The Morning Hark - 11 Oct 2023

Today’s focus...Middle East tensions remain, Fed speakers continue to play “Fed bingo” with long term yield references, Kashkari’s economic trifecta and SBF Day 5 Ellison’s 30 second dramatic pause.

Prices are at 7.05 BST/2.05 EST, with changes reflecting movement from midnight BST

Oil - Brent and Crude December futures both up smalls in Asian trading with tensions still ongoing in the Middle East spilling over into supply worries for the oil sector. The pair are currently sitting at 87.80 and 84.30 respectively. Oil seems to have found an equilibrium level around here until such time as there is further colour on Iran’s involvement in the attack on Israel or a potential peace initiative. Both seem some way off for now.

EQ - Asian equity markets all in the green following the US lead with Fed speakers helping yields back off from their recent highs and stocks continuing their relief rally. The Nikkei,  Hang Seng and Kospi all higher at 31,920, 18,000 and 327 respectively.

The US indicies have held onto their gains from yesterday’s session in Asia with the Nasdaq and S&P futures up smalls at 15,300 and 4390 respectively. Both indicies have seen an over 3% rally off Friday’s payroll lows. Santa Rally anyone?

Gold - Gold Dec flatlining in Asia but holding onto its safe haven bid currently at 1872.

FI - Global yields little changed overnight after yesterday’s Fed speakers continued to point to the recent rise in long term yields doing a lot of the heavy lifting for them. US yields; US2y and US10y currently trading at 5% and 4.65% respectively.

European yields closed lower and as they do followed the US lead with the German 10y yield closing at 2.77% and the Italian 10y yield at 4.74%.

UK gilt yields similarly at 4.43%.

FX - The USD stabilised after another sell off for it yesterday. The USD Index currently flat at 105.83. The JPY, EUR and GBP all a touch stronger with them currently at 148.90, 1.06 and 1.2285 respectively.

USDILS continues with a bid tone sitting at 3.9430.

FX expiries wise not a huge amount on the go. EUR sees €500m rolling off at 1.06 whilst the AUD sees 1.3bn rolling off around 0.6450/75. In the JPY we see $700m at 148.55.

Others - Bitcoin and Ethereum taking a step back over the last few sessions but in the bigger picture all pretty dull. The pair trading currently at 27,115 and 1556 respectively.

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Recap

The IMF sprinkled us with some wisdom yesterday at their annual meeting updating their forecasts from early summer. Probably the standouts were their lowering of global growth a touch for 2024 to 2.9% but more starkly their lifting of the inflation figure to 5.8% from 5.2% describing it as “tenacious”.

They also gave the UK a kicking lowering their 2024 growth figure, from 1% to 0.6%, as they expect a “fairly sharp slowdown” for the UK. This would represent the weakest growth for the year  in any of the G7 countries.

Chat about a new Chinese stimulus package, in the region of £140bn, and higher deficit to meet their growth targets.

Another pipeline sabotage attempt? A leak from a gas pipeline between Finland and Estonia is being treated as potential sabotage with both sides pointing to “outside activity” as likely culprits.  Watch this space or bubbles more appropriately.

Central bank speakers

Fed’s Bostic said that the Fed needs to be nimble and ready to adapt to risks whilst the war in Israel creates uncertainties for the economy. On inflation he claimed that the situation has “improved considerably” but there remains a long way to go. He even shared details of his dot plan which he said did not include a recession. The economy was “clearly slowing” and a lot of impact is yet to come. He felt there was no need to increase rates any more but if things come in differently from his projections then the Fed may have to raise again.

For clarity he is a know dove and not a voter until next year.

Waller didn’t comment on the near term interest rate outlook other than to say the Fed would “stay on the job” to achieve inflation target.

Kashkari was a little uncertain as to the rise in long term yields pointing to the possibility that they were caused by rising US debt issuance or higher growth expectations. In any case he found it “perplexing”. He also alluded to the fact that he was optimistic the Fed could shrink the balance sheet to pre-pandemic levels.

Now I’m no economist but seems to me he has a trifecta of reasons there why long term yields may go up?

Anyway he went on to point to wage growth and inflation as two factors to follow to attain whether the Fed have done enough. In addition the new money line that everyone looks for in Fed bingo now; “it is possible that higher bond yields could leave less for the Fed to do”.

