The Morning Hark - 17 Jan 2023
Today’s focus …Davos begins, BoJ rock and a hard place and exchanges payout!
Prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March off smalls with them currently trading at 84.50 and 79.40 respectively but little changed from yesterday. All eyes on the OPEC monthly report, which is out later today, and whether it will allude to any changes in demand due to the China reopening story.
EQ - Asia equity futures mixed overnight with the Hang Seng and Kospi off smalls trading at 21,553 and 315 respectively. The Nikkei is up one percent at 26,128.
The Nasdaq and S&P futures off smalls in Asia with them currently at 11,548 and 4004 respectively. US stocks continue to hold up well. 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 off a touch overnight to 1910 as traders take off some risk after the good start to the year. Next level on the topside now at year’s high at 1931 and beyond 1955/60. Support now at 1900 then 1870.
FI - US yields bear steepen overnight with US2y and US10y trading currently at 4.25% and 3.55% respectively.
European yields up smalls yesterday with the German 10y yields closing at 2.17% and Italian 10y at 4.04%.
UK gilt yields similar pattern with the 10y closing at 3.39%.
FX - Quiet session again in Asia for FX with the USD continuing to consolidate near the lows of last week. The USD Index sits currently at 102.45. The EUR and GBP now at 1.0821 and 1.2208 respectively. The JPY continues to whip around with a big figure range overnight and is currently sitting at 128.85.
Others - Bitcoin and Ethereum continuing to enjoy the spotlight with the pair sitting currently at 21,123 and 1563 respectively.
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Central Bank Speakers
The ECB were out in force over the last few sessions all with the usual rhetoric.
Rehn sees significant rate hikes over the next meetings.
de Cos expects significant rate hikes to continue.
Lane felt that rates need to rise enough to restrict growth in a long interview with Martin Wolf in the FT today. It’s a long and winding one but definitely worth a read.
The BoE’s Bailey expressed the view that inflation would fall in the year ahead but a major risk is the labour shortages in the UK. Indeed the FT Reports today on a research paper which estimates that the UK workforce has had a shortfall of over 300,000 workers due to Brexit. This is on top of the UK government estimates that over 500,000 have become “economically inactive” post the pandemic in what is being called the “great retirement”. To be honest you don’t need to commission a survey to tell you that, one only has to try and buy a pint in a London pub to understand those stats!
All eyes on the BoJ as they start their two day meeting today with the policy announcement early tomorrow morning. The market is certainly whipping itself up into a frenzy about it with the FX options market showing implied vols at historically high levels. 1w implied vol is trading around 25% with the overnight above 50% a six year high which implies an over 2% move. The skew is heavily favouring USD puts.
The market then is expecting some movement! Reports last week fuelled expectations of some sort of change when it was claimed that the meeting would be a platform for a review of the side effects of the Bank’s ultra loose monetary policy. But what can the Bank do? The JPY is pushing ever higher, the JGB repo market is all but stopped functioning, the general market liquidity is shocking and shorter duration bonds are yielding higher than the 10y. Not a sustainable situation. Below we look at some of the possible options:
Do nothing. Brave it out until Kuroda steps down at the end of March and make a significant shift in policy at that point. Given the stress we have seen in the last month since their last meeting, that seems a stretch. There is one other meeting, before he steps down, which is in mid-March but that seems a lifetime away for them to wing it.
Abandon the YCC totally. Walk away from the policy and let the market find its “natural” level. Again this seems a big call especially as the December move up in the range to 0.50% was not seen as a policy shift by the Bank but rather a move to make the market trade in a more functional manner. A complete abandonment could only be seen as a policy shift. Would Kuroda do this having made the ultra loose monetary policy his badge of honour all these years. He would then have the humiliation of going to Davos at the end of the week and explaining the decision. Seems unlikely.
Leave it unchanged but signal a policy shift is coming in the next few months. Again seems a dangerous policy and would surely lead the Bank to be writing bigger cheques by the day as the market tests its mettle.
Widen the band further say to 0.75bps again blaming market dysfunction and branding the move as a further market measure rather than a policy shift. Credibility shot, the market would be selling every JGB they could get their hands on to push yields beyond the new limit.
Widen to 1%. Even if again they blame market dysfunction this could only be seen as a policy hike. Again credibility shot and at this point probably makes more sense to just abandon the policy altogether.
Go to some form of YCC but don’t allude to a specific level so depriving the market of a specific line in the sand to focus on whilst trying to “smooth” the market as and when the Bank feels the market is trading in a dysfunctional manner. Problem is, at present, the market is always trading dysfunctionally!
As they say, pick the bones out of that one, and as we saw back in December the BoJ can surprise. In all honesty though, I’d rather try and pick a winner of the 1.40 at Kempton today rather than picking a outcome out of that lot. What I do know though, is that markets will move!
One thing that caught the eye yesterday was the story regarding the South Korean crypto exchange. A South Korean court has found in favour of the exchange clients whereby the exchange must pay damages due to a service outage back in November. The court stated that “the burden or the cost of technological failures should be shouldered by the service operator, not service users who pay commission for the service”. The period back in November was of course very volatile given the FTX collapse at the time and it would appear that the exchange was swamped with orders which caused the outage.
I wish we’d had those rulings when I was trading Globex back in the early days. My bottom line would certainly have improved a lot!
The Day Ahead
The day has already started with a bang as the NBS in China released their data dump with upside surprises across the board over expectations.
GDP was the obvious standout with q4 YoY coming in at 2.9% versus 1.8% expected.
Retail sales YoY although decreased by 1.8% in December were expected to crater by over 8%.
Industrial production was up over a percent at 1.3% versus 0.2% expected.
The jobless rate fell from 5.7% to 5.5%.
All in all pretty impressive if, of course, you believe the data. Nevertheless, it will give the Chinese economy a foundation to move forward into the new year with renewed confidence as it emerges from the Covid zero policy.
Elsewhere we have just had the final German inflation print for December which unsurprisingly was as expected.
UK labour report worryingly for the BoE saw an uptick in average earnings in the month
Later in the day both German and EU ZEW prints for January will give us the first hint of economic sentiment for 2023.
Canadian inflation report is expected to show a softening like its North American cousins’ CPI print from last week. Will it be enough for the BoC to pause next week when they meet for the first time this year?
Finally on the day the NY Empire State survey.
Remember too, it’s the first day of Davos, so there will be plenty of central bank chatter.
Overnight, the January Tankan, but of course, more importantly, the BoJ rate decision.
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- - The Housing Bubble and Mortgage Debt as a Percent of GDP 🔒
Blain's Morning Porridge - Consumption is the crisis. Market doesn’t get it!
Notayesmanseconomics - Falling house prices in Germany add to the pressure on the ECB
- - Inflection point
Follow the latest market narratives through our curated research & commentary channels on Harkster.
All times in GMT (EST+5 / CEST-1 / JST-9)
World Economic Forum in Davos starts
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 6.4% 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 previous 5.8% (13.30 GMT)
Canada Core Inflation Rate MoM Dec 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 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)
Muller (09.15 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 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 10.5% 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 6.2% vs previous 6.3% (07.00 GMT)
UK Core Inflation Rate MoM Dec consensus 0.4% vs previous 0.3% (07.00 GMT)
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