The Morning Hark - 16 Oct 2023

Today’s focus...Iranian sabre rattling nerves, The Week Ahead, SBF Day 8 - the Prince lords it over the defence, SBF requests more drugs, Trabucco gets off scot free and Ellison "rallies" the troops

Overnight Highlights

Prices are at 7.10 BST/2.10 EST, with changes reflecting movement from midnight BST

Oil - Brent and Crude December futures holding onto their bid tone in Asia with them currently sitting at 90.70 and 86.20 respectively. Rollercoaster of a week ended with oil up close to 7%. Lot of competing factors but ultimately the unrest in the Middle East unsurprisingly has won through for now. The cloud of Iran remains heavy over the sector with some sabre rattling from them over the weekend threatening that if the scope of the war in Gaza widens the US would suffer “heavy losses”.

EQ - Asian equity markets all soft overnight with the Nikkei,  Hang Seng and Kospi currently at 31,630, 17,665 and 324 respectively.

The US indicies marking time in Asia with the Nasdaq and S&P futures flat at 15,138 and 4360 respectively. Another big week of earnings ahead with Goldmans and Morgan Stanley trying to follow the successes of the banking sector last week as well as Tesla and Netflix.

Gold - Gold Dec backing off a touch in Asia but still well bid after Friday’s strong rally. Currently at 1932. Safe haven buyers continue as there seems no end in sight to the Gaza conflict coupled with the breach of 1900 giving the precious metal renewed legs. Seeing a 3% rally on Friday and its biggest weekly rally in over 6 months.

FI - Global yields continuing the bid tone from the tail end of last week with the US2y and US10y trading firmly at 5.07% and 4.67% respectively.

European yields closed the week a touch softer with the German 10y yield closing at 2.74% and the Italian 10y yield at 4.76%.

UK gilt yields similarly at 4.40%.

FX - Quiet session in FX overnight with the USD Index currently at 106.53. The JPY, EUR and GBP equally steady with them currently at 149.50, 1.0530 and 1.2165 respectively.

USDILS continues with a bid tone sitting at 3.9820.

Others - Bitcoin and Ethereum decent opening for crypto with both protagonists up over two percent the pair trading currently at 27,940and 1587 respectively. Lot of chatter that the SEC will not appeal the court ruling in favour of Grayscale Bitcoin ETF as a reason for the bid tone.

Macro Themes At Play

Recap

European industrial production for August saw a monthly beat on estimates at 0.6%.

UMich survey for October saw consumer sentiment fall to 63 below previous and consensus expectations, a five month low.

On the inflation side we saw expectations for both 1y and 5y rise to 3.8% and 3% respectively. The 1y’s sharp rise attributed to the higher energy cost expectations.

Reuters sources, over the weekend, claimed that the Saudis had delayed the US backed normalisation talks with Israel due to the ongoing conflict in Gaza. This was seen as a key first step on the path to a defence pact with the US. Is this a pause in the talks or a total rethink? Surely this was one of the main reasons for the timing of the Hamas attack last weekend given the leaks we had in the previous weeks regarding such talks. One to watch.

Central bank speakers

BoE’s Bailey warned that the UK must be prepared for shocks and its potential growth has declined. He saw solid progress on inflation but there’s work left to do. Policy needs to remain restrictive and rate decisions going forward will be “tight”.

ECB’s Nagel suggest the Bank will not rest until inflation is back at target. He sees it already peaked in Germany and to drop to 2.7% by 2025.

Lagarde still felt that there were policy lags in the pipeline from past hikes but is ready to do more, with regard to rates, if necessary.

Fed’s Harker was keen to stress that the Fed is likely to be done with rate hikes but it will not tolerate a reaccelerating in prices. He is in the camp of higher for longer but cannot say how long rates will need to remain high but expects it will be “for a while”. Which helps a lot!

The BoC’s Macklem said that longer run inflation expectations remain well anchored and short term expectations have come down but remain too high. He added we are not seeing any downward momentum in underlying inflation and that is a concern.

Interestingly he broke from his central bankers’ brethren when he claimed that rising long term yields were not a substitute for doing what needs to be done to get inflation back to target.

