The Morning Hark - 17 Oct 2022
Today’s focus ……Hunt brings calm to the UK but for how long?, Market Stresses and The Week Ahead
I shall be attending the Blockworks Digital Asset Summit in London over the next couple of days. I am really looking forward to one of the early panels today where we have Alfonso Peccatiello (Alf from The Macro Compass), Imran Lakha (Options Insight) and Bilal Hafeez (Macro Hive) discussing The Macro Crystal Ball: “What Comes Next”. All three have their content on the Harkster platform, and it will be a privilege to get their views on these markets.
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December up close to one percent in Asia, with them currently trading at 92.30 and 85.30, respectively. After all the excitement of the past week or so a quiet start to the oil markets this week as the US/Saudi spat continues to play out with both sides hardening their stance. As we say, this will run for some time yet. Oil is up on the general better risk sentiment.
EQ - Equity markets in Asia riding the better risk sentiment wave for now, with the Nikkei, Hang Seng and Kospi all up on the day at 26,750, 16,567 and 290, respectively.
The Nasdaq and S&P are up close to one percent in Asia at 10,825 and 3622, respectively. The mood has been lightened somewhat with the better news out of the UK with the change in chancellor, some continued u-turns, a positive meeting with the BoE governor and a statement today expected to show further fiscally sustainable measures for the medium term. Watch this space.
Gold - Gold Dec steadying a touch in Asia at 1655. Fairly sidelined for now as gold touched the bottom of our tight 1650/80 in late trading in the US last week before bouncing somewhat. See no reason to change the view that it ranges until further notice. Ranges 1650/80 and on the wide 1620/1700.
FI - US yields lower overnight in Asia trading with the US2y and 10y currently at 4.47% and 3.99%, respectively.
European yields rose on Friday with the general mood, with the German10y yield closing at 2.253%. The Italian 10y yields likewise to close at 4.798%. Again with the spread pushing wider.
UK gilts also closed higher at 4.389 with all the political uncertainty and the BoE withdrawing their support. Given the better mood and the futures price action in Asia we would expect European yields to be lower on the various opens.
FX - The USD a touch softer in Asia, with the USD Index trading at 113.06. GBP the leader in the clubhouse with all the various reports and meetings over the weekend, currently at 1.1255. EUR and JPY flat at 0.9736 and 148.73, respectively. As you’d imagine, AUD and NZD performing better in this environment at 0.6232 and 0.5583, respectively.
Others - Bitcoin and Ethereum same old story, with them currently trading at 19,239 and 1308 respectively.
Where do we start?
With USDJPY a stones throw away from recent decade highs, the Japanese authorities were out giving it large on the jawboning front with finance minister Suzuki monitoring developments with a “keen sense of urgency”. Same old story here fundamentals point to a lower JPY, especially when you have the BoJ Kuroda in the same breath claiming that as headline inflation is likely to decline below 2% in the next fiscal year, “we’re continuing with monetary easing”. Yes, the Japanese have a large amount of firepower, but at best their intervention makes it a two-way market for 4/5 big figure down move before the rally continues. Reports have suggested that they have concerns about intervening without the US something which we have stressed on many occasions. The US will only get involved when the strong USD starts to affect them directly in some systemic way. Ringing the bell at 150 soon.
Chinese state banks were reported to be active in the FX swap market selling Yuan to buy USDs which they then subsequently use to purchase Yuan in the spot market and like the Japanese try to temper the rise of USDCNH. Again looks like a futile task.
The OPEC+ spat continues to rumble on with OPEC members rolled out en masse over the weekend in support of their decision to cut production. Bahrain, Oman, Iraq, Algeria Kuwait to name but a few stood steadfastly behind the Saudis.
Interesting data out of the Fed USD swap lines which revealed that this week the SNB had used up $6.27bn more than double the $3.1bn of the previous week. In total, supposedly a total of 15 Swiss banks came to the SNB requesting the need for USDs. Obviously, the market will sense CS in there somewhere.
Our old mucker Timiraos was at it again on Friday with an interesting take on the UMich inflation expectations data. As a reminder, the 1y expectations rose from 4.7% to 5.1% with the 5y rising to 2.9% from 2.7%. He was keen to stress a paper published in the summer from the San Francisco Fed, which stated that in a high inflation environment like we currently have, 1y inflation expectations could influence wages. Interesting, he highlighted it and it would seem front and centre for the Fed as their inbox of woes seems only to grow.
