The Morning Hark - 12 Sep 2022
The Morning Hark - 12 Sep 2022
Today’s focus ……ECB speakers start the week, more UK data misses, Swedish Elections too close to call, Ukrainian counter offensive and The Week Ahead.
All prices are at 7.50 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures sold off in Asia currently trading down just under a percent at 92.20 and 85.40 respectively. China covid worries resurfaced as the main drain on enthusiasm for oil’s late revival into the close of last week as demand for the fuel wanes in the face of lockdowns. Coupled with the rate profile of the major central banks oil remains on the backfoot.
EQ - Equity markets quiet overnight with much of the region closed for the Mid-Autumn holidays. Nikkei was up smalls at 28,295.
The Nasdaq and S&P steady in the Asian session currently at 12,705 and 4092 respectively in very quiet markets. The US markets showed their first weekly gain in a month with the main indices up close to 4%. Will it continue? CPI is the obvious main driver of that in the near term. Then in the more medium term is this the last big rate hike by the Fed (been there before), how will QT play out in terms of liquidity in the overall market, will CPI stay sticky and a new target be brought in, will oil remain below 100 and will the USD back off further; these are all questions that need answered to see the future path for stocks. For now the market seems to go where maximum pain resides.
Near term levels for the S&P at 4020 and 4120 above.
Gold - Gold Dec futures flat overnight in Asia at 1728. There continues to be little to add here as we see 1700 support with topside remaining that noisy zone of 1750/55.
FI - US yields consolidate near their recent highs overnight with the US2y and 10y yields currently trading at 3.56% and 3.34% respectively as they continue to hold onto the majority of their post ECB and Powell gains.
European yields as we spoke about on Friday widened the spread by about 10bps closing at 1.701 and 4.019 for the German and Italian 10y yields respectively. With Italian elections in under two weeks we would expect this to continue to be a pressure point for the ECB. Equally the 10y gilt in the UK remains elevated and close to its recent highs closing at 3.095 on Friday.
FX - The USD continuing its soft tone again despite the firmness in US yields. The USD Index is currently back at 108.58 mainly on EUR gains. The EUR and GBP both close to half of one percent higher at 1.0119 and 1.1643 respectively. The EUR firmer on ECB chatter but also the seemingly successful counteroffensive by Ukrainian forces over the last few days. However the JPY is weaker at 143.22 up close to half of one percent in what looks more like position adjustment in illiquid markets. Equally USDCNH steady at 6.94. We continue to think that this period of USD weakness and profit taking makes a lot of sense whilst the rally in equities continues. The level that would change this readjustment into more of a longer term play is around 107.50 in the USD Index.
Others - Bitcoin and Ethereum continued their rally over the weekend although backed off a touch with the pair trading at 21,833 and 1735 respectively. Remember its merger week!
Fed Speakers
To close the week on Friday we got a number of Fed speakers continuing their usual rhetoric of late.
Mester was keen to stress that the rate path would be higher faster and inflation would not meet “target” before 2024.
Waller stated that 5% unemployment was acceptable in the face of fighting inflation although he felt that the threat of a recession was fading. However if inflation were to accelerate further rates would have to rise well above 4%. He backs a further “significant” rise in policy rates in September.
George was super helpful with her the case for rate hikes is clear.
Again nothing new and we are now in the quiet period ahead of next week’s FOMC. We have approximately a 90% chance of a 75bps hike at the meeting. Only a big miss either way in CPI will change the needle significantly on this projection and require a WSJ article to redirect the markets.
On the markets Bank of America had an interesting comment on their general state and its a theme we have emphasised on numerous occasions in TMH. They suggest that “declining liquidity and resilience in the treasury market arguably poses one of the greatest threats to global financial stability today”. They go onto suggest that it could potentially be worse than the GFC. Certainly what has been more and more apparent in the era of QE is that flow has become much more significant than underlying fundamentals.
Ukraine
As is so common in markets; memories are short. Ukraine was front and centre for so long and dominating markets earlier in the year but then people’s minds drift as Fed Funds, QT, ECB, CPI and such take over from the human suffering. Sadly the majority of us are all guilty of that but it would appear that our focus once again is turning East. Ukrainian forces are reported to have had a successful counter offensive in the East of the country retaking some 40 settlements as the Russian military admit to a period of “regrouping”. Encouraging news and markets (well at least the EUR) have taken some relief. On the flip side as Putin comes under pressure the danger is his “special operation” turns into a more aggressive “declaration of war”. Potentially something to keep an eye on especially with the SCO meeting this week (more below) and a need for him to save face?
Swedish Elections
Swedish election results are slowly coming in and with around 94% districts counted it would appear that the anti-immigration centre right parties coalition will have the slimmest majority in the Swedish Parliament. It’s too close to call and final results are not expected today but worth keeping an eye on as a prelude to the expected results of the Italian elections in under two weeks and what effect that may have on the markets given their anti EU and Euro stance.