Daly continued the theme overnight claiming that the risks of doing too much/too little are roughly balanced. On rising bond yields similarly she pointed out that the need for the Fed to additional tightening was not there.

RBA’s Kent felt that more tightening may be needed but policy lags mean that some further effects of previous tightening is still to be felt. The CPI data will be important but there will be other considerations.

SBF Trial

Wang finished off his testimony yesterday with the quote; “he asked us to do it, so we did it” ringing in the jury’s ears before star witness, and ex CEO of Alameda, Caroline Ellison took to the stage.

Quite an entrance as she took a full 30 seconds to identify SBF, her one time beau, sitting in the dock. Brain fog, new barnet, nerves, embarrassed who knows but quite the dramatic pause.

Her testimony continued with the general theme to date, that it was SBF’s masterplan and all they were doing was helping him carry it out. She went on to explain that SBF “directed me to commit these crimes” and “he set up the systems” to allow my firm Alameda squirrel away $14bn from FTX to help try to plug the leaks from my losses from market making and trading strategies.

Probably the revelation of the day from her was that SBF felt he had a 5% chance of becoming President. Doesn’t a conviction help that cause?

One final thing of note which may help SBF slither out of a long jail term. By chance, good investment acumen (seems a stretch) or a last throw of the dice to save the firm, SBF made a large investment in AI start up Anthropic. Potentially now set to be worth upto $5bn it may help make the clients of FTX “whole”. Let’s see.

Quote of the day has to be from Wang. When asked by the defence lawyers are you aware of the difference between solvency and liquidity he replied; “now I am”.

Laura Shin’s excellent companion podcast reviewing yesterday’s events in full below for those with a further need to scratch that itch.

Unchained - Day 5

The Day Ahead

Overnight Japan’s Tankan came in as expected. Nothing to see here.

The final September German inflation data just hit the tapes in line.

US PPI for September holds the market focus this afternoon which is set to show a further cooling in the series but will there be a late surge from the higher energy costs scuppering the recent relief  sell off in yields?

Some additional Fed speakers will no doubt continue the higher for longer theme but give a nod to the recent rise on long term yields.

Later we get the Fed minutes from the “September pause” meeting. Remember the market took it as a hawkish pause and off we went to the races with the higher for longer play. Recent Fed speakers have pricked that bubble with their nod to higher long term yields doing a lot of heavy lifting on the rates front for the Fed. As such these minutes should be a “touch stale”.

However may be worth a look at the comments around the dots and in particular how they were debated. As a recap they kept the 2023 dots unchanged but the cuts in 2024, which the dots had previously priced at 100bps, were cut to 50bps.

Early doors tomorrow we get Japanese machine orders for August and just prior to publishing we get a UK data dump with GDP and production data for August.

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All times in BST (EST+5 / CEST-1 / JST-8)

The main highlights for the day ahead in terms of data and speakers:

Wednesday

US PPI MoM Sept consensus 0.3% vs previous 0.7% (13.30 BST)

US PPI YoY Sept consensus 1.6% vs previous 1.6% (13.30 BST)

US Core PPI MoM Sept consensus 0.2% vs previous 0.2% (13.30 BST)

US Core PPI YoY Sept consensus 2.3% vs previous 2.2% (13.30 BST)

FOMC Minutes rates steady at 5.25% with a possibility of a further hike this year (19.00 BST)

Fed Speakers

Bowman (09.15 BST)

Waller (15.15 BST)

Bostic (17.15 BST)

Early Thursday

Japan Machinery Orders MoM Aug consensus 0.4% vs previous -1.1% (00.50 BST)

Japan Machinery Orders YoY Aug consensus -7.3% vs previous -13% (00.50 BST)

UK GDP MoM Aug consensus 0.2% vs previous -0.5% (07.00 BST)

UK GDP 3m Average Aug consensus 0.3% vs previous 0.2% (07.00 BST)

UK GDP YoY Aug consensus 0.5% vs previous 0% (07.00 BST)

UK Industrial Production MoM Aug consensus -0.2% vs previous -0.7% (07.00 BST)

UK Industrial Production YoY Aug consensus 1.7% vs previous 0.4% (07.00 BST)

UK Manufacturing Production MoM Aug consensus -0.4% vs previous -0.8% (07.00 BST)

UK Manufacturing Production YoY Aug consensus 3.4% vs previous 3% (07.00 BST)

Good luck.

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