The Morning Hark - 1 Dec 2023
Today’s focus... OPEC+ decision muddies the waters. US PCE softens but underwhelms. Powell will he be pre or post Waller?
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Overnight Highlights
Prices are as at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil holding steady and at least for now its stopped the bleeding. Brent and Crude February futures currently at 80.70 and 76 respectively. Oil set itself up for a fall with an over optimism surrounding the OPEC+ decision. The outcome seriously underwhelmed the market with the rather opaque nature of the decision and announcement alongside the obvious descent in the cartel’s ranks. Oil is now facing a sixth consecutive week of losses. In addition the EIA reported that US production levels in September rose to a new monthly record.
There was a lot of chatter pre OPEC+ decision and announcement. Conjecture, from two delegates, suggested that a proposal had been put forward that involved the Saudis extending their 1m bpd voluntary cut into the new year with others members making additional cuts.
This was then added to, again by two delegates, that the 2024 cuts could possibly take 1-2m bpd off the market in q1.
Eventually the agreement slowly dribbled out with delegates agreeing on a structure of voluntary cuts to go alongside the existing cuts from Saudi Arabia and Russia.
The end result was 8 countries involved with additional voluntary cuts of oil output of around 0.9m bpd taking the total cuts to 2.2m bpd according to OPEC. This should in theory move the oil market back into deficit for next year. More below.
I did say yesterday that the picture would become less muddied after the announcement but the nature of it and the fact that Angola has refused to accept the quota leaves the picture even more confused. In addition given the measures were “voluntary”, alongside Angola’s descent, suggests that getting an unanimous agreement in the future, for OPEC+, may prove to be tricky.
OPEC - Additional voluntary cuts
EQ - Asian equity markets starting the new month off a touch with the Hang Seng and Nikkei futures at 16,990 and 33,420 respectively.
The US indices consolidating in Asia with the S&P currently at 4575 whilst the Nasdaq is at 15,955. The pair had their best month since July 2022 with 9% and near 11% gains on the month respectively.
Gold - Gold holding in its new range above 2000 with it currently at 2041. Again little changed; 2050 the short term trading pivot with 2085 the upside target and support at 2020. All eyes on Powell.
FI - Global yields back into sell off mode in Asia after yesterday’s upside rebound. Currently the US2y and US10y sitting at 4.68% and 4.33% respectively. The upside move in rates perhaps due to some position trimming post PCE which, although softer, perhaps disappointed market participants it didn’t soften more in line with the earlier European prints. The spectre of Powell probably helped the trimming momentum as well as Williams nod to financial conditions.
European yields firmed a touch in line with their US counterparts with the German 10y closing at 2.45% and the Italian 10y yield similarly at 4.22%.
UK gilt yields similar pattern with the 10y closing at 4.17%.
FX -Quiet Asian session with the USD holding onto yesterday’s gains on the back of higher US yields. The USD Index little changed at 103.35. The JPY, EUR and GBP all equally quiet with them currently sitting at 148.20, 1.0910 and 1.2640 respectively.
FX option expiries wise today in the EUR we see €2bn rolling off at 1.10 and €1.6bn at 1.09. Whilst in USDCAD, in light of their labour report, we have $1bn each at 1.3620 and 1.36.
Others - Bitcoin and Ethereum bid in Asia with the pair knocking on their year’s highs. The pair currently at 38,180 and 2090 respectively.
Macro Themes At Play
Recap
Swiss Retail Sales followed their near German neighbours with a more upbeat report with a small upside beat.
German Unemployment Rate for November ticked up a touch to 5.9%.
The flash EU Inflation Report for November unsurprisingly followed the German and French softening trend. Big downside beats for both YoY measures; headline to 2.4% and core to 3.6%. Headline has, like the German series, halved in the last 3 months and is now at levels last seen back in mid 2021 whilst core is back to levels last seen in early 2022. The monthly reading firmly in deflation territory. ECB speakers will have a tough job convincing the markets its “higher for longer”!
October’s EU Unemployment Rate came in as expected at 6.5%.
Canada GDP showed a contraction in the quarter taking the annualised growth to -1.1%. More encouragingly though the monthlies showed small upside beats and both in expansionary mode, just.
US PCE came in pretty much in line with core slowing to 0.2% on the MoM and headline beating estimates at 0%. This takes the YoY rates to 3.5% for core and 3% for headline, their lowest levels in 18 months. Encouragingly the personal spending measure for October showed a five month low at 0.2% which will be a godsend for the Fed given the consumer driven bumper q3 GDP print.
Overall an encouraging report and continuing the softening theme we have seen of late, globally. Although not as eye catching as some of the drops we have seen in some recent reports, especially out of Europe.
US Chicago PMI came from nowhere to print 55.4! Blowing away expectations and printing its highest level since the first half of 2022.
US Pending Home Sales for October beat expectations but still slowing on a MoM basis by 1.5% and clocking up its lowest level in more than 20 years as higher mortgage rates continue to bite.
