The Morning Hark - 12 Jan 2023
Today’s focus …US CPI the only show in town and Collins gives the doves “another day in paradise”.
Prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March flat overnight with them currently trading at 82.70 and 77.70, respectively. The market spent much of yesterday nibbling at offers in anticipation of a continuing softer inflation outlook for the US. The market was even happy to look through the large build in inventories from the EIA stats. Let’s see if the optimism is justified today.
EQ - Asia equity futures a touch softer overnight with the Hang Seng, Nikkei and Kospi trading at 21,488, 26,358 and 313 respectively.
The Nasdaq and S&P holding onto their short squeeze gains from yesterday with them currently at 11,464 and 3989 respectively.
Gold - Gold Feb futures up smalls overnight at 1885. Gold is little changed over the last few sessions as it marks time ahead of today’s CPI print. 1900 continues to be the obvious next topside target. Near term support now at 1870 and further towards 1850.
FI - US yields bull flattened overnight with US2y and US10y trading currently at 4.23% and 3.53% respectively.
European yields followed the US lower yesterday, with the German 10y yields closing at 2.17% and Italian 10y at 4.04%.
UK gilt yields softer too, with the 10y closing at 3.41%.
FX -The FX space continuing to mark time with the USD Index unchanged at 103.20. The EUR and GBP little change too at 1.0760 and 1.2138, respectively. The JPY, however, is close to half of a percent higher at 131.75 with talk that the BoJ will review the “side effects” of the Bank’s massive easing monetary policy at next week’s meeting.
Others - Bitcoin and Ethereum enjoying the sunshine of the risk rally and the anticipation of a more passive Fed. The pair enjoying a decent rally, currently sitting at 18,162 and 1400 respectively.
US CPI Preview
Here we are again US CPI prime time. A further moderation in the Headline YoY for December is expected from 7.1% to 6.5% as well as one for Core from 6% to 5.7%. Further declines in both new and used cars are seen as the main drivers of the softness. In addition declines in apparel and airline tickets on the back of energy costs should contribute to the moderation. The report is also expected to show a slowing in the pace of the shelter component albeit from a high base.
On the MoM readings, there is a possibility, if we have a downside miss, that we actually see disinflation for the first time since June 2020 with Headline consensus looking for a 0% reading. Core as ever remains stickier with 0.2% the MoM consensus print.
One interesting point to note is that the CPI fixing market used by the inflation swap traders is on a 10 month winning streak whereby they have predicted the correct surprises on expectations. This month they are looking for another downside surprise on market consensus expectations.
For context, the fixings market is looking at PCE inflation to hit the Fed’s target 2% in the summer of this year and be around that level as we hit the turn of the year. Some disconnect there it would seem in comparison to the Fed’s forecasts. Indeed, as we spoke about in our Outlook piece for 2023, the Fed dots vs market expectations is going to be a big topic for the year ahead. As things stand the market is now pricing in 4.5% for year end rates with the Fed in the 5/5.25% range. Something will have to give and today it would seem is going to be the first major challenge to those two divergent viewpoints.
Couple of other things to mention, Biden is scheduled to speak later in the day post CPI on the subject of “inflation” so we’ve seen this movie before mainly on NFP prints but he is obviously feeling confident that today’s print will help his narrative. The Fed’s Bullard is scheduled to speak post the number too on the “economic outlook and monetary policy” so be careful of any financial conditions loosening pushback.
Finally, remember the “ex-shelter core services component” which has been flagged by Powell as the key to getting inflation down to target. If it remains elevated, no matter what the headline prints say, the Fed will “stay the course”. For context last month it rose by 0.3% MoM.
As for some form of a playbook, we know for sure that the market is going to move. CPI has become the biggest mover of markets over the last 6 months surpassing the NFP print. Given this is the last print before the February FOMC it would seem reasonable to expect another outsize move.
As we speak the S&P and Nasdaq are just shy of 4000 and 11,500 respectively.
Headline wise a 6.4/6.6% print would could see up to a 2% rally in stocks with the USD Index taking 103 out and pushing to the May low from last year in the mid 101s. US10y would push through the 3.50 level and beyond.
