The Morning Hark - 12 Dec 2022
Today’s focus … Quiet start to a busy week so there’s plenty to digest in The Week Ahead. Look back at the quarters.
All prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude February futures up a touch in the Asian session as oil flat lines to start the big week ahead. The futures currently trading at 76.50 and 71.80, respectively. Oil’s slightly firmer tone was once again related to the Keystone Canadian/US pipeline whose resumption to get back online after last week’s leak has been delayed.
EQ - Asia futures a mixed bag in a quiet start to the week overnight with the Hang Seng down close to one percent at 19,479 with the Kospi following lower at 309. Whilst the Nikkei bucks the trend as it’s a touch firmer at 27,762.
The Nasdaq and S&P flat overnight at 11,674 and 3967, respectively.
Gold - Gold Feb futures off around half of one percent in Asia, currently sitting on our trading pivot at 1800. The move seems like a paring of positions going into a week with a lot of uncertainty. First support at 1780 with some resistance towards 1810.
FI - US yields little of note overnight in Asia, with the US2y and US10y currently trading at 4.34% and 3.55%, respectively. 3.50% in the US10y again seems to be the trading pivot, with the firmer PPI report out of the US being the catalyst on Friday to trade back above. The level should be key throughout this heavy event risk week.
European yields closed the week on a firmer footing, with the German 10y yields closing at 1.932% and Italian 10y yields at 3.802%.
UK gilts rallied on Friday post US data print with the 10y yield closing at 3.183%.
FX - Again, another dull FX session with little new of note. The USD retained its post-US PPI gains, with the USD Index currently trading at 105.10. The majors all a touch softer, with JPY, EUR and GBP currently trading at 136.88, 1.0516 and 1.2226, respectively.
Others - Bitcoin and Ethereum softer with the general softer risk tone prior to the big events this week we currently sit at 16,925 and 1245 respectively.
The Week Ahead
US CPI. After a higher-than-expected print for US PPI last week, expectations have risen for a potentially higher CPI report on Tuesday, dashing hopes that US inflation had peaked last month and subsequently jeopardising the Fed’s clear path to slowing the pace of rate hikes starting with their FOMC meeting on Wednesday. As things stand, expectations are for a softer report, with the two YoY measures expected to show good declines from previous, with Headline down to 7.3% and Core to 6.1%. The MoM headline is expected to decline to 0.3% from 0.4% previously. Core however is expected to remain sticky at 0.3%. If we were to get a PPI type upside surprise, unless it’s a real shocker, it probably won’t change the Fed’s view for the next day’s rate decision. However, it would probably make them reinforce their view that rates will have to remain higher for longer as they try to beat inflation. A continuation of the softening in the report we saw last month will add fuel to the fire for the market’s core theme that 2023 will see rate cuts from the Fed, giving Powell a communication challenge for his press conference as he tries to keep financial conditions as tight as possible as he slows the rate of hikes going forward.
FOMC rate decision. The final Fed meeting of the year will release its decision on Wednesday, and it looks, unless of course the previous day’s CPI report throws a spanner in the works, to a relatively straightforward 50bp hike decision taking the upper band to 4.5%. Where the challenges will, of course, lie will be in the communication and specifically that; yes the Fed are slowing the pace of rate hikes, but they still remain on a hiking path and rates will remain higher for longer. Their job will be helped by the fact that the announcement will be accompanied by their new economic projections and dot plot for the future rate path. Expectations have risen of late, both fuelled by Fed speakers as well as some hawkish economic data prints, that we will get a terminal rate in the 5-5.25% range up from 4.6% in September. With this potential high point, it will open up questions for Powell as to how long he feels rates will remain at that terminal level. “Some time” seems thus far to be the common answer and covers a multitude of outcomes but remember, the Fed have been insistent that 2023 will not see any rate cuts. Given we could easily enter the lower band of the range by February that could see a potential 10 month stretch with no change to rates? On average, the terminal rate has remained in play for around 6/7 months. Let the game of bluff/counter-bluff begin.
