The Morning Hark - 10 Nov 2022

Today’s focus …CPI front and centre, Mid-terms grind on and FTX’s large black hole ain’t getting filled.

Nov 10, 2022

Is CPI the last obstacle in the way of a Santa rally?

Despite the contagion from FTX and the ensuing crypto sell-off, the Sept/Oct pressures in the system have alleviated ...

gas prices in Europe are lower
UK fiscal has returned to a more sustainable path
the tail of China reopening is moving to centre stage as peak Covid 0 policy is behind us
post midterms, a path towards UAH/RUB talks appears to be opening
many leading indicators are pointing to lower inflation in '23

JPow has not only opened the door to a higher terminal rate (5.25/5.50%) but accepted the impact lagging rate hikes can have on the economy. As a result, tomorrow's CPI is pivotal on the path towards a 50bps or 75bps hike in Dec.

As the data prints, follow up-to-date economic analysis on Harkster’s dedicated "US inflation" feed. It already includes pieces from the FT, Saxo, Macro Hive, ING, Dallas Fed, Fortune and many more.

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All prices are at 7.40 GMT, with changes reflecting movement from midnight GMT

Oil - Brent and Crude January futures flat in the Asian session, currently trading at 92.20 and 84.80, respectively. Another poor couple of sessions for oil with the general risk-off tone, China woes, uncertainty in the US mid-terms as well as all the crypto gloom weighing on the sector. To top it all, the large crude build showing up in the US data did little to help the overall sentiment.

EQ - Risk off continues in Asia with all the major indices a touch lower the Hang Seng, Nikkei and Kospi futures currently trading at 16,070, 27,388 and 313 respectively.

The Nasdaq and S&P stabilising overnight in Asia trading now at 3765 and 10,885, respectively, after yesterday’s sell-off as the red Republican wave in the US mid-terms turned more into a splash and the general risk-off tone sponsored by FTX. Remember the key downside levels remain 3700 and 10,800, respectively.

Gold - Gold Dec failing to make much progress, with it still sitting around 1710 overnight in Asia. That pesky noisy zone around 1720/25 continues to weigh heavy despite several attempts over the last few sessions. Downside support remains back at 1680.

FI - US yields continuing to suffer overnight with yields lower in Asia with the US2y currently at 4.60% whilst the 10y at 4.10%. Yesterday’s 10y auction was the worst since 2016 with a 3.4bps tail and only a 2.23x cover well below the previous auction and recent averages.

European yields continue to follow the US lower with the German 10y yields trading currently at 2.179% and similarly Italian 10y yields at 4.293%.

UK gilts similar story, with the 10y yield closing at 3.455%.

FX - The USD flat in Asia, with the USD Index currently 110.50 after it regained some of its footing yesterday. The majors marking time overnight pre US CPI with USDJPY, EUR and GBP currently trading at 146.40, 1.0005 and 1.1371, respectively.

Risk proxies all suffering with USDKRW, AUD and NZD much lower at 1383, 0.6395 and 0.5851, respectively.

Others - Bitcoin and Ethereum unsurprisingly suffering in the wake of the CZ/SBF fallout. Both lower currently at 16,676 and 1187 respectively. Further to go? It feels like we are not at our destination yet.

US CPI

Front and centre today. So the expectations are for a slight cooling in the majority of the US inflation profile in today’s report. Expectations for the headline MoM are seen as rising to 0.6% from 0.4%, but the YoY measure is seen as cooling to 8% from 8.2% previously. More importantly, Core is seen as cooling both in the MoM from 0.6% to 0.5% and in the YoY from 6.6% to 6.5%.

Small steps, I guess, if correct. However, in 10 of the last 12 prints expectations have undercooked the actual print. Even if there were to be a cooling we are starting from too high a base for the Fed’s liking.

The market’s take is that a lower print will give the Fed the cover they need to slow the pace of rate hikes and move down to 50bp increments or even lower in December.

Sectors which give the market hope are in used cars, which have peaked and are moving sharply lower and a potential turning in the health insurance component. On the flip side rents and shelter offer the hawks hope.

Market wise it seems to me that a downside miss will see a sharper rally in stocks than a subsequent upside miss’s sell-off just because that’s the direction the market seems to want to go. On that basis, merely looking at the Core measure. 6.4% YoY would get a 2%+ rally in stocks with the subsequent sell-off in the USD and yields. An inline or previous print match would see a 1% rally. 6.7% I would expect stocks to decline by 1% and further potentially depending on any more FTX-sponsored gloom!

US Mid-term Elections.

As we alluded to yesterday, it looks like the Republicans will win the House. As things stand, they lead 210/192 (218 to gain a majority) with a further 33 results to come.

The Senate, however remains in the balance with the split 48/48 with a further 4 results to come. Pennsylvania, as we said yesterday, crucially went to the Democrats but the Republicans won an equally crucial state in Wisconsin. Georgia, one of the key swing states, has to go to a run-off on 6 December as no candidate reached the 50% mark and that could hold the key to power. The remaining states are Arizona (currently 5% lead for Democrats), Nevada (slim lead for the Republicans) and Alaska (likely Republican). Ultimately the Democrats need 50 seats to win in effect with the vice president’s casting vote.

