The Morning Hark - 16 Jan 2023
Today’s focus …The BoJ’s travails continue, crypto back in the spotlight but good reasons and The Week Ahead.
Prices are at 7.30 GMT/2.30 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March off one percent overnight with them currently trading at 84.70 and 79.40, respectively. The oil sector had a decent week with gains of over 8% as a softening inflation profile in the US and China reopening fuelled hopes for the demand side of the market. However, it would seem the market has opened this week with a slightly more cautious tone as market participants take profits with a nod to the OPEC monthly report due out tomorrow. A touch of uncertainty with regard to whether the cartel will tweak their global forecasts, in light of the China reopening, has ushered in the more cautious tone.
EQ - Asia equity futures fairly muted overnight with the Hang Seng, Nikkei and Kospi trading at 21,770, 25,790 and 318, respectively.
The Nasdaq and S&P futures off smalls overnight with them currently at 11,585 and 4014, respectively. US stocks holding onto their gains from last week. The Nasdaq is close to its 100dma, at 11,650, whilst the S&P is trading above its 200dma around the 4000 level.
Gold - Gold Feb futures continue to love life with them ringing our next bell at 1925 overnight and remaining at elevated levels with it currently trading at 1919. Weaker USD, lower yields, a Fed looking to slow again and China on the bid are more than enough reasons for gold’s excellent start to the year. Next level on the topside now at 1955/60. Support now at 1900 then 1870.
One word of caution on the move would be that the indicators are pointing to very overbought conditions that, of course, doesn’t mean that the rally can’t continue, but extended periods of overbought conditions tend to see a pullback.
FI - US yields steadying overnight after their selloff last week with US2y and US10y trading currently at 4.22% and 3.50%, respectively.
European yields followed the US lower last week with the German 10y yields closing at 2.14% and Italian 10y at 3.99%.
UK gilt yields softer too on the week with the 10y closing at 3.37%.
FX - Quiet session in Asia for FX with the USD consolidating near the lows of last week. The USD Index sits currently at 102.15. The EUR and GBP now at 1.0840 and 1.2235, respectively. The JPY, however, has had a lot more action with it printing a low of 127.24 as the 10y once again tested the 0.50% upper limit. The JPY weakened a touch since then as traders take some risk off. Liquidity remains pretty poor as it currently trades at 128.10.
Others - Bitcoin and Ethereum the darlings of the market over the weekend as big buying in the futures pits forced the pair higher and back above pre FTX levels. Currently, the pair sit at 21,110 and 1567, respectively.
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The Week Ahead
China data dump. Tuesday sees a broad range of Chinese data for December which should give us a proper read on the state of the Chinese economy as it started to emerge from the Covid zero policy at the tail end of last year. Data includes; retail sales, unemployment, industrial production and q4 GDP. Due to the circumstances, poor data prints are expected across the board with the hope that as we move into the new year the data will start to improve gradually and indeed accelerate. On Friday, we also get the PBOC 1y and 5y rate decisions. December saw the fourth straight month of no change in official rates but the authorities have cited rate cuts as an option to stimulate the economy.
UK data dump. Similar measures throughout the week for the UK with December’s labour, inflation and retail sales reports out during the week. The data will have a big bearing on the BoE’s next rate decision scheduled for 1 February. Thus far, the market is evenly divided between a 25/50bp hike. The labour report is out on Tuesday and is expected to continue showing signs of resilience despite the underlying poor macro outlook for the UK. This has been fuelled by the Brexit/pandemic exit of a good percentage of the workforce. Subsequently, the average earnings have remained sticky. Any wobbles in these two measures will obviously have a bug influence on the BoE’s decision. Wednesday sees the inflation report. YoY saw a softening in the Headline but still well in double digits and that trend is expected to continue for December as it ticks down to 10.6%. Core saw a smaller decline last month but this month a flat reading is the consensus forecast for the YoY. No sign of a US softening type correction in the UK for now. Finally, retail sales on Friday. Anecdotal evidence from the retailers has been generally good for the Christmas period and Friday’s GDP number for November showed a pick up in spending over the World Cup so we would expect to see a “one last fling” type number for December prior to the batten down the hatches for the new year. Consensus is looking for a 0.40% increase. Bit of a mixed bag for the BoE but overall the inflation print will probably push them towards a 50bp hike but remember the split nature of the committee.
Canadian CPI. All the more relevant as the BoC rate decision comes next week. Expectations are for a 6.3% YoY print for the Headline after peaking at 8.1% back in the early summer. Is that fast enough for the BoC though? Governor Macklem has been keen to stress that the fear for the Bank is that elevated inflation becomes entrenched. December’s BoC statement did suggest with its language change that the BoC was done hiking for now. The, what had been, ever present line, which suggested that the policy interest rate will need to rise further was dropped for a more vague “looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target”. Tuesday’s report will tell us if they will stick to those guns or not.
