The Morning Hark - 15 Nov 2023

Today’s focus... CPI ends the hiking cycle? Its off to the races as the market looks for deep cuts next year. Pushback time Jay? Plus the Reshuffle Kerfuffle rumbles on.

Overnight Highlights

Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude January futures pretty much back to where we opened yesterday in Asia with the pair currently sitting up smalls at 82.90 and 78.70  respectively. The US inflation report boosted Brent to a weekly high around 83.70 before some short term profit taking put paid to any over enthusiasm. Overall the picture remains confused with today’s Chinese data dump encouraging the bulls but overnight news of the Japanese GDP contraction giving the bears encouragement. EIA data, which has been delayed for a couple of weeks, is out later today and may help the bull/bear argument at least for the short term.

EQ - Asian equity markets enjoying riding the US equity wave with gains across the board. The Hang Seng up over three percent at 18,060. The Nikkei up close to one percent with its gains tempered by the q3 GDP print. Currently sitting at 33,490.

The US indices off to the races post CPI and haven’t looked back. Overnight they have held onto their gains and are sitting near big levels having both taken out their 100dmas. The Nasdaq sitting a touch below the big 16,000 level at 15,940. Remember the year’s high around 16,060 is not far off. The S&P futures are currently sitting on the big resistance around the 4520 level.

Gold - A good US inflation report was all Gold Dec needed to get back its mojo. The print helped the precious metal jump back to 1970 where, to be honest, it has done little since.

FI - Global yields steadying overnight with the US2y and US10y currently trading at 4.85% and 4.45% respectively. The technical levels we spoke about yesterday for the US10y were blown away post CPI as US yields took a 20bp dip almost immediately. The peak in US rates is firmly in place according to the markets but we’d expect some Fed pushback if nothing else to temper the market’s enthusiasm. Financial conditions and all that!

European yields took their cue from the US print and played follow my leader with the German 10y closing much lower at 2.60% and the Italian 10y yield similarly at 4.41%.

UK gilt yields likewise with it closing at 4.16% levels last seen in the summer.

FX - One good print and its all over for the USD, or so it would seem. Sharp sell off post number but flatlined overnight with the USD Index currently at 104.15. The JPY, EUR and GBP all took the number well but similarly dull overnight with them sitting currently at 150.65, 1.0880 and 1.2470 respectively.

FX option expiry wise we have $1.5bn at 150 rolling off in USDJPY whilst in the EUR we see €1.3pm at 1.08.

Others - Bitcoin and Ethereum took a bath post CPI as the market swarmed to traditional assets for their gains. Both major cryptos down close to three percent at 35,600 and 1980 respectively. Bitcoin on a big support here at 35,500 a break of which could take us back to the 30,000 break out level.

Macro Themes At Play

Recap

Word on the street is that China is mulling over a $137bn funding package to boost the housing market.

German ZEW suggested that the sick man of Europe is stirring with a headline print at 9.8 for November beating estimates and the previous months. Indeed its the best reading since March of this year and the suggestion is that the German economic decline may have bottomed out. One of the quotes was especially upbeat with “heightened economic expectations are accompanied by significantly more optimistic outlooks for the German industrial sector”.

Eurozone wise q3 GDP came in on expectations showing a quarter in contractionary territory, just, at -0.1% which leaves the YoY barely breathing at 0.1%. Eurozone ZEW was also encouraging beating both previous and expectations at 13.8 and a best reading since February.

US Inflation report for October was a belter for the markets and the Fed. All measures a touch softer than consensus and continuing the general softening trend of the series over the last year or so. Headline and core MoM came in at 0% and 0.2% respectively with the equivalent YoY measures now at 3.2% and 4%. The core YoY now at a two year low.

Major contributions, for the drop, came from shelter and used cars.

Immediate market reaction was for the swaps market to discount fully any chance of further hikes and cement rate cuts for the middle of next year, now into May and 50bps by July. The boys and girls in the high tower will not like that!

The WSJ’s Fed whisperer Timiraos calling it. He suggests that the October prints we have seen thus far, especially the labour and now the CPI, point to July being the last hike in the cycle. Focus for the committee will now be on how they adjust the statement/presser to reflect that the Fed are on hold. It probably helps that the December FOMC sees a fresh set of forecasts and a new dot plan (which remember is out of date the minute it is released!) to help guide the markets as to their thinking.

Santa’s back?

One fly in the ointment in all this euphoria would be those lofty UMich inflation expectations we saw last Friday. Something doesn’t add up. Worth having that in the back pocket I think before betting the family silver on Santa.

Whilst the Fed will be pleased with the inflation print they will be less so with the market’s reaction and I would expect the upcoming Fed speakers to try and temper the enthusiasm of market participants. Look out for the usual sound bites; “long way to go”, “higher for longer to get inflation back to target”, “premature to be talking about rate cuts”, etc but whether such words will be enough to put the genie back in the bottle its hard to see.

Central Bank Speakers

The BoE’s Pill claims that there has been significant progress on inflation but there is still work to be done. However 5% inflation would be too high and there is a risk of more persistent inflation. Then the punchline; we may need to raise rates further! You got to laugh.

The SNB’s Jordan hawkish as ever claiming that the SNB will not hesitate to tighten further if necessary. In addition to his uncertainty as to whether the SNB has reached the terminal rate yet.

The Fed’s Jefferson expressed that uncertainty still remains with regard to inflation persistence which may warrant a stronger monetary policy path.

