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The Morning Hark - 1 Feb 2023
Today’s focus …ECI gives the Fed a welcome fillip, EU inflation report*, US ISM and of course the first FOMC of the year but will it be the last hike?
Prices are at 7.20 GMT/2.20 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude April futures holding onto their gains from yesterday in Asia with them currently trading at 85.60 and 79.40 respectively. US data in the form of ECI gave oil a boost yesterday with the lower print introducing the notion that the Fed are closer to a pause and with strong Chinese PMIs still fresh in traders’ minds oil recovered some of its recent lost ground. This despite data from API showing a fifth week of crude builds for US inventories. OPEC+ meeting today to be held virtually and with little anticipation of any change in production output.
EQ - Asia equity futures all firmer after the US stock markets rallies yesterday with the Nikkei, Kospi and Hang Seng all up a touch at 27,323, 322 and 22,072 respectively.
The Nasdaq and S&P futures a touch lower at 12,110 and 4080, respectively, but holding onto yesterday’s gains. The ECI print was good enough news for stocks to rally close to their year’s highs as we head into the FOMC.
Gold - Gold April futures enjoyed the ECI number too yesterday with it contributing to lower US yields and a lower USD giving the precious metal some scope to move back into the top part of its recent range. It current sits at 1942. Topside still at 1955/60. Support continues to be at 1900, then 1870.
FI - US yields off a touch again in Asia after yesterday’s sell off with the US2y and US10y trading currently at 4.20% and 3.49%, respectively.
European yields closed a touch softer yesterday with the German 10y yields closing at 2.293% and Italian 10y yields at 4.148%.
UK gilt yields did little with the 10y closing at 3.338%.
FX - FX subdued going into the risk events of the day, the USD is flat, with the USD Index currently sitting at 102.07. The majors mixed with JPY, EUR and GBP currently at 130.38, 1.0877 and 1.2320, respectively.
Others - Bitcoin and Ethereum fairly stable at 23,060 and 1574 respectively.
We have not spoken about our volatility indices in a long time, but I thought it worth flagging that MOVE (a measure of US interest rate volatility via the tracking of US treasury yield vols) has dipped below 100 for the first time since May of last year. Given we are on FOMC day I thought that worth noting. For reference we were trading around 120 at the last FOMC in December. So I guess the rates market is expecting a sleeper. Let’s see.
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The first rate announcement from the Fed of 2023 and with inflation seemingly having peaked, for now at least, and recent economic activity showing signs of slowing, consensus is leaning towards a further slowing in pace from the Fed. Having produced four consecutive 75bp hikes they slowed to 50bps in December and we expect a further reduction to 25bps taking the upper band to 4.75%. Despite a trader putting on a large 20/1 bet on for 50bp hike that would be a major surprise. December’s Fed dots would also indicate a further two 25bp hikes for March and May but that, for now, is for a future battle.
The chatter from the Fed speakers has been mixed of late, but there has certainly been a growing majority coming out in favour of 25bps. The main fly in the ointment is, of course, the tight labour market, but given its lag time, we’d expect the Fed to look through the labour market strength whilst cautioning against any complacency.
Statement wise the sentence that seems to be the focus of the market’s attention is:
“the Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”.
Dovish tweaks could potentially see “ongoing” in relation to “increases” being deleted inferring that there will be fewer increases in the future. In addition any insertion of “data dependency” would suggest a pause is closer than previously anticipated. We think this would be too soon to open this avenue as the mood the market is in, we could be off to the races in terms of rate cuts pricing and the obvious loosening further of financial conditions.
Hawkish tweaks would perhaps see an insertion of “for sometime” into the sentence above when referring to “monetary policy that is sufficiently restrictive”. This would fit the slower, higher, longer mantra.
In Powell’s press conference, we’d expect the tone to be hawkish. On that basis, he should stress that, unlike the BoC, the Fed are not for pausing yet nor indeed are they anticipating any rate cuts this year. How much the market believes this mantra is another thing. We’d also expect him to push back on any further market movements which contribute to additional loosening of financial conditions. He may wish to stress that any such loosening will merely make the Fed hike more and retain a higher terminal rate for longer.