Evergrande was back in the news yesterday as it races against time to stay afloat. The company has until Monday to present a revised debt restructuring proposal for offshore creditors. Sources told Reuters that the creditors were unlikely to accept the proposals due to the proposal’s low recovery prospects. Full story and implications below.
PiqsuiteReuters - Evergrande explainer
Central Bank Speakers
The ECB’s Panetta warned against “unnecessary damage” from high interest rates. He also pointed to monetary tightening not yet having its full impact and he expects it to continue to have a dampening effect on demand in the future.
The inflation data is a favourable development and the disinflationary process is well underway. Risks to the economy are tilted to the downside.
Nagel was encouraged by the inflation trends but insisted that it was too early to talk about rate cuts.
ECB insider story put QT on the agenda for the December meeting and insisted that Lagarde will not try to delay it indefinitely.
The BoE’s Greene stuck to the script by insisting that rates need to remain higher for longer and that higher rates may not be having as great an impact on inflation as thought. She also admitted that she was concerned that a soft landing might go wrong in the UK but doing too little is a bigger risk that doing too much in terms of monetary policy.
The Fed’s Williams stated that monetary policy is the most restrictive in 25 years but he expects it to still be appropriate to maintain a restrictive stance for quite some time. He thought that the Fed was likely done with the hiking cycle but rates could rise again if inflationary pressures do not continue to moderate.
The Fed remains data driven but he is “not losing much sleep” over market forecasts for cuts.
Interestingly in terms of financial conditions he claimed that the key for policy is the persistence of easing in financial conditions.
The Day Ahead
Overnight Japanese Unemployment rate for October showed a touch of improvement at 2.5%.
Capital Spending for q3 slowed from last month taking the annualised measure to 3.4%.
The final Japanese Manufacturing PMI came in a touch better than expected but still languishing below 50 at 48.3.
Elsewhere the final Australian PMI was as expected at 47.7.
The Caixin Chinese PMI was a beat and back into expansionary territory at 50.7.
The European morning begins with q3 Swiss GDP followed by the major European economies’ Manufacturing PMIs for November.
The afternoon is taken up with the Canadian labour report for November then the final readings for the Canadian and US Manufacturing PMIs. The highlight of the day data wise will be the US Manufacturing ISM with its underlying components.
Various central bank speakers throughout the day where they will be trying to temper tha market’s enthusiasm for rate cuts. The highlight by far with be Powell. Will he follow the Waller or be more of a Bowman?
Remember this will be the last uttering from a Fed speaker prior to the December FOMC. In terms of December policy there is not much to tee up as the market has consigned any thoughts of a further hike to yesterday’s news. What the focus will be on is will Powell’s script be aligned with preWaller or postWaller? We would imagine that given the market reaction postWaller and for the sake of keeping optionality he will be scripted more along the lines of preWaller. Let’s face it he’s going to have a tough presser in mid December explaining away the #DotPlot mayhem and charting a path for rates in 2024 why bring the pain early!
Given Williams comments on financial conditions it may be worth noting any clarification or agreement from Powell.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead in terms of data and speakers:
Friday
Swiss GDP Growth Rate QoQ q3 consensus 0.1% vs previous 0% (08.00 GMT)
Swiss GDP Growth Rate YoY q3 consensus 0.5% vs previous 0.5% (08.00 GMT)
Swiss procure.ch Manufacturing PMI Nov consensus 42 vs previous 40.6 (08.30 GMT)
Germany HCOB Manufacturing PMI Final Nov consensus 42.3 vs previous 40.8 (08.55 GMT)
EU HCOB Manufacturing PMI Final Nov consensus 43.8 vs previous 43.1 (09.00 GMT)
UK S&P Global Manufacturing PMI Nov consensus 46.6 vs previous 44.8 (09.30 GMT)
Canada Unemployment Rate Nov consensus 5.8% vs previous 5.7% (13.30 GMT)
Canada Employment Change Nov consensus 15k vs previous 17.5k (13.30 GMT)
Canada Average Hourly Earnings Nov consensus vs previous 5% (13.30 GMT)
Canada S&P Global Manufacturing PMI Nov consensus vs previous 48.6 (14.30 GMT)
US S&P Global Manufacturing PMI Final Nov consensus 49.4 vs previous 50 (14.45 GMT)
US ISM Manufacturing PMI Nov consensus 47.6 vs previous 46.7 (15.00 GMT)
US ISM Manufacturing New Orders Nov consensus vs previous 45.5 (15.00 GMT)
US ISM Manufacturing Employment Nov consensus vs previous 46.8 (15.00 GMT)
US ISM Manufacturing Prices Nov consensus vs previous 45.1 (15.00 GMT)
Fed Speakers
Barr (08.00 GMT)
Goolsbee (15.00 GMT)
Powell (16.00 GMT)
ECB Speakers
Elderson (10.00 GMT)
Lagarde (11.30 GMT)
Enria (11.30 GMT)
Good luck and a good weekend to one and all.
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