UK Data
Somewhat disappointing prints first thing with monthly GDP for July coming in lower than expected at 0.2% (0.4% expected) in what is the first “real” print since April given the distortions of the last two month’s data on the back of the Queen’s Jubilee celebrations. Similarly industrial production showed a big miss on the month down 0.3% (0.4% expected). Lots of work still on the table for Truss, Bailey and co.
The Week Ahead
US CPI. Front and centre this week the US CPI report for August out on Tuesday. Its the last inflation report and last key piece of data prior to the Sept FOMC next week. A big miss in either direction will be needed to steer the Fed off its 75bp hike path. Growth is still good, NFP was healthy enough and the Fed talk of late has been using “significant” and “forthrightly” in terms of their fight with inflation. This month’s headline is expected to decline by 0.1% a welcome sign, if true, for the markets and the Fed as it would be a first decline in 2 years. That’s the good news, the bad news is that core is set to rise again by the not too inconsiderable margin of 0.3% for the month.
UK Data and Trussenomics. Despite the BoE delaying their September meeting by a week there’s still a lot of UK data to keep us busy. Tuesday brings the labour market report. Wednesday CPI for August when again another rise in both the headline and core inflation rates is expected. However there is more of a mix of expectations with fuel costs expected to ease but food and rents should more than offset any benefits from fuel. Finally retail sales rounds the week off for the UK where the expansion seen in July is seen to be taken back and more with a -0.6% print for the month. One note on the economy moving forward is the effect The Queen’s funeral will have on the economy as a whole. There has been much talk of cancellations of reservations in bars, restaurants, concert venues and of course the much maligned postponement of football over the last few days as the country mourns its leader. The announcement of a bank holiday next Monday for the funeral has also made economists revise their predictions for UK GDP in q3 which was expected to show a rather pale rate of growth at best but is now has the potential to tip into negative territory bring the spectre of recession ever nearer. Let’s see and don’t forget a coronation, probably next year, will have the reverse effect as the country celebrates the crowning of its new leader. All for the future but in the immediate term Trussenomics is starting to garner more attention as her energy plans and the extent of their cost starts to sink in. Much talk over the weekend in the papers around exactly what the two year freeze on gas and electricity prices is going to cost. Indeed there are many questions as to how much, if any, analysis was done on the plan. In addition the BoE delayed rate meeting has given them additional time to assess the plan’s potential impact on monetary policy and potential factor in that analysis to their rate path going forward. Governor Bailey speaks on Tuesday but potentially too soon for such an assessment.
Shanghai Cooperation Organisation meeting. The meeting shall afford the first face to face meeting of China’s Xi and Russia’s Putin since Russia’s invasion of Ukraine. Expectations are for the two countries to strengthen their ties and condemn the West. Look out for any comments on the raised tensions between Taiwan and China and also there will presumably be a warm welcome for the Iranian delegation as their nuclear program continues to rattle the West. Over the weekend Israel noted that it does not see a renewal of the nuclear deal before the US mid-term elections.
ECB Speakers and the EU’s “State of the Union” address. Post ECB we get a plethora of ECB speakers who will no doubt stress the fact that the meeting was hawkish and that 75bps is on the table for October dependent on the incoming data. The ECB officials were obviously not happy with the market reaction on Thursday and turned things around by their “sources” story not long after Lagarde’s press conference. We would expect to see more of the same especially with the further sources story over the weekend which stressed that many in the committee saw a growing probability that rates would have to rise to restrictive territory (ie above 2%) to combat inflation. They also came out with the other nugget that their 2023 growth forecast was on the too “rosey” side. In addition Nagel of the Bundesbank was also hawkish with his comments whereby he sees inflation peaking in December around the 10% level and it staying above 6% next year and calls for the ECB to have more clear steps if inflation lingers in this manner. Finally talk emerged over the weekend that QT is on the cards with reinvestment and QT set to start in q1 2023. Talks are to start in the early October ECB non-monetary meeting with an announcement potentially from the October ECB onwards. Markets may have other ideas however with their attention focused, for now, more on the BTP spreads.