He clearly flagged that a hike is on the table at the next meeting in the last week of the month. CAD had a decent move on the back of the quotes and it seems fair to say that Tuesday’s CPI will be a market mover!

Japan’s Finance Minister Suzuki told finance leaders at the G20 that excessive volatility in currency markets was undesirable and they may need to take action.

However the IMF at their meeting stressed that the JPY was being driven by fundamentals and will remain so as long as the interest rate differentials remain as they are. As we have said many times before the Japanese are on their own on this one.

Speaking of the IMF I post here the excellent Robin Brooks’s succinct summary of the meeting with all the key themes. A great read.

Robin Brooks - IMF

SBF Trial

Zac Prince, of BlockFi, lived up to his princely name for the prosecution on Friday. He put up a strong defence of his now bankrupt company by pushing back on defence claims that he was to blame for BlockFi’s bankruptcy. He laid the blame firmly on the doorstep of Alameda’s fake balance sheet (which one of the seven Ellison alluded to in her testimony?). He also was keen to jump on the defence’s inconsistencies in their questioning of him. All in all another bad day for the defence and surely its only a matter of time before SBF sacks them all and starts to defend himself! Now that would be the icing on the cake.

Speaking of SBF his defence team have asked Judge Kaplan for more Adderall during the trial for said SBF so that he can “concentrate” enough to allow him to decide whether he should testify or not. If the guy, allegedly, hadn’t defrauded so many people you’d almost feel sorry for him.

Below an audio of Ellison’s “all hands” (on deck?) meeting a few days prior to the FTX collapse. She may have done well in court last week but judging by this audio not someone to inspire the troops!

Quote of the day, not from court, but of some of the leaked transcripts between the various protagonists. SBF was being told about the withdrawals from FTX which at that point had reached $120m an hour. He responded with “Oof”! That about captures it Sam.

Finally speaking of Sam’s. It emerged at the tail end of last week that the other Sam, Trabucco will not testify nor will he be charged in the whole sorry affair. He was the co-CEO of Alameda and left in August 2022 despite being on some group chats after that time. He was also named in court last week during the Thai prostitutes, Chinese officials, alleged $100m bribe thread. Seems to have dodged a bullet there.

Laura Shin’s excellent companion podcast reviewing yesterday’s events in full below for those with a further need to scratch that itch. There’s a lot to scratch!

Unchained - Day 8

Caroline Ellison's Nov 9 "all hands" meeting at FTX just prior to collapse

The Week Ahead

1. Inflation data. Several major economies print their inflation data for September this week; Japan, UK, EU and Canada. Whilst New Zealand print their data for q3. It’ll be interesting to see if they follow the path that the PMIs have been suggesting with a gradual cooling or we will get a reversal like we saw with the US CPI print last week. Japan is expected to see an easing in the YoY due to base effects although the MoM may see a tick up due to pressure on energy costs. The UK and EU are both expected to see a cooling in both headline and core YoY. However Canada looks set to buck the trend with a spike in headline and core with both MoM measures ticking up on the back of energy costs. The BoC have been recently concerned with broad based inflationary pressures and will have to weigh up if any tick up in inflation due to higher energy costs is short term or needs addressing with further hikes. Meanwhile the q3 NZ print is expected to cool somewhat on the YoY measure but see an increase on the quarter fuelled by higher energy costs and seasonality relating to local rates.

2. China data dump. Wednesday sees the usual Chinese data dump with retail sales, industrial production and unemployment for September being joined by the q3 GDP print. Consensus for GDP is well below trend of 5% with a weak quarter of data prints only slowly reversing in the latter weeks of September. Indeed Friday showed some glimmer of improvement with the export numbers printing at their highest for five months but still well in contraction. Elsewhere industrial production and unemployment are set to remain steady with retail sales, boosted by the holidays, potentially showing an upside beat. Finally at the start of the week we expect the PBOC to keep the 1y MLF rate steady at 2.5% especially with the Yuan under so much pressure.