BoJ rate decision, Outlook Report and December inflation report. After Friday’s bloodbath a lot of focus on Wednesday’s BoJ rate decision and a lot of speculation that they will once again provide a surprise for the markets. Remember back in December they raised the YCC cap totally out of the blue. Last week speculation added to the hype when it was suggested that the Bank would carry out a review of the “side effects” of the Bank’s ultra loose monetary policy. Upon raising the cap BoJ Governor Kuroda was clear that this was not to be seen as an exit of the YCC strategy or a change in policy tack. However, as his tenor is running into its last few months speculation of a change in policy is hard to ignore. We believe that they will refrain from any change for now. The other focus will be the release of the Bank’s Outlook Report. Late last year, there was a lot of chatter about them raising their inflation forecasts for the coming two years as a precursor to a change of policy post Kuroda so we shall see if that actually transpires. Friday sees the release of the Japanese December inflation report, which like the Tokyo version, is expected to hit a 40 year high and print 4% for the Core YoY measure. All adding to the BoJ’s dilemma and the pressure it is starting to feel in the markets.
US data dump. Post the NFP and CPI prints in the last week or so everything else tends to pale in significance. This week we may not have the quality but we certainly have the quantity as we get PPI, retail sales, industrial production, housing data and some regional surveys to keep us going. Yes, second tier but all pieces of the puzzle. Overall we’d expect some weak prints with retail sales set to be a downside outlier as auto sales have weakened of late and weather related issues affecting large parts of the country throughout December. Housing, of course as we know, is in a downtrend and we’d expect that to continue whilst the ISM numbers would suggest industrial production won’t be attractive either. All in all, adding to the already baked in 25bp slower Fed pace but watch those financial conditions!
ECB Minutes. The minutes for the December meeting are released on Thursday. The meeting had the ECB step down from 75bps to a 50bp magnitude of hike but accompanied the lower hike with strong wording that interest rates will still have to “rise significantly at a steady pace to reach levels that are sufficiently restrictive”. There was also the announcement that the APP portfolio would shrink by Eur15bn pm from March until the end of q2 and then reviewed. In addition, there was the release of the staff forecast projections. In the press conference, Lagarde was keen to stress that more hikes were on the way and there was a broad majority view that the ECB should persevere with the fight with inflation. Sources post-meeting suggested that a third of Board members wished a further 75bps, so any further colour on this debate, from the minutes, would be insightful.
Norges Bank rate decision. Stick or twist a further 25bps? That is the question for the Norges Bank on Thursday. The Bank signalled a further rise in rates in q1 the question is will they go this early or hold back for now. The December headline inflation print had a decent drop to 5.9% YoY but Core ticked up a notch to 5.8% so quite the dilemma for the Bank. At the margins we think they’ll take the plunge and get rates to 3% at this meeting and pause.
Central Bank Speakers. Lot of speakers in the week with Davos and all that. ECB wise Lagarde appears twice in the week as we start to look towards the next ECB meeting in a couple of weeks time. The general theme from recent speakers has been of a hawkish take and it will be interesting to get Lagarde’s feel of the world and whether she is onboard with a further 50bps hike. From a Fed point of view a good number of speakers on the cards with Collins, who broke ranks last week with the 25bp hike call for February, and Williams probably the highlights as we get a gauge on how much last week’s CPI report has changed their views, if at all.
Estimates suggest that thus far this month the BoJ has spent JPY18tn in its defence of the YCC which is now double their increased monthly limit which they set at their December meeting and we are barely past the half way point of January.
Troubling times for the Bank who sooner rather than later will have to abandon the policy. Liquidity in the market is shocking, the repo market in Japan is barely functioning and shorter dated JGBs are yielding higher than the “artificial 10y”. Not a good look all round and one which is unsustainable.
I post below some articles on the whole debacle. If you don’t follow PiQ you really should, their Twitter feed and PiQsuite are a great resource of information and headlines. In the two posts below, found via the PiQ Reuters feed, they discuss possible next steps for the BoJ and how the YCC works. Excellent stuff.
On the BoJ new governor a majority of economists surveyed have pointed to Amamiya as the likely candidate to replace Kuroda. Here’s a repeat of what we wrote last week on him:
Masayoshi Amamiya - is a current deputy BoJ Governor and an obvious candidate for promotion to the top job. Indeed many took it as read that, after the surprise YCC band lifting back at the December meeting, this was a signal that he was heavily involved in the decision and as such this was seen as a parting gift from Kuroda. However media reports suggest that no decision, as yet, has been made. He remains the strongest candidate, especially as he is the continuity candidate, and is a hawk in comparison to Kuroda but much less so than the other candidates.
