The Morning Hark - 17 Nov 2023

Today’s focus...Yields lead the way but stocks and the USD fail to take the bait. Tighter financial conditions leak away. Central banker central today and anyone else find Ueda a tough read?

@HarksterHQ is happy to welcome Darren Dempsey as Partner, Head of Business Development & Market Intelligence.

Darren comes with a wealth of experience on the sell and buy side having worked at StoneMilliner, BNYM, Lehman and Nomura.

Follow his daily commentaries on Harkster.Substack.com and the intraday Market Colour Channel on Harkster.com

Overnight Highlights

Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT

Oil - Ooopphh. Not a good look for oil over the last few weeks and yesterday’s move compounded the gloom with what looks like being oil’s fourth straight week of declines. Brent and Crude January futures steadying a touch in Asia with the pair currently sitting at 77.50 and 73.20 respectively. The recent Middle East tensions seem to have merely papered over the cracks in the market and given it some false hope. Stepping back we have a backdrop of rising US crude inventories and production at record levels, both pointing to weaker demand for oil in the US. Analysts however yesterday offered some hope with their comments that, given the recent drop in oil prices, the Saudis are more likely to extend their additional voluntary supply cut into next year. Indeed we are back below the level we saw when the cuts were announced in the summer. Maybe a sign that the sell off has become a touch overextended?

EQ - Asian equity markets mixed overnight with the Hang Seng dragged down by Alibaba’s ten percent decline on the back of them cancelling their cloud business spin off. Interestingly the index is back to its pre US CPI levels currenty down two percent at 17,490.  The Nikkei fairing a touch better up smalls at 33,595.

The US indices declined the kind invitation from the lower yield environment and decided to have a pass over the last two sessions, pretty much flatlining. That decoupling scenario we spoke of yesterday? The Nasdaq and S&P currently at 15,880 and 4525 respectively.

Gold - Once again Asia takes a pass despite yesterday’s decent rally by gold on the back of the lower yield environment. “Not for me thanks” as gold flatlines with Dec futures currently at 1987 and sitting well above its post CPI rally levels. Interestingly the 200dma, we flagged earlier in the week, proved a strong support so may be worth bearing in mind if we see any pullbacks.

FI - Global yields up smalls overnight with the US2y and US10y currently trading at 4.85% and 4.45% respectively. Yesterday saw the reversal of the reversal with the spike in yields from the previous day erased, bringing us back to the post CPI levels again before a small recovery.

Our pivot pivoted again as we broke back below 4.50%. Next downside target should be around 4.33% a previous resistance level on the way up. There is now close to 40% chance  priced in that the Fed start cutting rates in March. If this yield play continues then surely USDJPY is the next to go? We have always maintained that yields will be the factor that sustainably turns USDJPY around not jawboning or intervention. Worth bearing in mind as we head into the last central bank meetings of the year.

European yields for a change followed the US reversal with yields closing off on the day. The German 10y closing at 2.60% and the Italian 10y yield similarly at 4.34%.

UK gilt yields likewise with it closing at 4.15%.

FX - Like stocks the USD didn’t really react much to the yield story with the USD relatively unchanged. The USD Index currently at 104.35. The JPY, EUR and GBP little changed in Asia with them sitting currently at 150.65, 1.0850 and 1.2415 respectively.

FX option expiry wise surprisingly little for a Friday. We have in the EUR €1.2bn both at 1.0850 and in EURGBP we have €1.1bn rolling off at 0.8750.

Others - Bitcoin and Ethereum all over the shop yesterday once again finding its volatile reputation of days of old. Bitcoin had a 2000 range and Ethereum was equally as volatile. Net net we are little changed on the week with the pair currently at 36,350 and 1985 respectively. Mixture of news causing the volatility with on the positive side Blackrock officially filing for a spot Ethereum ETF whilst on the negative side the SEC once again talking about delaying the ETF process for the sector.

Remember the 35,500 level in Bitcoin remains key.

Macro Themes At Play

Recap

US Philadelphia Fed Manufacturing Index for November better than expected but still in negative territory at -5.6.

The underlying components were mixed with employment and new orders lower than last month’s readings but prices paid was also down on last month.

The US industrial and manufacturing production data for October all downside misses with the MoM readings at -0.6% and -0.7% respectively.

