The Morning Hark - 18 Aug 2022
Today’s focus ……The FOMO Express run aground? Fed stale minutes and BBBY intrigue.
All prices are at 6.55 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures flat in Asia as they rally one percent to 93.80 and 87.80 respectively. Compared to other markets oil has had a couple of quieter sessions with the usual offered tone stories continuing to weigh on the sector with general recessionary fears and the prospects of a US/Iran deal. However, we did get a rally on the back of a surprisingly large draw in the EIA crude report. US crude exports rose sharply as Europe has stepped into the vacuum that Russian sanctions have created. Overall a rosier picture suggesting better demand but far from a trend to hang your hat on given the volatility of these reports.
EQ - Equity markets suffering a touch in Asia overnight with all major indices smalls in the red following the weaker close in the US. The Nikkei, Hang Seng and Kospi all lower at 28,953, 19,795 and 329 respectively.
The Nasdaq and S&P flat on the session at 13,470 and 4271, respectively. The FOMO Express seems to have run into a wall up in that zone we had suspected would be stodgy 4300/4350. It had a few attempts at the 200dma but failed to push through and sustain the break. Lot of chatter that this is a similar pattern to the 2008 chart where we bear market rallied into the 200dma then had a significant period of selling off to new lows. Let’s see.
Despite a brief post Fed minutes rally we ended up lower into the close and now sit in what would seem to be the final level of support between 4250/70 a break of which should see us retrace to 4200. It looks like the retail meme stock frenzy was one of the last acts of this particular rally. As with all such feeding frenzies there always seems to be a story and this one is no exception with much talk of a 20 year old student making a 5x return in a month on BedBath&Beyond. More details at the bottom and it feels like that story will have some more legs before it’s consigned to the cutting floor.
Apologies for highlighting Target’s results coming out on Thursday. We definitely missed the target as they were actually released yesterday and bucked the trend of Walmart and Home Depots’ reports from the day before. They showed a miss on their q2 profits although they maintained a somewhat bullish outlook for the second half of the year. On that subject, the US retail sales report for July was somewhat benign with a report showing that the US consumer was holding in with a flat monthly read.
Gold - Gold Dec futures flat in Asia at 1778. Since dipping back through 1800 gold has never really looked like troubling that level again and the USD’s recent surge higher has put a lid on the precious metal for now. Downside targets appear at 1770 and further to 1750. The USD seems to hold the key to gold’s near term future.
FI - US yields lower overnight with the US2y and 10y yields currently trading at 3.28% and 2.88% respectively. Once again we migrate back to this 3.27 level in the 2y as we tried higher again in yesterday’s session before selling off post FOMC minutes. One positive note for an upside move for yields is that we did manage to close above 3.27% for the first time in this move so that does open up the potential to retake June’s highs and beyond to 3.75%. Similarly the 10y struggles to get even close to 3%. The 75bp hike for September is starting to get priced out with the market leaning roughly 60/40 in favour of a 50bp hike.
European yields continued their recent rally yesterday closing at 1.088 and 3.304 for the German and Italian 10y yields respectively.
The bigger mover was the UK where rates rallied more than 20bps on the back of the higher inflation print. With the 2y trading at levels last seen back in 2008 and the 2y/10y curve inverting the most since that period too.
FX - The USD remains bid but still cannot recapture the 107 level with US yields backing off. The USD Index trading currently at 106.66. USDJPY and GBP have taken the majority of the strain from the higher USD with them currently trading at 135.07 and 1.2036 respectively. The EUR has been fairly stable at 1.1070.
Others - Bitcoin and Ethereum suffering on the back of stocks backing off with them currently trading at 23,422 and 1847 respectively.
Not a great deal new out of the minutes from what we could see. The rate hiking process is ongoing and they may tighten too much which seem a little bit like death and taxes to me? They framed these two scenarios around the risks that they face; yes there is a risk that they tighten too much whilst on the other hand there is “significant” risk that if they do not follow through on their promises on rate hikes and their fight to tame inflation then the elevated levels of inflation have the potential to become entrenched and that would be more harmful to the economy in the long run. The use of “significant” in the latter scenario potentially makes the statement a touch more hawkish but it’s a push. As we said yesterday given the two “significant” data prints we have had post the July meeting these minutes are somewhat stale. What will be of much more importance for that September decision will be Powell’s Jackson Hole speech next week and the August NFP and CPI prints in the first couple of weeks of September. It’s interesting to look at the Fed schedule into the year end. As we say Jackson Hole next week which is always seen as a pseudo meeting, the September one, next up an early November one then finally the mid December meeting. Given that November comes a week before the mid term elections that does feel a little too hot politically for any move in rates so ultimately we have at the most this year two more potential shift in rates unless of course they do mid meeting shifts which would blow the market’s mind!
Remember too market’s are pricing in those q1 cuts for next year so it does feel like we are getting ever closer to the business end of the deal do the Fed buckle and follow the market’s lead or do they stick to their guns and push towards 4% for the terminal rate? Perhaps JH next week will reveal a little more.
The Day Ahead
The day kicks off with the likelihood of another central bank hiking. This time the Norges Bank is expected to hike 50bps, despite it being an interim meeting, in the face of rising inflation. Speaking of inflation we get the Eurozone’s final print for July which is expected to be revised up and knocking on the 9% door for the headline.
Later in the day we have the Philly Fed survey for August which takes on even greater significance after Monday’s NY Fed regional survey whose headline number came in at -31.1 levels last seen back in the GFC days. Following on from that some housing data which should continue to show the deteriorating trend in that sector and a couple of Fed speakers to round off the day.
Early doors tomorrow we get Japanese inflation data for July.
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Norges Bank Rate Decision 50bp hike expected to 1.75% (09.00 BST)
EU Inflation Rate YoY Final Jul consensus 8.9% vs previous 8.6% (10.00 BST)
EU Core Inflation Rate YoY Final Jul consensus 4% vs previous 3.7% (10.00 BST)
US Philadelphia Fed Manufacturing Index Aug consensus -5 vs previous -12.3 (13.30 BST)
US Philly Fed Business Conditions Aug previous -18.6 (13.30 BST)
US Philly Fed Employment Aug previous 19.4 (13.30 BST)
US Philly Fed Prices Paid Aug previous 52.2 (13.30 BST)
US Existing Home Sales Jul consensus 4.89M vs previous 5.12M (15.00 BST)
George (18.20 BST)
Kashkari (18.45 BST)
Japan Inflation Rate YoY Jul previous 2.4% (00.30 BST)
Japan Core Inflation Rate YoY Jul consensus 2.4% vs previous 2.2% (00.30 BST)
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It was a different article
Gold (& silver) also appear very inversely correlated to US10yr yields.