China central economic work conference. The conference, which opens on Thursday will see Chinese policymakers discuss 2023 and its related economic policies and GDP targets. The property sector indices had a healthy rally last week in anticipation that further measures will be put in place to boost the ailing sector, and this forum would offer a platform for such an announcement. Much speculation also that the Chinese will institute a pro-growth shift and install a 5% target for GDP. Look also for any indication that they may look to cut official rates to help kick start such a policy.
Norges Bank rate decision. The Norges Bank open up Thursday central bank announcement day, where a 25bp hike seems the most likely outcome as they look to follow up November’s hike with a similar magnitude of hike to close the year off. Since the November hike, we have had two CPI reports with October’s coming in hot but November showing a much needed softening to 5.75% for core, but still, inflation remains above the Bank’s target and forecasts. Look out also for an updated monetary policy report which is expected to see an upgrade to the inflation expectations justifying further this month’s hike.
SNB rate decision. 50bp hike expected, taking rates to 1% continuing their hiking cycle, which saw rates start to rise in June and only go into positive territory at their last meeting. The latest CPI report showed inflation stabilising at 3% but still well above the Bank’s target zone of 0/2%. Given the magnitude of the gap between actual and target 75bp remains a possibility. Also, look out for any comments from Chairman Jordan on FX. In the past, he has said the Bank is willing to step into the market on either side as and when required. He has reiterated on a number of occasions in the past that nominal CHF appreciation is a useful tool in the fight against inflation.
BoE rate decision. Another 50bp hike looks likely from the BoE, with the slower pace of hikes being attributed, in a good measure, to the more stable and fiscally controlled nature of the new government. All well and good, but with inflation over 11%, there is still a good deal of work to be done. The Bank’s committee, however, seems to be split with the doves looking towards a slower pace of hikes, given the brittleness of the economy, whilst the hawks see double digit as unacceptable given the Bank’s mandate. 50bp looks likely, but the vote split could be very interesting. The other thing that Governor Bailey will likely be tested on is where he expects the terminal rate to come and how long they intend to keep rates at such a level.
ECB rate decision. Deja vu? 50bp hike? Certainly, it looks that way with the latest EU inflation report seeing a welcome decline in Headline but a stubbornly unexpected rise in Core. There will be much debate, it is the ECB after all, with the hawks wanting a further 75bp, but we think the majority will edge towards 50bps. Elsewhere there is expected to be an announcement on the Asset Purchase Programme with the focus being on a reduction on the reinvestments of the bond maturities rather than any outright sells. The German/Italian spread has reduced significantly over the last couple of months which should give the ECB more comfort in announcing such a move.
December Flash PMIs. Late Thursday and into Friday, we get a preview of what to expect from the major economies around the world as we get the December flash PMIs. As things stand, Australian manufacturing and Japanese services PMIs are the only two measures of the major economies printing that remain in expansionary mode. The only way is up?
UK data dump. Lot of data out of the UK this week. We have just seen the monthly GDP print. Tuesday sees the employment report, which worryingly for the BoE is expected to show a further uptick in the average wages component. Wednesday brings the inflation print for November, where a downtick in headline is expected, but core looks stubbornly sticky with the market expecting a flat reading on the YoY. Finally, Friday sees retail sales and the flash PMIs.
The World Cup - Quarter Finals
Croatia v Brazil
Well, the bookies got it wrong! Neymar got his record-equalling goal, and what a goal at that, to go alongside Pele as Brazil’s all-time top goal scorer. However, that was all he was left with as he departed in tears and didn’t even take a penalty! I can never work that one out. Why would a team leave its normal penalty taker to the last penalty in a shoot-out when, as was the case on Friday, he might not even get the chance to take one?
Tiredness didn’t seem to play a part as both teams slugged it out for 120 minutes, and indeed the Croatians just seemed to go from strength to strength as the minutes ticked by and as we said in our preview, “they are very successful at finding a way”. They certainly do find a way but almost playing for penalties at the start of a game seems an extreme way of doing it. They scored in the 116th minute with their first shot on target, but they look after the ball so well and when you have a keeper like Livakovic you always have a chance of staying in the game. He will surely walk into the team of the tournament.
