The Morning Hark - 15 Dec 2022

Today’s focus … Fed delivers 50bps and Powell can’t stop talking, the Market sides with The Verve on the dots, Central Bank central today and the Moroccan fairy tale is over.

Dec 15, 2022

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All prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude February futures off close to one percent in the Asian session, with futures currently trading at 82 and 76.70, respectively. Oil was lifted yesterday by an IEA forecast that demand for oil would rebound next year driven largely by the China lifting of covid restrictions and a hope that, with the softer inflation profile in the US, the Fed could start to ease up on their tightening cycle. However, the rally was curtailed by Powell’s more hawkish tones and also overnight news that the Keystone pipeline had partially reopened after its earlier leak.

EQ - Asia futures mainly lower with the Hang Seng and Kospi currently trading at 19,420 and 307 respectively. The Nikkei trades flat at 27,930. Hang Seng not helped by the poor data out of the mainland.

The Nasdaq and S&P flat overnight at 11,829 and 4023 respectively as they mark time post Powell. The usual rollercoaster for stocks although in a more subdued manner than recent FOMCs. The 50bps was welcomed but the rally fizzled on the presser as Powell over emphasised the hawkish tones of the Fed. We continue to hover around the 200dma at 4050 in the S&P.

Gold - Gold Feb futures down close to one percent in Asia with gold trading now at 1803. Gold spent much of yesterday in our noisy 1820/25 zone before being spooked by the Powell hawkishness and dot profile and sold off back down to our first support at 1800. Sadly it looks like the Fed have offered no breakout direction for gold as yet. Continue with the range with support at 1800 and 1780 beyond. Topside first stop the week’s high around 1835 then onto 1870.

FI - US yields a touch softer overnight in Asia with the US2y and US10y currently trading at 4.24% and 3.50% respectively. There we go again with that 3.50% level in the US10y!

European yields opening firmer on ECB day with the German 10y yields currently at 1.988% and Italian 10y yields at 3.851%.

UK gilts traded a touch firmer yesterday with the 10y yield closing at 3.313%.

FX - Similar pattern to the other markets in FX with some knee jerk moves but ultimately not far off where we were at the start of the day yesterday. USD index currently at 103.92. All majors fairly similar levels with the JPY, EUR and GBP currently trading at 135.75, 1.0655 and 1.2386 respectively.

Others - Bitcoin and Ethereum both lower on the Fed with them currently trading at 17,730 and 1290 respectively.

FOMC Review

The 50bp hike was delivered and a hawkish statement to boot which was backed up by a dot plan and economic projections that suggests the Fed are not for turning for some time yet. The market though suggests otherwise.

Some Powell soundbites:

“ongoing hikes are appropriate to get sufficiently restrictive”;
“50bps still a historically large hike”;
“still ways to go”;
“can’t tell you we won’t move up estimate of peak rates at future meeting”;
“hold rates at peak until we are really confident inflation is coming down in a sustained manner”;
February hike is “dependent on incoming data”;
“no rate cuts until confident inflation moving towards 2%”;
“no rate cuts in 2023”;
“non-housing related services inflation will take a long time to fall”;
October and November inflation has shown a “welcome reduction”; and
on financial conditions he said that they “have tightened a lot in the past year” but made no mention of their recent loosening.

On the economic projections:

GDP 0.5% in 2023, 1.6% in 2024 and 1.8% in 2025. Lower for the first two years and significantly so for 2023 (previous 1.2%);
PCE 3.5%, 2.5% and 2.1% respectively. Up a touch in the first two years with 2023 0.4% higher; and
Unemployment 4.6%, 4.6% and 4.5% respectively. All up a touch.

Dots

2023 5.1% up from 4.6% in September;
2024 4.1% up from 3.9%; and
2025 3.1%. Up from 2.9%.

For the 2023 dots 10/19 members had 5.1%. 2 were below that level and 7 above.

In conclusion the key takeaways would be:

“core inflation ex. goods and shelter” or “non-housing core inflation” is the Feds new pressure point in terms of inflation;
this measure is highly dependent on wage inflation and hence the labour market is key and as Powell emphasised on numerous occasions in his press conference that market remains tight. But he does know this is a lagging indicator right?;
they will continue to hike. The dots say a further 75bps!;
they feel that it would be a bigger mistake to let inflation become entrenched than to over tighten;
there will be no change to the 2% inflation target; and
he was in no hurry to leave the stage talking for over twice his normal press conference time.