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Monday
ECB Speakers
Guindos (08.30 BST)
Schnabel (13.00 BST)
Tuesday
Australia Westpac Consumer Confidence Index Sep consensus vs previous 81.2 (01.30 BST)
Australia NAB Business Confidence Index Aug consensus vs previous 7 (02.30 BST)
German Inflation Rate MoM Final Aug consensus 0.3% vs previous 0.9% (07.00 BST)
UK Unemployment Rate Jul consensus 3.8% vs previous 3.8% (07.00 BST)
UK Claimant Count Change MoM Aug consensus vs previous -10.5 (07.00 BST)
UK Average Earnings inc Bonus Jul consensus 5.2% vs previous 5.1% (07.00 BST)
EU ZEW Economic Sentiment Index Sept consensus vs previous 54.9 (10.00 BST)
German ZEW Economic Sentiment Index Sept consensus -60 vs previous 55.3 (10.00 BST)
US Inflation Rate YoY Aug consensus 8.1% vs previous 8.5% (13.30 BST)
US Inflation Rate MoM Aug consensus -0.1% vs previous 0% (13.30 BST)
US Core Inflation Rate YoY Aug consensus 6.1% vs previous 5.9% (13.30 BST)
US Core Inflation Rate MoM Aug consensus 0.3% vs previous 0.3% (13.30 BST)
ECB Speakers
Enria (08.30 BST)
McCaul (14.45 BST)
BoE Speakers
Bailey (09.00 BST)
Wednesday
Japan Reuters Tankan Index Sept consensus vs previous 13 (00.00 BST)
Japan Industrial Production MoM Jul consensus 1% vs previous 9.2% (05.30 BST)
Japan Capacity Utilisation MoM Jul consensus % vs previous 9.6% (05.30 BST)
UK Inflation Rate YoY Aug consensus 10.2% vs previous 10.1% (07.00 BST)
UK Inflation Rate MoM Aug consensus 0.6% vs previous 0.6% (07.00 BST)
UK Core Inflation Rate YoY Aug consensus 6.3% vs previous 6.2% (07.00 BST)
UK Core Inflation Rate MoM Aug consensus 0.8% vs previous 0.3% (07.00 BST)
EU Industrial Production MoM Jul consensus -0.8% vs previous 0.7% (10.00 BST)
US PPI YoY Aug consensus 8.9% vs previous 9.8% (13.30 BST)
US Core PPI YoY Aug consensus 7.1% vs previous 7.6% (13.30 BST)
ECB Speakers
Lane (12.00 BST)
McCaul (13.00 BST)
Villeroy (14.30 BST)
Von der Leyen Eurozone State of the Union Address (08.00 BST)
Thursday
Australia Unemployment Rate Aug consensus 3.4% vs previous 3.4% (02.30 BST)
Australia Employment Change Aug consensus 50k vs previous -40.9k (02.30 BST)
RBA Bulletin (02.30 BST)
US Retail Sales MoM Aug consensus 0% vs previous 0% (13.30 BST)
US Phil Fed Manufacturing Index Sept consensus 3.5 vs previous 6.2 (13.30 BST)
US Phil Fed Business Conditions Sept consensus vs previous -10.6 (13.30 BST)
US Phil Fed Employment Sept consensus vs previous 24.1 (13.30 BST)
US Phil Fed Prices Paid Sept consensus vs previous 43.6 (13.30 BST)
US NY Empire State Manufacturing Index Sept consensus -13.9 vs previous -31.3 (13.30 BST)
US Industrial Production MoM Aug consensus 0.2% vs previous 0.6% (14.15 BST)
US Manufacturing Production MoM Aug consensus 0% vs previous 0.7% (14.15 BST)
US Capacity Utilisation Aug consensus 80.3% vs previous 80.3% (14.15 BST)
ECB Speakers
Guindos (10.15 BST)
McCaul (10.30 BST)
Centeno (12.00 BST)
Friday
China Retail Sales YoY Aug consensus 3.5% vs previous 2.7% (03.00 BST)
China Industrial Production YoY Aug consensus 3.8% vs previous 3.8% (03.00 BST)
China Unemployment Rate Aug consensus % vs previous 5.4% (03.00 BST)
UK Retail Sales MoM Aug consensus -0.6% vs previous 0.3% (07.00 BST)
EU Inflation Rate YoY Final Aug consensus 9.1% vs previous 8.9% (10.00 BST)
EU Inflation Rate MoM Final Aug consensus 0.5% vs previous 0.1% (10.00 BST)
EU Core Inflation Rate YoY Aug consensus 4.3% vs previous 4% (10.00 BST)
US Michigan Consumer Sentiment Prel Sept consensus 60 vs previous 58.2 (15.00 BST)
US Michigan Current Conditions Prel Sept consensus 60 vs previous 58.6 (15.00 BST)
US Michigan 5y Inflation Expectations Prel Sept consensus vs previous 2.9% (15.00 BST)
US Michigan Inflation Expectations Prel Sept consensus vs previous 4.8% (15.00 BST)
ECB Speakers
Rehn (09.00 BST)
Saturday
ECB Speakers
Lane (17.45 BST)
Sunday
RBA Kearns (23.10 BST)
Good luck.
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Love those Swedish Dems !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!