Barkin got the glory slot post CPI and revelled in it. Real progress is being made but risks remain in over/under correcting on inflation. However he fears that more needs to be done to curb demand and inflation. The impact from higher rates may be lagged. So something for everyone in there.

Goolsbee pumped up the volume by claiming this year could see the fastest non-war related one year fall in CPI inflation in a century! He is happy to see progression with inflation, the economy remains strong and the labour market vibrant. He sees external shocks as more of a threat than the economy overheating. However there is still a way to go to get inflation back to target.

As for the CPI report it “looked pretty good”.

IEA Monthly Report

Noted no material impact on oil supply from the Middle East tensions. However they do see oil demand growth slowing into 2024. Like OPEC they lifted their 2023 oil demand forecast to 2.4m BPD (from 2.3m).

UK Cabinet Reshuffle Kerfuffle

Oh oh “the Queen from over the water”, as Braverman supporters have started to call her, had a pop at her old boss. Reads as a pretty rough year end of review to be honest:

You have manifestly and repeatedly failed;

You never have any intention of keeping your promises;

Someone needs to be honest: your plan is not working. You need to change course urgently; and

You sought to put off tough decisions in order to minimise political risk to yourself.

I’ve had some stinkers in my time but I don’t think my year ends ever plumbed these depths although if any of my old bosses are reading please pile in!

She did end on a point of self reflection “I may not have always found the right words but…..”.

This one will rumble for a while yet but as we said in yesterday’s piece Sunak has tacked to the centre as his last throw of the dice for next year’s election. The right of the Conservative party are now gathering on the hill ready to lay siege, if they can get the numbers, lead by their Boudicca.

The Day Ahead

Overnight we got Japan’s preliminary q3 GDP report which wasn’t attractive. The QoQ GDP growth showed a contraction of 0.5% taking the annualised to an ugly -2.1% both well below estimates. The details didn’t make good reading either with capital expenditure a big downside miss at -0.6%.

Australian q3 wages data did little for the nerves of the RBA with the print showing the largest rise on record. YoY wages now at 4%. For reference the next RBA is 5 December.

The China data dump was on the margins positive with YoY industrial production an upside beat at 4.6%. The much anticipated strong retail sales number didn’t disappoint at 7.6% as Golden Week spending and Covid base effects helped it to a 5 month high. Unemployment rate at 5% was as expected and fixed asset investment had a small downside miss at 2.9%.

PBOC kept 1y rates steady as expected at 2.5% but did inject liquidity via policy loans and indeed the largest such liquidity in 7 years.

The Japanese less significant data dump was pretty much in line and all September numbers so touch of a history lesson about it.

UK inflation report for October just hit the wires with it better than expected. Expect Sunak to take all the glory for halving inflation if he gets time from defending the portcullis!

All downside beats across the board. Headline back below 5% at 4.6% and flat on the monthly measure. Core whilst lower than expectations is still sticky with MoM at 0.3% and YoY at 5.7%. Still overall good news although largely due to base effects.

Later in the day Eurozone industrial production for September then the afternoon is given over to the US PPI and retail sales reports for October.

A few central bank speakers and obviously the Fed’s comments will be interesting post CPI.

Overnight sees Japanese machinery orders and the Australian labour report for October.

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Main Highlights Ahead

All times in GMT (EST+5 / CET-1 / JST-9)

The main highlights for the day ahead in terms of data and speakers:

Wednesday

UK Inflation Rate MoM Oct consensus 0.1% vs previous 0.5% (07.00 GMT)

UK Inflation Rate YoY Oct consensus 4.8% vs previous 6.7% (07.00 GMT)

UK Core Inflation Rate MoM Oct consensus 0.4% vs previous 0.5% (07.00 GMT)

UK Core Inflation Rate YoY Oct consensus 5.8% vs previous 6.1% (07.00 GMT)

EU Industrial Production MoM Sept consensus -1% vs previous 0.6% (10.00 GMT)

EU Industrial Production YoY Sept consensus -6.3% vs previous -5.1% (10.00 GMT)

US PPI MoM Oct consensus 0.1% vs previous 0.5% (13.30 GMT)

US PPI YoY Oct consensus 1.9% vs previous 2.2% (13.30 GMT)

US Core PPI MoM Oct consensus 0.3% vs previous 0.3% (13.30 GMT)

US Core PPI YoY Oct consensus 2.7% vs previous 2.7% (13.30 GMT)

US Retail Sales MoM Oct consensus -0.3% vs previous 0.7% (13.30 GMT)

US Retail Sales YoY Oct consensus % vs previous 3.8% (13.30 GMT)

US NY Empire State Manufacturing Index Nov consensus -2.8 vs previous -4.6 (13.30 GMT)

Japan Balance of Trade Oct consensus -JPY735.7bn vs previous JPY72.1bn (23.50 GMT)

Japan Exports YoY Oct consensus 1.2% vs previous 4.3% (23.50 GMT)

Japan Imports YoY Oct consensus -12.2% vs previous -16.3% (23.50 GMT)

Japan Machinery Orders MoM Sept consensus 0.9% vs previous -0.5% (23.50 GMT)

Japan Machinery Orders YoY Sept consensus -7.7% vs previous -3.6% (23.50 GMT)

Fed Speakers

Barr (14.30 GMT)

Barkin (20.30 GMT)

BoE Speakers

Haskell (18.00 GMT)

Early Thursday

Australia Unemployment Rate Oct consensus 3.7% vs previous 3.6% (00.30 GMT)

Australia Employment Change Oct consensus 20k vs previous 6.7k (00.30 GMT)

Good luck.

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