The Morning Hark - 13 Oct 2022
Today’s focus ……US CPI cometh and who needs Game of Thrones when you can have Game of Chicken in the UK?
All prices are at 7.35 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December flat in Asia with them currently trading at 92.40 and 86 respectively. Oil returned to type yesterday after the PERN leak story spike as it traded back towards its recent lows with all the usual culprits in place with stronger USD, demand worries, impending rate hikes and indeed a large crude build thrown in on top from the latest API data.
The Saudi regime came out yesterday to confirm that the US indeed did request they lobby for a delay in the OPEC+ production cut by one month until after the mid-terms. This spat will run and run.
EQ - Equity markets in Asia all softer with the Nikkei, Hang Seng and Kospi lower at 26,222, 16,498 and 284 respectively.
The Nasdaq and S&P flat in Asia at 10,829 and 3588 respectively as they wait for the CPI verdict. Key level on the downside remains for S&Ps 3565/70 with upside contained for now around 3630/40.
Gold - Gold Dec flat in Asia at 1675 as gold remains firmly on hold until today’s CPI print. Support remains around the 1670 level but if that were to go then it would open up the downside to the year’s lows near 1620. Topside for now 1700 the obvious resistance with further in our 1720/25 “noisy zone”.
FI - US yields firm overnight in Asia trading with the US2y and 10y currently at 4.31% and 3.92% respectively.
European yields rallied strongly yesterday with the German 10y yield trading above 2.4% for the first time since August 2011 before selling off a touch to close at 2.311%. The Italian 10y yields likewise had a strong day in the general higher rates environment with a close at 4.794% not far from the year’s highs.
UK gilts lead the way, as ever it seems currently, touching another fresh high before settling lower to close at 4.417%.
Day 4 in the Big Brother House that is the Japanese 10y bond market as we clocked up a further day of zero trades. Unprecedented times.
FX - All quiet in FX land as we await the numbers this afternoon. The USD is flat with the USD Index holding onto recent gains at 113.30. EUR dull at 0.9698. USDJPY still testing gravity at 146.85 and GBP likewise at 1.1065. Shouldn’t it be a lot lower? Political turmoil and financial markets mayhem just round the corner? 100bps hike for November keeping it afloat? Let’s see what today brings.
Others - Yep you guessed it Bitcoin and Ethereum are still trading but going nowhere fast at 19,074 and 1285 respectively. CPI should raise them from their slumber but it is impressive that they have pretty much sustained these levels whilst stocks have sold off and yields risen over the last week or so. Impressive and lot of chatter that a natural floor is being built. I’m still a touch sceptical on that one but you cannot deny the price action.
So we come to one of the last staging posts on our journey to confirm or otherwise a further 75bp hike from the Fed. September CPI arrives this afternoon and given the recent prints it will provide some fun and games.
Expectations are for Headline monthly to come in at 0.2 with YoY at 8.1% with the Core equivalents at 0.5% and 6.5% respectively.
If we look at the last year of prints unsurprisingly I guess, given the nature of this current series, market expectations have missed to the topside in 10 of the last 12 months. Again unsurprisingly out of those 10 occurrences the USD and yields have rallied and stocks sold off.
On that basis the market most likely is skewed in that direction which matches the recent price action of markets and also reflects in the spread for the Core YoY forecasts which is skewed higher from between 6.4/6.7%. The Fed, out with the PCE reading which we shall print at the end of the month, look at Core more closely and that has been sticky to say the least of late with, in particular, rentals remaining stubbornly high and of course that old chestnut energy prices.
How to play it well let’s examine the last two recent prints of note we have had; August CPI if you remember was hot with both Headline and Core missing by 0.2% for the YoY prints. We subsequently got a 4%+ sell off in stocks. Last Friday we had a steady payrolls print with a small beat, a drop in the unemployment rate and uptick in wages and that precipitated a 3%+ drop in stocks albeit helped by positioning. So as we can see even a small miss can have an exaggerated move in these illiquid times.
As we say we are of the view that Core is king and hence any miss in that metric will have by far the greater effect on the markets so we shall take it as the measure.
6.4% and below should see stocks rally hard and the USD and US yields sell off. At the very least we would expect a 2% move on the day probably further given the recent price action and subsequent positioning.
Any print beyond 6.3% (previous months print) will obviously extend the move to closer to 4% with chat of Fed pause/pivot coming back hard into the market. If this were the case we would expect to have some Fed chatter in the coming days declaring that a “consistent” and “lasting” trend lower in inflation needs to be seen before any thoughts of a pause in the hiking cycle.
On the topside 6.6% and beyond and the downside will be tested even further in stocks reaching new lows for the year pushing 3%+ lower and US yields and the USD gaining renewed strength. Look out 150 USDJPY!
An inline print will still see stocks remain soft with a further 1%+ sell off with yields and the USD remaining underpinned.