We also expect no changes to the balance sheet run off.
For your reference, I post the December FOMC statement and the FxMacro Guy’s central bank speaker crib sheets.
Yesterday’s Points of Note
EU flash GDP for q4 surprisingly snuck into expansionary territory at 0.1% growth for the quarter avoiding the consensus small contraction expected and leaving the year’s expected growth a smidge under 2% for the year.
US ECI gave the Fed a pre FOMC fillip coming in lower than expected at 1% for the quarter. The peak was seen at 1.4% back in q1 last year, and since then, we have clocked up four quarterly declines in a row for the first time in nearly 20 years. However, the labour market, from the “official” figures at least, remains tight and the ratio between job openings and people seeking work remains elevated. Indeed the JOLTS data later today will give us an update on that latter stat. Not enough for the Fed to alter course today but a welcome bonus as it would appear that wage growth is becoming a diminishing factor in the fight against inflation.
A damning report from Celsius’s bankruptcy examiner shone the spotlight once again on the shady practices of some of the most high-profile crypto movers. The report is lengthy, to say the least, but some of the lowlights would be the failure of the company to report $800m worth of loans, the CEO Mashinsky’s continuing claim that he was not selling the native token despite offloading close to $70m worth whilst also using outside investor money to prop up the token. It also found that a third of the portfolio held was unsecured and one half of it under collateralised. I post a couple of articles below for further reading. Ram Ahluwalia’s Twitter thread is well worth a read, albeit rather uncomfortable reading.
The Day Ahead
Overnight we had the Australian, Japanese and Chinese manufacturing final PMIs for January. Australia got to 50 whilst Japan and China remain in contraction at 48.9 and 49.2, respectively.
The rest of the major economies will release their final manufacturing PMIs throughout the day. Otherwise, the morning will be taken up with the European January flash inflation report which is expected to see a slight softening to a still well elevated 9%. Remember, this print will have a big Asterix next to it because of the German inflation print delay, so be aware.
The afternoon holds the ISM manufacturing report for January, which is expected to move further into contraction and, of course, the highlight of the day, the first FOMC meeting of the year to round the day off.
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Aswath Damodaran - Data Update 3 for 2023: Inflation and Interest Rates
- - Daily Chartbook #130
- - #8: US Inflation is dying, but not dead
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All times in GMT (EST+5 / CEST-1 / JST-9)
German S&P Global Manufacturing PMI Final Jan consensus 47 vs previous 47.1 (08.30 GMT)
EU S&P Global Manufacturing PMI Final Jan consensus 48.8 vs previous 47.8 (09.00 GMT)
UK S&P Global/CIPS Manufacturing PMI Final Jan consensus 46.7 vs previous 45.3 (09.30 GMT)
EU Unemployment Rate Dec consensus 6.5% vs previous 6.5% (10.00 GMT)
EU Inflation Rate MoM Flash Jan previous -0.4% (10.00 GMT)
EU Inflation Rate YoY Flash Jan consensus 9% vs previous 9.2% (10.00 GMT)
EU Core Inflation Rate YoY Flash Jan consensus 5.1% vs previous 5.2% (10.00 GMT)
US ADP Employment Change Jan consensus 178k vs previous 235k (13.15 GMT)
Canada S&P Global Manufacturing PMI Jan previous 49.2 (14.30 GMT)
US S&P Global Manufacturing PMI Final Jan previous 46.2 (14.45 GMT)
US JOLTS Job Openings Dec consensus 10.25M vs previous 10.458M (15.00 GMT)
US ISM Manufacturing PMI Jan consensus 48 vs previous 48.4 (15.00 GMT)
US ISM Manufacturing Employment Jan consensus 49 vs previous 51.4 (15.00 GMT)
US ISM Manufacturing New Orders Jan previous 45.2 (15.00 GMT)
US ISM Manufacturing Prices Jan consensus 39.5 vs previous 39.4 (15.00 GMT)
US Construction Spending MoM Dec consensus 0% vs previous 0.2% (15.00 GMT)
FOMC Interest Rate Decision expected to raise 25bps to 4.75% (19.00 GMT)
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