The Morning Hark - 11 Oct 2022

Today’s focus ……Lift down Stairs up for the UK, the BoE back in and more Central Bank chatter

Oct 11, 2022

All prices are at 7.35 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December continues to give back some of its recent gains in Asia currently trading at 96.10 and 89.70 respectively. Oil continuing to struggle with the lower demand side still dominating trader’s minds. Continued hawkish Fed talk, China slowdown worries tipping over into a global recession and the general risk off theme all contributing to a softer oil backdrop.

EQ - The red theme continues for equity markets in Asia with indicies all off well over one percent as they follow the US markets lower. The Nikkei, Hang Seng and Kospi currently trading at 26,460, 16,965 and 285 respectively.

The Nasdaq and S&P down a further half of a percent in Asia at 10,945 and 3610 respectively. Continued Fed hiking and new US restrictions on the Chinese semiconductor industry weighed on the sector with JP Morgan’s Dimon adding to the gloom as he anticipates a US recession in 6/9 months. Hardly earth shattering news but just adds to the overall theme. Key level remains for S&Ps 3565/70.

Gold - Gold Dec flat in Asia at 1676 but continuing to suffer in this environment as we sit near the recent lows. With little of note in terms of data until Thursday’s CPI its all eyes on stocks. Sitting on the support around 1670 but if that were to go then would open up the downside to the year’s lows near 1620. Topside for now 1700 the obvious resistance.

FI - Brutal day for fixed income yesterday with yields continuing to press higher across the board with the UK leading the way. US yields are pressing ever higher in Asia trading with the US2y and 10y currently trading at 4.33% and 3.98% respectively.

European yields decoupled somewhat with the German10y yield reaching an eleven year high at 2.359% as the German government was reported to be more open to an EU bond issuance for loans to cover the European energy crisis costs. Reports from Reuters later in the day however quote sources as saying the German government has no such plans to support such measures. Let’s see. The Italian 10y yields closed lower on the day at 4.609%.

UK gilts had quite the stormy day as they lead the rout with yields rising across the curve despite the additional BoE measures to support the market and Kwarteng’s earlier “reassurance session” with the markets set now for Halloween. As we go into below credibility is a precious commodity and one that should never be arrogantly taken for granted. The 10y closed at 4.47%.

FX - Same old story as the USD continues to edge higher with the USD Index now trading at 113.38. All the majors taking their share of the strain with the EUR, GBP and JPY trading lower at 0.9698, 1.1028 and 145.71 respectively. USDJPY once again knocking on the year’s highs with little sign of the Japanese authorities. Risk soft so the AUD and NZD suffering as you’d expect at 0.6268 and 0.5562 respectively.

Others - Both Bitcoin and Ethereum softer with the general risk theme although holding up relatively well in the wider context. They are currently trading at 19,032 and 1275 respectively.

UK continues in flux

Post the BoE market support statement all long dated gilt yields traded higher and back to levels last seen when the Bank intervened to support the market at the end of last month.

Sources also suggested that the Financial Conduct Authority requested for daily real time reporting from the gilt and related markets of any deterioration in market conditions amid concerns for the market as the BoE tries to withdraw its support for the market at the end of the week.

Ratings agency Fitch poured more gloom on the UK with it expecting a deeper recession in the UK on the back of the likelihood that interest rates will have to rise faster to offset the UK chancellor Kwarteng’s fiscal package.

One brighter point of note was that Kwarteng will release his updated financial strategy alongside the independent economic assessment from the OBR on October 31 rather than the previously touted November 23. This is two days before the November MPC so it doesn’t give the Bank a whole lot of time to assess the package and then incorporate it into their revised forecasts but hopefully the two parties will play nicely this time! However reports in the papers today suggest that he needs to find £60bn worth of cuts to balance the books so more political turmoil is on its way as we edge our way towards Halloween.

Both the BoE’s measures and Kwarteng’s earlier budget date have been attempts to “cool” the pressures in the markets but thus far the markets have tested their resilience. It’s a sharp lesson in markets for Kwarteng that credibility is a “lift down stairs up” type gig and that lift journey happened back on 23 September and it’s a long way back to reclaim that credibility.

