The Morning Hark - 11 July 2022
Today’s focus ……Chilly in Germany?, China Covid woes continue, Japan election landslide and the Conservative leadership donkey derby
Daily roundup - all prices are at 7.45 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September down over a percent on the day at 105.80 and 100.20 respectively as they give up some of their gains from the tail end of last week. Demand concerns reappeared with China reporting higher numbers of Covid patients form the previous day and reports that Macau’s casinos were shutting down as of today to ease the spread of the virus. Today is also when the biggest Russian gas pipeline into Germany gets shut down for 10 days maintenance and there is much speculation as to whether it will come back online again. Already major cities in Germany are putting in place measures to save energy. US natural gas futures showing a 5% gain.
As an aside an ex advisor to the oil kingdoms of the Middle East was very optimistic that Saudi Arabia could up its production of oil as required just as President Biden prepares for his trip to the region later in the week and speculation that he will lift the Saudi arms sale ban. Let’s see.
Quick word on copper which opened lower in Asia and has failed to rally sitting now at 3.44. Keep an eye on it as we are sitting between the 3.50 level, we have spoken about as a pivot, and the year’s low around the 3.37 area.
The Bloomberg Commodity Index now sitting a little more comfortably, close to 117, above its 200dma which comes in around the 114 area.
The LME Nickel story continues to throw up great narrative and I post a story on the continuing saga below in the ‘Further Reading’ section.
EQ - Mixed bag again in Asia with the Nikkei up over one percent at 26,810 helped by PM Kishida’s landslide victory which some believe was an endorsement of the BoJ/government easing policy. However the Hang Seng showing a loss of over three percent at 21,100 on renewed Covid fears with officials warning of “very high” risks as reports of the spread of a very contagious sub-variant of the virus in Shanghai. Kospi down smalls with risk at 309.
The US futures have given back some of their recent gains with the Nasdaq and S&P trading at 12,030 and 3870 respectively both down close to a percent on the session.
Gold - Gold futures flat at 1739. Continues to be sidelined for now. 1730/1750 looks to set the tone for any bigger move.
FI - US yields backed off smalls to start the week after the NFP rally on Friday with the US2y and 10y yields remaining inverted just at 3.09% and 3.07% respectively. Our 10y rough and ready pivot at 3% worked well with the strong headline NFP print the catalyst for the topside break and the yield has remained bid since. In European yield space the German 10y yield rallied throughout the day Friday closing at 1.347 with the Italian 10y yield at 3.272 helping the spread between the two to narrow back below the 200bp mark.
FX - USD up smalls overnight with the USD Index at 107.40 after earlier printing yet another new high for the move at 107.47. USDJPY had a similar pattern with it up on the day and hitting another new high at 137.26. The election landslide has opened up more upside for USDJPY as the easing policy in Japan is seen to be endorsed by the electorate and as such physical intervention may be further from fruition opening up 140 at the very least. Risk proxies weaker with stocks and risk assets with the AUD and NZD at 0.6810 and 0.6165 respectively. EUR and GBP continue to struggle to hold any rally at 1.0135 and 1.1970 respectively.
Others - The continuing pattern of Asian timezone selling of Bitcoin and Ethereum continued with the pair lower to 20,430 and 1142 respectively. Little to add on the price action other than to say that the correlation between the Nasdaq and Bitcoin has broken down over the last few days. Bitcoin catch up or is it time to fade the stocks rally?
So NFPs came in stronger than expected with stocks rallying on allayed recession fears and bond yields rallying as a 75bp hike by the Fed is on the cards for later in the month. However there are a couple of flys in the ointment. Last month’s revisions cut the net add to jobs significantly and the household survey also showed losses a figure which contradicts the headline number. In addition the labour force shrank which suggests a tightness in the market which is going to do nothing to help the inflationary pressures growing from wage demands. Overall not as rosey as the market seems to have taken it. However what we can say with almost near certainty is that the Fed will hike by at least 75bp in the July meeting. Is there a chance they make look to do 100bp? Remember , last month, 75bp seemed as equally far off when Powell took it off the table but then the higher CPI print put it back on the table to such an extent as the new forward guidance tool of the WSJ had to be deployed. Worth bearing in mind for given its US CPI print week. Wednesday’s expectations are for a 8.8% print YoY (8.1/8.9 consensus range) and 1.1% for the MoM (0.6-1.3).
Stocks have had their best start to q3 in over 40 years as we head into earnings season. July is seasonally a good month and we have seen inflows into the space with the CTA community getting heavily involved in the rally with a touch of FOMO sprinkled on top. It will be interesting to see how many earnings reports cite the USD in one way or another given its recent rally. The USD Index had a 8% rally in the quarter and has pushed a further 3% since so how much of a drag that causes on earnings may have a large influence on the sustainability of the rally in stocks.
The Week Ahead
The week ahead as we note is all about US CPI. We also get the Bank of Canada rate decision and Monetary Report and as well as UK monthly GDP on Wednesday. On Friday a slew of Chinese data and similarly in the US where we get retail sales for June and the UMich survey for July as well as several other prints. The week however starts with a sleeper with no prints of note, BoE’s Bailey speaks a couple of times and Fed’s Williams speaks post European close.
