The Morning Hark - 10 Jan 2023
Today’s focus …as FC loosen once more will Powell do a JH, another SBF ally turns and a look at the BoJ succession plan.
Prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March futures off smalls overnight as they currently trade at 79.30 and 74.70 respectively. Off their recent highs but staying above near term support for Brent at 78 as Powell is awaited.
EQ - Asia equity futures trading in a subdued manner overnight and consolidating their recent gains with the Hang Seng, Nikkei and Kospi trading at 21,357, 26,148 and 312 respectively.
The Nasdaq and S&P similar pattern with them currently at 11,162 and 3907 respectively. A post-Europe close sell off was sparked by the Fed hawkish chatter and the shadow of Powell. However stocks remain elevated, and indeed higher post Fed minutes, so they seem intent in playing their game in the belief that the Fed will pause/pivot sooner rather than later.
Gold - Gold Feb futures flat overnight at 1877. Little to add as gold consolidates near its recent highs after a decent start to the year. 1900 the obvious next topside target. Near term support now at 1870 and further towards 1850.
FI - US yields regained some ground in Asia after selling off again in the US session. The US2y and US10y trading currently at 4.22% and 3.54% respectively.
European yields closed with little change yesterday with the German 10y yields at 2.23% and Italian 10y at 4.19%.
UK gilt yields closed up 5bps on the hawkish tone of BoE members with the 10y closing at 3.53%.
FX - Little movement of note in the FX space with the USD recovering some its poise after dipping below 103 in the USD Index for the first time in seven months. Currently sitting at 103.32. The majors all smalls lower with the JPY, EUR and GBP now at 132.12, 1.0729 and 1.2147 respectively.
Others - Having had their fun we are back to being pinned to the wall for Bitcoin and Ethereum as they currently sit unchanged at 17,200 and 1323 respectively.
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Bank of Japan
Given the quiet news day yesterday, little to talk about with regard to today’s key events and the release overnight of the Tokyo CPI data I thought I would take the opportunity to discuss one of the potential key macro themes of the year; the changing of the guard at the BoJ.
When?
Well, the current incumbent BoJ Governor Kuroda will step down at the end of the Japanese fiscal year; 31 March. If we look back at the previous two appointments Kuroda was appointed at the end of February 2013 ahead of him taking the reigns on 1 April. Prior to him, Shirakawa was the subject of much political horse-trading and his appointment came in mid-March for his 1 April 2008 start date.
So ultimately we should expect an announcement in a similar timeframe.
Who?
Well, there are several runners and riders:
Masayoshi Amamiya - is a current deputy BoJ Governor and an obvious candidate for promotion to the top job. Indeed many took it as read that, after the surprise YCC band lifting back at the December meeting, this was a signal that he was heavily involved in the decision and as such this was seen as a parting gift from Kuroda. However, media reports suggest that no decision, as yet, has been made. He remains the strongest candidate, especially as he is the continuity candidate, and is a hawk in comparison to Kuroda but much less so than the other candidates.
Hiroshi Nakaso is an ex deputy BoJ Governor. His name was foremost in a poll of market experts surveyed by the Jiji Press. His experience of being a BoJ official during the GFC and his practical knowledge of monetary policy featured highly in his attributes for the top job. Indeed he has written a book on the exact steps he would propose to lift the BoJ out of their ultra loose monetary policy. More hawkish than Amamiya.
Hirohide Yamaguchi a former deputy BoJ Governor and by far the most hawkish of the candidates. As we spoke about in the TMH Outlook for 2023 he is a vocal critic of the current regime’s policies and in a speech at the tail end of last year seemed to throw his hat in the ring. The fact he wants to distance himself from the reflationary policies of Abenomics may be an attraction for PM Kishida who is also keen to move away from this policy.
Masazumi Wakatabe is the other deputy BoJ Governor so obviously would be in discussions. However less high profile than Amamiya and as such very much an outsider.
Other factors?
Perhaps an indication of exactly how hawkish the new regime will be could be signalled from the deputy Governor appointments. Yuri Okina would certainly be on the hawk’s side. She is currently head of the Japan Research Institute. She was quoted in November as a proponent of the phasing out of the yield cap control and had a running battle with Iwata, a reflationary economist, who later served as one of Kuroda’s deputies. Her appointment would certainly garner attention from those who are looking for a more hawkish change of direction from the BoJ. Other candidates include Shinichi Uchida who would be on the dovish side of the debate and Shigeaki Okamoto who would help the hawk’s arguments.
