The Morning Hark - 16 Dec 2022

Today’s focus … The Hawk Lagarde plays catch up, flash December PMIs and the World Cup final.

Dec 16, 2022

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

Oil - Brent and Crude February futures flat in the Asian session, with futures currently trading at 81.30 and 76.10, respectively. Treading water at this stage after a week of hawkish central banks, the partial reopening of the Keystone pipeline, China continued relaxation of covid restrictions and better forecasts for 2023 demand which all in all was taken as a net positive for oil as it shows a healthy rally on the week.

EQ - Asia futures showing the usual split shift, with the Hang Seng currently trading up over one percent at 19,529 with some help from reported further measures from the authorities for the ailing property sector. The Nikkei and Kospi, however are down smalls at 27,482 and 305, respectively.

The Nasdaq and S&P flat overnight at 11,468 and 3931, respectively as they steady the ship after more post Powell “higher for longer” declines not helped by the hawkish ECB and some terrible US data prints fuelled recessionary worries. Seems like bad is now bad again in terms of news.

Today sees “quadruple witching” day in US stocks with $4th of expiries across the am/pm settlements. This is basically the expiry of stock index futures, options on stock index futures, single stock options and index options. It has the potential to be noisy, especially with stocks somewhat on the back foot!

Gold - Gold Feb futures steadying a touch overnight in Asia, with gold trading now at 1792. Gold pushed through our 1800 pivot yesterday morning and has done very little ever since. Doesn’t feel like there’s much to add here with resistance now at 1800 and further at our noisy 1820/25 zone. First support at 1780.

FI - US yields a touch firmer overnight in Asia, with the US2y and US10y currently trading at 4.25% and 3.48%, respectively. We just can’t keep away from that 3.50% level in the US10y!

European yields rallied strongly post the hawkish ECB, with the German 10y yields closing at 2.08% and Italian 10y yields at 4.153%. Not the spread back out beyond 200bps again.

UK gilt yields backed off post BoE yesterday, with the 10y yield closing at 3.241%. The yields had rallied on the expectations of the BoE hike, but the split vote and the nod, from the BoE, that market pricing had adjusted to be more in line with their thinking saw yields come off.

FX - Subdued FX markets in Asia after a busy week. The USD index currently at 104.28 off a touch in Asia but up from our previous opening, with downturn fears helping the USD hold firm. In this environment, the JPY is giving back some of its recent gains as the market again focuses on rate differentials, with it trading now at 137.34. GBP up a touch at 1.2195 but lagging in comparison with the least hawkish central bank yesterday. The EUR is the big obvious gainer trading now at 1.0661. Post the ECB we were trading over 1.07 and hitting six month highs.

Others - Bitcoin and Ethereum both off a touch in line with the more hawkish central bank outlook, with them currently trading at 17,460 and 1277, respectively.

SNB Bank Review

50bp hike was duly delivered, taking rates to 1% and a promise that further hikes could not be ruled out given that it was too early to claim victory over inflation. FX wise the SNB will remain active as and when necessary. They revised their 2024 estimation for inflation down a touch to 1.7%.

Norges Bank Review

As expected, again a 25bps hike taking rates to 2.75% in Norway, which was also accompanied by a hawkish statement. Higher rates were needed to dampen inflation. Their forecasts are uncertain, but if they were to evolve as anticipated, then that would see policy rates at 3% next year. They also claimed that signs of a slowdown may prove to be more pronounced than they had been in September. With regard to forecasts, again inflation has risks to the upside, whilst growth projections have downside risks. Finally, they revised up their projections for core inflation next year from 4.8% to 5.2%.