Industrial production’s YoY level printing its lowest in 2 years as did the initial claims data.

Walmart’s forward guidance did little for market sentiment with them seeing q4 sales growth moderating and warns that consumer spending is deteriorating. Shares down 8% pre-open and indeed closed down the same amount to record their worst drop in 18 months. A week before Thanksgiving….hmmm.

Those tighter financial conditions, the Fed’s get out of jail card, have basically retraced in two weeks the move up we saw from the middle of September and over half of the whole move from back in the summer. As we said previously be careful what you wish for when you let the genie out of the bottle too quickly.

Central Bank Speakers

The ECB’s Centeno noted that interest rates will come down eventually but won’t desirably return to zero.

The Fed’s Mester said that whether further hikes were needed depended upon the economy. We need to see more evidence that inflation is on its way to 2% and I would be concerned if it stalled. At this time it is not about cutting rates, its about how long we stay in a restrictive stance and possibly higher. At present she has not assessed whether a further hike in December is in her projections. Overall she surmised that the Fed have gotten policy to a really good place to where it can observe and thats a good place to be.

The BoE’s Greene was trying to win some ground back from the government by claiming that the latest inflation data was good news but the question remains whether the BoE’s policy is restrictive enough. There remain reasons to worry about the persistence of inflation and hence rates may need to stay higher for longer. In addition low productivity and high wage growth will make it hard to hit the inflation target. Data is also showing that the economy is slowing but she is not thinking about cuts.

Ramsden suggested that rates will stay higher than post the global financial crisis. In addition the latest projections from the MPC indicate that rates will likely have to remain restrictive for an extended period.

BoJ’s Ueda on the tapes earlier today. Far from inspiring; making strong comments now on how we could change policy could have unintended consequences in markets. He doesn’t expect the 10y JGB to rise sharply above their 1% reference rate even if yields come under upward pressure. It’s desirable for FX moves to reflect fundamentals. The weak Yen pushes up domestic inflation via import costs. Service consumption is rising but consumption of goods that saw sharp price rises, such as food, is somewhat weak.

Don’t know about you but, there’s central bank dryness then there’s Ueda dryness! He’s a tough read.

Meanwhile further down the brain trust was the deputy finance minister Akazawa who claimed that they didn’t have a specific FX level in mind for intervention and just because the Yen is weakening they wont intervene. Roger that.

The Day Ahead

UK retail sales for October just hit the tapes showing a further down month at -0.3% bringing the YoY to -2.4%. Both measures a lot lower than consensus and previous. Take your pick…..cost of living, reduced footfall or wet weather are the excuses being wheeled out. I’d say people are basically skint!

Later in the day little to move the dial with EU final inflation print for October and some US housing data.

Plethora of central bank speakers though which mat be of more interest to us.

Early doors to start the week on Monday we have the PBoC prime rate announcements with no change expected.

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Main Highlights Ahead

All times in GMT (EST+5 / CET-1 / JST-9)

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

Friday

EU Inflation Rate MoM Final Oct consensus 0.1% vs previous 0.3% (10.00 GMT)

EU Inflation Rate YoY Final Oct consensus 2.9% vs previous 4.3% (10.00 GMT)

EU Core Inflation Rate YoY Final Oct consensus 4.2% vs previous 4.5% (10.00 GMT)

US Building Permits Prel Oct consensus 1.45m vs previous 1.471m (13.30 GMT)

US Housing Starts Oct consensus 1.35m vs previous 1.358m (13.30 GMT)

Fed Speakers

Collins (13.45 GMT)

Barr (13.45 GMT)

Goolsbee (14.45 GMT)

Daly (15.00 GMT)

Collins (15.15 GMT)

ECB Speakers

de Cos (08.00 GMT)

Lagarde (08.30 GMT)

Cipollone (15.00 GMT)

BoE Speakers

Ramsden (13.10 GMT)

Greene (13.15 GMT)

Early Monday

PBoC Loan Prime Rate 1y announcement expected to keep rates steady at 3.45% (01.15 GMT)

PBoC Loan Prime Rate 5y announcement expected to keep rates steady at 4.2% (01.15 GMT)

Good luck and a good weekend one and all.

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