3. US Retail Sales. Expected to slow for September but still remain in positive territory for the sixth month in a row. Credit card data in the US has been soft in September and this is a good canary in the coal mine for this series. In addition there is anecdotal evidence of household savings diminishing and pressure on households is growing. It may also be worth noting the Fed’s Beige Book released the day after retail sales for further indications of pressure on the US consumer.

4. UK Employment Report. With what appears to be a stagnant quarter at best growth wise the BoE will be keen to observe how the labour market is reacting and whether a cooling in wage growth can assist them with their fight with inflation and smooth the road to the inevitable rate cutting cycle further down the road. Average earnings are expected to cool from last month but still remain at elevated levels whilst employment change is expected to slow in lime with the slowing employment components of the recent PMIs.

5. Central Bank Speakers - Powell front and centre. A flood (we need a collective noun for this) of central bank speakers next week with well over 30 already on the docket. Higher for longer, long term yields, blah blah I guess. Powell will be the main focus though and he has a tightrope to walk with a disappointing CPI report coupled with a better than expected NFP, albeit with some flaws, leaving him in a dilemma whether he talks up a late 2023 rate hike or gives a nod to rising yields and let them do the talking for him? Options open and more of the same I’d imagine.

The Day Ahead

Japan manufacturing data came out overnight showing a mixed picture with August capacity utilisation beating previous and consensus and showing expansion at 0.5%. However industrial production for the same month showing downside misses on both consensus and previous.

Chin, as expected, held their MLF rates steady at 2.5%.

Little to excite for the rest of the day with NY Empire State Manufacturing about it! Although overnight we get the NZ inflation report for q3 plus the RBA minutes from the September meeting.

Central bank speakers, geo-political headline watching and mind the yields.

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Main Highlights Ahead

All times in BST (EST+5 / CEST-1 / JST-8)

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

Monday

US NY Empire State Manufacturing Index Oct consensus -7 vs previous 1.9 (15.00 BST)

NZ Inflation Rate QoQ q3 consensus 2% vs previous 1.1% (22.45 BST)

NZ Inflation Rate YoY q3 consensus 5.9% vs previous 6% (22.45 BST)

Fed Speakers

Harker (15.30 BST)

Harker (21.30 BST)

ECB Speakers

Enria (08.30 BST)

Tuominen (09.00 BST)

BoE Speakers

Woods (09.10 BST)

Pill (09.30 BST)

Tuesday

RBA Minutes rates kept steady at 4.1% with a possibility of a further hike this year (01.30 BST)

UK Unemployment Rate Aug consensus 4.3% vs previous 4.3% (07.00 BST)

UK Average Earnings incl bonus Aug consensus 8.3% vs previous 8.5% (07.00 BST)

UK Employment Change Jul consensus  -195k vs previous -207k (07.00 BST)

EU ZEW Economic Sentiment Index Oct consensus  vs previous- 8.9 (10.00 BST)

German ZEW Economic Sentiment Index Oct consensus -9 vs previous-11.4 (10.00 BST)

Canada Inflation Rate MoM Sept consensus 0.1% vs previous 0.4% (13.30 BST)

Canada Inflation Rate YoY Sept consensus 4% vs previous 4% (13.30 BST)

Canada Core Inflation Rate MoM Sept consensus 0.3% vs previous 0.1% (13.30 BST)

Canada Core Inflation Rate YoY Sept consensus 3.3% vs previous 3.3% (13.30 BST)

US Retail Sales MoM Sept consensus 0.3% vs previous 0.6% (13.30 BST)

US Retail Sales YoY Sept consensus 1.5% vs previous 2.5% (13.30 BST)

US Industrial Production MoM Sept consensus 0% vs previous 0.4% (14.15 BST)

US Industrial Production YoY Sept consensus -0.8% vs previous 0.2% (14.15 BST)

US Manufacturing Production MoM Sept consensus 0.2% vs previous 0.1% (14.15 BST)

US Manufacturing Production YoY Sept consensus -1% vs previous -0.6% (14.15 BST)

RBA Bullock speaks (23.30 BST)

Fed Speakers

Williams (13.00 BST)

Bowman (14.20 BST)

Barkin (15.45 BST)

ECB Speakers

af Jochnick (12.50 BST)

de Guindos (18.00 BST)

Nagel (18.00 BST)

