The Morning Hark - 14 Dec 2022
The Morning Hark - 14 Dec 2022
Today’s focus … US CPI fireworks didn’t disappoint, 50bps nailed on so its over to you Jerome, Messi’s odyssey continues and is it France or Morocco?
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All prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude February futures off a touch in the Asian session with futures currently trading at 80.40 and 75.30 respectively. Oil enjoyed the soft CPI ride yesterday helped by the weakening USD. On top of that, continuing relaxation of covid protocols in China as well as a report that the US are set for well below average temperatures for the majority of the Christmas week, helped boost the demand side debate. The move was tempered somewhat, however by a surprisingly large build in US crude inventories.
EQ - Asia futures all fairly steady overnight with the Hang Seng, Nikkei and Kospi currently trading at 19,780, 28,047 and 311, respectively.
The Nasdaq and S&P flat overnight at 11,990 and 4065, respectively as they hold onto some of their gains from yesterday. Stocks spiked post CPI, with the Nasdaq up over 4% at one point before reality and gravity kicked in. It felt like the shadow of a Powell scolding hang heavy over the sector, and gains were slowly eroded. I do wonder, if the FOMC hadn’t been today, whether stocks would have held onto more of their gains. I think yes, but we’ll never know. For today the 200dma around the 4050 looks key to the downside, with yesterday’s spike towards 4150 capping topside for now.
Gold - Gold Feb futures, as you’d expect, rallied strongly on the CPI print and have held onto the majority of those gains in Asia, with gold trading now at 1821. Gold made a mockery of our noisy 1820/25 zone blasting through it to 1835 but has since retraced and is sitting back in that zone. Expect a lot of noise and hopefully some direction one way or another post Powell. Our old pivot should provide support at 1800 and 1780 beyond. Topside first stop yesterday’s high, then onto 1870.
FI - US yields softer again overnight in Asia, with the US2y and US10y currently trading at 4.19% and 3.47%, respectively. Our 3.50% in the US10y seems to be a magnet for now, and I can’t help feeling it will be the key to today’s post Fed trading. US yields obviously softer on the back of the CPI print as the whole curve recalibrated for less hikes and more cuts moving forward.
European yields opening softer again as they follow the US’s lead, with the German 10y yields currently at 1.893% and Italian 10y yields at 3.777%.
UK gilts traded a touch firmer yesterday, with the 10y yield closing at 3.296%.
FX - FX livened up yesterday with the USD crashing to levels last seen in the early summer. It regained a little of its poise as it trades back towards 104 overnight. All majors stronger, as you’d expect, with the JPY, EUR and GBP currently trading at 135.46, 1.0623 and 1.2349, respectively.
Others - Bitcoin and Ethereum enjoyed the print, with both hitting highs last seen in early November. They currently sit at 17,802 and 1324, respectively.
US CPI Review
Well, that’s put the cat amongst the pigeons. Downside beats across the board versus previous and consensus the only thing that was missing from a total market blowout was both measures trading on lower handles. So as we close the year YoY Headline sits at 7.1%, its lowest level all year and a full 2% off its peak. However Core sits at 6% and still sticky with a high of 6.6% on the year with the year’s low a touch lower at 5.9% seen back in the summer. Interestingly this was the first time in 4 years that we have had two consecutive inflation reports that have had downside beats.
Energy costs and used cars were the main coolers for the print. Shelter remains stubbornly high, but as we have talked about before it’s a laggard and as such when it tips it will drag the whole index lower. Indeed inflation traders are pricing in 2.5% inflation by the summer of next year!
Market wise, the knee-jerk reaction was as you’d expect stocks surged higher with the Nasdaq leading the way some 4% higher. The US10y dropped to September’s lows. The USD disappeared off the bottom of the screen and Bitcoin rang the 18k bell. However, stocks gave up the majority of their gains, perhaps in the anticipation of a Powell scolding.
Looking forward, the Fed terminal rate projection from the market is back well below 5%. Today’s 50bp hike is little changed but February’s expected 50bp hike is getting nibbled at with 25bps more likely and March is now only a 50/50 chance of a further 25bp hike.
FOMC Preview
Anything but a 50bp hike, taking the upper band of Fed Funds to 4.50%, would be a surprise for the markets even after yesterday’s softer CPI print. Statement wise, we’d expect a reference to the slowing pace of hikes being by no means a sign that the Fed is “going soft” on inflation rather, it is a reflection of the new Fed mantra that the pace of rate hikes will be slower, but the terminal rate will be higher than previously thought and held there for a longer period of time. Well, that was yesterday’s script but does it still stand today?
The Fed’s economic projections and dot plan will be revised too at the meeting, which may assist Chair Powell in getting his message over to the markets.
