The Morning Hark - 14 Oct 2022

Today’s focus ……CPI review…where do we start? Is the Game of Chicken over and is it all about “Where’s Kwasi” now?

Oct 14, 2022

All prices are at 7.45 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December up smalls in Asia with them currently trading at 95 and 88.30 respectively. Oil bounced unexpectedly with the CPI print and once again it may be down to prepositioning covering and even a bigger build in crude from the EIA data couldn’t blunt the bid. Although, as always, there were question marks as to the credibility of the data. Anyway focus will now will flip to China where the Peoples Congress begins over the weekend and we should receive an update on the zero covid policy with all reports pointing to it remaining in place with the subsequent drag on demand.

Couple of “spat” updates. I post below some more background but the US have now claimed that other OPEC+ members told them they had been coerced by Saudi Arabia to support the cuts. Elsewhere the IMF threw their tuppence worth in warning that the supply cuts could tip the world into a recession.

EQ - Equity markets in Asia riding the wave and happy they didn’t catch the 3% down move. The Nikkei, Hang Seng and Kospi all showing a healthy rise at 27,052, 16,800 and 290 respectively.

The Nasdaq and S&P consolidating their gains and add a touch more in Asia at 11,163 and 3708 respectively. Revised levels post yesterday’s rollercoaster for S&Ps 3660 support with upside now around 3730/40.

Gold - Gold Dec flat in Asia at 1677 as gold returns pretty much to the level we started at yesterday morning. As with all markets big round trip but unlike other markets fairly contained. Yes we went to fresh recent lows on the print but nowhere near troubling the year’s lows. Feels like a sit on your hands market until further direction is provided. Range 1650/80 and on the wide 1620/1700.

FI - US yields touch softer overnight in Asia trading after yesterday’s drama with the US2y and 10y bear flattening substantially yesterday with them currently at 4.41% and 3.90% respectively.

European yields followed the UK lower yesterday, albeit in a more considered fashion, with the German10y yield closing at 2.283%. The Italian 10y yields likewise to close at 4.714%.

UK gilts continued the brutality with huge sell offs across the curve in the gilt market as the Kwasi u-turn started to become more of a reality throughout the day. The 10y closed down 23bps at 4.192%. Also remember roll up roll up last chance saloon for the emergency gilt and linker auctions today. Yesterday saw a larger pick up in the linker space at £3.1bn vs £1.6bn in the conventional gilts.

FX - The USD flat after yesterday’s shenanigans with the USD Index trading at 112.33 having at one point yesterday recaptured 114. Risk currencies as you’d imagine are off to the races with the AUD and NZD both up close to a percent at 0.6337 and 0.5672 respectively. The oil move has helped the NOK gain back some ground at 10.54.

USDJPY continues to tempt the authorities trading currently at 147.45. EUR dull at 0.9783 whilst GBP is riding up in first class with Kwasi as it reaches the dizzy heights of 1.1310.

Others - Bitcoin and Ethereum followed stocks to a T yesterday and continue the theme today with them currently trading at 19,800 and 1326 respectively.

CPI Review

So it’s still too hot that’s for sure but the miss was only 0.1% on the YoY as opposed to August’s 0.2% miss so small mercies and all that and to be honest the state the markets are in any little silver lining please.

Core came in at 6.6% YoY higher than both previous and expectations, and indeed a 40y high, whilst the Headline came in at 8.2% a beat on expectations but a touch lower than the previous month. However, the MoM readings for both measures showed a beat for both expectations and previous. Once again the rental sector, a notoriously lagging indicator, was a big part of the gain with its biggest monthly increase since 1990 at 0.8%.

Market wise the immediate reaction was to price in a full 75bps for November with a 17% chance of 100bp with the terminal rate knocking on 5% for q1 next year but obviously more rate cuts getting priced in further out.

USDJPY hit a new 32y high at 147.68.

US10y clipped 4% again and the 2y hit a 15y high above 4.50%. Beyond that even the US30y clipped 4% hitting an 11y top.

Stocks were routed matching roughly our 3% loss target with the Nasdaq hitting a 2 year low and the S&P scuttling about in the low 3500’s.

Then what happened? Well as we had mentioned in our preview yesterday “the market most likely is skewed in that direction which matches the recent price action of markets” in terms of they were expecting a hotter print. What we hadn’t anticipated was the level of prepositioning which appears to have been at play pre-number. It also appears that there was a fair amount of doubling down post number. A combination of that oversold positioning and better than expected earnings combined with the failure to break the 3500 level lead to short covering and some. Remember too liquidity is shocking so both moves down and up have an exaggerated tone to them but no matter what it was some move.

