The Morning Hark - 13 Dec 2022

Today’s focus … US CPI expecting fireworks, at last SBF arrested and the first WC semi-final

Dec 13, 2022

All prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude February futures up close to two percent in the Asian session as it continues to rally after yesterday’s gains. The futures currently trading at 79.30 and 74.50, respectively. Oil’s firmer tone was once again related to the Keystone Canadian/US pipeline, which looks like having an extended period offline than first thought. In addition, China covid restrictions being lifted continue to give oil a generally firmer tone but remember, markets are thin and moves become over-extended in such periods.

EQ - Asia futures sat in a very quiet session overnight although, as per usual of late, the Hang Seng has a mind of its own and is close to two percent up on the day at 19,685. All manner of reasons from a financial package from the Chinese authorities to help the semi-conductor industry to covid restrictions starting to lift for arrivals into the territory all being attached to the rally. The Kospi and Nikkei much more subdued and currently sit flat at 27,907 and 308, respectively.

The Nasdaq and S&P flat overnight at 11,843 and 4029, respectively, as they hold onto their gains from yesterday.

Gold - Gold Feb futures as you’d expect flat-lining in Asia ahead of the big data print, currently sitting at 1799. Gold has spent the last few sessions trading around our pivot at 1800, and we await direction from the CPI print. First support at 1780 then 1750 with resistance towards our noisy 1820/25 zone.

FI - US yields softer overnight in Asia, with the US2y and US10y currently trading at 4.37% and 3.60%, respectively. Remember 3.50% in the US10y, which seems to be the trading pivot as we head into the CPI print.

European yields opening on the firm side, with the German 10y yields closing at 1.963% and Italian 10y yields at 3.842%.

UK gilts traded a touch firmer yesterday, with the 10y yield closing at 3.20%.

FX - Again, another dull FX session with little new of note. The USD a touch softer with softening US yields, with the USD Index currently trading at 104.90. The majors all a touch firmer with JPY, EUR and GBP currently trading at 137.37, 1.0556 and 1.2294, respectively.

Others - Bitcoin and Ethereum softer with the general softer risk tone prior to the big events this week we currently sit at 17,150 and 1262 respectively.

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US CPI Preview

With a 50bp hike tomorrow from the Fed all but sealed the US CPI print for November is probably the data highlight of the week and will help shape the future debate on how high and for how long rates will have to go in the US.

Headline is expected to soften further to 7.3% YoY, off a peak in June of 9.1%, which would be the lowest print of the year. Core is also expected to ease to 6% off its more recent peak at 6.6% in September. For reference the low for Core this year was in June and July at 5.9%.

When we look at the recent Core PCE print at the end of last month we also saw a softening in that measure down to 5%. However, Friday’s PPI report for November showed a disturbing trend whereby both YoY measures had upside surprises versus expectations albeit with both measures coming in lower than the previous month’s prints. That print has made the market a touch more nervous about today’s report and the softening trend is not the foregone conclusion that the market was anticipating.

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 tomorrow’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.

Market wise, as we say above, there’s a nervousness about proceedings. The S&P and the VIX (Volatility Index - measure of expectation of volatility based on the S&P index options) both had big moves up yesterday afternoon. Couple of things to note here we have large option expiries coming up at the end of the week with a large number of strikes in the 4000 area. Also, this points to expectations of a big move in the S&P on the CPI print. The average move for the S&P has been 3% post CPI in the last 6 prints, and that was helped by a 5.5% on the softer last print for October so strap yourselves in!

We would expect those extravagant outsize moves of well over 3% to come either way on an upside miss on the YoYs above 7.7% on Headline or 6.3% on Core, basically above their previous prints. Downside wise we would expect such moves if we printed below 7% and 6% respectively. We believe the skew in terms of magnitude of move inbetween these levels is more to the downside for inflation rather than the upside. So a smaller downside miss will have more market Impact on the upside for stocks than a small upside miss will have. Again it’s where the market wants to go! JP Morgan was as bold to say that S&P could rally some 10% on a soft number today.

SBF is Back in the Headlines

He’s back with a bang! News broke overnight that he had been arrested in the Bahamas and will face SEC charges as well as an indictment from the Southern District of New York’s attorney’s office which will be unsealed at some point today.

The NYT seems to have managed to get a sneak preview, and I’m sure the charges will come as no surprise that they include; wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering. Quite the full house. It would seem that the spotting of Caroline Ellison in NY was maybe not a coincidence after all?

Let’s see what today brings but it does feel like the beginning of the end for SBF. Oh and it doesn’t rain, but it pours for the man as the Congressional hearing gets underway today too.