British politics will continue to get some outsized attention over the next few weeks as the Conservative Party works out a way to decide on who is going to take the lead post Boris. Lot of weekend press and speculation as you can imagine with the early signs, as we had thought, that it will divisive and has the potential to rip the party in two. I post the usual excellent Politico take on life and a left and right leaning papers take on the expected 11 runners and riders. Remember the vote is rather a peculiar one in that the race is whittled down to two MPs by the MPs’ votes and then it goes out to the party members for a final decision. The party members tend to be older and Southern based and as such the race, as the Spectator so succinctly put it, is more like the Grand National than the Derby with its unpredictability and the favourite quite often falling early. This contest has already seen one of the early favourites, Ben Wallace, not even making it into the field as he has decided not to throw his hat in the ring and given what he’d be leading in terms of the party and the country its hard to argue with his decision!
If you found today’s post useful, please give it a ‘Like’ at the bottom of the page. It’s always appreciated!⠀
📅⠀The main highlights for the week ahead in terms of data and speakers:
Williams (19.00 BST)
Bailey (15.15 and 18.00 BST)
EU ZEW Economic Sentiment Index Jul consensus vs previous -28 (10.00 BST)
German ZEW Economic Sentiment Index Jul consensus -38 vs previous -28 (10.00 BST)
Barkin (17.30 BST)
Villeroy (11.15 BST)
Japan Reuters Tankan Index Jul consensus vs previous 9 (00.00 BST)
German Inflation Rate YoY Final Jun consensus 7.6% vs previous 7.9% (07.00 BST)
UK GDP MoM May consensus 0% vs previous -0.3% (07.00 BST)
UK Industrial Production YoY May consensus -0.5% vs previous 0.7% (07.00 BST)
UK GDP MoM May consensus 0% vs previous -0.3% (07.00 BST)
EU Industrial Production YoY May consensus 0.2% vs previous -2% (10.00 BST)
US Headline Inflation Rate YoY Jun consensus 8.8% vs previous 8.6% (13.30 BST)
US Core Inflation Rate YoY Jun consensus 5.8% vs previous 6.0% (13.30 BST)
Bank of Canada Rate Decision 75bp hike expected to 2.25% (15.00 BST)
Bank of Canada Monetary Policy Report (15.00 BST)
Australia Unemployment Rate Jun consensus vs previous 3.9% (02.30 BST)
Australia Employment Change Jun consensus vs previous 60.6k (02.30 BST)
Japan Industrial Production YoY Final May consensus vs previous -4.9% (05.30 BST)
Japan Capacity Utilisation MoM Final May consensus vs previous 0% (05.30 BST)
US PPI YoY Jun consensus 10.7% vs previous 10.8% (13.30 BST)
US Core PPI YoY Jun consensus 8.3% vs previous 8.3% (13.30 BST)
Waller (16.00 BST)
China Unemployment Rate Jun consensus vs previous 5.9% (03.00 BST)
China GDP Growth Rate YoY q2 consensus vs previous 4.8% (03.00 BST)
China Industrial Production YoY June consensus vs previous 0.7% (03.00 BST)
China Retail Sales YoY June consensus vs previous -6.7% (03.00 BST)
China Industrial Capacity Utilisation q2 consensus vs previous 75.8% (03.00 BST)
US Retail Sales MoM Jun consensus 0.8% vs previous -0.3% (13.30 BST)
US NY Empire State Manufacturing Index July consensus -2 vs previous -1.2 (13.30 BST)
US Industrial Production YoY June consensus vs previous 5.4% (14.15 BST)
US Capacity Utilisation Jun consensus 80.4% vs previous 80.8% (14.15 BST)
US Michigan Consumer Sentiment Prel Jul consensus 49.8 vs previous 50 (15.00 BST)
US Michigan 5 Yer Inflation Expectations Prel Jul consensus vs previous 3.1% (15.00 BST)
US Michigan Consumer Expectations Prel Jul consensus 47 vs previous 47.5 15.00 BST)
Bostic (13.45 BST)
Subscribe to our free, 5-minute morning update. Used by 9k+ people to start their day!
🔥⠀Top 5 trending posts on Harkster.com yesterday:
The BondBeat - NFP recap: bad ≠ good (despite the 'print'); sellside observations and a couple economic calendars ...
EPB Macro Research - [Chart Of Interest] The Employment Report In One Chart
The Macro Trading Floor - A Trade For The U.S Dollar's Reversal | Julian Brigden 🎧
FX & Macro Weekly - FX and Macro Outlook for Week 28/2022
Lyn Alden - Energy: The Area Under the Curve
Discover more market commentary & research from 450+ curated sources on Harkster.com.
📚⠀Further reading on the current key macro themes:
Imran Lakha | Options Insight - Crypto Roundup Thread
CoinTelegraph - Bombshell allegations of fraud as KeyFi takes Celsius to court
Politico - London Playbook: Fight for the right — 1922 things to do — Liz means biz
The Guardian - Race to be PM: who’s backing who and where they stand on tax, Johnson and the culture war
The Telegraph - Runners and riders: The Tory contenders battling to become the next Prime Minister
Fortune - How the ‘Big Shot’ billionaire tycoon who broke the nickel market managed to claw his short squeeze back from a $10 billion loss
The information provided in this post is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision.
I admit I'm a bit proud to be in the Top 5 trending posts just behind The Macro Trading Floor.