I post at the bottom a couple of articles on the general stresses in play from a more macro basis, with the brilliant Robin Brooks take on the IMF/WB meetings in Washington last week, which he attended. Several of the themes that we have highlighted previously he expands on in more intellectual detail, including liquidity and the Italian bond spreads. I also post Jens Nordvig’s recent piece, which is free and well worth a read. Jens is an economist who worked for a good number of years on Wall Street and now has his own research company. His piece is very macro but excellent and discusses how risk management has overtaken risk-taking as the strategy of choice this year with all that’s going on it’s an excellent read.
UK soap opera continues
So Kwasi no more and its Hunt that we trust in but for how long? The latest out of the weekend papers is that Hunt is also going to delay the plans to reduce the rate of basic income tax by a year in yet another u-turn, but I guess as he wasn’t involved initially, it doesn’t stick in the throat as bad as the previous regime. He is scheduled to make a statement later today “bringing forward measures from medium-term fiscal plan that will support fiscal sustainability”. He will continue to deliver the full plan with the OBR forecasts on 31 Oct. In addition, he met with the BoE Governor Bailey and the Debt Management Office last night to discuss his statement. Bailey was keen to stress that they had an “immediate meeting of minds” when it came to financial sustainability. Very grown-up behaviour and a welcome breath of common sense. A small step back up those stairs back to credibility but a long way to go. Let’s see what he has to say.
This morning’s papers are rife with the news that PM Truss will come under even more pressure this week to resign. Her speech on Friday did little to dispel the fact that she truly believes Kwasi and her did very little wrong and it’s those pesky global headwinds that dun it! She certainly didn’t sound like someone who wouldn’t go without a fight. Sadly over-promoted and well out of her depth albeit she was coming into a precarious situation with the cost of living crisis on the home front and all the geo-political chaos around the world. Anyway, we are where we are but where do we go from here?
One MP has gone public calling for her resignation and letters are supposedly reigning in like confetti to the 1922 committee chairman. The issue they have is that they would have to get her to resign as the vote of confidence route is blocked off for a further 10 months or so. Also, remember all the rigmarole we had for the previous election as the vote within the MPs whittles the candidates down to two before it heads off to the members for their vote. A 3-month process which, frankly, the country has little time for. If they don’t go to the members then the Southern shires dwelling folks will not be best pleased. The other option, of course, is a general election which given Major’s election drubbing post the ERM crisis you wouldn’t hold out much hope for the Conservatives in a pre-Christmas election; turkeys voting for Christmas and all that. This would appear to be the foundation for Truss staying in power; the alternative is the majority of you would be looking for new jobs. Let’s see how the week pans out but with all the political instability, the BoE back in the dugout and the markets as shaky as they are UK assets don’t look attractive. On that basis I post below an article on a Morgan Stanley piece on the UK which lays out the numerous issues that the UK faces.
Just when you thought it couldn’t get any madcap in the UK reports have emerged that Coffey, the deputy PM and health secretary, has apologised for “illegally sharing prescription antibiotics with friends and family”. The comments were supposedly made last week in a meeting with civil servants. The meeting was regarding how to relieve pressure on GPs, so in her defence, she was trying to do her bit! Seriously you couldn’t make this stuff up.
I post Politico at the bottom for more details.
Central Bank Speakers
ECB speakers on Friday were all on the hawkish side with Vasle who thought that 75bps was appropriate for October and December whilst it was appropriate to discuss QT once rates had reached neutral.
Zuzimir was of the same view in terms of October.
de Guindos borrowed a phrase from years gone by claiming that the ECB would do whatever it takes to get inflation down.
Lagarde was super helpful in telling us that rates need to rise further.
Nagel as ever was making it plain and simple that it was critical to tighten monetary policy.
The Fed pretty much in a similar vein with George expressing the need to move to restrictive and that she supports ongoing rate hikes. Although she tempered it somewhat with the thought that moving too fast could disrupt financial markets.
Daly was in no doubt we need more restrictive policy and the Fed are not talking about pausing or stopping. They will stop hiking when it is appropriate.
Bullard expressed that more “front loading” was needed and he would like to see rates at 4.50/75% by year end with hikes in 2023 more data dependent.
One final point on the Fed with Bostic admitting to trading violations on his personal dealings and somehow thought that outsourcing his share dealings to a third party would exempt him from such restrictions. It’s reported that he did no less than 150 transactions within the restricted blackout periods. Far from ideal when confidence in “authority” figures is waning by the day.
