The Morning Hark - 13 Sept 2023
Today’s focus... Headline vs Core CPI... A hot blip vs cooling trend
Second tier data in APAC (Japan PPI, NZ food prices) left the market to consolidate ahead of US CPI
ECB sources story on Reuters "The European Central Bank expects inflation in the 20-nation euro zone to remain above 3% next year, bolstering the case for a tenth consecutive interest rate increase on Thursday, a source with direct knowledge of the discussion told Reuters on Tuesday." ... this has EURUSD at the top of its recent narrow range 1.0750-60 on the London open as well as EURGBP clearing 0.8630 after weak UK data. Rates market has now one full hike priced by year end for the ECB, with expectations also rising that it will be delivered tomorrow.
UK GDP -0.5% vs exp -0.2% and prior +0.5%... strikes, impending mortgage cliff, wet weather impacting retail and construction... no longer is the discussion of a search for once in a lifetime trips post covid, the focus at the pub is on mortgage repayments and the elevated cost of living. 1.6mio households are still to refinance in the coming 12months (source FT) with the average 2year mortgage rate north of 6.5%.
Equities: the up/down/up/down cycle continues as the major indices give little guidance and continue their choppy price action following the Apple 15 release event. HSI and CSI 300 down 40bps and 20bps respectively following the negative US close of -1% for Nasdaq.
The day has finally arrived and consensus is looking for headline to spike higher but crucially core to maintain its downwards trajectory. Are base effects rolling through? Will GS be right and we start to see core inflation trending higher? Is there enough fear in the market of a 'hot' print that we can actually see an inline to softer number take the pressure off the Fed and weigh on USD (rates rally)? Is there anything in today's data that can reignite a September hike? This seems grossly unlikely however Nov can easily reprice the probability of a hike by 10-20%.
We've all seen the gas and oil charts, so headline inflation to rise from 3.2% to 3.6%. Base effects are now a supporting factoring having accelerated the disinflation in H1. However the majority of the gas / oil price rise has occured after the observation window. The market maybe susceptible to expecting a rise that is coming but it curcially may not show up today.... Making a noisy day even harder to interrupt. As always wait for the FX experies at 15:00 to see if the first move sticks.
MoM headline is expected at 0.6%. That is not something the Fed will feel comfortable with, that their fight is done. After all 0.6% MoM does not correspond with making our way back to 2% target.
Core inflation has been sticky but the market is looking for all of the good news to come from here today with an expected drop from 4.7% to 4.4% and crucially MoM stays around 0.2%. This is where @HarksterHQ will be watching closely, the headline noise is one thing but if the core is to remain sticky then we can quickly revert from "soft landing" vibes to something more sinister, that the Fed's job isn’t done yet, a hike in Nov becomes more likely and "higher for longer" is in a clear conflict with the market expecting a cut by Q1 2024. The market needs core to deflate or the prospects of "higher for longer" in the face of weakening US data will embolden bears/ stagflationists.
US CPI Previews (Sourced from the "US CPI" curated channel on Harkster.com):
Brent Donnelly: Mexico and CPI
Livesquawk: US Headline Inflation Poised To Move Higher, But Likely Drop In Core Rate Should Placate Policymakers
Saxo Bank: Macro and FX: King Dollar, pressures on China, and will ECB hike?
Advisor Perspective: CPI and PCE - Two Measures of Inflation and Fed Policy
Outside of US CPI... UK activity is cooling, ECB expectations are rising and as ever China remains a key focus in the market's literature
UK slowing faster than Man Utd's premier league title bid...
China: some silver lining?
Man Group: Views from the Floor - China: Approaching a Cyclical Reprieve?
Bloomberg: Yuan Bears Feel Heat of PBOC Defense as Funding Costs Surge
Europe: nothing like a source story to spoke pricing
Nordea: Eur rates: 75/25 for a hike going into the ECB meeting
FT: Central banks debate: can ‘high for longer’ substitute for rate rises?
ㅤ
If you found this morning’s briefing useful, please give it a ‘Like’ at the bottom of the page. It only takes a few seconds and helps our free commentary reach a wider audience. 🙏
MS Thoughts on the Market: US and China on Divergent Paths
Bloomberg: BOJ Watchers Bring Forward Rate Hike Forecasts on Ueda’s Remarks
Oaktree Capital: Fewer Losers, or More Winners?
Follow the latest market narratives through our curated research & commentary channels on Harkster.
All times in British Summer Time (BST)
USD (13:30): Core Inflation exp 0.2% MoM (prior 0.2%)
USD (13:30): Headline Inflation exp 0.6% MoM (prior 0.2%)
USD (13:30): Core Inflation exp 4.3% YoY (prior 4.7%)
USD (13:30): Headline Inflation exp 3.6% YoY (prior 3.2%)
ㅤ
The information provided in this post is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision.
Right On !!!