Asia Nikkei - BoJ record breaking bond buying
PiqSuite - Reuters - BoJ's possible next steps
PiqSuite - Reuters - How BoJ's YCC work
Hello strangers! Bitcoin and Ethereum recaptured the 21,000 and 1500 levels over the weekend taking the market back to levels last seen back in early November. If you remember back then Messi had his eye on securing his legacy by winning the World Cup whilst, little did we know that, SBF had his eyes on securing his client funds to fund his lavish lifestyle! Well, one turned out pretty well!
The move was a classic crypto one with the main move up coming with a big Asian green candle at the start of the weekend. Reports suggest the move was due, in the main, to purchases of around $4bn worth of bitcoin futures.
Back to SBF, and over the weekend, we got a long crypto thread from the ex FTX president who explains in great detail the reasons for his resignation and what he did/didn’t know about what was going on back in the Bahamas. Fascinating read.
The Day Ahead
Nothing for the day ahead, and with the US holiday for Martin Luther King Day markets will either be closed or quiet and, in both cases very illiquid!
Lot of chatter started on the debt ceiling crisis in the US with Yellen’s warning that come Thursday, she will have to enact extraordinary measures to keep the lights on. Worth keeping an eye on, especially with the debacle of the Republican speaker vote just behind us.
Remember too early doors tomorrow we get the China data dump and of course the great and the good at Davos also starts tomorrow.
Finally, as ever the excellent FXMacro Guy’s central bank speaker recap and outlook for the week. Packed with excellent information. A treasure trove of a resource and was recently endorsed by none other than Brent Donnelly. High praise indeed and very well deserved too.
FXMacro Guy - CB Speakers recap
FXMacro Guy - Outlook for the week
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Brent Donnelly - am/FX: Triskaidekaphobia
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Saxo Markets - US banking earnings disappoint and what to expect next week
- - 2023's Market Cycle & Price Action
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All times in GMT (EST+5 / CEST-1 / JST-9)
Bailey (15.00 GMT)
World Economic Forum in Davos starts
China Industrial Production YoY Dec consensus 0.2% vs previous 2.2% (02.00 GMT)
China Retail Sales YoY Dec consensus -8.6% vs previous -5.9% (02.00 GMT)
China Unemployment Rate Dec consensus vs previous 5.7% (02.00 GMT)
China GDP Growth Rate QoQ q4 consensus -0.8% vs previous 3.9% (02.00 GMT)
China GDP Growth Rate YoY q4 consensus 1.8% vs previous 3.9% (02.00 GMT)
German Inflation Rate YoY Final Dec consensus 8.6% vs previous 10% (07.00 GMT)
German Inflation Rate MoM Final Dec consensus -0.8% vs previous -0.5% (07.00 GMT)
UK Unemployment Rate Nov consensus 3.7% vs previous 3.7% (07.00 GMT)
UK Claimant Count Dec consensus vs previous 30.5k (07.00 GMT)
UK Average Hourly Earnings incl. Bonus Nov consensus 6.1% vs previous 6.1% (07.00 GMT)
EU ZEW Economic Sentiment Index Jan consensus vs previous -23.6 (10.00 GMT)
German ZEW Economic Sentiment Index Jan consensus -15 vs previous -23.3 (10.00 GMT)
Canada Inflation Rate YoY Dec consensus 6.3% vs previous 6.8% (13.30 GMT)
Canada Inflation Rate MoM Dec consensus -0.5% vs previous 0.1% (13.30 GMT)
Canada Core Inflation Rate YoY Dec consensus vs previous 5.8% (13.30 GMT)
Canada Core Inflation Rate MoM Dec consensus vs previous 0% (13.30 GMT)
US NY Empire State Manufacturing Index Jan consensus -8.7 vs previous -11.2 (15.00 GMT)
Japan Reuters Tankan Index Jan consensus vs previous 8 (23.00 GMT)
Japan Machinery Orders YoY Nov consensus 2.4% vs previous 0.4% (23.50 GMT)
Williams (20.00 GMT)
Centeno (07.30 GMT)
Fernandez-Bollo (08.00 GMT)