The latest episode of Keeping up with the Central Bankers can be found on the excellent FXMacro Guy’s daily tweet at the bottom. Also, I would seriously recommend his weekly, which I also post below, given that there were close to 50 central bank speakers over the last week it has a huge amount of essential market intel packed into a super readable format. I wish I could say that it’s good value for money but sadly I can’t because it’s FREE!
The Week Ahead
Chinese CCP National Congress. Began yesterday and progresses throughout the week. The meeting occurs every 5 years and will decide the top positions in China’s government for that period. It is expected that President Xi will secure a third term as CCP leader which will set him up to retain the presidency next spring at the annual National People’s Congress. The main focus for the West will be the extent of the hawkishness for those appointed into the senior military positions and for the markets will focus on the extent of any change to economic policy and of course any changes to the zero tolerance Covid policy. As we have mentioned recently the influential press have written several leading articles in favour of the policy and the senior health advisor has also come out on the side of it being retained. This has obvious consequences to growth moving forward. Xi’s speech opened the Congress and indeed said there would be no change to the Covid or the housing policies. I post a couple of articles giving a more detailed breakdown of the various topics in his speech. The twitter feed from Bonnie Glaser, a director at German Marshall Fund, is of particular interest.
RBA Minutes. Worth a look here, on Tuesday, as the RBA minutes are from the October meeting. Remember this was the meeting where they surprised markets with a smaller than expected 25bp hike as opposed to 50bp. The statement did not point to a pause in rate hikes but rather suggested further were on the horizon in its continuing fight to get inflation back to the 2/3% target range. The statement also alluded to the size and timing of future rates being data dependent. The minutes will be interesting to see if there was much dissent for the smaller hike.
China Data Dump. GDP, Retail Sales and Industrial Production amongst others out on Tuesday. Q3 GDP QoQ is expected to rebound from the negative print last quarter (-2.6%) to a healthy 3.5%. The rebound is part due to the lifting of lockdowns caused by the zero tolerance policy of the authorities however the rebound will be tempered somewhat with the continuing sporadic lockdowns we have seen due to the virus across the mainland during the quarter. Industrial a production is expected to rise from last months print whilst retail sales are seen as slowing somewhat. On Thursday we get the PBOC rate announcement which is expected to keep 1y and 5y rates unchanged.
UK Data. UK inflation out on Wednesday and expected to climb into double digit territory and be a precursor to a large rate hike at the November MPC. The report whilst expecting to see a continued drop in petrol prices and second hand cars this will be counterbalanced by imported costs rising on the back of a weaker GBP. Whilst the BoE will obviously take note of the report its eyes are probably more focused on exactly what u-turns to the fiscal package are actually followed through on. Friday sees the retail sales print which is expected to show yet another contraction although not as severe as last months decline. The cost of living crisis continues to bite in the UK and shows no sign of letting up.
Japanese Inflation. Out on Friday Japanese inflation is set to remain elevated with the previous prints for Headline at 3% with Core at 2.8%; 8 year highs. Food and energy are expected to be the main culprits as well as of course the weakening JPY. However no matter we have above target inflation Governor Kuroda is not for turning with no sign of any policy change from their uber easing policy.
The UK. Of course the UK will remain firmly in focus as the gilt market potentially returns to “normal” with the emergency auctions a distant memory for now. New chancellor Hunt will have to try and steady the ship and of course PM Truss will try and muddle through as best she can. I’d be surprised if the markets don’t test the nerves of the BoE and government with another assault on yields and GBP especially as Truss seems deluded in her letter to Kwai which she again alluded to “global headwinds” in reference to the recent problems in the UK financial markets. Reports in the press over the weekend that the OBR report which hit the chancellor’s desk did show a £60bn hole in the accounts in 2026/27. The expected revenue generated from the u-turn on corporation tax will only account for a third of this so there’s plenty more work to do for Hunt and co. Whether Truss remains part of the repair job remains to be seen. As we’ve said before lift down stairs up for market credibility and we remain firmly in the basement.
US Housing Data. In an otherwise quiet week in the US data wise attention will shift to housing data. With a 75bp hike pretty much in place for November and December looking more than likely following the same path the lagging housing data will be a key indicator to sit alongside the two big beasts of inflation and unemployment. July started to see the cracks forming in the sector with house prices falling for the first time in ten years and conditions have generally worsened since. With mortgage rates in the US knocking on 7% it doesn’t get any easier. The shelter components account for a third of the inflation data and they tend to lag the actual housing data by about 12 months. The various prints this week are all expected to slowdown and it will be the magnitude of that slowdown that will be key for markets.