In her SNP closing conference speech yesterday Scotland’s first minister Sturgeon once again reinforced her determination to push through a second independence referendum for Scotland with or without Westminster’s permission. Indeed, on that basis, tomorrow such an argument will be heard in the Supreme Court in London. It is expected to take between 6/8 weeks for a verdict to be handed down and the expectation is for the SNP to lose the vote. If so the SNP will use the next general election as a “referendum” of sorts with a vote for the SNP, or pro-independence parties, being a vote for a mandate for negotiations to separate from the UK. Nothing in the short term to alter market pricing but on the margins it’s a further long term negative for GBP and UK assets as a whole.

Further gloom with reports from Santander that there is a rise in borrowers falling behind on their mortgage repayments.

OPEC+

Some further US sabre rattling with the Senate Foreign Relations Chair Menedez calling for an immediate halt to US cooperation with Saudi Arabia in light of last week’s OPEC+ production cut. In addition he is refusing to sign off on the arms sale to the Saudis using his veto power to do so. I guess they’ll just go shopping in China?

I post at the bottom an interesting background article from Bitcoin magazine regarding the complex web of the petrodollar. Well worth a read for those with an interest and great background as we move into a new chapter in the saga.

Central Bank Speakers

A variety of central bank speakers yesterday so here’s a quick recap.

Knot was probably the pick of the bunch from the ECB yesterday. He expects “significant” moves by the ECB in 2023 in order to get inflation down. He also used “significant” to describe the move in rate from them later this month although it was too early to exactly how big a move. On the QT question he felt that we are at least two meetings away before QT comes into force and given there are only two monetary policy meetings between now and the year end it’s safe to say that it’s a 2023 story.

On the Fed side Evans all of a muchness with him expecting rates to rise “slightly above 4.5% by early 2023 whilst there is “great uncertainty” over how rates must rise although restrictive monetary policy will be needed for “some time” after rate increases end.

Brainard was keen to stress the lag effects of the Fed hiking path and coupled that with the danger of making a “costly” mistake by overshooting. Indeed there were signs in this and her recent speech that she is in the “pause” soon camp. The overshooting line is different from the recent party line of the fear of prematurely pausing and no cuts in 2023. She also was keen to stress that excessive savings had been drawn down. Probably worth keeping an eye on her speech’s going forward and of course the question remains as to how much influence she would have on the committee as a whole. Waller seems to have the closest link to Powell and he is firmly on the hawkish side of the debate.

Once again, I post at the bottom the excellent FXMacro Guy’s daily tweet for a more comprehensive round up of all the central bank speakers from yesterday. Also, for those that may have missed it, I’ve included 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 Day Ahead

UK employment report has just been released and its a mixed bag. Unemployment rate ticked lower to 3.5% but that was driven by people leaving the labour market. The claimant count rose on previous and average earnings were higher than expected and sharply higher on previous at 6%. The shrinking labour force will do little to help the BoE’s inflation fight.

The BoE once again gives a 7am update of support for the markets. They will now buy index-linked gilts, up to £5bn daily, in the remaining days of the week which is intended to backstop the market and restore “orderly market conditions”. They go onto say that they are likely to accept most offers above market mid-yields and maturity of 3y and above. In addition they are temporarily pausing their corporate bond sales. The market has met the announcement with a knee jerk selling of GBP. Here we go again.

No real data of note but we do have a variety of central bank speakers from the Fed, BoE and ECB throughout the day. We also have the SNB’s Jordan at 17.45 BST so watch for renewed chatter on the CHF.

Early doors on Wednesday we have some Japanese data with the Tankan for October the pick of the bunch.

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Tuesday

ECB Speakers

Lane (13.45 and 19.00 BST)
Enria (14.00 BST)
Villeroy (23.00 BST)

Fed Speakers

Harker (16.30 BST)
Mester (17.00 BST)

BoE Speakers

Cuncliffe (19.00 BST)
Bailey (19.30 BST)

Early Wednesday

Japan Reuters Tankan Index Oct previous 10 (00.00 BST)

Japan Machinery Orders MoM Aug consensus -2.3% vs previous 5.3% (00.50 BST)

Good luck.

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