The Morning Hark - 1 Sep 2022
Today’s focus ……Mester on message, US yields on the highs, USDJPY knocking on 140 and ISM ahoy.
All prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures off close to one percent in Asia trading at 95 and 88.40 respectively. The trend lower in oil continues with the overhang of Powell’s sustained period of below trend growth comments being added to by yet more Chinese covid restrictions and higher European inflation pointing to a more aggressive ECB. All in all anyone for a global recession. Again liquidity is poor so moves are getting overextended. G7 finance officials are reported to be meeting tomorrow to endorse setting a price cap on Russian oil with a view for a working plan to be in place by December. Good luck with that.
EQ - Equity markets traded lower overnight in Asia as they continued the weakness from the US session with the Nikkei and Hang Seng both significantly lower at 27,613 and 19,500 respectively. The Kospi suffered more after the weak trade numbers down close two percent at 314.
The Nasdaq and S&P continue their slide with a further one percent given up currently trading at 12,129 and 3925 respectively. We saw the largest August decline for the US indices in 7 years and September historically is a poor month for stocks and throw in the acceleration in QT and the market looks like it’s begging for a downside shock in tomorrow’s payroll report to garner some relief.
Gold - Gold Dec futures down over half of one percent in the Asia session at 1715. We have a breakout on the downside of our range with 1720 breaking and the year’s lows now very much in sight. Sell zone remains in the noisy 1750/55 zone. Gold remains caught in the strong headwinds with US yields and the USD making hay on the back of the hawkish Fed talk.
FI - Lots of ringing of bells in US yields space as the US2y captured the 3.50% level for the first time in 15 years and 10y yields conquered 3.20% for the first time in a couple of months.
European yields unsurprisingly continued their climb yesterday with the German and Italian 10y yields closing higher again at 1.542 and 3.888 respectively.
FX - USD back on the front foot with the USD Index back above 109 as it joins US yields higher. The majors all suffering with the JPY, EUR and GBP currently trading at 139.37, 1.0012 and 1.1580 respectively. The JPY hit a near 25 year high and has 140 firmly in its sights. GBP at levels last seen well over 35 years ago although the EUR is a little more supported on the back of the hawkish ECB chatter. Given all that’s going on the USDCNH is relatively stable at 6.91 despite a further stronger than expected Yuan fixing. With oil lower, the Norges Bank yesterday signalling an increase in their NOK purchases this month and the strong USD unsurprisingly USDNOK is over 10 again. It feels that this time there is an opportunity to push towards the 10.20 level and beyond. USDKRW also down close to one percent after the poor trade data at 1354.
Others - Bitcoin and Ethereum continuing to trade on the sidelines at 20,026 and 1553 respectively.
Final PMI day got off to a rather inauspicious start with all the major economies reporting lower than expected and trending down from their previous prints. Australia, Japan and China reporting final measures for August at 53.8, 51.5 and 49.5 respectively.
In other news China extended Covid lockdowns on the mainland. Reports also that China will publish details on their economic stimulus measures in early September ahead of the Chinese Communist Party Congress set for mid October.
South Korea reported its widest trade deficit on record on the back of a weakening KRW and higher energy costs.
Yet More Fed Talk
Mester was up yesterday and she didn’t let the crowds down.
Echoing all that has gone before she remained on message as she does not see any rate cuts next year and she sees the policy rate getting raised to “somewhat above 4%” by early next year and holding there. Data wise she feels that unemployment will tick up above 4% as the job market cools and sees inflation in the 5/6% range by year end and it will take a further two years to move back to target.
Nothing new of note in her remarks and the market, from the price action, is certainly taking the message on board. For now the Fed have got their point over the real crunch will be when employment and inflation data starts to turn and indeed turn consistently. At that point will the market start to anticipate a pause and pivot by the Fed and equally will the Fed be able to hold their nerve and their promises.
European CPI did little to deter the ECB hawks with a fresh record high with both headline 9.1% and core 4.3% prints above market expectations. The market is now starting to side with the ECB hawks pricing in an over 60% chance of a 75bps hike from the ECB next week. Some of the banks are starting to officially call it with BoA and Goldmans jumping on the bandwagon yesterday.
The Day Ahead
Slew of European data to keep us warm in the morning with German retail sales, EU unemployment data and the final manufacturing PMI readings for the major European economies, the combined Eurozone and the UK which are all set to hardly lighten the mood.
The major highlight will come in the afternoon with the US ISM for August which is expected to show a further down print albeit remaining above the 50 boom/bust level. In addition prices paid in line with the recent inflation prints look set to show a further slackening.
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German Retail Sales MoM Jul consensus 0% vs previous -1.6% (07.00 BST)
German S&P Global Manufacturing PMI Final Aug consensus 49.8 vs previous 49.3 (08.55 BST)
EU S&P Global Manufacturing PMI Final Aug consensus 49.7 vs previous 49.8 (09.00 BST)
UK S&P Global Manufacturing PMI Final Aug consensus 46 vs previous 52.1 (09.30 BST)
EU Unemployment Rate Jul consensus 6.6% vs previous 6.6% (10.00 BST)
Canada S&P Global Manufacturing PMI Aug previous 52.5 (14.30 BST)
US S&P Global Manufacturing PMI Final Aug consensus 51.3 vs previous 52.2 (14.45 BST)
US ISM Manufacturing PMI Aug consensus 52 vs previous 52.8 (15.00 BST)
US ISM Manufacturing New Orders Aug previous 48 (15.00 BST)
US ISM Manufacturing Prices Aug consensus 55.5 vs previous 60 (15.00 BST)
Bostic (20.30 BST)
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