Probably the most impressive part of the Croatian performance was their fullbacks, who marshalled Brazil’s wide players extremely well and indeed saw off both of the first choices wingers by the 64th minute, unlike the torrid time they had against the Japanese wide players.
So it’s the Croatians that go through to their second consecutive World Cup semi-final, and the dancing Brazilians are sent home dreaming of what might have been.
Netherlands v Argentina
We got another classic from these two after a slow burner of a first half, which was only lit up by a wonder pass from Messi to set up the Argentinian first goal; the second half burst into life. A Messi penalty got them 2-0 to the good and seemingly cruising into the semi-final and rubbing salt into Brazilian wounds. All was going to plan until Van Gaal shed his total football roots and resorted to the Burnley playbook of getting the big men on and getting it in the mixer! Boy, did it work as Weghorst first headed home a beauty before, in the 11th minute of stoppage time, delivered the killer touches to an ingenious free-kick routine to level the scores. Both teams had chances in extra time before Argentina eventually prevailed on penalties and will go through to meet Croatia for a place in the World Cup final.
The game was pretty ugly at times, and there were no fewer than 17 yellow cards and one red card, which, not surprisingly, is a World Cup record. There were also ugly scenes at the end when, rather than celebrate their victory, a large number of the Argentinian squad took more pleasure in taunting their rivals.
So Messi turned up with an assist and a goal as well as a penalty in the shootout, but the Dutch talisman Depay barely showed at all and was indeed substituted well before full time. Messi then continues his quest for Argentinian football immortality, but another footballing legend, in the shape of Van Gaal, has probably played his last part on the stage that is football.
Morocco v Portugal
The Atlas Lions continue to roar and also continue not to concede goals! They shut out the Portuguese team that came into the game as joint top goalscorers in the competition but yet couldn’t find a way past the backline of the Moroccans. In doing so, Morocco became the first African nation to reach the semi-finals of the World Cup.
Portugal had their chances but could not take them; either being denied by some excellent goalkeeping, the woodwork or some poor finishing and not even Ronaldo coming off the bench could inspire them to victory. The Moroccans ground it out with a backs to the walls display, with many of the team carrying injuries, but when they break they break in an admirably swashbuckling manner. In the end, the Portuguese succumbed to a defensive error and couldn’t find a way back in. Ronaldo departed the scene, potentially never to return to the international stage.
Morocco have had an incredible run, and who knows where it will end. Can they do a Greece from 2004? Why not when you don’t concede goals you always have a chance. Remember too, that no team has defended the World Cup since Brazil in 1962, so that’s quite a sequence for the French to break.
France v England
England played the same team thankfully and showed the world what they can do when the shackles are off and when they are allowed to play with more flair and courage. However, once again, they came up short, beaten by two French goals which really came out of nothing but were taken with much brilliance.
As we pointed out on Friday, the French defence is there for the taking with no real authority figure, and they really do miss Hernandez, especially when his replacement, his brother, almost single-handedly threw the game away. England carved out the better chances of the two teams but couldn’t convert and indeed their best two chances were given to them via the penalties. France’s defensive frailties would be a worry against a Moroccan team who thrive on set pieces and counter attacks.
It wasn’t the Mbappe show but more the Greizmann one for the French as he seemed to cover every blade of grass as well as supply that sumptuous cross for Giroud’s winner. England are left to regret a Kane missed penalty and potentially some dubious refereeing decisions, but all in all, they can go home safe in the knowledge that, although they departed the tournament earlier than the previous two major ones, from a playing point of view they have progressed as a team. They just miss that Pirlo/Modric/Xavi metronome in the middle of the park who can dictate the pace of the game and exert some control, but those diamonds are hard to uncover.
The Day Ahead
We have just had a UK data dump, one of several that we will have this week. The monthly GDP print came in a touch better than expected at 0.5% for October, although the 3m average remains in contraction at -0.3%. Industrial production was flat for the month of October, but manufacturing produced a healthier 0.7% up print for the month.
Other than that, there is little to feast on today but plenty of prep work tine for the busy week ahead.
