The Morning Hark - 13 July 2022
Today’s focus ……EUR parity according to Bloomberg, US CPI, central bank hikes and seconds out round one of the UK leadership election
Daily roundup - all prices are at 7.50 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September both up a percent on the day at 100.60 and 94.20 respectively and taking a much needed breather after yesterday’s 7% sell off. Oil’s price action yesterday resembled a Scottish summer’s day whereby you experience all seasons in one day; we went through pricing in a global slowdown with a soft landing, full on global recession with a hard landing to an out and out depression. We have to factor in once again liquidity conditions which remain shocking but still it’s not a good look. All the usual portents of doom were rolled out from recession fears, renewed China Covid restrictions and the new front page of a stronger USD. All eyes on Biden’s Middle East mission and of course US CPI. Brent around the 97 level looks key to hold for any renewed topside momentum.
The Bloomberg Commodity Index is back through its 200 dma level around the 114 trading which we flagged previously so may be worth bearing in mind with today’s data on the horizon. It closed yesterday a shade over 112.
EQ - After yesterday’s sell off in stocks we see some stability ahead of the data with Asian indices all up smalls Nikkei, Hang Seng and Kospi currently trading at 26,485, 20,900 and 307 respectively.
The US futures also a touch higher with the Nasdaq and S&P trading at 11,820 and 3835 respectively despite everything pretty much the levels we talked about at yesterday’s open if you ignore the up/down 1% in between. The market’s moves were not helped by a fake twitter “leaked” US CPI report claiming today’s headline would come in at 10.2% which was later discredited.
Gold - Gold futures flat at 1725 as once again Asia not keen to get involved. Gold again playing with the 1730 pivot from yesterday and remains a victim to USD strength. 1700 the next obvious downside target.
FI - US yields smalls up overnight with the US2y and 10y yields remaining inverted at 3.05% and 2.97% respectively. This inversion reached a 15 year high at greater than -12 yesterday as recession fears grew ever stronger.
European yields continued their sell off yesterday with the German and Italian 10y yields closing at 1.13 and 3.113 respectively. Quite a round trip for these two when you consider within the last month we have printed 1.78 and 4.17. Unsurprisingly ECB rate hikes are slowly being repriced out of the market with 10bps less being priced in for year end.
FX - Breather time for the high octane USD as it slows its frantic race higher although he USD Index still remains above 108 at 108.11. The majors are steady as they gasp for air with the JPY, EUR and GBP trading at 137.20, 1.0040 and 1.1920 respectively. Quiet overnight session after a rip roaring day yesterday. The market’s worst kept secret that the EUR would hit parity was let out of the bag as it hit a low of 1.00 according to Bloomberg at least. Lots of claim and counter claim in the FX options market with digitals, knock-ins/outs and barriers all riding on that print. I’m sure there was some heated FX sales desks around the globe trying to reason between their clients and trading desks. Anyway, suffice to say the EUR remains on the back foot with 1m ATM vol pressing ever higher to 12.7%. The whole mood was not helped by the ZEW sentiment survey printing its worst in over 10 years which was eventually, back then, countered by a spate of QE but we find ourselves in a very different landscape these days. Barclay’s research extrapolated EU GDP data in the scenario whereby the NordStream doesn’t get turned on again on the 22 July and it wasn’t pretty with a 5% for the Eurozone.
Some context in the EUR’s move when we compare it to our other FX favourite short GBP. I realise it’s not an exact science but there’s a certain symmetry to it as we find they are both down approximately 12% from their opening levels of the year but the BoE has obviously been on a hiking path in all that time with the ECB yet to jump on that boat.
For a balanced debate there was some better news out of the UK this morning with all economic prints beating expectations MoM GDP for May came in at 0.5% and industrial and manufacturing production both showing strong May uplifts. GBP didn’t really take note.
