The Morning Hark - 14 July 2022
Today’s focus ……CPI aftermath, 75 or 100?, the USD keeps going and the UK leadership election drags on.
Daily roundup - all prices are at 7.50 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September flat on the day at 99.70 and 93.80 respectively. PnL destruction price action post print yesterday with a two percent spike and followed by a sharp rebound. The supply side remains tight amid Russian sanctions, Libyan disruption and OPEC running, supposedly, at full capacity. However, demand fears remain amid growing recessionary concerns. With both sides seemingly cancelling each other out we are stuck around the 100 level for now. We still believe that Brent’s big pivot is around the 97 level. It was announced yesterday that Biden will have bilateral talks with the Saudi hierarchy on Friday evening.
EQ - Mixed bag in Asia with the Nikkei up smalls at 26,650 but the Kospi and the Hang Seng both down smalls at 306 and 20,730 respectively.
The US futures also a touch lower with the Nasdaq and S&P trading at 11,700 and 3790 respectively. The US markets dumped over two percent on the CPI print before spiking higher to regain all the lost ground as the market grasped onto the fact that Fed cuts had started to get priced into the curve in the early part of next year.
Gold - Gold futures smalls lower at 1723 and right back pretty much where we started yesterday. However, that doesn’t tell the full story with gold dropping a percent on the CPI print before rebounding sharply with a close to two percent spike higher. Volumes not attractive as we know but the move highlights the market’s perception that the Fed is going down the wrong road.
FI - US yields up across the curve overnight with the US2y and 10y yields at 3.20% and 2.94% respectively extending their inversion yet further. The 10y smashed through our rough and ready 3% recession/inflation pivot on the numbers printing back above 3.05% on before the recessionary side of the weather vein took hold and we returned back below the price pivot. The rates market can’t be much clearer in expressing its view that the Fed is making a huge policy mistake but it would appear not to want to listen.
European yields followed the US round trip but the German and Italian 10y yields closed at 1.142 and 3.139 respectively not much changed from their previous close.
FX - Another day another new high for the USD with the USD Index printing 108.58 post numbers yesterday and remains elevated this morning at 108.50. All those barrier and knock out FX options related arguments we were talking about yesterday were resolved as the EUR did print below parity to 0.9999 a 20 year low for the single currency. Adding to the EURs woes Italian political uncertainty is in the shadows with a vote of confidence in the government set for today. Unsurprisingly, given the rate differentials, USDJPY is leading the USD charge up to 138.76 a new 23 year high.
Others - Bitcoin and Ethereum followed the equity prints lower then higher and trading now at 20,000 and 1100 respectively.
Rather unsurprisingly Celsius filed for bankruptcy more details on which below.
Well, expectations and the hype suggested an “elevated” print and we got it with the 9 handle attained for the headline with the 9.1% print beating expectations by 0.3% and another new cycle high. A small glimmer of hope was in the core print which although beat consensus by 0.2%, at 5.9%, did actually print lower than last month’s 6%. Potentially a sign that inflation is peaking but certainly not enough to make a Fed pause or pivot likely. Post numbers in extremely illiquid conditions we got all the knee-jerk reaction prints with bond yields higher, stocks, gold and oil all lower. However, the reversal was sharp as markets started to price in a recession and a subsequent policy reversal by the Fed. US 2y10y inversion has deepened, July FOMC is now being priced as having more chance of a 100bp hike than a 75bp one and a full rate cut is priced in for early next year. All in all not what the Fed ordered after the biggest US YoY print in over 40 years. So what now. As we flagged earlier in the week could we replicate what happened last month post CPI print when 75bp had seemingly been discounted only for a hot print to put it firmly back on the table. History does seem to be repeating itself with the only exception being we are now talking about a 100bp hike. Interestingly Nomura are the first bank to break cover and call for 100bp for the July meeting. If you remember they were the first to call the 75bp last month and incidentally the ones who have called for a US recession for H2 this year. One thing is certain the market is more aggressive than the Fed’s dots both in terms of what it sees for hikes this year and what it is looking for in terms of rate cuts in the following two years. Fed’s Bostic came out later in the day referring to a 100bp hike question with “everything is in play”. The Fed’s Daly in the WSJ also noted that such a magnitude is a possibility whilst Mester added that the step in rate hikes should be at least as large as the 75bps seen last month.
It’s interesting to reflect on where markets were on the day of the Fed’s June hike. Roughly we had the US10y having just knocked on the 3.50% door, S&Ps were around 3790, Nasdaq 11,600, USD Index 105.50, Gold 1815 and Crude 115. Once again it feels like stocks haven’t got the memo or maybe they are just skipping a generation and looking at those cuts? Let’s see.
For a much deeper dive into the nuances of the CPI print I post below another excellent Twitter thread from Alf of The Macro Compass.
Central Bank Hikes
The Bank of Canada made it a central bank trifecta following on from the RBNZ and the BoK with their rate hike. However, unlike the first two, the BoC surprised the market with a 100bp hike getting their preemptive strike in early. Perhaps they’d seen the US CPI print and wanted to steal the Fed’s thunder either way in all the post CPI mayhem it somewhat went under the radar.
Today is light on data but no doubt heavy on volatility! Fed’s Waller later in the day will be watched closely as he just recently endorsed 75bp for the July meeting. Also given the magnitude of yesterday’s print some unscheduled Fed talk is not out of the question. UK politics will grind on with the leadership election as we are now down to six candidates with more below from Politico below. Finally a quick nod to a raft of Chinese data early tomorrow morning which may be worth noting.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
US PPI YoY Jun consensus 10.7% vs previous 10.8% (13.30 BST)
US Core PPI YoY Jun consensus 8.1% vs previous 8.3% (13.30 BST)
Waller (16.00 BST)
China Unemployment Rate Jun previous 5.9% (03.00 BST)
China GDP Growth Rate YoY q2 consensus 1% vs previous 4.8% (03.00 BST)
China Industrial Production YoY June consensus 4.1% vs previous 0.7% (03.00 BST)
China Retail Sales YoY June consensus 0% vs previous -6.7% (03.00 BST)
China Industrial Capacity Utilisation q2 previous 75.8% (03.00 BST)
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
Blain's Morning Porridge - How long and deep is Inflation, and how close is China to a Banking Crisis?
The Gryning Times - Inflation, Core or Otherwise.
Economic Policy Institute - June inflation data show continued growth in overall CPI, but don’t capture recent price declines in food and energy
Macrodesiac - 🔔 The Greatest Doomster You've Never Heard Of
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📚⠀Further reading on the current key macro themes:
Fortune - Missing 3AC cofounder Su Zhu reappears on Twitter to break his silence and accuses the firm’s bankruptcy administrator of entrapment
CoinDesk - Celsius Files for Chapter 11 Bankrupcty
@MacroAlf - Twitter Thread
ZeroHedge - Nomura Now Sees 100bps Rate Hike In Two Weeks, As Bostic Says "Everything Is In Play"
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