The Morning Hark - 14 Sep 2022
Today’s focus ……Hot US CPI brings carnage and Japan raises the intervention stakes.
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures down small in Asia currently at 93 and 86.50 respectively. OPEC’s monthly report offered some positive news for oil with expectations that the remainder of this year and next will see oil demand grow despite growing concerns of a global recession. However they also warned that “the oil market is disconnected from fundamentals” which may be a warning shot that further production cuts are in the pipeline literally. API data showed another unexpected build in crude inventories. Later today we expect to hear from the European Energy Commission as it lays out its proposals for measures to combat the energy crisis. Leaked reports suggest that price caps on Russian gas will not go ahead but a windfall tax is being proposed.
EQ - Equity markets in Asia all a touch weaker and given the carnage we saw in the US session its a surprise we have not seen bigger losses. The Kospi is down over two percent but this is more a give up of their major gains from yesterday. It currently trades at 313. The Nikkei, and Hang Seng currently flat at 27,655 and 18,855 respectively.
Similarly the Nasdaq and S&P trade up smalls in the Asian session currently at 12,145 and 3960 respectively.
We are approaching critical levels for both with 12,000 and 3900 important levels to hold if we are to see any meaningful rebound.
Gold - Gold Dec futures down smalls overnight in Asia at 1711 as gold consolidates near its recent lows. Hot CPI put paid to any hopes for gold bulls as it sold off two percent in the face of a stronger USD. Support remains around the 1700 level with topside remaining that noisy zone of 1750/55.
FI - US yields off a touch overnight in Asia with the US2y and 10y yields currently trading at 3.75% and 3.41% respectively close to their year’s highs.
European yields followed their US counterparts higher yesterday closing at 1.733 and 3.989 for the German and Italian 10y yields respectively. Similarly the 10y gilt in the UK which closed at the year’s high at 3.174.
FX - The USD flat on the session after yesterday’s sharp rally currently trading at 109.81. Yesterday’s hot CPI was the catalyst for the turn in the USD with the EUR and GBP back into the lower end of their recent ranges trading currently at 0.9965 and 1.1482 respectively. Remember of late the EUR has struggled below 0.99 and GBP has bounced from the 1.14 level so it will be interesting to see if this trend continues to play out. The JPY did not follow suit with USDJPY lower by almost one percent on the day at 143.62 as the threat of intervention reared its head (more below). The Yuan again had a stronger fix, the fifteenth consecutive day, and its widest margin to date (598 pips). It currently trades around 6.9720 and remember 7 has yet to be breached this year.
The outside day we saw in the USD Index suggests we could get a move back to year’s highs at 110.80.
Others - Unsurprisingly with the risk sell off both Bitcoin and Ethereum are much lower off some 10% from their recent highs at 20,250 and 1609 respectively.
US CPI Review
Well that didn’t go down well!
CPI missed to the topside and the fragility of the markets was laid bare for all to see.
MoM headline was 0.1% (vs -0.1% expected) and core 0.6% (vs 0.3%)
YoY headline came in at 8.3% (vs 8.1%) with core at 6.3% (vs 6.1%).
A crumb of comfort was the headline YoY rate is lower than the previous months but core’s YoY is significantly higher than previous.
All in all not much comfort in the underlying numbers as inflation was in positive territory for the 27th straight month. More worryingly is that certain sectors of the report like shelter and medicare are rising faster than they were in the earlier part of the year. Indeed if gas prices hadn’t reduced by over 10% this month it’s hard to imagine how bad the report could have been. Shelter is a double edge sword as although it rose at 0.7% for the month, the highest monthly rate in over 30 years, it is a known lagging indicator. Food was up over 11% on the year the largest yearly gain since the late 70’s.
One further worry, as we pointed out yesterday, is the looming railroad strike in the US which will only add to price pressures for such goods as grains, fertilisers and coal and whilst, if it goes ahead, it’ll be transitory it will still be a further psychological blow to the markets.
Where does this leave the markets? Well we expected 8.5% to be the threshold for carnage but the market took a different view. We did get the knee jerk lower but the jerk turned into a full blown wobble with the US stocks having their worst day in well over two years, US yields pushing backwards the recent highs and starting to price in a potential 100bp hike for next week, although interestingly rate cuts are still a feature for markets next year, and of course the USD ripped higher.
The WSJ’s Timiraos will of course be watched like a hawk for any indications that the Fed will lean towards 100bps although thus far he has only gone as far to say they will do “at least 75bps”. The market is now pricing in about a third chance that we see 100bps and the terminal rate now is above 4.3%. Nomura was one of the first banks to fold changing its forecast for next week to 100bps with further 50bp hikes in November and December. Certainly it would appear the Fed has to remain strong and tighten significantly into the year end which in turn heightens the chances of a recession in the US. Risk assets look very much on the backfoot again with no real data ahead of the FOMC next week and obviously no Fed speakers its all eyes on price action and the WSJ.
JPY and Intervention
Definitely a step up in rhetoric from the Japanese authorities overnight.
MoF’s Kanda expressed that “all options are on the table” and they are “monitoring FX moves with a sense of urgency”.
Also the finance minister Suzuki noted that FX response options include intervention.
The BoJ also stated that it would boost its bond purchases at the regular operations.
Probably more intriguingly is that, according to The Nikkei, the BoJ conducted a rate check in preparation for currency intervention. This would be the first time they have done such a thing since 2016. They have not actively intervened since 2011 and the last time they intervened to buy JPY was back in1998 so it is a rare occurrence. I still post below the FX MacroGuy’s excellent escalation path towards intervention. The key phrase to look out for is “will take determined actions” as we edge closer to physical intervention. Remember, as we have said previously, intervention generally has a short term effect but to turn the tide coordinated intervention is more of what is needed.
Simkus was the only speaker of note yesterday and reiterated a familiar theme when stressing that he sees “at least 50bps in October” in terms of the magnitude of hike from the ECB.
Overnight Data and the Day Ahead
Out with the CPI report yesterday we had some poor European data with both the German and Eurozone ZEW Economic Sentiment prints well below expectations. Indeed the comments did not hold out much hope either “the outlook for the next six months has deteriorated further”.
Overnight we had a mixed bag of data out of Japan with the Tankan index and capacity utilisation printing lower than the previous month but machinery orders a strong beat.
In the UK inflation data for August fell unexpectedly back below 10% to 9.9% a welcome boost for the BoE with downward pressure on fuel costs being the main driver. Core however remains sticky and came in unchanged due in the main to food costs.
Day ahead will be flow and price level driven with US PPI the only data point of note.
ECB speakers are once again out in force and we have the European President giving her assessment of the state of the EU so probably best to find a comfy spot behind the sofa for that one!
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EU Industrial Production MoM Jul consensus -1% vs previous 0.7% (10.00 BST)
US PPI YoY Aug consensus 8.8% vs previous 9.8% (13.30 BST)
US Core PPI YoY Aug consensus 7.1% vs previous 7.6% (13.30 BST)
Lane (12.00 BST)
McCaul (13.00 BST)
Villeroy (15.30 BST)
Von der Leyen Eurozone State of the Union Address (08.00 BST)
Australia Unemployment Rate Aug consensus 3.4% vs previous 3.4% (02.30 BST)
Australia Employment Change Aug consensus 35k vs previous -40.9k (02.30 BST)
RBA Bulletin (02.30 BST)
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