The Morning Hark - 10 Oct 2022
Today’s focus ……BoE ramps up support, Putin’s response in Kyiv and The Week Ahead.
All prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December down half of one percent overnight in Asia currently trading at 97.40 and 91 respectively. Unsurprisingly after hitting 5 week highs the market has seen some profit taking especially given the poor China PMI over the weekend and yet again reports of further lockdowns in China after Shanghai reported an increase in covid cases and the obvious impact that would have for demand going forward.
EQ - Equity markets a sea of red in Asia with indices following the US markets lower. The Nikkei, Hang Seng and Kospi currently trading at 26,547, 17,218 and 292 respectively.
The Nasdaq and S&P down half of a percent in Asia at 11,054 and 3638 respectively. Q3 earnings season kicks off with the major US banks all reporting this week as well as PepsiCo and Delta AirLines. Last week’s low in the S&P around the 3570 is an obvious downside target.
Gold - Gold Dec down a further percent in Asia at 1694. The honeymoon is over for gold, for now at least, as it drops back below 1700 in Asia on the back of higher yields and the ever firm USD. Gold never really convinced in its attempt to break out of that 1720/25 noisy zone and, as we spoke about last week, it followed stocks lower post US payrolls. Seems like a similar trading policy of following stocks will continue until Thursday’s CPI which hopefully will give us some clues as to a longer term directional play. For now we look at 1710/15 topside with the recent lows at 1670 offering the first support.
FI - US yields consolidating last week’s post payroll gains in Asia trading with the US2y and 10y currently trading at 4.31% and 3.89% respectively.
European yields rallied strongly on Friday to close the week at 2.199% and 4.696% for the German and Italian 10y yields respectively. UK gilts similar pattern with the 10y closing at 4.235%.
FX - USD holding onto last week’s gains in Asia with the USD Index trading at 112.85. All the majors lower with the EUR, GBP And JPY trading lower at 0.9731, 1.1082 and 145.37 respectively. USDJPY was 25pips off its year’s highs with no sign of the Japanese authorities thus far. With risk soft the AUD and NZD suffering down over half of one percent at 0.6323 and 0.5590 respectively.
Others - Both Bitcoin and Ethereum flat in the session currently trading at 19,426 and 1320 respectively.
US Payrolls Review
Steady as she goes was the name of the game for the US payrolls report with a small beat and revision higher for the headline number at 263k. The unemployment rate dipped to 3.5% whilst average hourly earnings rose as expected at 0.3%. As we posted on Twitter after the numbers nothing to see here in terms of deviation from the intended Fed rate path and the WSJ’s Timiraos alluded to such in his article later on Friday which I post at the bottom. Next stop Thursday’s CPI.
As a follow up from last week’s OPEC+ decision and the US’s initial reaction, Politico has an excellent article laying out the potential responses the US could retaliate with although as they say none look particularly appealing. They include the NOPEC legislation, banning of exports, opening up the Iranian talks again and pulling military support for the Saudis all of which we flagged on Friday. The article also alludes to the opening up of a strategic reserve for gas and diesel to sit alongside the already functioning one they have for crude and a plain and simple plan to open up the taps more at home. Much more detail at the bottom for those of an interest.
Central Bank Speakers
A variety of central bank speakers on Friday to recap quickly.
BoE’s Ramsden explained his vote for 75bps at the last MPC was based on “persistent inflation”. He also stated that for the November meeting the committee will consider “whether recent market repricing of UK assets reflects a changed assessment by markets of the UK macroeconomic policy mix between fiscal and monetary policy”.
Again he was keen to stress the UK specific nature of the repricing in direct conflict with the government’s view. Remember also the early November meeting will include the Bank’s revised forecasts taking into account the recent fiscal package.
SNB’s Jordan was more forthright in his rhetoric whereby he stated that the SNB “won’t tolerate above target inflation” with 3% “no longer price stability”. He followed up with a similar thread to Maechler from earlier in the week on the Swiss franc when he claimed they would intervene if if appreciated “too much”.
Bundesbank’s Nagel hawkish as you’d expect demanding that “rates must continue to rise significantly”.
The Fed’s Williams rounded off the day with much of the same rates up further and we are a long way from where it needs to be in terms of inflation. However he was somewhat contradictory with a couple of his soundbites when he said “rate hike pace and how high rates go hinge on data” but then went onto say that we “need rates to 4.5% over time”.
