The Morning Hark - 1 Aug 2023
Today’s focus... RBA pause, continued softness in Chinese data and all eyes on Jolts and the start of this weeks US labour data set
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AUD the clear loser overnight as the RBA remained unchanged. Despite the stronger employment data, softness in inflation allowed the board to skip this meeting before the new governor arrives in Sept. The mkt had only a 10% chance of a hike priced, but the mkt also naturally likes to run long AUD into these events looking for a surprise. Following yesterday's outperformance during month end and despite the RBA re-iterating more hikes maybe needed, AUDNZD < 1.08, AUDUSD < 0.6700 and GBPAUD north of 1.92, the lack of yield support from the RBA (4.1%) relative to its peers will leave the AUD vulnerable in the crosses unless China releases the much-anticipated big bang fiscal policy.
On that note, we also got a disappointing Chinese Caixin PMI manufacturing (49.2 vs exp 50.3) print overnight. It may be looking in the rear-view mirror following last week's Politburo. The mkt still wants to believe fiscal policy is coming; the comments from the party leadership supported such a view ... the details are what's missing. How can the leadership encourage Chinese households to return to confidence and spend following covid 0?
BoJ stepping in to buy bonds within their new flexible band continues to weigh on JPY, and we're now testing 143.00, the highest level for a week in USDJPY. A wave of strong US data (Jolts, ADP, NFP, ISM) and with a subsequent repricing for Sept Fed meeting and the interest rate differential could see us re-test the July highs 145.00-20. The weight of US issuance this week is also of importance as the risk of heavy US yields remains.
The Fed Quarterly SLOOS noted banks expect further tightening of lending standards whilst noted less demand for households. Short term US data continues to outperform, but with the lagged impact of US MonPol maybe the 2024 cuts priced into the FED curve will remain reasonable as the impact of higher real rates finally drags on US consumption. Will Q4 this year mirror last year as the mkt once again focuses on yr ahead trades and a likely recession in the US.
BoJ: Did they hike? This was not an SNB-esque VAR shock to the system. The unlimited purchases from the BoJ yesterday has the yield curve compressed and back to where it all began, with US overnight at 5.3%, long USDJPY is long carry and long the US economy that's fuelled by fiscal policy and continues to outperform the mkts v.low forecast expectations.
US Soft Landing: wages are strong but not overheating, unemployment remains at historic lows (fiscal support and post covid labour hoarding), inflation is trending lower (risk to next week's number higher not lower as fuel / oil both rally), Fed no longer forecasting a recession as their base case ... But US Exceptionalism just doesn't go away, as the market focuses on a soft landing in the US, the RoW growth outlook led by China and Europe continues to worsen. A soft landing in the US does not appear to mean a global soft landing. Once again, we've seen Chinese factory order data as well as Caixin PMI disappoint and point towards the clear need for fiscal policy.
As the market rolls into a new month, the implications of the BoJ policy tweak continues to revibrate throughout the carry trade. As the dust settles on the "widening" of the band and the interest rate differential remains. Harkster HQ couldn't have written a better piece than yesterday's publication from The Blind Squirrel (appears below in Top 5).
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- Waiting For The Big One
JPM Notes on the Week Ahead: The Soft Landing Scenario
Pepperstone: A traders weekly playbook - no rest for the wicked
- Capitulation
- Sticking the Soft Landing
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All times in British Summer Time (BST)
GE (08:55): German Jun Unemployment Report
UK (09:30): Manufacturing PMI
CA (14:30): Manufacturing PMI
US (15:00): ISM Manufacturing Index exp 46.9
US (15:00): June Jolts Report exp 9620k (Ratio of openings to UER = 1.6)
US (15:00): Fed: Goolsbee
NZ (23:45): Labour Market
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Great to have you back,
Matt
Good to have you back!