chartbook: #273
MS Thoughts on the Market: Are Stocks Beginning to Question Economic Resiliency?
JPM Asset Management: Unemployment and Wage Inflation
Follow the latest market narratives through our curated research & commentary channels on Harkster.
All times in British Summer Time (BST)
GBP (09:30): Construction PMI
USD (12:00): Mortgage Applications
USD (13:30): Fed's Collins
CAD (15:00): Bank of Canada
USD (15:00): ISM Services PMI, Employment Index and Prices
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As always, a concise morning update