The Morning Hark - 15 Aug 2022
Today’s focus ……The week ahead, China cuts and no confirmation yet of the shooting star
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures down one percent in Asia at 97.10 and 90.60 respectively. Oil slipping in Asia with the China data weighing heavily on the global growth outlook and in turn the demand for oil. In addition Aramco, the world’s leading exporter, said it was ready to increase production if it was requested to do so by the Saudi authorities.
EQ - Equity markets trading in a muted fashion in Asia overnight, despite the poor Chinese data prints, with the Nikkei, Hang Seng and Kospi all close to flat at 28,865, 20,065 and 331 respectively.
The Nasdaq and S&P down smalls at 13,548 and 4272 respectively. So our shooting star was not confirmed on Friday, just yet anyway, with stocks continuing their momentum higher with the S&P and Nasdaq back at levels last seen in early May after a week which saw over 3% gains for both indicies. Much talk about this being a hated rally with lots of players reluctantly getting involved due to FOMO and ultimately the market going where the most pain is. Remember it’s August which is often a month of outlier moves in poor liquidity conditions. Let’s see if that confirmation candle arrives. It does feel like the rally is on borrowed time but there’s no denying the strength of it. For now the target is 4300 then 4350 with the 200dma roughly splitting that zone. 4200 has to hold for the rally to continue. I post at the bottom the FX Macro Guy’s excellent take on the rally, which we concur with. His final sentiment of “strong opinions, weakly held. Trading the market, not expectations” I think sums up August markets and what we are seeing at present very well. Don’t get married to your positions.
Gold - Gold futures down close to half of one percent in Asia at 1808. Gold continues to be rangebound and still holds the 1800 pivot level well although does not seem to want to break above 1820. We await direction.
FI - US yields backed off a touch again overnight with the US2y and 10y yields currently trading at 3.25% and 2.85% respectively.
European yields closed the week a touch firmer with the German and Italian 10y yields closing at 0.994 and 3.073 respectively.
FX - The USD flat overnight with the USD Index at 105.88. The USD has held onto its gains from the tail end of last week in somewhat lacklustre trading to start the week. The majors all flat versus the USD with the JPY, EUR and GBP currently trading at 133.26, 1.0238 and 1.2111 respectively. Not surprisingly USDCNH gained on the back of the poor Chinese data prints with the pair currently trading at 6.77. NZD and AUD as risk proxies also suffered on the data both showing half percent losses to 0.6411 and 0.7083 respectively.
Others - Bitcoin has played a bit of catch up with Ethereum, with the pair now trading at 24,325 and 1920 respectively.
The Week Ahead
FOMC Minutes - Main highlight of the week will be the Fed minutes from their July meeting. Remember this was the meeting which saw a 75bp hike bringing rates back to the perceived “neutral” level. It was also signalled that forward guidance would be jettisoned for a more meeting to meeting, data dependent approach to rate setting. It will be interesting to see how this new approach was arrived at by the members and if there was any dissent. In addition any colour on where we are in terms of rate hike magnitude going forward will be seized on although these views will be somewhat stale especially in light of the two major data points we have had since the meeting with a strong NFP report and a softening CPI one. Given the disconnect between the market and the Fed on the terminal rate and when rate cuts may appear back on the agenda any clarity on what the terminal rate may look like will be useful. However, given the disparity, we have seen this week amongst members, with Kashkari looking for close to 4% but Evans in the 3.25%+ area, its maybe a pipe dream. On the all important data front this week we get retail sales, further housing data and the Philly Fed survey.
UK Inflation - The US CPI data may or may not have peaked but at least it is showing signs of slowing something that certainly cannot be said of the UK’s inflation profile. Wednesday will have the July print in the series with expectations (9.8%) perilously close to double digits. Remember the BoE recently revised up (again) their forecasts for peak inflation to 13%. The backdrop is not good with the BoE, despite being the first of the G7 central banks to hike in this cycle, remaining well behind the curve caught in the dual headlights of roaring inflation but a softening economy coupled with a cost of living crisis that is the worst in 50 years. Speaking of the economy, in addition to the inflation print, we shall also get the employment report, retail sales, wage growth and public finance data. On top of that we have a power vacuum with a lame duck prime minister and a new one not due to be announced for a further three weeks. On top of that the leading candidate is keen to pick a fight with the BoE and potentially reduce its powers/independence. Remind me again why would you want to own GBP?
Other Central Banks - The Norges Bank (Thursday 09.00 BST) and the RBNZ (Wednesday 03.00 BST) are both expected to hike rates. In Norway although it is a so called interim meeting we expect them to hike by a further 50bps with inflation continuing to run higher than forecast. Similarly in New Zealand a further 50bps is expected taking rates to levels last seen in 2015 with once again inflation gaining at a pace last seen in the early 1990’s.