On the dots, back in September the median terminal rate was 4.625%. We would expect the Fed to revise this up further but not as far as it might have been prior to yesterday’s number. We believe they can now go no further than the 4.75/5% range. On that basis, and given the fact that many Fed speakers have suggested no rate cuts will occur next year, then that should be the median dot for 2023 with 2024 in the 3.75/4% range as rate cuts start to become a reality.
Justifying this move higher for the terminal rate, we would expect to see small upward revisions to both inflation and GDP projections with a slightly lower unemployment profile in comparison to September’s forecasts.
Once that’s all out of the way, it will be over to the Powell press conference and this will be where the ultimate battle will be fought! We would imagine a reiteration of the slower, higher, longer mantra won’t take long to reappear in the answers, but its surely starting to wear a bit thin. A reference to the loosening of financial conditions will probably be given a name check too given what has happened of late with the lower US yield profile, weaker USD and narrowing of credit spreads. That has become even more pronounced after yesterday’s moves and surely Powell will try to temper the market’s enthusiasm, although it would seem the stocks pullback, late in the day, is in anticipation of such a scolding.
We cannot believe that a question on the terminal rate peak will not be thrown in especially with the new dots and questioning around how long rates would remain at their peak would seem another obvious hot topic. The obvious “some amount” of time is the usual stock reply and we cannot imagine Powell giving away much more than that. For reference, rates have normally held at their peak for a duration of between 1 and 5 quarters with the average being around 2 quarters. Given rates look set to peak in q1 next year then the Fed would have to stretch beyond that 2 quarter average to stay true to their word that 2023 will be rate cut free. His job got a whole lot tougher after yesterday’s number.
The timing of future rate cuts is where there is a large disconnect between the markets and the Fed. Of late the market has come to the realisation that the higher for longer is probably the direction of travel but they remain steadfast in their belief that a recession is coming and subsequently rate cuts will be required next year. The Fed, on the other hand is not in this camp or so it would seem. Probably a more likely scenario is that the Fed actually side with the market on this but to state that, at this point in time, would set the market off to the races and subsequently see a further loosening of financial conditions. That is obviously the Fed’s nightmare scenario so for now they will hold firm.
Powell is running out of bullets. He can’t conceivably talk about more rate hikes so surely it’s all on a longer terminal rate and cuts still a long way off.
Good luck Jerome. I think you may well need it.
Follow the evolving narrative on today’s FOMC meeting via our dedicated Harkster channel, ‘The Fed’. A curated stream of research and commentary pieces from sources including bank publications, independent research, governments/central banks and financial press.
SBF back in the headlines and now behind bars
So Sam is now holed up in a Bahamian prison and it must be one for the bucket list being in the Top 5 of worst prisons in the world. Not sure how they rate them or indeed who?
Anyway, for now, he is there until the next hearing at the start of February, which probably means that his extradition to the US will be more likely to happen now. I post at the bottom a NYT article about the family web around SBF, and it makes for pretty interesting reading.
On the Binance side of things, the “bank run” seems to have abated for now, with inflows back onto the exchange starting to gather pace. This after a total of $3bn outflows from the exchange in the previous 24 hour period. The soft CPI print I think certainly helped the exchanges cause as Bitcoin rallied to a one-month high. Interestingly despite the “news”, bitcoin had no negative reaction.
Central Bank Speakers
RBNZ’s Hawkesby was true to his name overnight with some hawkish soundbites.
The RBNZ needs to keep up with inflation.
Neutral interest rates have risen
Higher interest rates have had little impact so far on inflation.
Need to do more to reduce inflation.
Worker shortage is the most serious economic constraint.
The RBNZ is forecasting a recession from q2 next year.
The World Cup - Second Semi-Final
France v Morocco
Does the Moroccan fairytale continue, and they become the first African nation to compete in the World Cup final or do France get to their second successive World Cup final and a step closer to retaining their title and matching Brazil’s achievement from some 60 years ago?
Could it come down to who is available to play? France had both Upamecano and Tchouameni miss training but both are expected to be fit. However, Morocco’s camp is looking more like a field hospital with Aguerd and Saiss the central defence stalwarts, both struggling to make it. Amrabat, their star midfielder, has been playing with a back injury throughout and has required pain-killing injections to even get on the pitch. Also, Cheddira will miss the match through suspension.
We go back to the one stat about this Moroccan team that beggars belief when you sit back and think about it. They have not conceded one goal, by an opposition player, throughout the whole tournament. That includes games against European “powerhouses” like Croatia, Belgium, Spain and Portugal. France, on the other hand, has conceded in all of their games thus far in the tournament. Just for context, and not financial advice, Morocco are 13/1 to win 1-0! However, with all due respect to Morocco’s previous opponents, they have not faced a front quartet of the quality of France’s; Mbappe, Giroud, Dembele and Greizmann.