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US NY Empire State Manufacturing Index Oct consensus -4 vs previous -1.5 (13.30 BST)
Guindos (09.00 BST)
Lane (16.00 BST)
Australia RBA Minutes (01.30 BST)
China GDP Growth Rate YoY q3 consensus 3.4% vs previous 0.4% (03.00 BST)
China GDP Growth Rate QoQ q3 consensus 3.5% vs previous -2.6% (03.00 BST)
China Industrial Production YoY Sept consensus 4.5% vs previous 4.2% (03.00 BST)
China Retail Sales YoY Sept consensus 3.3% vs previous 5.4% (03.00 BST)
China Unemployment Rate Sept consensus % vs previous 5.3% (03.00 BST)
EU ZEW Economic Sentiment Index Oct consensus % vs previous -60.7 (10.00 BST)
German ZEW Economic Sentiment Index Oct consensus -66 vs previous -61.9 (10.00 BST)
US Industrial Production MoM Sept consensus 0.1% vs previous -0.2% (14.15 BST)
US Manufacturing Production MoM Sept consensus 0.3% vs previous 0.1% (14.15 BST)
US Capacity Utilisation Sept consensus 80% vs previous 80% (14.15 BST)
Schnabel (17.00 BST)
UK Inflation Rate YoY Sept consensus 10% vs previous 9.9% (07.00 BST)
UK Inflation Rate MoM Sept consensus 0.4% vs previous 0.5% (07.00 BST)
UK Core Inflation Rate YoY Sept consensus 6.4% vs previous 6.3% (07.00 BST)
UK Core Inflation Rate MoM Sept consensus 0.5% vs previous 0.8% (07.00 BST)
EU Inflation Rate YoY Final Sept consensus 10% vs previous 9.1% (10.00 BST)
EU Inflation Rate MoM Final Sept consensus 1.2% vs previous 0.6% (10.00 BST)
EU Core Inflation Rate YoY Final Sept consensus 4.8% vs previous 4.3% (10.00 BST)
Canada Inflation Rate YoY Sept consensus 6.8% vs previous 7% (13.30 BST)
Canada Inflation Rate MoM Sept consensus 0% vs previous -0.3% (13.30 BST)
Canada Core Inflation Rate YoY Sept consensus % vs previous 5.8% (13.30 BST)
Canada Core Inflation Rate MoM Sept consensus % vs previous 0% (13.30 BST)
US Housing Starts Sept consensus 1.478M vs previous 1.575M (13.30 BST)
US Building Permits Sept consensus 1.53M vs previous 1.542M (13.30 BST)
Australia Unemployment Rate Sept consensus 3.5% vs previous 3.5% (01.30 BST)
Australia Employment Change Sept consensus 25k vs previous 33.5k (01.30 BST)
China Loan Prime Rate 1y consensus % vs previous 3.65% (02.15 BST)
China Loan Prime Rate 5y consensus % vs previous 4.3% (02.15 BST)
US Philadelphia Fed Manufacturing Index Oct consensus -5 vs previous -9.9 (13.30 BST)
US Philadelphia Fed Employment Oct consensus vs previous 12 (13.30 BST)
US Philadelphia Fed New Orders Oct consensus vs previous -17.6 (13.30 BST)
US Philadelphia Fed Prices Paid Oct consensus vs previous 29.8 (13.30 BST)
US Existing Home Sales Sept consensus 4.69M vs previous 4.8M (15.00 BST)
Bullard (00.30 BST)
Jefferson (18.30 BST)
Cook (18.45 BST)
Bowman (19.05 BST)
Japan Inflation Rate YoY Sept consensus % vs previous 3% (00.30 BST)
Japan Core Inflation Rate YoY Sept consensus 3% vs previous 2.8% (00.30 BST)
UK Retail Sales MoM Sept consensus -0.5% vs previous -1.6% (07.00 BST)
Canada Retail Sales MoM Aug consensus 0.2% vs previous -2.5% (13.30 BST)
Williams (14.10 BST)
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Got a kick out of your first sentence of four words under Market Stresses; "Where do we start?" I'm beginning to wonder; Where do we end?
A globalist coup in London. The de-facto PM is a CCP admirer who wanted zero covid lockdowns & mandated vaccines, happy to be in Mexico!