Somewhat diverging prints from Japan and China overnight. Japan a touch mixed with preliminary q2 GDP coming in slightly weaker than expected with QoQ printing at 0.5% vs 0.6%. However the final prints for June industrial production and capacity utilisation were both strong beats. In contrast China data was extremely poor with misses across the board. Industrial production came in at 3.8% vs 4.6% expected, retail sales similarly 2.7% vs 5% and fixed asset investment at 5.7% vs 6.2%. Additionally, July property sales showed a near 30% fall for the year on year figures and in conjunction with last week’s loan data there is a glaring lack of credit demand. The Chinese authorities have given a nod to the data by unexpectedly cutting rates by 10bps. Hardly going to touch the sides but it’s a gesture to show the people that they are prepared to act to shore up the economy. We would expect more measures to be announced in the near future.
On the day little to get too excited about data wise so it feels like its all eyes on stocks for direction.
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US NY Empire State Manufacturing Index Aug consensus 5.5 vs previous 11.1 (13.30 BST)
RBA Meeting Minutes August meeting raised 50bps, dovish tone to the statement (02.30 BST)
UK Unemployment Rate Jun consensus 3.8% vs previous 3.8% (07.00 BST)
UK Claimant Count Change Jul consensus vs previous -20.1k (07.00 BST)
EU ZEW Economic Sentiment Index Aug consensus vs previous -53.8 (10.00 BST)
German ZEW Economic Sentiment Index Aug consensus -52.7 vs previous -53.8 (10.00 BST)
German ZEW Current Conditions Aug consensus -48 vs previous -45.8 (10.00 BST)
Canada Inflation Rate YoY Jul consensus 7.6% vs previous 8.1% (13.30 BST)
Canada Core Inflation Rate YoY Jul consensus vs previous 6.2% (13.30 BST)
US Building Permits Jul consensus 1.64M vs previous 1.696M (13.30 BST)
US Housing Starts Jul consensus 1.54M vs previous 1.559M (13.30 BST)
US Industrial Production MoM Jul consensus 0.3% vs previous -0.2% (14.15BST)
US Manufacturing Production MoM Jul consensus 0% vs previous -0.5% (14.15BST)
US Capacity Utilisation MoM Jul consensus 80.1% vs previous 80% (14.15BST)
Japan Reuters Tankan Index Aug consensus vs previous 9 (00.00 BST)
Japan Machinery Orders YoY Jun consensus 7.5% vs previous 7.4% (00.50 BST)
UK Inflation Rate YoY Jul consensus 9.8% vs previous 9.4% (07.00 BST)
UK Core Inflation Rate YoY Jul consensus 5.9% vs previous 5.8% (07.00 BST)
EU Employment Change YoY Prel q2 consensus 2.5% vs previous 2.9% (10.00 BST)
EU GDP Growth Rate YoY 2nd Est q2 consensus 4% vs previous 5.4% (10.00 BST)
US Retail Sales MoM Jul consensus 0.1% vs previous 1% (13.30 BST)
US Business Inventories MoM Jun consensus 1.4% vs previous 1.4% (15.00 BST)
FOMC Minutes 75bp hike, forward guidance gone and an alleged pivot (19.00 BST)
Bowman (14.30 and 19.20BST)
Australia Unemployment Rate Jul consensus 3.5% vs previous 3.5% (02.30 BST)
Australia Employment Change Jul consensus 25k vs previous 88.4k (02.30 BST)
EU Inflation Rate YoY Final Jul consensus 8.9% vs previous 8.6% (10.00 BST)
EU Core Inflation Rate YoY Final Jul consensus 4% vs previous 3.7% (10.00 BST)
US Philadelphia Fed Manufacturing Index Aug consensus -5 vs previous -12.3 (13.30 BST)
US Philly Fed Business Conditions Aug consensus vs previous -18.6 (13.30 BST)
US Philly Fed Employment Aug consensus vs previous 19.4 (13.30 BST)
US Philly Fed Prices Paid Aug consensus vs previous 52.2 (13.30 BST)
US Existing Home Sales Jul consensus 4.88M vs previous 5.12M (15.00 BST)
George (18.20 BST)
Kashkari (18.45 BST)
Japan Inflation Rate YoY Jul consensus vs previous 2.4% (00.30 BST)
Japan Core Inflation Rate YoY Jul consensus 2.4% vs previous 2.2% (00.30 BST)
UK Retail Sales MoM Jul consensus -0.2% vs previous -0.1% (07.00 BST)
Canada Retail Sales MoM Jun consensus 0.3% vs previous 2.2% (13.30 BST)
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