BoE Speakers

Dhingra (10.05 BST)

Wednesday

RBA Smith speaks (00.40 BST)

China GDP Growth Rate QoQ q3 consensus 1% vs previous 0.8% (03.00 BST)

China GDP Growth Rate YoY q3 consensus 4.4% vs previous 6.3% (03.00 BST)

China Industrial Production YoY Sept consensus 4.3% vs previous 4.5% (03.00 BST)

China Retail Sales YoY Sept consensus 4.8% vs previous 4.6% (03.00 BST)

China Unemployment Rate Sept consensus 5.2% vs previous 5.2% (03.00 BST)

China Industrial Capacity Utilisation q3 consensus 74.6% vs previous 74.5% (03.00 BST)

UK Inflation Rate MoM Sep consensus 0.4% vs previous 0.3% (07.00 BST)

UK Inflation Rate YoY Sep consensus 6.5% vs previous 6.7% (07.00 BST)

UK Core Inflation Rate MoM Sep consensus 0.3% vs previous 0.1% (07.00 BST)

UK Core Inflation Rate YoY Sep consensus 6% vs previous 6.2% (07.00 BST)

EU Inflation Rate MoM Final Sep consensus 0.3% vs previous 0.5% (10.00 BST)

EU Inflation Rate YoY Final Sep consensus 4.3% vs previous 5.2% (10.00 BST)

EU Core Inflation Rate YoY Sep consensus 4.5% vs previous 5.3% (10.00 BST)

US Building Permits Prel Sept consensus 1.455m vs previous 1.541m (13.30 BST)

US Housing Starts Sept consensus 1.38m vs previous 1.283m (13.30 BST)

Fed Beige Book (19.00 BST)

Fed Speakers

Waller (17.00 BST)

Williams (17.30 BST)

Bowman (18.00 BST)

Harker (20.15 BST)

Cook (23.55 BST)

ECB Speakers

Elderson (08.30 BST)

Wuermeling (09.20 BST)

Lagarde (10.00 BST)

BoE Speakers

Stheeman (18.30 BST)

Thursday

Australia Unemployment Rate Sep consensus 3.7% vs previous 3.7% (01.30 BST)

Australia Employment Change Sep consensus 18% vs previous 64.9k (01.30 BST)

US Philly Fed Manufacturing Index Oct consensus -6.4 vs previous -13.5 (13.30 BST)

US Philly Fed Business Conditions Oct consensus  vs previous 11.1 (13.30 BST)

US Philly Fed Employment Oct consensus  vs previous -5.7 (13.30 BST)

US Philly New Orders Oct consensus  vs previous -10.2 (13.30 BST)

US Philly Prices Paid Oct consensus  vs previous 25.7 (13.30 BST)

US Existing Home Sales Sept consensus 3.89m vs previous 4.04m (15.00 BST)

Fed Speakers

Jefferson (14.00 BST)

Powell (17.00 BST)

Goolsbee (18.20 BST)

Barr (18.30 BST)

Bostic (21.00 BST)

Harker (22.30 BST)

Friday

Japan Inflation Rate MoM Sept consensus 0.1% vs previous 0.2% (00.30 BST)

Japan Inflation Rate YoY Sept consensus 3.1% vs previous 3.2% (00.30 BST)

Japan Core Inflation Rate YoY Sept consensus 2.7% vs previous 3.1% (00.30 BST)

China Loan Prime Rate 1y consensus 3.45% vs previous 3.45% (02.15 BST)

China Loan Prime Rate 5y consensus 4.2% vs previous 4.2% (02.15 BST)

UK Retail Sales MoM Sep consensus -0.1% vs previous 0.4% (07.00 BST)

UK Retail Sales YoY Sep consensus 0% vs previous -1.4% (07.00 BST)

Canada Retail Sales MoM Sep consensus -0.3% vs previous 0.3% (13.30 BST)

Canada Retail Sales YoY Sep consensus 0.2% vs previous 2% (13.30 BST)

Fed Speakers

Logan (00.00 BST)

Harker (14.00 BST)

Mester (17.15 BST)

ECB Speakers

McCaul (13.30 BST)

Good luck.

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