The overall result has been a poorer display than expected for the Republicans, who were expected to win the House easily and push in the Senate. Even more so it’s a disappointment for Trump, whose endorsed candidates, have failed to fire and have performed generally worse than the other Republican candidates.

SBF/CZ/Alameda

Plenty more developments to report as this story continues to unravel.

Thus far a couple of FTX’s investors have owned up to their losses and “moved on”. Sequoia has admitted to investors that it had an over $200m investment in the firm which it has written off and oh by the way, we are having a good year. Galaxy Digital have a close to $80m exposure as it reported losses for the third quarter yesterday. Look out for more such stories as the future looks pretty bleak for the beleaguered SBF and FTX.

Yesterday saw an admission from them that they had a $8bn shortfall and without plugging that hole, its bankruptcy. Can’t see that getting funded somehow. It’s also quite a coincidence that that number pretty much matches the amount the kids at Alameda allegedly had on their balance sheet in FTX tokens and other illiquid alt coins; just saying.

Unsurprisingly, as we alluded to yesterday, Binance have walked away from any deal after taking a look under the hood. More pertinently, it cited the reasons to be more on the “news on the handling of customer funds” as well as the alleged US agency investigations.

Adding fuel to the fire, it would appear that the legal and compliance team at FTX have quit and that the SEC and Justice Departments are in ongoing investigations surrounding securities violations (on-going) and the handling of client funds and lending (new). SBF seems to have done a nice old-world mix of Lehman and MF Global; an LMF. It doesn’t help his cause when he deletes tweets where he suggested that “assets are fine”, we don’t “invest client assets”, and FTX has enough to “cover all client holdings”. For a supposedly smart guy…….

On a market basis, the wider market is all a sea of red with pockets of more intense pain like in Sol which has taken the brunt of the selling given Alameda’s positioning as well as reports yesterday of large quantities of the coin being “unstaked” presumably in order to join the fire sale.

I have continued to add to the articles at the bottom for those that want to try and get more background on the hows and why’s of all this. Jonwu’s twitter thread is well worth a dive into.

Central Bank Speakers

RBA Bullock was laying the path for a pause. Whilst insisting that rates would rise “a little further” he went on to say that we are getting closer to the point where we might be able to take a break and look.

Lot of Fed chatter, with Kashkari giving a mixed bag. Whilst he saw the idea of pivoting as “extremely premature”, he did admit that monetary policy has a time lag. Furthermore, he admitted that he wanted to see how the economy evolves in order to reduce the risk of an overshoot.

Evans in one of his last speeches, given he retires in January, was keen to push for a slowing in the pace of interest rates “as soon as we can”.

Barkin was more hawkish overall with an insistence that we can’t let inflation fester and expectations rise and that the Fed have to accept that the inflation fight will lead to a downturn.

BoJ Kuroda maybe gave up some of his play sheet when he said that “if necessary negative rates can be reduced”.

More from CB world from FXMacro Guy at the bottom, as ever.

Other news

Probably no way they are related? As we see mortgage rates in the US hit a 20y high at 7.14%, Horton, the US’s largest homebuilder, reported a 15% decline for q3 in sales orders from the same quarter a year ago.

The Day Ahead

US CPI very much front and centre today as we discuss above.

Elsewhere no fewer than 6 Fed speakers, who will opine on pause/50/75/view on the world.

Also, BoC and BoE speakers to help us navigate these dangerous waters.

Heads up for early tomorrow European session with final German prints for October’s inflation which is expected to see a slowing in the MoM versus previous but the YoY print is expected to press on ever higher. Also, a first look at the UK’s q3 GDP which is expected, as the BoE flagged last week, to contract by half of one percent.

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Thursday

US Inflation Rate MoM Oct consensus 0.6% vs previous 0.4% (13.30 GMT)

US Inflation Rate YoY Oct consensus 8% vs previous 8.2% (13.30 GMT)

US Core Inflation Rate MoM Oct consensus 0.5% vs previous 0.6% (13.30 GMT)

US Core Inflation Rate YoY Oct consensus 6.5% vs previous 6.6% (13.30 GMT)

BoC Macklem speaks (16.05 GMT)

BoE Speakers

Tenreyro (13.10 GMT)

Fed Speakers

Waller (07.00 GMT)
Harker (14.00 GMT)
Logan (14.35 GMT)
Mester (17.30 GMT)
George (18.30 GMT)
Williams (23.35 GMT)

Early Friday

Germany Inflation Rate MoM Final Oct consensus 0.9% vs previous 1.9% (07.00 GMT)

Germany Inflation Rate YoY Final Oct consensus 10.4% vs previous 10% (07.00 GMT)

UK GDP Growth Rate QoQ Prel q3 consensus -0.5% vs previous 0.2% (07.00 GMT)

UK GDP Growth Rate YoY Prel q3 consensus 2.1% vs previous 4.4% (07.00 GMT)

UK Industrial Production MoM Sept consensus -0.2% vs previous -1.8% (07.00 GMT)

Good luck.

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