The Morning Hark - 16 June 2022
Today’s focus ……Jerome delivers for the wagging tail, markets settle for now, BoE and SNB rate outcomes and potentially a BoJ blockbuster in the early hours tomorrow.
Daily roundup - all prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August both up smalls on the day at 119.40 and 114.00 respectively.
Oil recovered some of its poise in the Asian session after a troublesome few sessions which saw it come off some 5% from its recent highs. As we mentioned yesterday Russian increase in output, a build in the API and EIA data and then a confirmation of the aggressive Fed all contributed to the fall in price. The slight recovery was helped by the easing of the USD strength and continuing hopes that demand remains in play with the US driving season in full swing.
EQ - Another mixed bag again in Asia with the Nikkei and the Kospi both up smalls at 26,430 and 322 respectively. However, the Hang Seng has given back over a percent to 20,875. The fall is due mainly to declines in the property development sector which is trading heavily on the expectations of higher borrowing costs.
The US indices are giving back some gains on the session with the Nasdaq and S&P at 11,500 and 3,755 respectively. They both showed gradual gains throughout the day yesterday prior to the Fed and continued apace post Fed. However to put it in context despite the good gains we still remain below the opening levels for the week with the Asian session contributing to the slide.
Gold - Gold futures up smalls overnight at 1831. Little to add on gold and happy to sit on the sidelines for now. Look out for the price action below 1800 which could provide some acceleration to the downside. Equally, 1845 would open the topside again.
FI - US yields continue to back off from their recent highs with the US10y close to 5% lower off its highs to 3.32% and the 2y a similar fall to 3.26%. As we mentioned yesterday in comments by Schnabel the ECB were concerned about borrowing costs in the Eurozone and as we went to press they called an emergency meeting to discuss the issue. We discuss this further below. Suffice to say all the fun in the European rates market was ended for now and, in conclusion, it seems that the ECB stress level appears to be around 250bp in the Italian/German rate spread. The market reacted as the ECB wanted with both bonds selling off in yield terms with the Italian 10y yield closing eight percent off its recent high to 3.82 and the German 10y Bund a 7% decline to 1.64. The spread back to a more “manageable” 220bp. Watch this space.
FX - Knee jerk sell off in the USD was somewhat reversed and the USD Index remains near its highs above 105. The main strain of the USD bid tone has been taken by a weaker EUR after all the ECB emergency antics and what that may entail for QE and rates in the region with it trading just above 1.04. Equally, GBP looks soggy despite the expected BoE hike today at 1.2125. It remains a sell on rallies story.
Others - At last a touch of love for the beleaguered crypto sector with Bitcoin and Ethereum currently trading at 21,700 and 1,175 respectively. Our targets on the downside survived by a whisker with the low prints in the pair at 20,070 and 1012. However, post Fed we saw rallies to as high as 22,975 and 1255. All things being said it still feels heavy. Couple of positive news stories to brighten the mood yesterday after all the negativity as Binance and Kraken said that they were looking to hire around 2,500 between them and even the SEC threw their hat in the ring. Positive news or vultures picking over the scraps?
So that’s all we need a good old 75bp hike and the world’s a better place. For now at least.
So Jerome delivered exactly what the market demanded, the WSJ had written about and ex Fed Dudley had expected so I guess we have a new forward guidance mechanism. The brief highlights of the rate announcement, Chair Powell’s press conference and the economic projections are that the 75bp hike was delivered, the end rate for this year is 3.4% and for next 3.8%. Remember in March almost all the committee was looking for terminal rates below 3%. Powell did not rule out a 75bp hike for the July meeting which the market now prices in upto 80% and its also keen for a 50bp hike in September. By which time it is anticipated that the Fed Funds rate will be at or above the neutral rate and then the Fed expect to go onto “autopilot” which in layman’s terms is 25bp increments as and when needed. Hence we saw the rally in equities and sell off in yields. The market prior to the meeting was looking for terminal rates above 4% by March 2023. It seems however the Fed is on a get to neutral quickly then pullback a tad and take longer to get to the terminal rate as they assess the impact of the hikes and the subsequent state of the economy. It’ll be interesting to see going forward how the market/Fed dynamic plays out. It seems that the market having demanded the 75bp, against previous forward guidance, and getting it has given them the power. Will they then use this power start to demand a higher and quicker terminal rate and if so will the Fed react?
On inflation, the Fed see a fall in CPI by the end of next year to 2.7% although they unanimously point to upside risks to this figure. Couple of points to note; this would be the quickest retracement in inflation in nearly 40 years and such a magnitude of drop has always been accompanied by a recession. Seems to us that either inflation stays stickier for longer or we dip into recession or of course we get both!
