The Morning Hark - 10 Feb 2023

Today’s focus …The RBA sees more hikes ahead, the BoE agree to disagree, a hawkish Riksbank and a Valentines Day massacre in Japan? BREAKING NEWS Ueda to be new BoJ Governor

Feb 10

Due to personal circumstances, this will be the last week, for the foreseeable future, that TMH will be published. See Wednesday’s post for full details.

Thank you again for all your support!

TMH

Prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude April futures broke the trend of the week by weakening yesterday and trading flat overnight with them currently sitting at 84.40 and 77.90 respectively. Oil’s winning streak ended yesterday with a bout of profit taking spurred on by recessionary fears as the US 2y10y yield curve inverted to its deepest levels in almost 40 years. However overall oil remains supported with supply issues after the Turkish earthquake and the remaining hopes on the Chinese demand side.

EQ - Asia equity futures again mixed in Asia with the Nikkei up smalls at 27,588. However the Hang Seng and the Kospi on the back foot at 21,216 and 323 respectively.

The Nasdaq and S&P futures flat, currently sitting at 12,405 and 4085 respectively. Stocks took a backward step yesterday on the steeper inversion of the US yield curve. In addition, a lot of buying of short-term downside strikes in the S&P did little for market sentiment.

Gold - Gold April futures off a touch in Asia as we currently sit at 1873. Gold took a step back yesterday as short term US yields edge up. Topside resistance now at 1900 and support coming in at 1860.

FI - US yields backing off a touch in Asia but remaining elevated with the US2y and US10y trading currently at 4.50% and 3.68%, respectively. The bear flattening of the curve yesterday pushed the US2y10y to its most inverted since the 1980s.

European yields closed a touch lower yesterday, with the German 10y yield closing at 2.301% whilst the Italian 10y yield closed at 4.131%.

UK gilt yields little changed with the 10y closing at 3.288%.

FX - Not a lot to report in FX land with the USD flat and trading around in its recent well-defined range. The USD Index currently sitting at 103.30. The majors a touch stronger with JPY, EUR and GBP currently at 131, 1.0732 and 1.21, respectively. USDJPY just dipped 60 pips on the back of the BoJ nominees news.

Others - Bitcoin and Ethereum followed risk lower yesterday with the pair taking a further backward step to 21,840 and 1544 respectively. The SEC settlement with Kraken did little to lighten the mood. Asian red candles this weekend?

Riksbank Rate Decision

The Riksbank as expected raised rates by 50bps taking rates to 3%. In addition, they forecast further rate rises in the coming months to combat inflation and the weak currency. It was a surprisingly hawkish statement for the new Governor Thedeen’s first policy meeting in charge. Whilst giving a nod to a weak housing market and the slowing economy, they insisted that getting inflation under control was their priority. In addition, they were worried that the weak crown was at risk of becoming even weaker, which could drive inflation higher than previously thought. Markets are now looking at a peak for Swedish rates at 3.5%.

In addition, starting in April the Riksbank will sell SEK 3bn of nominal bonds and SEK 500m of inflation-linked bonds per month.

SEB - Riksbank review

RBA Statement on Monetary Policy

Further rate hikes were expected in the coming months, although the Board is aware that previous hikes were still to feed through fully into the economy. There was significant uncertainty about the outlook and level of rates required to fulfil the Board’s objectives.

Forecast wise, CPI was seen at 4.8% by the end of this year, 3.2% in 2024 and 3% the year after. GDP’s trajectory for the same period is expected to be 1.6%, 1.6% and 1.7%.

Based on the Board’s technical assumptions, cash rates will peak this year at 3.75% and fall to 3% by mid 2025.

Central Bank Speakers

The BoE roster was probably the most interesting of the central bank speakers yesterday with some divergent views on the state of the UK economy, which is in sharp contrast to the “same hymn sheet” type rhetoric we have seen of late from the Fed and ECB.

Governor Bailey expected inflation to come down “rapidly” this year, although he is “concerned about the persistence” of high inflation. He expects an “extended period of weakness” in the UK economy.