So where does this all leave us well, other than the usual rollercoaster for the markets in the moment, the longer term disconnect between the Fed and the markets has only widened. The market believes cuts are incoming in 2023 whilst the Fed insist not. The markets are now pricing approximately a 65% chance of a 25bps hike for the February meeting but then believe that will be that and by year end they see Fed Funds around 4.4% a full 70bps lower than the Fed. Something will have to give over the coming months that’s for sure. As we said yesterday the inflation traders are looking for inflation to be below 3% by the summer of next year! If they are proved wrong then the Fed will be scrambling.

I’ll leave you with a look back at last year’s December FOMC. The Fed’s projection for year end rates in 2022 was 0.9% as of 7pm GMT yesterday they were 4.5%.

As The Verve so eloquently put it “Now the dots don’t work, they just make you worse……..”

SNB Bank Review

50bp hike expected taking rates to 1% continuing their hiking cycle which saw rates start to rise in June and only go into positive territory at their last meeting. The latest CPI report showed inflation stabilising at 3% but still well above the Bank’s target zone of 0/2%. Given the magnitude of the gap between actual and target 75bp remains a possibility. Also, look out for any comments from Chairman Jordan on FX. In the past he has said the Bank is willing to step into the market on either side as and when required. He has reiterated on a number of occasions in the past that nominal CHF appreciation is a useful tool in the fight against inflation.

Norges Bank Review

The Norges Bank open up Thursday central bank announcement day where a 25bp hike seems the most likely outcome as they look to follow up November’s move with a similar magnitude of hike to close the year off. That would take rates to 2.75%. Since the November hike, we have had two CPI reports with October’s coming in hot but November showing a much needed softening to 5.7% for core beating the 6% expectations but still, inflation remains well above the Bank’s target and forecasts. Look out also for an updated monetary policy report which is expected to see an upgrade to the inflation expectations justifying further this month’s hike.

BoE Bank Review

Another 50bp hike looks likely from the BoE with the slower pace of hikes being attributed, in a good measure, to the more stable and fiscally controlled nature of the new government. All well and good but with inflation still close to 11% there is still a good deal of work to be done. The Bank’s committee however seems to be split with the doves looking towards a slower pace of hikes, given the brittleness of the economy and not wanting to over tighten, whilst the hawks see double digit inflation as unacceptable given the Bank’s mandate. 50bp looks likely but the vote split could be very interesting. Will there be any votes for no hike at all and signal at least some members are thinking that the tightening cycle is over?

The other thing that Governor Bailey will likely be tested on is where he expects the terminal rate to come and how long they intend to keep rates at such a level. Overall though we expect a more relaxed MPC ahead of us in comparison to the last couple. The Bank will also be encouraged to see market rate expectations lower and closer to the Bank’s forecasts after their warning last month that the market’s expectations were unrealistic.

Yesterday’s inflation report showing a turn lower across all measures will have cheered the Bank a touch too, as they look to close the books on what has been a rather harrowing year both for the Bank and the UK as a whole.

ECB Bank Review

Deja vu? 50bp hike? Certainly, it looks that way with the latest EU inflation report seeing a welcome decline in Headline but a stubbornly unexpected rise in Core. There will be much debate, it is the ECB after all, with the hawks wanting a further 75bp but we think the majority will edge towards 50bps. If so then we would expect a more hawkish statement and Lagarde press conference with the message that the ECB has further tightening to do. Remember this has been the quickest pace of tightening in the ECB’s 20+ year history with 200bps being accumulated in the space of three meetings. Lagarde had said that she felt that inflation had not peaked in October however November showed a softening in the series and the doves will have taken heart from that.

Elsewhere there is expected to be an announcement on the Asset Purchase Programme with the focus, for now, being on a reduction on the reinvestments of the bond maturities rather than any outright sells. The German/Italian spread has reduced significantly over the last couple of months which should give the ECB more comfort in announcing such a move.