BoE Bank Review

Another 50bp hike taking rates to 3.5%, a level last seen in the UK at the tail end of 2008. As we anticipated, the split of the vote was interesting, with 2 members, Tenreyro and Dhingra, voting for no change, which suggests they believe the tightening cycle should have ceased at 3% due to fears of over tightening and strangling what is left of the economy. 6 members voted for the 50bps hike whilst Mann was in the 75bps camp. Haskel and Ramsden were the two hawks that buckled. Interesting the vote split, and you have to think if inflation continues tipping over the doves will have some company in the new year. Guidance wise, the usual stuff that further hikes may be required, but they took out the reference to financial markets being overly aggressive on the rate peak.

ECB Bank Review

This was the belter! 50bps hike taking rates to 2.5%, a hawkish statement and Lagarde couldn’t have been more hawkish if she’d walked onto the stage caped in feathers with a big beak! No comment.

The money line from the statement was that rates need to rise “significantly and steadily in order to reach levels that are sufficiently restrictive to ensure a timely return of inflation to target”.

Future rate hikes will be “data dependent”.

The APP will decline at a measured and predictable rate from March 2023. There will be no reinvestment of principal payments from maturities which will amount to €15bn per month. The February ECB will offer more parameters on the QT program.

The projections backed up the hawkishness of the statement and press conference:

Inflation 6.3% (5.5% previously) in 2023, 3.4% (2.3%) in 2024 and 2.3% in 2025;
Core inflation 4.2% (3.4%) in 2023, 2.8% (2.3%) in 2024 and 2.4% in 2025; and
GDP 0.5% (0.9%) in 2023, 1.9% (1.9%) in 2024 and 1.8% in 2025.

In summary, the inflation profile was raised for next year and the year after whilst growth was trimmed next year. The hawkishness of the ECB is a big surprise given the growth profile suggesting, like the Fed, they are willing to sacrifice a recession and potentially a deep one to counter inflation. The startling thing is that inflation, according to their projections, will still be above target in 2025 despite their “aggressive stance”.

Just in case that wasn’t enough Lagarde underlined the hawkishness in her presser:

underlying inflation measures are high;
depreciation of the EUR has added to inflation;
risks to the forecasts on growth are to the downside and the upside for inflation;
it is “obvious to expect more 50bps hikes;
should expect the “50bps pace for a period of time”;
ECB has to do more on rates than the markets have priced;
the broad majority of the members agreed with the decision today;
December inflation may show a downtick but January and February will show increases again;
we are note wavering/pivoting; and
we will “keep policy tight for the long run”.

If that wasn’t enough, our old friends “ECB sources” fuelled the flames by saying that a third of the members wanted a further 75bp increase, but Lagarde offered back-to-back 50bps hikes as a compromise. Even with the compromise, several of the hawks remained on the 75bp side of the debate.

Well, there’s not much to add other than the ECB seem willing to drive the car at full pelt off the cliff edge to get inflation down and let the economy be damned. Seems like a Fed type policy which is about 6+ months behind the curve but desperately trying to catch up. What could possibly go wrong?

Yesterday’s US Data

Just a quick nod to the data points out of the US yesterday, which disappointed across the board. Retail sales was the worst in two years and perhaps was a give back from the previous month’s bumper print, the regional surveys both missed estimates and remain in contraction whilst both manufacturing and industrial production both had declines and missed estimates. Worryingly for the Fed, initial claims again showed the “robustness” of the lagging labour market.

The World Cup - The Final

Argentina v France

A real final of two heavyweights, and what makes it even better, as a romantic, is that there’s one from Europe and one from South America. They last met in a World Cup last time out in Russia and produced a cracker in the round of last 16. France went on to win 4-3 on their way to picking up the trophy. Oh, for a repeat of a game like that!

So will it be the completion of the Messi odyssey, or will the young pretender Mbappe help his team be the first country, in 60 years, to retain the title. PSG teammates but opponents for one night only. Apart from the magic that seems to spring from Messi’s boots and the direct running of Alvarez the Argentinians are a pretty functional team. Equally, you could say the same for France outwith Mbappe’s speed and occasional brilliance, Giroud’s eye for goal and Greizmann’s intelligence, they are team that is happy to grind out games. Both teams like to play without the ball, so that may be an issue for us viewers!

