The Morning Hark - 11 Aug 2022
Today’s focus ……Peak Euphoria?
All prices are at 7.50 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures flat at 97.30 and 91.20 respectively. The oil rollercoaster returned yesterday with it selling off post CPI before rallying sharply. The general mood was also helped by the resumption in flows in the Druzhba pipeline, US production data showed it at its highest levels in over two years as well as a large build in inventories. The EIA data also showed an increase in demand for gasoline negating last week’s data and whilst we remain in the US driving season that was seen as a positive.
EQ - Equity markets in Asia firmer overnight as they ride the post CPI euphoria wave. All indicies up well over one percent with the Hang Seng leading the way at 20,005. The Nikkei and Kospi also up but to a lesser degree at 28,168 and 330 respectively.
The Nasdaq and S&P steady at 13,460 and 4228 respectively holding onto their post CPI gains. We are at interesting levels here for both indicies. Remember on Friday we spoke about the 4150/4200 zone in the S&P and how it had been a zone the market has visited on several occasions before setting off on a decent move. We suspected if the pattern was to be repeated we needed a few days of extra work before a move and potentially CPI would be the trigger. Well so far that’s worked but we wouldn’t like to see it back below 4170. 4235 next upside target. Equally the Nasdaq is now above the trend line at 13,410/00 so worth keeping an eye on that support.
Gold - Gold futures down close to a percent on the session at 1801. Gold initially spiked on the CPI report before retracing somewhat before coming under further pressure on the back of the hawkish Fed talk. Stepping back we are back pretty much at our opening print from yesterday and for now at least holding our 1800 trading pivot.
FI - US yields backed off a touch overnight with the US2y and 10y yields currently trading at 3.19% and 2.77% respectively and after all the volatility actually not that far off our opening levels from yesterday. The US2y sold off 22bps on the print whilst the 10y had a 13bp dip. However the move was retraced almost in full with the later hawkish Fed talk. The US2y10y yields inversion stretched to 58bps post the number.
European yields somewhat sidelined in all the noise elsewhere yesterday with the German and Italian 10y yields closing at 0.917 and 3.005 respectively.
FX - The USD flat overnight with the USD Index at 105.27. As expected with the lower CPI print the USD suffered selling off some 1.5% as the yield differential play started to be priced out. However post the Fed talk some of the move has been retraced. The majors all obviously higher than yesterday’s open versus the USD with the JPY, EUR and GBP trading now at 132.74, 1.0305 and 1.2220 respectively. At one point yesterday the JPY was 3 big figures lower before the USD regained some of its poise. It’s interesting to note that the USD peaked in mid July at the end of the week when there was a G20 finance ministers and central bankers meeting. Somewhat of a coincidence?
Others - Bitcoin and Ethereum found in the CPI the catalyst to get back and breach properly the stubborn 24,000 and 1800 levels. In addition to all the euphoria, the Goerli test we have spoken of of late was deemed a success. Currently, we are trading at 24,555 and 1890 respectively. I post below Glassnode’s latest piece which gives some insightful analysis of positioning and especially how the market is positioned in Ethereum, which from their report seems in a very much buy the rumour sell the fact mode for the merger.
Peak, Peak, Peak went up the cry as the July CPI report offered the markets a boost to their belief that the peak in inflation is in and the equity rally can continue. Well there were certainly positives but as all the Fed speakers were keen to stress we are not out of the woods yet.
Across all measures the report came in lower than expectations and matched or was lower than the previous month’s prints. Core MoM 0.3% vs 0.5% expected and 0.7% previous; YoY 5.9%, 6.1% and 5.9% respectively. Headline MoM 0% vs 0.2% expected and 1.3% previous; YoY 8.5%, 8.7% and 9.1% respectively.
Indeed if you look at the headline unrounded number it actually showed a small negative print. This was the first downside surprise in the CPI report in almost a year and was most welcome. The lowballing of forecasts by the consensus crowd I guess is now consigned to NFP prints! As we spoke about yesterday the markets played out as expected for a downside miss; stocks rallied, US2y/10y inverted further, rates dipped in the front end by more than 20bps, Bitcoin rallied 800 points and the USD suffered.
Looking at the underlying components there was some encouraging signals for the Fed but also some concerns. Energy prices as a whole were 4.6% lower with individually gasoline down 7.7% and given its trajectory in August thus far that trend should continue for next months print. Airfares were down a similar amount largely due to the gasoline drop and car rentals had a near 10% drop. On the flip side, groceries were up 1.3% and core remains sticky despite having seen no uptick in the YoY print for 4 months it remains stubbornly high. Equally, headline remains on an eight handle so stepping back inflation is far from being conquered. Markets are happy to look through this and focus on the future and believe that the peak in the aggressiveness of Fed rate hikes is over and inflation has peaked. All that may be the case but headwinds remain and the Fed is still hiking, 75bp is not off the table just yet and we have the little matter of QT revving up its engines.
As you’d expect the Fed speakers talked up the risks of reacting to one print (might have a word with Powell’s relationship with the UMich inflation expectations) and stressed the need to see a series of declining prints before accepting that inflation was defeated.
Evans stated that he does “not expect that we’re finished with rate hikes”.
Kashkari stressed again that he felt it was “unrealistic” to expect rate cuts early next year. He also felt that rates could be around 3.9% by year end and that we are “far from declaring victory on inflation”. His favoured path would be a series of more hikes before pausing to see a clear trajectory for inflation back to 2% target before easing.
Daly was a little less hawkish with her estimate of 3.5% for year end rates and felt that 50bps hike for September was her “baseline”. Whilst agreeing that prices remained “far too high” she felt there were signals to support smaller rate increases.
Summarising both Evans and Kashkari are doves but once again rolled out a more hawkish tone whilst Daly has now offered up 50bps on two previous occasions of late.
Worth also noting the Fed whisperer Timiraos said in his column that with the hot labour market 75bps was still an option for September and they would want to see further evidence of a slowing in inflation. On that basis the next major US data prints to look out for prior to the September FOMC are; PCE on the 26Aug, NFP 2Sept and Aug CPI on 13Sept. Also remember Jackson Hole is the same week as PCE.
Anyway for now let’s all get some warmth from the price action. Where does this leave us well in terms of September’s hike the market has gone from roughly 70/30 in favour of 75bps to now roughly 60/40 in favour of 50bps.
All very much after the Lord Mayor’s show today with US PPI the only data of note.
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US Core PPI YoY Jul consensus 7.6% vs previous 8.2% (13.30 BST)
US Headline PPI YoY Jul consensus 10.4% vs previous 11.3% (13.30 BST)
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