The Morning Hark - 11 Sept 2023

Today’s focus... BoJ, WSJ Timiraos, CPI and ECB expectations

Sep 11, 2023

Two focus points to start the week: BoJ Ueda and a WSJ article from Nick Timiraos
BoJ Ueda said they "cannot rule out that they might have sufficient data by year-end to determine whether they can end negative rates." As a result, USDJPY is down 75bps from 146.70 to 146.00. The market has been erring on the side of caution, not expecting any further BoJ normalization until next year so this is a good reminder that the BoJ is not done. Above 150 may still be the trigger level for the MoF, let's see if it's tested following Wed's US CPI. (ING FX Daily: Hawkish vibes from Asia)
WSJ Timiraos: An Important Shift in Fed Officials’ Rate Stance Is Under Way... September pause is now priced by the street and "the bigger debate is what would prompt them to raise rates again in November or December"
As a result, broader softer USD to start the week with EURUSD 1.0735, GBPUSD 1.2515 but bigger moves from the antipodeans as AUDUSD is 85bps higher to 0.6440 and NZDUSD +65bps to 0.5935.
Mixed China Picture: CPI softer than expected but no longer "deflationary", PBoC allowed a fix > 7.20 (marginally) and HSI down 1.35% and CSI 0.5% ahead of important Chinese data this week (retail sales, IP and medium-term lending rate).

Relatively empty data docket today, with the main events not starting until midweek. As a result, the "Week Ahead" channel is dominating traffic on Harkster.com as the market focuses on CPI and ECB previews

Christophe Barraud: Week Ahead Preview - ECB Meeting; Possible US Auto Strike; EC Outlook Update; US CPI and Other Data; Belt and Road Summit
Marc to Market: Week Ahead: US CPI to Make the Doves Cry even if Core Eases, and Euro Vulnerable to ECB Regardless of Decision
ING: Key events in developed markets and EMEA next week
S&P Global Market Intelligence: Week Ahead Economic Preview
Newsquawk: Week Ahead 11th-15th September: Highlights include UK Jobs, US CPI & Retail Sales, ECB and Chinese Activity Data
Pepperstone: A Traders' Playbook: The agile trader wins this week

Data Dependent Fed: US CPI, Sept pause and do they need more?

With the Fed now entering their blackout window and WSJ Timiraos releasing another important piece on the eve of that aforementioned window, the focus now rests on November pricing rather than a September move. Following the softness in recent data and growing expectations of a US housing slowdown, the market was already comfortable pricing a Sept skip from the Fed and the SEP projecting a more balanced view of impending hikes, a 50-50 that they may need to do one more. Once again JPow will be expected to say the Fed's battle on inflation is not done, their data dependent but must be cognisant of being "near" restrictive as some members fear "hiking too much" as leading indicators turn south. This week's CPI will not capture the full uptick in oil prices that the market has been watching with discomfort, however with the data softening it is extremely important that it does not come in "hot". It's one thing for the data to slow as well as disinflationary forces to continue, it's another for core inflation to remain sticky as growth data slows and the market to test where the Fed put now rests. As stagflation envelops the rest of the world, the market will want the "soft landing" vibes in the US to remain.

JPM's EM Fixed Income Podcast (EM implications of higher-for-longer US rates) captured this balancing act well and thus was highlighted in our newly released HarksterPro Intraday Market Colour Channel (press Select Channels to add to your Dashboard).

What does a prolonged period of higher rates mean for EM local paper and sovereign credit? JPM believe there is a distinction between higher for longer short-term rates rather than higher for longer long-term rates.

Scenario 1. R* is higher, trend growth and productivity is higher = benign risk environment, mid cycle feel
Scenario 2. Lower growth but sticky inflation = bad for EM
For Example, Fed hiking cycle 1994-95 … EM struggled, Sov credit pressure, BBoP crisis and at the time US equities went higher (ended up being the dotcom). Shift in capital flows were USD positive, EM had to finance external debt … higher rates in US, capital outflow

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SCMP: China GDP: Annual forecasts cut to below Beijing's target due to weak exports, property crisis
Steno Research: Steno Signals #64 - The one on ESG-flation, oil and other tangibles
Brent Donnelly: Friday Speedrun - America is an island but Apple stock chart fugliness.
FT: Housing will keep the Fed honest
The MacroTourist: Weekly Wrap Up
The Gryning Times: Inflation Looking Ahead

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All times in British Summer Time (BST)

GBP (09:00): BoE Pill
USD (16:00): Consumer Inflation Expectations

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