One twist is from previous statements from his lawyer who suggest that the FTX “leadership”, if you can call them that, were “compromised” and suggested back then that the SDNY were investigating his client. That language would suggest some espionage or insider threat and speculation abounds that this may be more focused on organised crime than from state intervention. Again other than SBF, everyone else is very very quiet. If nothing else it makes for a great story!

More reports suggested that the top brass at FTX had a “secret” signal channel which they called “wirefraud”. Hardly illegal, just optically a tad stupid, but they were young and foolish! Anyway, I post the link at the bottom.

On a more serious note, Binance has come under more scrutiny with the revelation that Jump, the HFT market maker, has withdrawn around $250m of funds off Binance in the last month. This may be nothing, and after the FTX debacle, when they had funds left on the platform, it may just be a reorganisation of how Jump treat their operational risks but worth keeping an eye on. Indeed close to a yard has been withdrawn in the last 24 hours. This comes as further headlines hit the tapes including potential money laundering charges of some of their executive team and their proof of reserves audit raised some red flags. More at the bottom and Binance would appear to be financially sound, but we have heard that before, but probably worth keeping an eye on. Bitcoin has not taken the bait as yet which probably tells a story in itself.

Central Bank Speakers

Bank of Canada’s Macklem was on the tapes overnight with some pearls.

Inflation is well above target and it’s a long way back to the Bank’s 2% target.

He felt that the Bank was beginning to see some improvements in the labour market balance.

Finally, there would be clearer evidence of inflation coming down in the spring of next year.

The World Cup - First Semi-Final

Croatia v Argentina

A second successive final for the Croats or does the Messi odyssey to the GOAT accolade continue as he tries to emulate his hero and mentor Maradona?

Will the pass masters do it again? They are only in their seventh World Cup finals since they became an independent nation, but this is their third semi-final. This from a country that is around half the size of London! Controlling the pace of the game and protecting the ball like a mother protects a new born baby. In Livakovic, they have a keeper that is the form of his life. The masked Gvardiol at 20 is one of the hottest properties on show at the World Cup and of course the midfield trinity of Kovacic, Brozovic and of course Modric. What they don’t have, sadly for them, is a striker who is of a similar quality to these team mates. If they did, surely they would be favourites to go all the way. Remember, they scored against Brazil with their first shot on target in the 116 minute and if the Brazilians had been a little more cynical and taken Modric out earlier in the move then the story could have been very different. One thing is for sure the Argentinians will not think twice about a professional foul if it ensures their progress.

The emotional rollercoaster of Argentina’s campaign continues. Having started with that defeat to the Saudis, they changed half the team and have slowly come onto a game. Having been in total control of their quarter final versus the Dutch, it all fell apart in the last 20 minutes or so, and they were probably lucky to take it to penalties. Credit where credit is due that they came through the game after that late late Dutch equaliser in normal time but how much emotional energy was spent on that game and indeed the taunting after the game of the losing team. Not a great look, but the Argentinians won’t care if they get their hands back on the trophy that was last raised for their country by the late great Maradona some 36 years ago. One slight quirk is that Group C, where Argentina came out of, has provided the eventual winner of the trophy 3 out of the last 6 World Cups.

Good luck to both teams. Penalties anyone?

The Day Ahead

Final print for German inflation in November came in bang in line with YoY now at 10%.

UK employment report showed a mixed bag with the unemployment rate a slight uptick to 3.7% but inline with expectations. Average earnings ticked up from previous months at 6.1% but were lower than expected and the claimant count was up higher than expected at 30.5k. Nothing to get all that fussed about to be honest.

Later in the day we have the December ZEW economic sentiment measures for Germany and the EU, which are both expected to show a slight improvement albeit both remaining in negative territory.

The main event of course is the US CPI report.

Late in the evening RBA Lowe speaks and overnight we get Japanese Tankan survey for q4 which is expected to show a slight slowdown. Also, machinery orders which are expected to improve and further industrial measures in the early hours of Wednesday.

Also on a week like this, the FXMacro Guy’s weekly is a must-read, especially with his Fed speaker crib sheet (link at the bottom).

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All times in GMT (EST+5 / CEST-1 / JST-9)

Tuesday

Germany ZEW Economic Sentiment Index Dec consensus -26.4 vs previous -36.7 (10.00 GMT)

EU ZEW Economic Sentiment Index Dec consensus -25.7 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 Tankan 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)

Early Wednesday

Japan Industrial Production MoM Final Oct consensus -2.6% vs previous -1.7% (04.30 GMT)

Japan Capacity Utilisation MoM Oct previous -0.4% (04.30 GMT)

Good luck.

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