The other thing to look out for are the new staff projections and we have already had a peak behind the curtain as our old friend “ECB sources” let us know that inflation will be “comfortably above” the ECB’s 2% target rate in 2024 and “just above” it in 2025. If the sources are correct don’t rule out a further 75bps.

The World Cup - Second Semi-Final

France v Morocco

The Cinderella story of Morocco ended last night and sadly just before midnight struck. 11.55 pm Doha time the Moroccans departed the scene having given their all and pushed France hard despite the 2-0 scoreline. The early goal must have shaken them given their long stretch in this tournament without conceding and whilst Hernandez scored the goal it was the magnetism of Mbappe that created it as so many Moroccans were drawn to him that the goalscorer was left in acres of space. The French then were happy to give up possession and play on the counter and for all the Moroccan pressure they only managed three shots on target. They finally succumbed to another piece of Mbappe magic whose shot was saved but then turned in at the far post by Kolo Muani and that was that.

Thank you the Atlas Lions for the memories and the great supporters but the World Cup of shocks had none in the semi-finals, and it’s Argentina v France on Sunday for the World Cup final.

The Day Ahead

Overnight the Australian labour report for November showed a continued improvement with employment beating estimates and the unemployment rate remaining at a near 50 year low,

Chinese November data wasn’t attractive at all with big misses across the board. Industrial production rose 2.2% after 5% last month and 3.6% expected. Retail sales fell 5.9% versus an expected drop of 3.7% and unemployment rose to 5.7% from 5.5% previously. All heavily distorted by the covid restrictions so will we see a rebound next month as China reopens?

Central bank central from now on with SNB, Norges, BoE and ECB all lined up for a Super Thursday. In the afternoon we get a slew of US prints with retail sales, industrial and manufacturing production as well as the NY and Philly December regional surveys.

Later in the evening, Australia kicks off the flash PMIs for December with the Japanese following in the early hours of Friday.

Pre publishing tomorrow UK retail sales.

I post an excellent piece at the bottom from Concoda on the US treasury market. It’s 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)

Thursday

SNB Interest Rate Decision 50bp hike expected taking rates to 1.00% (08.30 GMT)

Norges Bank Interest Rate Decision 25bp hike expected taking rates to 2.75% (09.00 GMT)

SNB Press Conference (09.30 GMT)

Norges Bank Monetary Policy Report (10.00 GMT)

BoE Interest Rate Decision 50bp hike expected taking rates to 3.50% (12.00 GMT)

BoE MPC Meeting Minutes (12.00 GMT)

ECB Interest Rate Decision 50bp hike expected taking rates to 2.50% (13.15 GMT)

US Retail Sales MoM Nov consensus -0.1% vs previous 1.3% (13.30 GMT)

US Retail Sales YoY Nov previous 8.3% (13.30 GMT)

US NY Empire State Manufacturing Index Dec consensus -1 vs previous 4.5 (13.30 GMT)

US Philly Fed Manufacturing Index Dec consensus -10 vs previous -19.4 (13.30 GMT)

US Philly Fed Employment Dec previous 7.1 (13.30 GMT)

US Philly Fed New Orders Dec previous -16.2 (13.30 GMT)

US Philly Fed Prices Paid Dec previous 35.3 (13.30 GMT)

ECB Press Conference (13.45 GMT)

US Industrial Production MoM Nov consensus 0.1% vs previous -0.1% (14.15 GMT)

US Manufacturing Production MoM Nov consensus -0.1% vs previous 0.1% (14.15 GMT)

US Capacity Utilisation Nov consensus 79.8% vs previous 79.9% (14.15 GMT)

Australia S&P Global Manufacturing PMI Flash Dec previous 51.3 (22.00 GMT)

Australia S&P Global Services PMI Flash Dec previous 47.6 (22.00 GMT)

Friday

Japan Jibun Bank Manufacturing PMI Flash Dec previous 49 (00.30 GMT)

Japan Jibun Bank Services PMI Flash Dec previous 50.3 (00.30 GMT)

UK Retail Sales MoM Nov consensus 0.3% vs previous 0.6% (07.00 GMT)

UK Retail Sales YoY Nov consensus -5.6% vs previous -6.1% (07.00 GMT)

Good luck.

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