The Morning Hark - 1 June 2022
Today’s focus …….QT Day, Global ISMs, BoC rate decision and German yields
Daily roundup - all prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August futures up smalls in the Asian session to 116.20 and 112.50 respectively after all the fireworks we saw yesterday. Having touched contract highs on the news of the EU ban on Russian oil imports yesterday morning the market was then spooked later in the day by reports out of OPEC that they were considering the suspension of Russia’s participation in an output deal hence swelling the supply of oil. This saw oil sell off some $3.5 before stabilising. We are still trading above its recent breakout levels and remain at elevated levels. It does beg the question though that even if Russian supply increases who will buy the surplus from them? The US EIA released data yesterday also which showed US oil production had risen by 3% the highest in six months.
EQ - Asian stock futures a mixed bag with the Nikkei and Kopsi showing small gains to 27,450 and 354 respectively. The Hang Seng however is struggling down close to 1.5% on the day to 21,100. The losses are being attributed to the downside miss of the Chinese manufacturing PMI data which at 48.1 remains well into contraction mode. The US indices are steady with the Nasdaq and S&P at 12,640 and 4140 respectively. The much-vaunted large buying related to month-end rebalancing failed to materialise yesterday.
Gold - Gold futures slipped overnight down close to a percent and extending its losses from yesterday to 1837. The markets have had a turn around from their recent trends with the USD and US yields pushing higher and as such gold has lost the shine that it had recently found. Thus far we have held the first support at the 1830 level but for the upside to remain in play 1800 is the key support it needs to hold. Upside targets remain at 1880 with 1900 beyond that but they look a long way off for now.
FI - Global yields push higher again with the US10y now at 2.86. For once the attention has moved away from the US yield picture to Germany. Monday saw Lane’s comments and German inflation lead the way and yesterday was the same with the EU inflation print which came in at 8.1% YoY sending global yields higher. With the ECB perceived to be well behind the curve and Lagarde in charge there’s a lot to fear. The 10y Bund yield is sitting close to a multi year breakout level around 1.12% and its felt if this were to break then there would be a global shift higher in yields.
FX - Bit more life in the FX space again with the USD back on a more secure footing and the USD Index hovering close to 102. Once again with yields pushing higher the JPY is on the back foot trading now at 129.25. Similarly, USDCNH is back through 6.70 on the higher yield picture and a contracting manufacturing sector.
Others - Bitcoin and Ethereum steady after their recent recovery to 31,600 and 1935 respectively.
Our risk measures are diverging once again with the MOVE index pushing higher with the bond yield move back above 100 to 107.12 with the more muted equity markets reflecting weaker VIX futures at 26.25.
Welcome one and all to QT day! The day the Fed starts its quantitative tightening program with an eye watering $30bn of treasuries and $17.5bn of MBS being withdrawn from the market monthly. It will be interesting to see how the market responds to this over time but it does feel like it has not been front and centre of the market’s attention of late. All eyes today on the manufacturing PMIs across the major financial centres with some central bank speakers thrown in for some fun.
In addition, the Bank of Canada has its rate decision where expectations are for a 50bp hike. Expectations had been higher towards a 75bp hike but such magnitude has since been talked down by Governor Macklem as well as the recent chat from their US neighbours on such a move.
Overnight data was mixed with small beats in Australia and Japan manufacturing PMIs but China were lower than expected and remain in contraction mode. Another couple of interesting points to note overnight were the response of Biden to his meeting with Fed Chair Powell where he seems to have passed all responsibility in fighting inflation to Powell by stressing the Fed’s independence. So I guess he believes the Fed are on a losing ticket for the Make Inflation Low Again game. With mid term elections later in the year and his popularity on the lows I guess trying to hand the inflation fight off is one less issue on his plate. US Treasury Secretary Yellen also was glad to hand off the admission that she was wrong on her thoughts on the path of inflation last year when alluding to its transitory nature but stopped short of suggesting where she thought it may be heading and what would be a good solution for arresting its rise. Good to see Jerome is getting all the help and support he needs.
Fed’s Bostic unstuck his September pause language by stating that this was in no way intended to reintroduce the concept of a “Fed put” and the goal remains to get inflation lower. On the back of Waller’s comments yesterday it looks like a green light for US 10y yields to recapture a 3 handle.
📅⠀The main highlights for the day ahead in terms of data and speakers:
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Wednesday
EU S&P Manufacturing PMI May - consensus 54.4 vs previous 55.5 (09.00 BST)
UK S&P Manufacturing PMI May - consensus 54.6 vs previous 55.8 (09.30 BST)
EU Unemployment Rate April - consensus 6.7% vs previous 6.8% (10.00 BST)
CAD S&P Manufacturing PMI May - previous 56.2 (14.30 BST)
US S&P Manufacturing PMI May - consensus 57.5 vs previous 59.2 (14.45 BST)
CAD BoC Rate Decision - expectations for a 50bp hike to 1.5% (15.00 BST)
US ISM Manufacturing PMI May - consensus 54.5 vs previous 55.4 (15.00 BST)
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ECB Speakers
Knot (09.00 BST)
Lagarde, Yi, Campos Neto and Villeroy (12.00 BST)
Panetta (16.15 BST)
Lane (16.30 BST)
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Fed Speakers
Williams (16.30 BST)
Bullard (18.00 BST)
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BoE Speakers
Hauser (16.30 BST)
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Good luck.
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
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Stocks
Visual Capitalist - The Best Months for Stock Market Gains
Hussman Market Comment - Making Friends with Bears Through Math
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🔥⠀Top 5 trending links on Harkster yesterday:
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Fed Guy - Turbo Tightening
Marc to Market - June Monthly
Cheap Convexity - rate vol not done 🔒
SGH Macro Advisors - Tim Duy’s Fed Watch, 5/26/22
Nordea - Euro-area inflation: breaking another record
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