The move has continued into the Asia session so much so that we are back at pre-US payrolls levels. So where does this leave us well the Fed look nailed on to do their fourth 75bp hike in a row as “confirmed” by Timiraos tweet who also went on to question whether the 50bp Dec and 25bp Jan hikes model is now in question? Indeed early estimates for the Fed’s favourite inflation measure core PCE (28 Oct) are showing signs of a 5.2% print versus 4.9% previously.

One thing is for sure if the rally continues the Fed hawkish speak will get ramped up again. The Fed will not stop until it breaks the back of inflation (or the UST market) and it feels a way away yet.

UK soap opera continues

U-Turns-R-Us or so it would seem. Claim, denial, counter claim and counter denial. It was hard to work out what was going on so the market seemed grateful to have the US CPI data to concentrate on and at least get something to get its teeth into without a denial rearing its ugly head!

The day was spent playing a new market pass time “Where’s Kwasi?” As journalists at the IMF meeting in Washington scampered about trying to work out if he was in the main conference room, in one on one meetings or indeed heading back to the airport.

The latest chitter chatter surrounded a u-turn in the corporation tax cut which was announced a mere three weeks ago in the fiscal package. It would appear to be the next item on the list to be cancelled and replaced rather with the corporation tax hike which had been pencilled in for next year. All very embarrassing but that’s what happens when amateurs get the keys. Looking more likely by the day that Kwasi will be getting the removal vans in again in what must be one of the shortest stays in Downing Street ever. I guess people won’t forget him.

Markets wise it was one of those moves where the market lead the news with gilt yields selling off aggressively and GBP catching a bid. It’s funny how the market can smell a story sometimes.

Still it could be worse we could have been part of the pension funds that offered £4.35bn out on Wednesday and basically sold the lows.

Anyway the latest is that indeed Kwasi is heading back early to “work on his fiscal package” or maybe to wrap up some crockery and supervise the removal team? Prior to his departure, he was asked by The Daily Telegraph if the reason for the markets improvement was because they were expecting a u-turn on corporation tax he replied “let’s see”.

So has Governor Bailey won the “Game of Chicken”. He was certainly looking smugger than usual in his dispatches from Washington yesterday. “Let’s see”.

Conservative MPs can smell blood with one rebel claiming “we have the numbers” to overthrow PM Truss. Boris pass the popcorn ……..

Central Bank Speakers and Fed minutes

ECB Wunsch would not be surprised to see rates above 3% and at 2% by year end.

Kazaks was along the same lines but spelled it out more with 75bps nailed on for October and a debate of 50/75bps for December.

Simkus seemed a touch more deluded when claiming that he doesn’t see any financial instability in the EU area and a discussion on TLTRO is needed at the next policy meeting.

On a side note ECB sources were out questioning the ECB model which has the target rate at 2.25% which ECB policymakers have given a somewhat mixed reception to and “fear errors” in the model.

The latest episode of Keeping up with the Central Bankers can be found on the excellent FXMacro Guy’s daily tweet at the bottom. Also, I would seriously recommend his weekly, which will be published tomorrow, it is a great read and has a huge amount of essential market intel packed into a super readable format. I wish I could say that its good value for money but sadly I can’t because its FREE!

The Day Ahead

China inflation out earlier in the day and nothing to see here with an on the money 2.8% YoY print with a slight decline on the monthly to 0.3%.

The remainder of the day we have US retail sales for September and then UMich preliminary sentiment read for October as well as the 1y and 5y inflation expectations.

Also the small matter of North Korea arming their tactical nuclear weapons may gather momentum.

Remember we have the Chinese Peoples Congress which gets under way over the weekend where President Xi will lay out his vision for the next 5 years. Given the recent press reports and a statement from the senior health adviser the zero tolerance approach to the Covid virus looks set to remain in place with all the implications that has as a headwind to growth prospects.

Also the submission of the Italian budget will be submitted to the EU is imminent and any indications that there is excessive borrowing then Italy will get the “UK treatment”.

One thing that may be of interest for a read over the weekend is a piece I post below on the Fed whisperer the WSJ’s Timiraos. Great article and always good to know your “enemy”.

And of course the main theme of the day will be “Where’s Kwasi?”. That’ll be fun!

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Friday

US Retail Sales MoM Sept consensus 0.2% vs previous 0.3% (13.30 BST)

US Michigan Sentiment Prel Oct consensus 59 vs previous 58.6 (15.00 BST)

US Michigan 5y Inflation Expectations Prel Oct previous 2.7% (15.00 BST)

US Michigan 1y Inflation Expectations Prel Oct previous 4.7% (15.00 BST)

ECB Speakers

Holzmann (09.00 BST)
Nagel (13.00 BST)
Lane (18.15 BST)

Fed Speakers

Cook (15.30 BST)

Good luck and a good weekend to one and all.

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