Pill suggested that there was still “substantial further monetary policy tightening still to come through as a result of lags in policy tightening”. He also expects an “extended period of weakness” in the UK economy, but the BoE needs to “see it through” in terms of tightening.

Haskel was worried at the momentum building in inflation, which still has upside risks, and on that basis was ready to act forcefully on inflation if needed.

Tenreyro felt that a massive recession was needed to keep CPI at 2%. She felt that a mere fifth of rate hikes had fed through into the UK economy, and on that basis rates are too high. She would consider a cut in rates at some future meeting.

The Fed’s Barkin was the lone voice yesterday but continued the usual themes of late out of the Fed. Median inflation remains high and as such Fed hikes remain in play as they look to “stay the course”.

ECB’s Nagel insisted that interest rates have some ground to cover as they were not yet in restrictive territory.

BoJ

So we now know it’s all about Valentines Day as the Japanese government will announce their nominees for the upcoming vacancies at the BoJ on the 14th February at 02.00 GMT. Rumours have just hit the tapes that Amamiya was sounded out for the job but turned it down, and reports now suggest that Kazou Ueda will become the new Governor of the BoJ. Uchida and Himino are also reported to be nominated for the deputy governor position.

JGBs have dropped 24 ticks whilst the JPY rallies.

Earlier Amamiya was on the tapes.

He maintained that the current 2% inflation target was appropriate.

Current policy was appropriate as economy and prices have improved significantly.

YCC is an extraordinary policy so must carefully weigh its benefits and costs.

The BoJ will continue to maximise the impact of YCC while minimise its side effects although he did acknowledge that there were demerits to the policy.

It was appropriate to maintain the current ultra loose monetary policy.

So nothing to see here and a “steady hand on the tiler” if he indeed were to succeed Kuroda.

Speaking of which, Governor Kuroda echoed a lot of what was said as he continued to claim that BoJ easing was appropriate and the benefits of easing outweighed the side effects. In addition, the BoJ would continue to ease for as long as necessary to achieve the Bank’s price target.

Crypto

Kraken settled with the SEC yesterday paid a $30m fine and closed its staking business in the US as they failed to register the offer and sale of its staking program.

The Block - Kraken settlement

The Day Ahead

China’s January inflation report came in as expected at 2.1% YoY for January.

UK GDP scraped a pass with 0% QoQ growth in the fourth quarter of last year as the UK clocked up a worse than expected 0.5% contraction in December. That leaves the YoY reading for q4 at 0.4%. Elsewhere the manufacturing data was a touch better than expected but hardly worth writing home about.

As ever, it’s central bank speaker central throughout the day with, I’m sure more of the same rhetoric.

Elsewhere we have the Canadian labour report and the an early nibble at the economic sentiment for February in the US with the preliminary UMich survey in addition to its usual inflation expectation measures.

Busy data week next week with US CPI on Tuesday the main highlight but we also have UK labour and inflation reports, Japan GDP, EU labour report and a raft of secondary data in the US too. In addition, we could get a Valentines Day massacre as the Japanese government submit their BoJ nominees!

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All times in GMT (EST+5 / CEST-1 / JST-9)

Friday

Canada Unemployment Rate Jan consensus 5.1% vs previous 5% (13.30 GMT)

Canada Employment Change Jan consensus 15k vs previous 104k (13.30 GMT)

Canada Average Hourly Earnings YoY Jan previous 5.2% (13.30 GMT)

US Michigan Consumer Sentiment Prel Feb consensus 65 vs previous 64.9 (15.00 GMT)

US Michigan 1y Inflation Expectations Prel Feb previous 3.9 (15.00 GMT)

US Michigan 5y Inflation Expectations Prel Feb previous 2.9 (15.00 GMT)

BoE Speakers

Pill (14.00 GMT)

Fed Speakers

Waller (17.30 GMT)
Harker (21.00 GMT)

ECB Speakers

Schnabel (14.00 GMT)
de Cos (14.10 GMT)

Good luck and a good weekend to one and all.

And finally, for now, goodbye.

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