Once again I post at the bottom the excellent FXMacro Guy’s daily tweet for a more comprehensive round up of the central bank speakers and summary for the week. Also, for those that may have missed it, I’ve reposted his weekly which is a great read for a round up of the week gone by. Huge amount of essential market intel packed into a super readable format.
The Week Ahead
UK Data. Both the UK employment report and the monthly GDP data up this week. Expectations are for Tuesday’s unemployment rate to remain steady at 3.6%, employment change to pick up but earnings to also pick up. A mix that suggests that the BoE will be hard pressed to do anything but raise the pace of their rate hikes especially in light of the government’s recent expansionary fiscal package. The next day brings the monthly GDP print which hardly brings a warm glow with an expected return to contraction for growth expected for August. Poor retail sales for the month as well as contractionary PMIs does little to tell us to expect anything different.
G20. The meeting of the central bank heads and finance ministers starts on Tuesday and could get the pulses racing given what is afoot at present in the markets. YCC in Japan, PBOC helping out their beleaguered currency, the gilt market intervention in the UK and the ECB’s backstopping of the borrowing costs of the “weaker” EU member states all point to markets in a state of stress. Could this forum create a backdrop for some coordinated action to alleviate some of these stresses? The much talked about Plaza Accord II? As we have said before the US needs to come to the table for that rock to drop and so long as they remain happy for a stronger USD to continue to export inflation its hard to see them agreeing to such a policy unless of course there was some indication of a systemic risk to the wider global economy and it doesn’t feel as if we are quite there just yet.
FOMC Minutes. Minutes from the September FOMC are released on Wednesday. The meeting contained a hike of 75bps as expected bringing rates to 3/3.25% with an accompanying statement which was very similar to the previous meetings. The main focus however was on the updated projections which ratcheted up the rate profile with year end seen at 4.25/50% and a terminal rate next year at 4.50/75%. Inflation was also shifted higher with no expectation of it normalising until 2025. Finally, growth projections were aggressively cut. Chair Powell, in line with his Jackson Hole speech, was short and to the point in his press conference. Overall the tone was decidedly hawkish. Given the continued hawkish tone to the Fed speakers of late it would be a surprise to see anything other than more of the same from the minutes.
US CPI. The big one comes on Thursday with the US CPI print for September. Headline MoM expected to tick up again by 0.2% but the YoY slipping back but remaining above 8%. Core is expected to rise further by 0.5%, albeit at a slower pace than last month, with the annual measure pressing higher to 6.5%. After Friday’s steady payrolls it’s the last key piece of data prior to the FOMC at the beginning of November. We are now pricing in approximately a 95% chance of a further 75bp hike. All recent soundbites from the Fed speakers are pointing in that direction too and it would take a monumental downside miss to overturn that magnitude of hike.
Central bank speakers. As ever a fair slew of speakers throughout the week. Highlights will be for the ECB Lagarde in one of her last appearances ahead of their meeting in two weeks time. The Fed should be more of the same especially as we have no scheduled speakers, as yet, for after the CPI print. The BoE speakers however will offer the most interest for us. Policy seems to be in a state of flux given all the noise surrounding the government’s fiscal package both in terms of the market turmoil as well as the political fallout. Over the last week we have seen several of the BoE speakers expressing their views on who was responsible for the turmoil in markets, and indeed the BoE’s report on the matter came to the same conclusion, and that blame lay firmly at door of the UK chancellor. It will be interesting to see if the speakers will continue to inflame this spat with the government and secondly given the markets any further guidance, in terms of pricing, as to what to expect as we move towards the November MPC.
Other points of note. Some other points to note for the week; the submission of the Italian draft budget to the EU which is expected to happen by the weekend. Obviously with the German/Italian 10y spreads close to their widest and the fallout form the UK fiscal package the market’s attention will be on the extent of borrowing proposed and whether this is sustainable and palatable for the EU and the markets. In the UK Friday brings a close to the BoE’s emergency gilt buying program. Given the lack of liquidity in the gilt and FX markets this “unknown” could provide some additional volatility going into the end of the week and beginning of next. Indeed as we speak the BoE have announced some new measures. It is set to launch a temporary expanded collateral repo facility to enable the banks to ease liquidity pressures surrounding the LDI funds. They are also increasing the maximum daily auction size to £10bn. These are seen as steps towards ending the support, the Bank has given the markets over the last few weeks, in an orderly fashion. I post at the bottom the press release from the Bank below for those with an interest. China’s Peoples Congress gets under way at the weekend so worth keeping a look out for any Chinese “intervention” in the markets ahead of the date in case of any market volatility. All worth bearing in and as we head onto the end of the week.
