The Morning Hark - 13 Jan 2023
Today’s focus …US CPI brings a smile to the markets but the Fed/market expectations remain unreconcilable. Friday 13th nightmare for the BoJ as they burn through cash quicker than SBF.
Prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March off a touch overnight, with them currently trading at 83.80 and 78.50, respectively. The oil sector has had a decent week with gains of over 5% as a softening inflation profile in the US and China reopening fuels hopes for the demand side of the market.
EQ - Asia equity futures mixed overnight, with the Hang Seng and Kospi trading up at 21,785 and 316, respectively, as they bask in the US equity rally. However, the Nikkei is off close to one percent at 26,050 as the spectre of a policy shift in Japan becomes more of a reality.
The Nasdaq and S&P off smalls overnight with them currently at 11,508 and 3997 respectively. The initial reaction was a sell off in stocks post CPI as the market was looking for that downside surprise, but once the short term positioning was squared and the realisation that the report was enough for the Fed to slow further, the liquidity junkies were back in buying up all they could get their hands on.
Gold - Gold Feb futures loving life at the moment as they rang the bell at our 1900 target and seem happy to remain there. Yesterday post CPI saw us take this level out and reach a high of 1904 to levels last seen back in April. Next up looks like 1925 then further to 1955/60. Support now 1870.
Lot of speculation on the precious metals great start to the year, which has barely seen it flinch. Indeed since the start of November its up over 15%. Obviously, the slowing pace of Fed hikes with the softening inflation profile have played a major part as the USD has weakened some 8% in the same period. In addition a lot of chat that China has started to accumulate physical gold starting back in November as it potentially builds a case for a gold linked currency to challenge the might of the USD. Not sure if they remember the gold standard and Bretton Woods?
FI - US yields steadying overnight after their post CPI selloffs with US2y and US10y trading currently at 4.14% and 3.45%, respectively.
European yields followed the US lower yesterday, with the German 10y yields closing at 2.12% and Italian 10y at 3.99%.
UK gilt yields softer too, with the 10y closing at 3.33%.
FX - Quiet session in Asia for FX with the USD consolidating near the lows after yesterday’s sell off. The USD Index sits currently at 102.26. The EUR and GBP now at 1.0840 and 1.22, respectively. The JPY, however, is close to half of a percent higher again at 128.72 with all the action in the Japanese rates pits, which we touch on below. The JPY back to levels last seen in May.
Others - Bitcoin and Ethereum loving life in the “softer” inflation environment and shrugging of all manner of woes for the sector. Bitcoin enjoying a decent rally again, with it currently sitting at 18,800. Ethereum lagging at 1407.
US CPI Review
Pretty much bang in line with expectations, with only the Headline MoM coming in slightly softer than expected at -0.1% and ushering in disinflation to the US for the first time since the pandemic days of the summer of 2020. Core, however, remains sticky with a 0.3% MoM print which further emphasises the Fed’s dilemma.
The details suggest that energy costs provided the biggest help for the decline, but the stickiness was in the main down to the shelter component, which contributed 0.8 for the month, the biggest leap since the 1990s.
However, just over 40% of the components of the report show deflation and this will give the Fed comfort that 25bps hikes are okay to move down to but equally will fuel market expectations that a pause is on the way sooner rather than later.
For the Fed watchers amongst us, the “ex-shelter core services component” came in at an elevated 0.4% for the month of December.
The report leaves us with the consensus view that rates will shift higher in February but by only 25bps. The market is pretty much fully priced for such a hike for the February and March meetings, which would take the policy range to 4.75/5% before a pause in May. Let’s see. There still remains quite a divergence between the two camps. The Fed remains of the view that there will be “stickiness” in the inflation series, whilst the market is anticipating a “road runner” type cliff edge for the series sooner rather than later.
Financial conditions are close to Jackson Hole looseness, so will we get a Powell rebuke at some point? Remember the Fed minutes; this only makes the Fed’s job harder. I’m beginning to wonder which is the harder job, The Fed Chair or the Chelsea manager?
Scott Grannis - Why inflation has declined
Fed speakers
Harker joined the 25bp club as he stated that that level of hike would be appropriate moving forward. However, he saw rates rising a few more times in 2023 and once the hiking had ceased, the Fed needs to hold rates steady “for a bit”. Terminal for him is just over 5%.
He sees the labour market softening in the year, with the unemployment rate expected to tick up to 4.5%.
He felt the CPI report showed that the inflation trend was headed down. Saw signs in moderating shelter component and realising the lag in this sector.