As we know Morocco will be happy to give up possession and use the counterattack and set pieces as their best form of attack. Ziyech and Boufal will certainly fancy their chances at running at the two full backs for France, who have looked the weakest link in this French team.
The French too like to counterattack but will have less opportunity to do so with the style of play the Moroccans favour. Their best form of attack would appear to be quick transitions whenever the Moroccans do venture forward or, probably more importantly, by using Giroud as a pivot up top, especially if the Moroccan central defence is compromised through injury and have runners playing off him.
This is not only a football game but a derby of sorts! France, of course, controlled the North African nation for close to half a century in the early 20th century, and currently, there are believed to be over 1m Moroccans living in France, so this means a lot. The crowd in Doha will be firmly behind the Atlas Lions but will that be enough for them to conquer the world champions? Let’s see.
Good luck to both teams. Penalties anyone?
The winner will face Argentina as they demolished the Croatians 3-0 in the first semi-final. The Croatians started brightly, but as we alluded to yesterday, the end product is sadly lacking, and for once, their defensive fortitude escaped them too. They were caught on the break a couple of times which cost them two goals. One from a disputed penalty and the other from an Alvarez run which ended in some slapstick defending as he prodded it into the net after two mis-kicks by the Croatian defence. The icing on the cake was the old master Messi teaching, the much hyped (and by us) 20 year old Gvardiol, a big lesson turning him inside out as he set up Alvarez’s second goal. So the Messi odyssey goes on with a goal and two assists and the type of performance that may well seal his legacy as the GOAT if he manages to get his hands on the little gold statue on Sunday.
The Day Ahead
Overnight we had a slew of Japanese data with the Tankan the main focus coming in lower than the previous quarter at 7. The fourth quarter in a row that we have seen a decline.
UK inflation report has just hit the tapes and carries on the theme from yesterday with downside beats across the board. Headline inflation YoY is now back off the highs at 10.7% and Core likewise at 6.3%. Still shockers of numbers, but at least the peak, for now, seems to be in.
Later in the day we have EU industrial production data and of course rounding off the day the last Fed of the year dots and all!
Early doors tomorrow, we get the Australian labour report and a Chinese data dump.
Essential reading pre-Fed the FXMacro Guy’s weekly with his Fed speaker crib sheet!
Also pre Fed, given there should be plenty of time, I post an excellent piece from Concoda on the US treasury market. Its very relevant to where we are in terms of the US inflation profile and that 3.5% US10y level we keep referring to. It delves into the deeper workings of the market and all its moving parts in great detail. A really fascinating read.
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All times in GMT (EST+5 / CEST-1 / JST-9)
Wednesday
EU Industrial Production MoM Oct consensus -1.5% vs previous 0.9% (10.00 GMT)
EU Industrial Production YoY Oct consensus 3.4% vs previous 4.9% (10.00 GMT)
FOMC Interest Rate Decision 50bp hike expected taking rates to 4.50% (19.00 GMT)
FOMC Projections (19.00 GMT)
Chair Powell Press Conference (19.30 GMT)
World Cup - Semi Final
France v Morocco (19.00 GMT)
Early Thursday
Australia Employment Change Nov consensus 19k vs previous 32.2k (00.30 GMT)
Australia Unemployment Rate Nov consensus 3.4% vs previous 3.4% (00.30 GMT)
China Industrial Production YoY Nov consensus 3.6% vs previous 5% (02.00 GMT)
China Retail Sales YoY Nov consensus -3.7% vs previous -0.5% (02.00 GMT)
China Unemployment Rate Nov previous 5.5% (02.00 GMT)
Good luck.
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Saxo Markets - FX Update: US CPI circus and FOMC to shape USD into 2023.
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FXMacro Guy Weekly Review and Daily Tweet
- - Outlook for Week 50/2022
@fxmacroguy - Tuesday wrap-up thread
Crypto
Australian Financial Review - FTX’s inner circle had a secret chat group called ‘Wirefraud’
CoinDesk - Binance Withdrawals Surge as Concerns About Its Reserve Report Spook Traders
NY Times - Sam Bankman-Fried’s Parents Under Scrutiny in FTX Collapse
Concoda
Follow the latest market narratives through our curated research & commentary channels on Harkster.
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Excellent analysis of the Fed and J. Powell.
Great commentary on the World Cup...
Love to see Morocco beat the French and Messi to ultimately win his 1st WC.
That would be a Hollywood ending.
But I guess the French will likely spoil all that...
When you state "His [Powell's] job got a whole lot tougher after yesterday’s number", I am curious what you mean by this? (Assuming it is not cutting rates in 2023.)
Nobody seems to be talking about the fact that even if inflation were to hit 1% by next October / November, that would still mean our prices are elevated. While cutting rates may be seen as a net benefit to the economy, it would not alleviate actual prices for consumers unless we start seeing deflation.