The Day Ahead
Over the weekend we got a very poor Chinese services PMI print with the month of September returning to contraction at 49.3 from last month’s 55.
Today is a US holiday and we’d expect, with little on the docket, the day to be very much price driven and of course all eyes East to Putin and what measures he proposes to retaliate with after what he has called “an act of terrorism” by Ukrainian special services for their part on the blast on Crimea bridge over the weekend. As we are writing there have been explosions in Kyiv with some reports suggesting that President Zelensky’s office has been hit. There are further reports of explosions in Lviv, Ternopil and Dnipro.
Some central bank speakers but we’d expect little new of note.
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Centeno (09.15 BST)
de Cos (11.30 BST)
Lane (14.00 BST)
Evans (14.00 BST)
Brainard (18.35 BST)
UK Unemployment Rate Aug consensus 3.6% vs previous 3.6% (07.00 BST)
UK Employment Change Jul consensus -127k vs previous 40k (07.00 BST)
UK Claimant Count Change Sept consensus vs previous 6.3k (07.00 BST)
UK Ave Earnings incl Bonuses Aug consensus 5.9% vs previous 5.5% (07.00 BST)
Lane (13.45 and 19.00 BST)
Enria (14.00 BST)
Villeroy (23.00 BST)
Harker (16.30 BST)
Mester (17.00 BST)
Cuncliffe (19.00 BST)
Bailey (19.30 BST)
Japan Reuters Tankan Index Oct consensus vs previous 10 (00.00 BST)
Japan Machinery Orders MoM Aug consensus -2.3% vs previous 5.3% (00.50 BST)
UK GDP MoM Aug consensus -0.1% vs previous 0.2% (07.00 BST)
UK Industrial Production MoM Aug consensus -0.2% vs previous -0.3% (07.00 BST)
EU Industrial Production MoM Aug consensus 0.5% vs previous -2.3% (10.00 BST)
US PPI YoY Sept consensus 8.3% vs previous 8.7% (13.30 BST)
US PPI MoM Sept consensus 0.2% vs previous -0.1% (13.30 BST)
US Core PPI YoY Sept consensus 7.3% vs previous 7.3% (13.30 BST)
US Core PPI MoM sept consensus 0.3% vs previous 0.4% (13.30 BST)
US FOMC Minutes (19.00 BST)
Haskell (09.00 BST)
Pill (12.35 BST)
Mann (08.00 BST)
Lagarde (14.30 BST)
Knot (16.00 and 19.30 BST)
de Cos (22.00 BST)
Barr (17.45 BST)
Bowman (22.30 BST)
German Inflation Rate Final MoM Sept consensus 1.9% vs previous 0.3% (07.00 BST)
US Inflation Rate YoY Sept consensus 8.1% vs previous 8.3% (13.30 BST)
US Inflation Rate MoM Sept consensus 0.2% vs previous 0.1% (13.30 BST)
US Core Inflation Rate YoY Sept consensus 6.5% vs previous 6.3% (13.30 BST)
US Core Inflation Rate MoM Sept consensus 0.5% vs previous 0.6% (13.30 BST)
Breeden (09.00 BST)
Nagel (13.00 BST)
China Inflation Rate YoY Sept consensus 2.8% vs previous 2.5% (02.30 BST)
China Inflation Rate MoM Sept consensus 0.4% vs previous -0.1% (13.30 BST)
US Retail Sales MoM Sept consensus 0.2% vs previous 0.3% (13.30 BST)
US Michigan Sentiment Prel Oct consensus 59 vs previous 58.6 (15.00 BST)
US Michigan 5y Inflation Expectations Prel Oct consensus vs previous 2.7% (15.00 BST)
US Michigan 1y Inflation Expectations Prel Oct consensus vs previous 4.7% (15.00 BST)
Holzmann (09.00 BST)
Nagel (13.00 BST)
Lane (18.15 BST)
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