I post at the bottom a review of President Xi’s recent trip to Saudi Arabia and its potential impact on geopolitics. Good read for a quiet day. Also, on a week like this we have the FXMacro Guy’s weekly is a must-read, especially with his Fed speaker crib sheet.
👍 If you found today’s piece useful, please consider giving it a ‘Like’ at the bottom of the page. It only takes a few seconds and helps our free commentary reach a wider audience.
All times in GMT (EST+5 / CEST-1 / JST-9)
Monday
BoC Macklem Speaks (20.40 GMT)
Tuesday
Germany Inflation MoM Final Nov consensus -0.5% vs previous 0.9% (07.00 GMT)
Germany Inflation YoY Final Nov consensus 10% vs previous 10.4% (07.00 GMT)
UK Claimant Count Change Nov consensus vs previous 3.3k (07.00 GMT)
UK Unemployment Rate Oct consensus 3.7% vs previous 3.6% (07.00 GMT)
UK Ave Earnings incl. Bonus (3m/yr) Oct consensus 6.2% vs previous 6% (07.00 GMT)
Germany ZEW Economic Sentiment Index Dec consensus -26.4 vs previous -36.7 (10.00 GMT)
EU ZEW Economic Sentiment Index Dec consensus vs previous -38.7 (10.00 GMT)
US Inflation Rate MoM Nov consensus 0.3% vs previous 0.4% (13.30 GMT)
US Inflation Rate YoY Nov consensus 7.3% vs previous 7.7% (13.30 GMT)
US Core Inflation Rate MoM Nov consensus 0.3% vs previous 0.3% (13.30 GMT)
US Core Inflation Rate YoY Nov consensus 6.1% vs previous 6.3% (13.30 GMT)
RBA Lowe Speaks (22.30 GMT)
Japan Large Manufacturers Index q4 consensus 6 vs previous 8 (23.50 GMT)
Japan Machinery Orders MoM Oct consensus 2.6% vs previous -4.6% (23.50 GMT)
Japan Machinery Orders YoY Oct consensus 2.6% vs previous 2.9% (23.50 GMT)
World Cup - Semi Final
Croatia v Argentina (19.00 GMT)
Wednesday
Japan Industrial Production MoM Final Oct consensus -2.6% vs previous -1.7% (04.30 GMT)
Japan Capacity Utilisation MoM Oct consensus vs previous -0.4% (04.30 GMT)
UK Inflation Rate MoM Nov consensus 0.6% vs previous 2% (07.00 GMT)
UK Inflation Rate YoY Nov consensus 10.9% vs previous 11.1% (07.00 GMT)
UK Core Inflation Rate MoM Nov consensus 0.5% vs previous 0.7% (07.00 GMT)
UK Core Inflation Rate YoY Nov consensus 6.5% vs previous 6.5% (07.00 GMT)
EU Industrial Production MoM Oct consensus -1.5% vs previous 0.9% (10.00 GMT)
EU Industrial Production YoY Oct consensus 3.6% vs previous 4.9% (10.00 GMT)
FOMC Interest Rate Decision 50bp hike expected taking rates to 4.50% (19.00 GMT)
FOMC Projections (19.00 GMT)
Chair Powell Press Conference (19.30 GMT)
World Cup - Semi Final
France v Morocco (19.00 GMT)
Thursday
Australia Employment Change Nov consensus 17k vs previous 32.2k (00.30 GMT)
Australia Unemployment Rate Nov consensus 3.4% vs previous 3.4% (00.30 GMT)
China Industrial Production YoY Nov consensus 3.8% vs previous 5% (02.00 GMT)
China Retail Sales YoY Nov consensus -3% vs previous -0.5% (02.00 GMT)
China Unemployment Rate Nov consensus % vs previous 5.5% (02.00 GMT)
SNB Interest Rate Decision 50bp hike expected taking rates to 1.00% (08.30 GMT)
Norges Bank Interest Rate Decision 25bp hike expected taking rates to 2.75% (09.00 GMT)
SNB Press Conference (09.30 GMT)
Norges Bank Monetary Policy Report (10.00 GMT)