Elsewhere US Treasury Secretary Yellen discounted any FX intervention in the face of the rising USD saying that it was warranted in only rare circumstances.
Others - Nothing from Asia today in the pair with Bitcoin and Ethereum smalls lower to 19,500 and 1060 respectively.
3AC case gets ever more intriguing by the day with claim and counterclaim with a game of “Where’s Wally” thrown into the mix. Anyway more below for those interested but yesterday saw a NY court freeze what little asset remains of the company.
Couple of points to note from yesterday. Fed’s Barkin remained on script although was more sympathetic on the possibility of a recession. Agreeing that a soft landing would be “challenging” and a recession was “possible”. Even going as far to say the Fed would “take seriously” a negative q2 GDP print.
Secondly, the IMF downgraded their US forecasts (after only one month) after poor data prints over the last month with GDP lowered to 2.3% for this year (2.9% prev) and 1% for next (1.7% prev). Unemployment had similar revisions on the topside. However, their inflation still sees a cliff like drop from 2022 to 2023 from 6.6% to 1.9% which seems out of kilter.
US CPI and a lot of hype and a lot of “elevated” talk from all corners. Consensus is 8.8% for the headline with the major banks all in the 8.6/8.9% range. New cycle high seems nailed on but is it the peak? Some previews below for a deeper dive.
Central Bank Hikes
RBNZ hiked 50bp overnight as expected taking rates to 2.5%, a six year high, with little fanfare. Similarly South Korea raised rates 50bp, its biggest increase in over 20 years, as it joins other global central banks in the fight against inflation.
The BoE’s Bailey was trying to stay strong with a very “forcefully” expressed view in a rather BBC like interpretation of rate hike magnitudes when he claimed that other options are available when discussing a 25bp hike.
Day ahead of course US CPI but also remember the BoC which seems to have been forgotten in all the hype. 75bp hike expectations and the monetary policy report too but it may get swept under the carpet by the “elevated” expectations for CPI. The BoC Governor Macklem will also talk post release (16.00 BST).
Of course more UK politics with the first round proper of voting by Conservative MPs today (apologies for somewhat skewed calendar of events yesterday) for the leadership. Politico below has all the “best bits”.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
EU Industrial Production YoY May consensus 0.3% vs previous -2% (10.00 BST)
US Headline Inflation Rate YoY Jun consensus 8.8% vs previous 8.6% (13.30 BST)
US Core Inflation Rate YoY Jun consensus 5.7% vs previous 6.0% (13.30 BST)
Bank of Canada Rate Decision 75bp hike expected to 2.25% (15.00 BST)
Bank of Canada Monetary Policy Report (15.00 BST)
Australia Unemployment Rate Jun consensus 3.8% vs previous 3.9% (02.30 BST)
Australia Employment Change Jun consensus 30k vs previous 60.6k (02.30 BST)
Japan Industrial Production YoY Final May consensus vs previous -4.9% (05.30 BST)
Japan Capacity Utilisation MoM Final May consensus vs previous 0% (05.30 BST)
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
Diego Parrilla - Chronicle of a Crisis Foretold
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The BondBeat - while we slept; NFIB details 'severe decline'; 'Summer (Il)liquidity'; pro equities (strategically)BUT underweight in short run -BlackRock
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📚⠀Further reading on the current key macro themes:
The Verge - Liquidators for crypto hedge fund Three Arrows Capital say they can’t find founders
The Block - First meeting of Three Arrows Capital's creditors to take place on July 18
Fortune - Missing 3AC cofounder Su Zhu reappears on Twitter to break his silence and accuses the firm’s bankruptcy administrator of entrapment
Fortune - How the ‘Big Shot’ billionaire tycoon who broke the nickel market managed to claw his short squeeze back from a $10 billion loss
Pepperstone - US CPI preview - a major volatility event risk in the making
Employ America - June Inflation Preview: Lagging Consensus Catches Up To Hot Headline, But Relief Nearing...
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