USD/JPY?
Is it as simple as if a hawk is appointed then we see 120 soon and if it’s a status quo candidate then the 130’s remain the handle? If USDJPY lived in a BoJ vacuum absolutely that would be a likely outcome but, as we have seen this year, it is generally caught in the cross winds of Fed policy decisions. More than likely that will remain the case going into 2023 as the market debates how high is the terminal rate, how long is the pause at terminal and how soon is the Fed pivot. Yes, the BoJ Governor matters but the Fed matters more. What I would say though is that if we get a hawkish top team at the BoJ this will have marginally more market impact than a status quo team.
Indeed if the Fed gets itself into an over tightening pickle then it’s not inconceivable we could be seeing the Fed cutting rates aggressively whilst the BoJ start to edge their policy rate higher.
All things for a future date but definitely good to keep abreast of developments.
Tokyo CPI came in as expected at a 40 year high but beat consensus expectations printing at a lofty 4% for both Core and Headline. The series has now printed for the seventh month straight above the BoJ target once again fuelling expectations that, sooner rather than later, the BoJ will have to change tack.
Fed speakers
Interesting that Daly and Bostic were noticeably hawkish in their dispatches yesterday as we hit Powell day. Despite the mention of any loosening of financial conditions, making the Fed’s job harder in last week’s Fed minutes, they have basically done just that. According to the Chicago Fed’s tracker they have loosened to levels last seen in August pre Jackson Hole and we all know what happened then!
Daly could see arguments for both 25 or 50bps hikes in February but it was too soon to stop hiking. Ominously she felt that getting inflation down to the 2% target won’t be completed this year even with a 5% terminal rate as she gave a nod to no rate cuts this year.
Bostic agreed with Daly on the 25/50 argument and saw the terminal rate in the 5/5.25% range. He was keen to stress that we at the Fed must “hold our resolve” and he was keen to get to the terminal rate and then hold. When asked for how long the Fed intended to hold he replied “a long time”. Again he felt that, which is becoming a theme, the Fed are willing to overshoot as the lesser of the two evils.
Not much ambiguity there but the markets continue to play the game they want to. Haven’t we seen this movie before?
Are we about to get a JH lite from Powell? “Central bank independence” as the subject doesn’t suggest a platform for a market rebuke which tends to make you think if he does get the “scolding voice” on it should be noted and should have a greater impact. Potentially a preemptive strike ahead of an expected softer CPI report on Thursday?
UK
The BoE’s Pill warned that the UK’s tight labour market means that inflation may continue and, if necessary, the Bank will respond forcefully.
Mann was concerned that the energy price caps were potentially sparking inflation in other sectors by boosting consumer spending.
Perhaps she will be reassured by news that around 1.4m fixed rate mortgages are up for renewal this year which could see over 800,000 households seeing a doubling of their mortgage rates.
Crypto
Another domino goes as Nishad Singh, a former senior engineer at FTX and one of the inner circle, appears to be discussing matters with US prosecutors. This would add to the growing ranks on the prosecution benches with FTX’s lawyer Friedberg, CEO Ellison and CTO Wang already taking their seats. Trabucco next?
The Day Ahead
All eyes on Powell of course but we also get the Governors of the BoC, BoE and BoJ up this morning for what it’s worth. Note that Powell speaks twice on the day.
Early doors tomorrow we get some Australian inflation data.
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All times in GMT (EST+5 / CEST-1 / JST-9)
Tuesday
Fed Speakers
Powell (09.30 and 14.00 GMT)
ECB Speakers
Schnabel (09.30 and 10.10 GMT)
de Cos and Knot (15.35 GMT)
Other Speakers
BoE Bailey (09.30 GMT)
BoJ Kuroda (10.10 GMT)
BoC Macklem (10.10 GMT)
Early Wednesday
Australia Monthly CPI Indicator Nov consensus 7.3% vs previous 6.9% (00.30 GMT)
Good luck.
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Does Mr. Powell speak again today ? where? thanks very much