We flagged yesterday talk by the ECB of an “anti-fragmentation tool” in the fight against any blowout of borrowing costs. It would appear that with Italian/German rate spreads blowing out to 250bp enough was enough as they called an unscheduled meeting to discuss the market turmoil. No measures have been released but relevant staff have been asked to prepare new “anti-crisis” tools for approval and accelerate the completion of a new “anti-fragmentation” instrument. The immediate reaction was a fall in European yields and a weakening EUR.
Stepping back a number of things strike you. Surely QE was/is a tool that would help to prevent anti-fragmentation but they pulled the bridge up on that particular life raft last week. It never ceases to amaze you how easily and regularly the ECB manages to lose credibility under Lagarde. Calling an emergency meeting days after an official meeting and subsequently coming up with nothing other than asking a task force to work on a plan hardly spreads confidence the one thing that the market is lacking in droves. They have to realise they have a choice they cannot fight inflation and reduce borrowing costs. I’ll leave that to the task force to figure out.
BoE meeting main topic on the agenda today. Market expectations are leaning towards another 25bp hike although some analysts are looking for a 50bp. Either way, it would be the 5th back to back hike. If they were to do the larger magnitude then this would be a BoE first since it gained independence some 25 years ago. Soaring inflation and a tight labour market point to a 50bp hike however the release on Monday of a further negative monthly print for GDP will have tempered the hawks. The recently announced fiscal boost coupled with the ECB chat of a 50bp hike, although after yesterday’s emergency meeting debacle that seems unlikely now, and the Fed’s 75bp from yesterday may give the Bank some air cover for the larger hike. However, it would be a surprise to see the BoE being so bold especially as they were out of the traps first of the major central banks to start the hiking process.
Before we are on the tapes tomorrow morning we shall have the BoJ rate decision meeting with rates expected to be kept on hold but more interestingly the discussion surrounding the 25bp yield cap on the 10y JGB and the subsequent weakening of the JPY will be very much front and centre of the market’s attention. Indeed depending on what happens it could be the event of the week even trumping the Fed’s 75bp hike yesterday. The market’s expectation is for the BoJ to stick to its ultra easy monetary policy and yield curve controls. However, some players are starting to bet heavily that the BoJ will capitulate in a BOE/Soros type event. I post an article on the move and some previews below.
One other thing to note is the Swiss National Bank rate meeting and subsequent press conference (08.30/09.30 BST). No change is expected but some street analysts are looking for a 25bp hike.
📅⠀The main highlights for the day ahead in terms of data and speakers:
SNB Rate Decision - no change expected (08.30 BST)
BoE Rate Decision - 25bp hike expected (12.00 BST)
US Philadelphia Fed Manufacturing Index June - consensus 5.3 vs previous 2.6 (13.30 BST)
Panetta (08.50 BST)
Vasle (09.00 BST)
BoJ Rate Decision - consensus -0.1% vs previous -0.1% (04.00 BST)
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
ZeroHedge - Goldman Trading Desk: After This FOMC Squeeze, Market Wants To Take Another Leg Lower
Calculated Risk - FOMC Projections and Press Conference
Nordea - FOMC Review: Catching the inflation curve
ZeroHedge - Lagarde Capitulates As The Euro-Zone Divides
Saxo - A hidden force could soon be released by BoJ
Real Vision - What Comes After the Biggest Rate Hike in 28 Years?
ZeroHedge - Japanese Bond Futures Suffer Biggest Rout Since 2013, Trigger Circuit-Breakers After 'Soros'-Style Bets Build
Pepperstone - BoE Meeting Preview - 50bps or 25bps hike that is the question
Coindesk - 'Staked Ether' Becomes Focus of Crypto Stress, From Celsius to Three Arrows
CoinTelegraph - Su Zhu’s cryptic statement as rumors swirl of 3AC liquidations and insolvency
Cobie - Staking, pegging and other stuff
NEWSBTC - A Look Inside MicroStrategy’s $2.4 Billion Loan Used To Buy Bitcoin
ZeroHedge - The Great Celsius Implosion: What Went Wrong And How Much More Will Bitcoin Drop
🔥⠀Top 5 trending links on Harkster yesterday:
Macro Ops - Feedback Loops of Destruction…
Prometheus Research - The Observatory
Alhambra Partners - Globally Synchronized Last October, Not Some Far-Distant Future Risk
Brent Donnelly - Week 18: Fun with Quadrants
Bond Economics - Fed Panics
The information provided in this post is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision.
Apologies for the delay in this morning's piece. Substack had an outage and subsequently the publishing/sending of this article was help up for around 30 mins. All issues now appear to have been resolved.