As ever far from a science and much more of a pin the tail on the donkey exercise bit like Fed policy tbh!
UK soap opera continues
So then came the proper denial from the BoE. The gilt buying scheme WILL end on Friday come hell or high-water and let them eat cake and whatever other metaphor is appropriate. They did throw in the caveat that “a number of facilities including the new TECRF (the temporary repo facility details of which I post at the bottom) are in place to ease liquidity pressures on LDIs”.
Reports later in the day more cracks seemed to be appearing as it was suggested that large UK companies were receiving requests from their pension funds for loans.
Markets wise the emergency auctions had their biggest day yet potentially spurred on by the BoE’s warnings with a total of £4.35bn offers accepted by the Bank (£2.37bn conventional with the balance the linkers).
Politically there was much speculation (which we tweeted yesterday) that Truss and Kwarteng would ditch the budget and perform one of the quickest and most embarrassing u-turns in British political history. It was subsequently denied later by the Treasury Minister.
Furthermore at PMQs in the UK Parliament PM Truss doubled down and said that there would “absolutely” be no cuts in public spending. Speculation continued that she also believes in the tooth fairy and that is yet to be denied by her aides.
Later in the day at the IMF gathering Kwarteng as an aside said that any market turmoil after Friday would be a “matter for the Governor”. So the battle lines have been drawn.
Meanwhile back in the “real world” UK gilt yields are hitting 20y highs.
As we said earlier in the week credibility is a lift down stairs up concept for markets and both the government and the BoE are proving to be a great tag team in destroying the UK financial market’s credibility.
One theory, from Nomura, as to why BoE Governor Bailey was so forthright in his end game on Friday for the gilt buying, is that he is playing a game of “chicken” with the government. By pulling the rug on the Bank’s scheme he is pushing the government into a corner and forcing them to perform a u-turn on their tax cutting budget in order to restore market stability and credibility. This may also have the bonus of Truss and Kwarteng having to resign and a potential reset on the relationship for the Bank with a new more “cooperative” government. Well its a theory of sorts and we have talked in the past about the disintegration of the relationship between the two warring factions but its playing with fire but in these times nothing is impossible!
I post at the bottom a couple of articles on the credibility issue (from the ever-insightful Duncan Weldon) and the Nomura piece on the “game of chicken”.
Central Bank Speakers and Fed minutes
Much of a muchness
The BoE speakers offered nothing new on the Gilt market after the BoE statement earlier in the day. Pill was probably the most forceful with his warning to the market to expect “significant” policy action at the November meeting.
The ECB’s Knot expressed the need for “at least 2 more significant hikes” whilst warning that inflation will probably not disappear with weak economic growth.
On the Fed front they are not backing away. Evans suggested that “aggressive rate hikes” were still needed even if it meant more job losses.
Bowman also said that “sizeable” rate hikes were still on the table if there was no sign of inflation moving lower and on that basis the move needs to be “consistent” and “long lasting”. Rates need to rise to a “restrictive” level and remain there for some time.
The Fed minutes echoed these and recent Fed sentiments from the past few weeks. They underlined the hawkish Powell presser and dot plan. More hikes are needed and rates need to stay higher for longer. There was some chat of MBS sales being under consideration but in what is potentially a nod to Brainard’s latest comments there were some members starting to see risks become two sided.
As we say nothing majorly new. As an aside Treasury Secretary Yellen stated that she was worried over the loss of “adequate liquidity” in the treasury market. Something which we have stressed a number of times lately and I repost below BoA’s Cabana great read discussing such stresses for those with an interest.
It’s hard to keep up with all the central bank speak but the excellent FXMacro Guy’s daily tweet below has a comprehensive round up of all the central bank speakers from yesterday. Also for a longer look back his weekly, which I have posted below, is a great read for a round up of the recent speakers and the week gone by. Huge amount of essential market intel packed into a super readable format.
The Day Ahead
German inflation is just out and inline. Nothing to see here.
The stage is now clear for US CPI.
Early doors tomorrow we get Chinese inflation.
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US Inflation Rate YoY Sept consensus 8.1% vs previous 8.3% (13.30 BST)
US Inflation Rate MoM Sept consensus 0.2% vs previous 0.1% (13.30 BST)
US Core Inflation Rate YoY Sept consensus 6.5% vs previous 6.3% (13.30 BST)
US Core Inflation Rate MoM Sept consensus 0.5% vs previous 0.6% (13.30 BST)
Breeden (09.00 BST)
Nagel (13.00 BST)
China Inflation Rate YoY Sept consensus 2.8% vs previous 2.5% (02.30 BST)
China Inflation Rate MoM Sept consensus 0.4% vs previous -0.1% (02.30 BST)
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Strong - thanks for giving us a platform to amplify our message!
Great report. Thanks 😊