BoJ Interest Rate Decision no change expected leaving rates at -0.1% (03.00 GMT)
BoJ Quarterly Output Report (03.00 GMT)
Japan Capacity Utilisation MoM Nov consensus vs previous 2.2% (04.30 GMT)
Japan Industrial Production MoM Nov consensus -0.1% vs previous -3.2% (04.30 GMT)
UK Inflation Rate YoY Dec consensus 10.6% vs previous 10.7% (07.00 GMT)
UK Inflation Rate MoM Dec consensus 0.4% vs previous 0.4% (07.00 GMT)
UK Core Inflation Rate YoY Dec consensus 6.3% vs previous 6.3% (07.00 GMT)
UK Core Inflation Rate MoM Dec consensus 0.4% vs previous 0.3% (07.00 GMT)
EU Inflation Rate YoY Final Dec consensus 9.2% vs previous 10.1% (10.00 GMT)
EU Inflation Rate MoM Final Dec consensus -0.3% vs previous -0.1% (10.00 GMT)
EU Core Inflation Rate YoY Final Dec consensus 5.2% vs previous 5% (10.00 GMT)
US PPI YoY Dec consensus 6.8% vs previous 7.4% (13.30 GMT)
US PPI MoM Dec consensus -0.1% vs previous 0.3% (13.30 GMT)
US Core PPI YoY Dec consensus 5.6% vs previous 6.2% (13.30 GMT)
US Core PPI MoM Dec consensus 0.1% vs previous 0.4% (13.30 GMT)
US Retail Sales YoY Dec consensus vs previous 6.5% (13.30 GMT)
US Retail Sales MoM Dec consensus -0.8% vs previous -0.6% (13.30 GMT)
US Industrial Production YoY Dec consensus vs previous 2.5% (14.15 GMT)
US Capacity Utilisation Dec consensus 79.6% vs previous 79.7% (14.15 GMT)
US Manufacturing Production YoY Dec consensus vs previous 1.2% (14.15 GMT)
Bostic (14.00 GMT)
Bullard (14.30 GMT)
Harker (19.00 GMT)
Logan (22.00 GMT)
Villeroy (09.15 and 12.15 GMT)
Schnabel (10.30 GMT)
Australia Consumer Inflation Expectations Jan consensus vs previous 5.2% (00.00 GMT)
Australia Employment Change Dec consensus 22.5k vs previous 64k (00.30 GMT)
Australia Unemployment Rate Dec consensus 3.4% vs previous 3.4% (00.30 GMT)
Norges Bank Interest Rate Decision 25bp hike expected taking rates to 3% (09.00 GMT)
ECB Monetary Policy Meeting Minutes (12.30 GMT)
US Building Permits Prel Dec consensus 1.37m vs previous 1.351m (13.30 GMT)
US Housing Starts Dec consensus 1.358m vs previous 1.427m (13.30 GMT)
US Philadelphia Fed Manufacturing Index Jan consensus -11 vs previous -13.8 (13.30 GMT)
US Philly Fed Employment Jan consensus vs previous -1.8 (13.30 GMT)
US Philly Fed New Orders Jan consensus vs previous -25.8 (13.30 GMT)
US Philly Fed Prices Paid Jan consensus vs previous 26.4 (13.30 GMT)
Japan Inflation Rate YoY Dec consensus vs previous 3.8% (23.30 GMT)
Japan Inflation Rate MoM Dec consensus vs previous 0.3% (23.30 GMT)
Japan Core Inflation Rate YoY Dec consensus 4% vs previous 3.7% (23.30 GMT)
Collins (14.00 GMT)
Brainard (18.15 GMT)
Williams (23.35 GMT)
Lagarde (10.30 GMT)
Knot (14.00 GMT)
Schnabel (17.00 GMT)
China Loan Prime Rate 1y consensus vs previous 3.65% (01.15 GMT)
China Loan Prime Rate 5y consensus vs previous 3.9% (01.15 GMT)
UK Retail Sales MoM Dec consensus 0.4% vs previous -0.4% (07.00 GMT)
UK Retail Sales YoY Dec consensus -4.4% vs previous -5.9% (07.00 GMT)
Canada Retail Sales MoM Dec consensus -0.5% vs previous 1.4% (13.30 GMT)
Canada Retail Sales YoY Dec consensus vs previous 6.4% (13.30 GMT)
US Existing Home Sales Dec consensus 3.95m vs previous 4.09m (15.00 GMT)
Harker (14.00 GMT)
Waller (18.00 GMT)
Nagel (09.00 GMT)
Lagarde (10.00 GMT)
Elderson (15.30 GMT)
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Harkster's 'Like ❤️' button is sooo far down the page, you may get more likes if you place the 'Like❤️' button right next to Harkster's request to 'submit a like'.
Otherwise, a top notch, broad overview of the Macro 👍
I read somewhere that if Japan had to refinance all their sovereign debt at 3% all of their revenue would be required to service the interest expense.
Francis Hunt made some interesting comments about currency devaluation as bonds fall. Who's going to keep buy the these bonds I wonder.