BoE Interest Rate Decision 50bp hike expected taking rates to 3.50% (12.00 GMT)
BoE MPC Meeting Minutes (12.00 GMT)
ECB Interest Rate Decision 50bp hike expected taking rates to 2.50% (13.15 GMT)
US Retail Sales MoM Nov consensus -0.2% vs previous 1.3% (13.30 GMT)
US Retail Sales YoY Nov consensus % vs previous 8.3% (13.30 GMT)
US NY Empire State Manufacturing Index Dec consensus -1 vs previous 4.5 (13.30 GMT)
US Philly Fed Manufacturing Index Dec consensus vs previous -19.4 (13.30 GMT)
US Philly Fed Employment Dec consensus vs previous 7.1 (13.30 GMT)
US Philly Fed New Orders Dec consensus vs previous -16.2 (13.30 GMT)
US Philly Fed Prices Paid Dec consensus vs previous 35.3 (13.30 GMT)
ECB Press Conference (13.45 GMT)
US Industrial Production MoM Nov consensus 0.1% vs previous -0.1% (14.15 GMT)
US Manufacturing Production MoM Nov consensus -0.1% vs previous 0.1% (14.15 GMT)
US Capacity Utilisation Nov consensus 79.8% vs previous 79.9% (14.15 GMT)
Australia S&P Global Manufacturing PMI Flash Dec consensus vs previous 51.3 (22.00 GMT)
Australia S&P Global Services PMI Flash Dec consensus vs previous 47.6 (22.00 GMT)
Friday
Japan Jibun Bank Manufacturing PMI Flash Dec consensus vs previous 49 (00.30 GMT)
Japan Jibun Bank Services PMI Flash Dec consensus vs previous 50.3 (00.30 GMT)
UK Retail Sales MoM Nov consensus 0.3% vs previous 0.6% (07.00 GMT)
UK Retail Sales YoY Nov consensus -5.7% vs previous -6.1% (07.00 GMT)
Germany S&P Global Manufacturing PMI Flash Dec consensus 46.2 vs previous 46.2 (08.30 GMT)
Germany S&P Global Services PMI Flash Dec consensus 46.2 vs previous 46.1 (08.30 GMT)
EU S&P Global Manufacturing PMI Flash Dec consensus 47.1 vs previous 47.1 (09.00 GMT)
EU S&P Global Services PMI Flash Dec consensus 48.5 vs previous 48.5 (09.00 GMT)
UK S&P Global Manufacturing PMI Flash Dec consensus 46.2 vs previous 46.5 (09.30 GMT)
UK S&P Global Services PMI Flash Dec consensus 48.5 vs previous 48.8 (09.30 GMT)
EU Inflation Rate MoM Final Nov consensus -0.1% vs previous 1.5% (10.00 GMT)
EU Inflation Rate YoY Final Nov consensus 10% vs previous 10.6% (10.00 GMT)
EU Core Inflation Rate YoY Final Nov consensus 5% vs previous 5% (10.00 GMT)
US S&P Global Manufacturing PMI Flash Dec consensus 47.7 vs previous 47.7 (14.45 GMT)
US S&P Global Services PMI Flash Dec consensus 46.5 vs previous 46.2 (14.45 GMT)
Saturday
Fed Speakers
Daly (17.00 GMT)
Good luck.
- - sellside observations for the week ahead (12/12)
- - Outlook for Week 50/2022
Mish Talk - Nearly the Entire Yield Curve is Inverted From 6 Months to 30 Years
StockCharts - And That's Why We Wait for the Close
TFTC - Issue #1290: China is making a move against the petrodollar
Discover more market commentary & research from 500+ curated sources on Harkster
FXMacro Guy Weekly Review and Daily Tweet
Crypto
Forbes - Despite Boasting Of Big Profits, FTX And Alameda Lost $3.7 Billion Before 2022
ZeroHedge - Feds Probing Bankman-Fried's Manipulation Of TerraUSD, Luna... Which Eventually Crushed FTX
China/Saudi Arabia
Follow the latest market narratives through our curated research & commentary channels on Harkster.
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.