Below 6.4% it would seem reasonable to expect a 3%+ move in stocks. US10y would threaten 3.40% and the USD look to break that mid 101 level.
Above 6.7% stocks would reverse sharply a good 2%. USD relief rally above 104 and the 10y to 3.60%+. This would obviously be the pain side for the market.
All very finger-in-the-air type of stuff and remember the “ex-shelter core services component” but we are at some important levels in the US stocks. Around 4050 in the S&P is the 200dma. Good support at 3900 too.
Nasdaq wise the bulls would like to protect 10,800 with the 100dma around the 11,700 level.
The Macro Compass - Why CPI matters
Fed speakers
The Fed’s Collins has broken cover and explicitly sided for a 25bp hike for the February FOMC in an interview with the NYT. She’s the first to side for the smaller hike, and although she is not one of the voters, she will be involved in the decision making. Her final decision will be “data dependent” so I’m guessing today will have the potential to be the clincher for her.
Her main justification for her view is that she feels the more gradual approach gives the Fed more flexibility as it allows them more time to assess the economy as its rate hikes start to feed through into the real economy.
ECB Speakers
Villeroy wanted the ECB to reach the terminal rate by the summer and affirmed that further hikes were on their way in the coming months at a “pragmatic pace”.
Holzmann went further and said it was too early to talk about the terminal rate. Inflation has not peaked and risks remain skewed to the upside. The ECB will not change tack until such time as core starts to ease and rates will rise further to reach levels that are “sufficiently restrictive” to ensure a timely return for inflation to target.
de Cos was happy to maintain a hawkish front by claiming that the ECB would continue to raise rates significantly at a “sustained pace”.
Crypto
The early 2023 woes for the sector continue with news that the DoJ are set to investigate the founders of the Solana stable coin exchange Saber Labs.
CoinDesk - DoJ to probe Saber Labs
The Day Ahead
Chinese CPI for December came in as expected with a slight tick up in the headline YoY measure to 1.8%.
It’s all about the CPI print then of course we have Bullard to backstop any extraneous market moves and Biden to do some high fives?
Pre-publishing tomorrow we get a UK data dump with the monthly GDP print being the highlight.
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- - The CPI Report Matters
Visual Capitalist - Prediction Consensus: What the Experts See Coming in 2023
RIA Advisors - Lower Stock Prices are the Fed’s Goal
- - Mortgage Rate Update 🔒
- - The Observatory
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All times in GMT (EST+5 / CEST-1 / JST-9)
Thursday
US Inflation Rate YoY Dec consensus 6.5% vs previous 7.1% (13.30 GMT)
US Inflation Rate MoM Dec consensus 0% vs previous 0.1% (13.30 GMT)
US Core Inflation Rate YoY Dec consensus 5.7% vs previous 6% (13.30 GMT)
US Core Inflation Rate MoM Dec consensus 0.2% vs previous 0.3% (13.30 GMT)
Fed Speakers
Harker (12.30 GMT)
Bullard (16.30 GMT)
Early Friday
UK GDP MoM Nov consensus -0.2% vs previous 0.5% (07.00 GMT)
UK GDP YoY Nov consensus 0.3% vs previous 1.5% (07.00 GMT)
UK Manufacturing Production YoY Nov consensus -4.8% vs previous -4.6% (07.00 GMT)
UK Industrial Production YoY Nov consensus -3% vs previous -2.4% (07.00 GMT)
UK Construction Output YoY Nov previous 7.4% (07.00 GMT)
Good luck.
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"another day in paradise".....it sure has been nice...almost felt normal, but probably was just a dream.
Fantastic Inflation summary !!!!!
I'm with Collins on the 25....makes sense...I think Powell is there too.
I optimistically believe that most of the hard work has been done..
Hopefully, just some fine tuning is left to do.
I believe Biden has the number ahead of time....he'll take every cheating advantage he can.
But he's also stupid..."so the ex-shelter core services component", might trip him up.
Really a great pleasure to read this newsletter !!!!!!!!!!
We'll cross our fingers and say a prayer....Normal is coming...Normal is coming....Normal is coming..