Argentina are on a mission, a movement to get Messi over the line and if the scenes in Buenos Aries from after their semi-final victory are anything to go by, everyone is swept up with the fever. The whole country seemed to either be in Doha or in that square in Buenos Aries! The country has really been captured by this World Cup, maybe because of last year’s Copa America triumph or perhaps its the realisation that this will likely be Messi’s last World Cup and hence his last chance to emulate his hero and mentor; Maradona. The famous Panini sticker book became a matter for the Argentinian government earlier in the year as the Trade Secretary was asked to help with a shortage of the stickers in the country. No prizes for guessing whose card was the scarcest of all.

Previously it seemed the Argentinian team would wait for that one piece of magic from Messi to bring them victory. It now seems that the team is doing everything it can to support the magician. Will that be enough to get them over the line? Who can forget his haunted face back in 2014, when he walked past the little gold statue on his way to picking up his runners up medal. The Argentinians will be hoping they don’t see the same image again.

The French have been there and done it, and in Deschamps they have a proven winner both on and off the pitch. He has reverted to type by moving back to the strict disciplinarian of Russia 2018 and playing in a solid tight formation and using the pace and guile of his front four to spring on the counter. It is scary that they have reached the final without their Ballon d’Or winning centre forward, their two best midfielders and several of their first-choice defenders. Impressive to say the least, and its surprising, given their track record, that they are only slight favourites. Indeed over 90 minutes there is little to choose between the three outcomes.

Congratulations to both teams for getting this far and good luck to you both.

Congratulations also to Inter Milan and Bayern Munich, who have now had at least one representative from their team in the squads that contest the World Cup final stretching back now 40 years.

The Day Ahead

Overnight we had Australian and Japanese flash PMIs for December. Australia showed declines in both measures, although manufacturing remains above the 50 boom/bust line just at 50.4. Services, however, edged lower again to 46.9. In Japan, slightly rosier picture with manufacturing a touch lower at 48.8 but services increased to 51.7.

UK retail sales just printed for November and are not attractive, showing a decline for the month of 0.4% versus an expected uptick of 0.3%. YoY is tracking at -5.9%.

The morning is all about the flash PMIs in Europe as we get the first look behind the curtain for December as to how the economies are doing.

We also get the final EU inflation report for November. Whilst the afternoon sees the flash PMI for the US.

In summary, all are expected to stabilise but remain well below the 50 boom/bust line.

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

Friday

Germany S&P Global Manufacturing PMI Flash Dec consensus 46.3 vs previous 46.2 (08.30 GMT)

Germany S&P Global Services PMI Flash Dec consensus 46.3 vs previous 46.1 (08.30 GMT)

EU S&P Global Manufacturing PMI Flash Dec consensus 47.1 vs previous 47.1 (09.00 GMT)

EU S&P Global Services PMI Flash Dec consensus 48.5 vs previous 48.5 (09.00 GMT)

UK S&P Global Manufacturing PMI Flash Dec consensus 46.3 vs previous 46.5 (09.30 GMT)

UK S&P Global Services PMI Flash Dec consensus 48.5 vs previous 48.8 (09.30 GMT)

EU Inflation Rate MoM Final Nov consensus -0.1% vs previous 1.5% (10.00 GMT)

EU Inflation Rate YoY Final Nov consensus 10% vs previous 10.6% (10.00 GMT)

EU Core Inflation Rate YoY Final Nov consensus 5% vs previous 5% (10.00 GMT)

US S&P Global Manufacturing PMI Flash Dec consensus 47.7 vs previous 47.7 (14.45 GMT)

US S&P Global Services PMI Flash Dec consensus 46.8 vs previous 46.2 (14.45 GMT)

Sunday

The World Cup Final
Argentina v France (15.00 GMT)

Good luck and a good weekend to one and all.

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