The Morning Hark - 16 Sep 2022
Today’s focus ……ECB Speakers with the USD and US rates remaining key to market direction
All prices are at 7.25 BST with changes reflecting movement from midnight BST
As a mark of respect for The Queen’s state funeral, The Morning Hark will not be published on Monday 19th September.
There will however be a publication on Sunday which will contain The Week Ahead and the economic calendar for the coming week.
Oil - Brent and Crude November up smalls in Asia currently at 91.50 and 85.20 respectively. Oil continues its topsy turvy week with a sharp down day yesterday as it heads for a potential third straight down week. Recessionary fears seemed to grab the market’s attention yesterday with China’s slowing demand and the spectre of a more hawkish Fed looming large on the hopes for the US economy. In addition, the “pulling” of the SPR replenishing bid, seemingly around the $80 level, hasn’t done much for sentiment as that floor was taken away by the US Department of Energy’s denial of such a strategy.
At least one bright light was the tentative agreement with the US railroad workers preventing any strike action as the deal is taken back to the workers for a vote. Supposedly the two sides have agreed to a “cooling off period” of several weeks but a rumoured 24% raise in wages should heat them up a bit.
EQ - Equity markets a sea of red in Asia with the Nikkei, Hang Seng and Kospi all down currently trading at 27,380, 18,791 and 308 respectively reflecting the weakness we saw yesterday in the US.
Similarly the Nasdaq and S&P showing further losses at 11,893 and 3889 respectively.
We are through our respective critical levels at 12,000 and 3900 so let’s see if today sees some trimming of positioning pre-weekend and we recapture the levels or we continue to test the pain tolerance of the market below. Near term levels for the S&P at 3850 and 3925.
Sentiment was not helped after the bell with FedEx pulling their earnings guidance and flagging a worldwide recession causing a post close rout of the stock which had its biggest one day loss on record.
A Deutsche Bank research paper suggested that rates need to be closer to 4.5% and by early next year and further that a terminal rate closer to 5% is more appropriate later next year. Ray Dalio, the head of the largest hedge fund Bridgewater, also had a similar view with a 4.5/6% range for terminal rates and even at the lower end of that range he believes that stocks have a further 20% to go.
Gold - Gold Dec futures consolidating close to their recent lows overnight in Asia at 1672. Gold continues to struggle with the higher US rates profile and USD strength. 1650 the next downside target with topside now lowered into the 1700 area.
FI - US yields continue their climb in Asia with the US2y and 10y yields currently trading at 3.91% and 3.46% respectively with the the front end yield better bid causing the inversion to widening even further overnight.
European yields followed the US higher yesterday closing at 1.769 and 4.021 for the German and Italian 10y yields respectively. Similarly the 10y gilt in the UK which closed off at 3.165.
FX - The USD remains underlying bid with the USD Index at 109.83. The majors remain soft with the JPY, EUR and GBP at 143.47, 0.9993 and 1.1437 respectively. The Yuan took out our 7 target yesterday and remains well above that level now at 7.02 with no sign of any official pushback as yet. A weekly close above 7 should see a further push higher towards the high last seen back in 2019 and 2020 at 7.1965. The USDNOK, for now at least, has established itself above 10 despite weaker oil which is encouraging for a test of the year’s highs up towards 10.35 currently at 10.2040. NZD saw levels last seen back in pandemic days as it dipped lower to 0.5955 with the general risk off tone.
Others - Both Bitcoin and Ethereum lower with the general doom and gloom theme at 19,784 and 1472 respectively. As we reported on twitter yesterday, just after TMH was published, the merger was completed successfully although it was a very much buy the rumour sell the fact story at least for now.
So retail sales was the beat that the Fed was most likely not looking for as August showed a 0.3% rise in the measure as opposed to a flat read however the rise was more than offset by the downward revision to the previous month’s reading which now shows a 0.4% contraction. The regional surveys continue to muddy the waters with the NY Empire State showing a strong beat but the Philly equivalent an equally strong miss reversing their respective trends from last month. One sign of commonality is the prices paid measure which again showed a healthy shift lower. However, as we know its services that are driving the inflation story just now and I refer you to the excellent Twitter thread (link at the bottom) from Gordon Johnson on his take on the inflation landscape and spoiler alert he doesn’t see it disappearing anytime soon. Well worth a look.
All in all however despite the price action we remain close to the 80/20 chance split for next week in terms of 75/100bp hikes.
De Guindos was the latest on the tapes with the hawkish talk this time more on the inflation problem; “depreciation of the EUR also adds to these inflation pressures”, inflation is projected to be unacceptably high this year and next” and “must take determined steps to root out high inflation”. Also there was a note of reality when it came to growth with it seen slowing “substantially”. Nothing new to shift the needle just more of the same doom and gloom.
Overnight Data and the Day Ahead
The Yuan sinks to below 7 and we then get a raft of economic upside surprises as if by magic. Those liquidity measures seem to have kicked in pretty quickly for the August numbers to show such upside with industrial production, retail sales, unemployment rate and fixed asset investment data all the same or better than expected. Property investment was the only outlier with a downside miss which is hardly surprising given the recent news from that sector of late.
UK retail sales just published were a shocker with the headline showing a 1.6% decline in August (-0.5% expected) with GBP now close to its lows and not far off our 1.14 “bounce zone”.
Later in the day we get European final inflation data which should have little impact. In addition, we have three ECB speakers including Lagarde. Finally the UMich survey out of the US. Always volatile but given the market’s current frailties who knows what could happen. It feels like a flow and price level driven day to be honest and hopefully we have highlighted some of the trigger points for the markets above.
The SOC summit continues with Iran expected to be the main topic on the agenda today. Once again any headlines will be worth keeping a close eye on.
Finally, a couple of central bank speakers over the weekend to take note of (see below).
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EU Inflation Rate YoY Final Aug consensus 9.1% vs previous 8.9% (10.00 BST)
EU Inflation Rate MoM Final Aug consensus 0.5% vs previous 0.1% (10.00 BST)
EU Core Inflation Rate YoY Aug consensus 4.3% vs previous 4% (10.00 BST)
US Michigan Consumer Sentiment Prel Sept consensus 60 vs previous 58.2 (15.00 BST)
US Michigan Current Conditions Prel Sept consensus 60.8 vs previous 58.6 (15.00 BST)
US Michigan 5y Inflation Expectations Prel Sept previous 2.9% (15.00 BST)
US Michigan Inflation Expectations Prel Sept previous 4.8% (15.00 BST)
Rehn (09.00 BST)
Lagarde (11.00 BST)
Villeroy (11.00 BST)
Lane (17.45 BST)
RBA Kearns (23.10 BST)
Good luck and a good weekend to one and all.
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