Bostic welcomed the CPI news and felt it may allow the Fed to slow the pace of rate hikes. He tempered it somewhat by saying that the economy still had a lot of momentum when you consider the job additions are trending above 200k per month.
Barkin is more supportive of a “rate path that is slower but potentially higher”.
Bullard, as ever, however, wanted to dampen the high spirits on show. He stated that greater than 5% rates was the lowest required to restrict inflation in a credible fashion. He also wanted to maintain rates at a high enough level to avoid the mistakes of the 1970s. Yes, CPI was encouraging, but there is possibly too much optimism in the market that inflation will fall.
China
Further reports, out of China, of another draft paper being drawn up to help improve the “high quality” property developers’ balance sheets. The draft contains some 21 points as a map to guide them to financial stability. Part of the package alludes to a further $20bn plus worth of special loans.
Japan
Certainly Friday the 13th for the BoJ as their 10y yield curve control cap at 0.50% is well and truly broken with the market testing the Bank’s resolve and pushing yields to 1.03%, an eleven-year high. This has prompted the BoJ to “schedule” two unscheduled bond buying operations on the day, which have managed to stem the bleeding and eventually returned yields back to 0.50%. In addition, the Bank offered market participants 0% loans in order for them to buy the interest bearing bonds. What a mess!
History tells us repeatedly that caps and pegs rarely work in the long term and especially when underlying fundamentals do not support them. Remember BoJ policy rate is -0.1% in a 40 year high 4% inflation environment.
The BoJ is burning through money faster than even SBF did. On Thursday alone, they bought over half their monthly scheduled purchases (JPY 9tn)! The 9tn amount was the number cited in the BoJ’s December meeting minutes as the increased level the BoJ anticipated using. That, with the ink nearly dry, already seems now to be a tad undercooked.
All eyes on next week’s BoJ meeting, and the pressure is certainly building for a policy shift.
Crypto
More ’23 woes.
Nexo, the crypto exchange, has been raided by Bulgarian police with allegations that they have been involved with money laundering and tax crimes.
crypto.com to lay off 20% of their workforce. I guess they waited a month after the World Cup, where their brand was plastered everywhere, to announce this. No-one will remember right?
The FT runs a story that sources close to DCG suggest that their Genesis unit owes creditors over $3bn. Obviously, $900m of that is owed to Gemini and is the subject to the ongoing public spat between Barry Silbert and Cameron Winklevoss, which we have flagged recently.
DCG is considering offloading some of its crypto portfolio although this is said to be worth a “mere” $0.5bn, and all other funding options seem to be meeting with little success, unsurprisingly. They have already cut some 30% of the workforce and have shut their wealth business in cost cutting measures.
To pour more fuel on the fire the SEC have charged both Genesis and Gemini for the “unregistered offer and sale of crypto asset securities” through the Gemini Earn lending program. Some lovely hindsight trading from the SEC here, given the product was in circulation for 2 years.
Finally, SBF has written a substack piece which is long and rambling and really reads perfectly as a “the dog ate my homework” type excuse. Basically, it’s a history lesson on the travails of crypto in 2022 with no real mention of his squirrelling away of client funds, etc. Quiet day today, so may be worth having a look for the entertainment value alone. Oh, and it’s free to read, but if you’d like to “pledge” money to him you can. Wasn’t that how all this mess started in the first place?
CoinDesk - Nexo subject to investigation by Bulgarian police
CoinDesk - SEC alleges Genesis/Gemini sold unregistered securities
The Day Ahead
UK data dump provided some glimmer of hope for the UK with beats for November GDP, although the YoY still teeters close to 0%. However, unsurprisingly, all the production prints came in lower than expected and the previous prints.
Main focus is the UMich survey for January with its inflation expectations but little else other than watch those financial conditions loosen.
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Macrodesiac - 💵 Thinking The Right Way About CPI
- - Daily Chartbook #118
- - Fed Overview into 2023 🔒
- - The Courage of Bulls
- - How Europe is Decoupling From Russian Energy
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All times in GMT (EST+5 / CEST-1 / JST-9)
Friday
EU Industrial Production YoY Nov consensus 0.5% vs previous 3.4% (10.00 GMT)
US Michigan Consumer Sentiment Prel Jan consensus 60.5 vs previous 59.7 (15.00 GMT)
US Michigan Inflation Expectations Prel Jan previous 4.4% (15.00 GMT)
US Michigan 5y Inflation Expectations Prel Jan previous 2.9% (15.00 GMT)
Fed Speakers
Harker (12.30 GMT)
Good luck and a good weekend to one and all.
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Think JPY will continue it´s rally to heaven
I've looked in to it enough