The Morning Hark - 15 July 2022
Today’s focus ……CPI aftermath part II, 75 or 100?, the USD keeps going again and safe haven shortbread tins.
Daily roundup - all prices are at 7.50 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September up smalls on the day at 99.50 and 93.00 respectively. Yet another PnL destruction day with the Fed flip helping Brent recover its poise back to the no-mans land zone of around the $100 level. Earlier the pricing in of 100bp hike for the July meeting, the “inevitable” resulting recession and hence subsequent rate cuts for next year led to a steep sell off which took us through the 97 level we had been focusing on in Brent over the last few days. The subsequent walk back negated the move but leaves the market somewhat marooned in a sea of uncertainty. I post at the bottom a podcast which is worth listening to, and hopefully will lift some of the uncertainty, on inflation, energy markets and the USD with Lyn Alden who is always an excellent listen. Remember its Biden’s big day as he will have bilateral talks with the Saudi hierarchy this evening.
EQ - Mixed bag in Asia with the Nikkei and Kospi up smalls at 26,790 and 308 respectively. However, the Hang Seng down one percent at 20,300. Poor mainland data depressed the market with GDP having a big miss with only 0.4% growth seen in the second quarter the slowest since the start of the pandemic. Housing data was also poor and the story surrounding disgruntled homeowners non payment of mortgages has hit the banking sector hard (I post below an article on the crisis). On the flip side retail sales printed better than expected for June at 3.1% YoY.
The US futures a touch stronger, after yesterday’s shenanigans, with the Nasdaq and S&P trading at 11,800 and 3790 respectively. Big expiry today in the US markets with close to $2tn worth of contracts rolling off today, approximately half of which is S&P related.
Gold - Gold futures down smalls at 1700 as it steadies itself after yesterday’s steep sell off. The 1730 level again proved a good level to lean into and the subsequent sell off captured the 1700 downside target before stabilising. Gold seems more and more a victim of other markets. Going forward it looks like some more work needs to be done if we are to break lower and through the 1695 lows but certainly 1730 remains the sell on rallies zone.
FI - US yields down smalls overnight with the US2y and 10y yields at 3.10% and 2.93% respectively. The curve remains inverted but a lot less so than at one point yesterday where we saw it at close to 28bps of an extreme as the 2y printed above 3.23%.
European yields causing alarm in the marbled halls of the ECB with both German and Italian 10y yields closing higher yesterday at 1.179 and 3.314. However, the Italian curve outpaced its German equivalent by some yardage and as you can see the spread is widening and getting into toolbox territory for the ECB. All driven by the continued political uncertainty in Italy where PM Draghi won his vote of confidence but lost his coalition majority. He subsequently resigned but the President declined the resignation and we sit and wait. It would appear that he could potentially try and build another coalition or go to the country. As ever Politico has it all covered in the post below. Italian BTPs should definitely be on the front page today.
FX - Not a surprise to find the USD remaining bid with the Index at 108.65 remaining close to its recent 20 year highs. No major standouts in the majors with the JPY, EUR and GBP all in tight ranges overnight at 138.75, 1.0020 and 1.1824 respectively.
The real bloodbath in recent days has been in the EM space where the USD strength continues to weigh on the developing countries. USDKRW is at multiyear highs at levels last seen around the GFC and currently trading at 1328.50. Similar pattern in the THB and TRY and nearer to home with the ZAR printing its highest in two years at 17.3060. USDCNH too remains at elevated levels. Worth keeping an eye because, as we have seen many times in the past, if EM tips over it tends to go pretty quickly and contagion in the space becomes inevitable.
Others - Bitcoin and Ethereum followed the equity prints and look a touch healthier at 20,600 and 1200 respectively.
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Well that was a complete and utter shambles of a day. Maximum confusion reigns as nobody seems to be driving the bus! As we have seen in the past when you have generational deficits in market knowhow (especially the policy makers), like a 40 year high CPI print, the consequence can be irrational, volatile and expensive and we got that in spades yesterday. The day started with Nomura forecasting a 100bps hike for July and the post CPI market pushing towards that idea and add to the mix a further 75bp for September. The outlier was the Fed’s WSJ whisperer Timiraos who sided with a 75bp base case for the July meeting. The market felt that it had bet on the correct colour especially when the Fed’s Waller claimed that he would “lean toward larger July hike if data warranted”. The market took this as an endorsement of their view, doubled down and pressed on with stocks selling off and yields, especially in the front end, rallying. However little over an hour later after the volatility the market found it was on the wrong colour as Waller walked this back a touch with claims that the “Fed can do its job without accelerating to a full point rate rise” and the market pricing in 100bp hike maybe “getting ahead of themselves”. Swift reversal of markets and some ensued especially with Bullard chiming in that he supported a 75bp hike and further that “would get to neutral”. Quite a turnaround and just shows you the state of flux the markets are as so the people that are meant to be in charge of them. So where does this leave us for one Timiraos seems to have the inside track and should be front and centre as the confirmed forward guidance tool for the Fed. Secondly it makes me crave for the safe haven of my grandmother’s shortbread tin where she used to keep all her money! Markets are now siding with a 75bp for July with some tail risk for 100.
If you have time, I also post below a piece which highlights BoA’s new call for US rates by their much esteemed rates strategist Cabana. They have basically shifted lower by 75bps their year end US10y forecast as well as the Fed’s terminal rate predictions. They also look for a mild H2 recession with rate cuts to follow next autumn and a cessation of QT around the same time.
The Day Ahead
Today is all about US data after the last two days worth price volatility driven off the CPI and Fed speakers. Retail sales and University of Michigan survey and especially its inflation component are up. Another volatile and tiring week for markets will hope for some inline “quiet” prints but don’t hold your breath. BoA have a large miss for retail sales lined up so let’s see. Also more UK politics as we are down to the famous five now and have a TV debate over the weekend before the next round of voting takes place on Monday (more below as usual from Politico).
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📅⠀The main highlights for the day ahead in terms of data and speakers:
US Retail Sales MoM Jun consensus 0.8% vs previous -0.3% (13.30 BST)
US NY Empire State Manufacturing Index July consensus -2 vs previous -1.2 (13.30 BST)
US Industrial Production YoY June previous 5.4% (14.15 BST)
US Capacity Utilisation Jun consensus 80.6% vs previous 80.8% (14.15 BST)
US Michigan Consumer Sentiment Prel Jul consensus 49.9 vs previous 50 (15.00 BST)
US Michigan 5 Yer Inflation Expectations Prel Jul previous 3.1% (15.00 BST)
US Michigan Consumer Expectations Prel Jul consensus 47 vs previous 47.5 15.00 BST)
Bostic (13.45 BST)
Good luck and a good weekend to one and all.
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