The Morning Hark - 15 Sep 2022
Today’s focus ……Quiet after the storm. US Retail Sales to tip the balance? Xi/Putin meet, US Railroad Strikes and JPY Jawboning.
All prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures flat in Asia currently at 93.90 and 88 respectively. Oil has had a decent week backing away from the supposed Biden bid zone around the $80 level and getting back into slightly healthier territory. The spike higher yesterday was being credited to the IEA report on oil which, despite forecasting that China would suffer its first drop in oil demand in over three decades, was seen as positive. The main area of hope lies in the fact they expect widespread switching from gas to oil for heating purposes over the winter months which could account for as much as double the oil demand for such purposes seen last year. This coupled with the weak supply profile was deemed worthy of a close to 3% spike in oil.
All eyes, in the commodity space, on the headlines regarding the US railroad strike as Friday’s deadline looms. Latest news suggests that there is the potential for a long strike especially as the unions had agreed on a settlement only for the workers to throw out the deal. In the meantime Amtrak has cancelled all of its passenger long haul trains in light of the looming strike action.
EQ - Equity markets a mixed bag in Asia in light trading with the Nikkei and the Kospi both down smalls currently trading at 27,675 and 311. The Hang Seng currently up smalls at 18,894.
Similarly the Nasdaq and S&P trading flat at 12,215 and 3966 respectively.
Not much of a bounce after Tuesday’s sell off and the pair were dragged back into positive territory only by what seemed some frenzied late algo buying into the close. Critical levels for both remain not too far away at 12,000 and 3900. 3960 looks like a near term trading pivot within the wider 3920/4000 range.
Gold - Gold Dec futures down again overnight in Asia at 1687 as gold continues its sell off we saw yesterday and sits near the recent lows. Continued hawkish sentiment surrounding the Fed and the underpinned USD strength continue to pull gold lower. 1680 and further at 1650 are the downside targets. Topside now feels like any rally into 1720 will be jumped upon.
FI - US yields continue their climb in Asia with the US2y and 10y yields currently trading at 3.83% and 3.44% respectively with the inversion starting to edge wider again. The odds of 100bp hike have slipped back a touch with about a 22% chance now priced in.
European yields backed off a touch yesterday closing at 1.716 and 3.971 for the German and Italian 10y yields respectively. Similarly the 10y gilt in the UK which closed off at 3.137.
FX - With US yields remaining bid the USD continues to hold onto Tuesday’s post CPI gains trading in Asia at 109.85. The majors remain offered with the JPY, EUR and GBP all lower overnight at 143.65, 0.9960 and 1.1511 respectively. The Yuan continue its stronger fix trend and remains close to 7 at 6.9790. The other big mover overnight was USDNOK as it once again tries to stabilise above 10. Stronger oil and the USD have boosted it to around 10.12. Let’s see if it manages to hold up here with so many recent failures. 10.35 the year’s high is the near term target if we can remain above 10.
Others - Both Bitcoin and Ethereum a touch soggy at 20,025 and 1580 respectively. Merely hours until the Ethereum merger and I post a number of articles below explaining what to expect and what the various implications for trading the newly merged crypto and indeed what implications a “fork” may have for the space. All good stuff for those with the interest and inclination.
EU Energy Crisis
The EU energy commission proposals to engage the energy crisis which surrounds Europe entail caps on electricity prices and fund this via windfall tax levies on the energy companies. Pretty much what had been leaked previously.
JPY and Intervention
Still a hot topic in the markets as you’d expect. Couple of points that we stressed on Twitter yesterday were concerning the actual procedure surrounding actual physical intervention. The Japanese would need informal consent from their G7 counterparts before they carried out any intervention. In particular, as they would be intervening via USDJPY they would need the US’s specific permission. This could be a tough ask as the US only tends to want to intervene in periods of extreme volatility and this move hasn’t shown such traits this far. A further sticking point would be the YCC policy of the the BoJ which is one of the main reasons for the disparity in rates between the two countries and hence the rally in the USD versus the JPY. In truth the policy goes against the fundamentals of why the Japanese are thinking of intervening to support their currency so it could be a hard sell. We believe that this will remain a jawboning stage until such time as we breach 150 or markets start to become unruly.
One further point to note on the subject is that if we did get joint intervention, which we still believe is a bit off for now, it tends to occur “on the hour” and when the US get to their desks so at noon or 1pm BST. However that’s for another day.
The Japanese ruling party official Katayama spoke much sense overnight when declaring that “conducting solo FX intervention won’t be that effective in stemming the sharp JPY fall”. A point we have stressed on many occasions before in TMH. In addition he claimed the country lacks sufficient tools to battle the JPY’s steep decline.
Lane stressed that the ECB is set to “raise interest rates over the next several meetings” whilst blaming energy as the main inflation driver.
Kazaks spoke about the potential need for the ECB to continue to raise interest rates “beyond February”.
Overnight Data and the Day Ahead
Overnight the Australian employment report showed the first uptick in the unemployment rate in almost a year although markets remained unperturbed.
The Swedish elections, as early results had suggested, appear to show a very narrow win for the right wing bloc with the standing prime minister standing down in the face of defeat.
The morning session will be consumed with ECB speakers where we expect more of the same chatter. The afternoon session is all US focused with retail sales and the NY and Philly Fed surveys. As we know volatile at best but with the market in the flux it’s in it could see some knee jerk reactions. As for retail sales after the hot CPI print this week will a strong retail sales number showing strong consumer spending tip some Fed members towards a 100bp hike as a strong statement of intent?
Early doors tomorrow a slew of Chinese data in the early hours. Headline wise today obviously the Xi/Putin meeting soundbites (post at the bottom an article on the potential outcomes) will have the most interest and of course the ongoing US railroad strike saga.
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US Retail Sales MoM Aug consensus 0% vs previous 0% (13.30 BST)
US Phil Fed Manufacturing Index Sept consensus 2.8 vs previous 6.2 (13.30 BST)
US Phil Fed Business Conditions Sept previous -10.6 (13.30 BST)
US Phil Fed Employment Sept previous 24.1 (13.30 BST)
US Phil Fed Prices Paid Sept previous 43.6 (13.30 BST)
US NY Empire State Manufacturing Index Sept consensus -13 vs previous -31.3 (13.30 BST)
US Industrial Production MoM Aug consensus 0.1% vs previous 0.6% (14.15 BST)
US Manufacturing Production MoM Aug consensus 0% vs previous 0.7% (14.15 BST)
US Capacity Utilisation Aug consensus 80.3% vs previous 80.3% (14.15 BST)
Guindos (10.15 BST)
McCaul (10.30 BST)
Centeno (12.00 BST)
China Retail Sales YoY Aug consensus 3.5% vs previous 2.7% (03.00 BST)
China Industrial Production YoY Aug consensus 3.8% vs previous 3.8% (03.00 BST)
China Unemployment Rate Aug previous 5.4% (03.00 BST)
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