The Morning Hark - 18 July 2022
Today’s focus ……Timiraos “confirms” Fed 75bp, ethereum merge and the week ahead
Daily roundup - all prices are at 7.40 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September up over a percent on the day at 102.70 and 95.90 respectively. Tightness on the supply side seemed to recover some poise overnight with some conflicting reports on what actually was said behind closed doors post that fist bump. The Saudi’s seemed pretty clear in expressing their view that no commitments were given to the US on boosting oil production unless the market was in deficit. However US officials felt “pretty confident” that a “few more steps” would be seen in the coming weeks in terms of the supply side. Next up for oil is the Aug3 OPEC+ meeting given their latest output pact which expires the following month. Remember too, in natural gas, the Nord Stream 1 maintenance is meant to finish and hence reopen on Thursday of this week although chat from Gazprom over the weekend hinted at “delays”. Price cap talks, for Russian oil, continue “apace” with US treasury secretary Yellen claiming to have had productive meetings at the G20 finance meeting over the weekend.
EQ - Asia up as risk gets a dust off and remerges with some aplomb for the Kospi and Hang Seng both up over two percent on the session at 315 and 20,812 respectively. With little macro data on tap this week the market focused on the positive tone of the US markets at the close of last week and played a bit of catch up. Japan holiday observing Marine Day but Nikkei futures are up small at 27,110.
The US futures also a touch stronger with the Nasdaq and S&P trading at 12,100 and 3880 respectively, continuing their positive tone from the tail end of last week.
Gold - Gold futures up smalls at 1711 as it claws itself away from the year’s lows. The 1695/1700 area remains the key to the downside with 1730 the first sell zone.
FI - US yields flat overnight with the US2y and 10y yields at 3.13% and 2.93% respectively. The curve remaining inverted and once again back to -20bps.
European yields continuing to be an issue for the ECB with German and Italian 10y yields closing the week at 1.133 and 3.26 and remaining well above 200bps for the spread. Uncertainty in Italian politics remaining a big cloud as we enter ECB week with PM Draghi still insisting he will resign. He speaks on Wednesday to parliament. More analysis of potential outcomes below for those with the inclination and the time.
FX - With US yields lower and risk gaining some momentum in Asia the USD is a touch softer with the USD Index down to 107.90. All the majors have benefitted smalls with the JPY, EUR and GBP at 138.22, 1.0095 and 1.1898 respectively.
The EM currencies, we spoke of last week, have all been supported with the USD’s softness and given their recent sell offs the rebounds have been healthy off their recent lows. The exception has been TRY which has again seen some weakness today despite the USD’s softness to 17.46.
In what looks like being a pretty quiet day (normally when I say that things go haywire), I post at the bottom the latest piece from the FX & Macro Guy, which gives a lot deeper dive into some of the things we highlight in our daily TMH. Really comprehensive read, which I can’t recommend highly enough, especially for a “quiet” day.
Others - Bitcoin and Ethereum had a healthy weekend with a sharp spike over the weekend helping the pair bounce nicely to 22,300 and 1465 respectively. The break was led by ethereum as the much touted merge (whereby the network moves from a proof of work consensus to a more the efficient proof of stake one) was tentatively pencilled in for September. The break technically if it holds the 1250/70 area has a target in the mid 1800’s. Let’s see. More on the merge below.
According to the WSJ Fed whisperer Timiraos the Fed are all in on 75bp hike for next week’s FOMC and with little on the data and speaker front, as we head into the quiet period, then who’s going to argue with that. Indeed one large player in the October Fed Fund futures pit placed a large trade on Friday betting against any chance of a 100bp hike. The US data from Friday would lean that way too with retail sales and NY manufacturing beating expectations although industrial production and capacity utilisation did have small misses. The UMich survey however beat expectations and is back about the all important 50 level. For Chair Powell there was comfort too with his 5y inflation expectations below consensus and also showing a lower print from last month which remember was held up by him as part of the reasoning for the 75bp hike. To round off, Bostic weighed in with Waller and Bullard from the previous day in endorsing a 75bp hike and wanting to see an orderly policy transition code for 100’s not for me. On the downside, the Atlanta Fed is still looking for negative growth in q2 and not long to wait until next week’s print.
4 things for the market to focus on for the week as the US, in the main, takes a step back from the spotlight.
Global flash PMIs for July will be taken as an early indication of the various major economies’ health as we head into the second half of the year and if any of them are heading into a recession. At the margins the most at risk would appear to be the UK and the Eurozone.
Next up inflation prints for Japan, Canada and the UK. With Japan having several decades clawing its way up above the 2% target rate there’s not much interest in this measure and much more focus on the BoJ’s yield curve controls. Canada will be expecting another large print especially with last week’s 100bp hike by the BoC and further upside to this series would see 75bp confirmed for the September meeting and depending on the magnitude of upside miss a further 100bp as the bank tries to be preemptive. The UK has the highest level of inflation in G7 and the BoE, having told us to expect a 11% print at some point this year further upside for this month is expected. On that basis a high print will fan the flames of a 50bp hike in early August and raise expectations of further such size hikes into the next two meetings.
BoJ and ECB Rate policy meetings. The BoJ is seen as a rather dull affair although they do have some updated forecasts for us which will, I’m sure, point to lower growth and higher inflation. Remember the hype around the last BoJ meeting all the talk about whether the yield curve controls would be abandoned this month in contrast has seen little noise. It’ll be interesting to see if the market ratchets up the pressure on the Bank in the run up to this week’s meeting. The ECB has a lot more up for grabs as we have the first rate hike in quite sometime scheduled with a 25bp priced in with an outside chance for 50bps. We also will hopefully have more concrete details on the Bank’s anti-fragmentation tools as they try to stop the widening of the borrowing costs between the weaker southern countries and the stronger northern cousins. Remember the two speed Europe they proposed previously the donors, recipients and neutrals proposal. Press over the weekend suggested that an agreement to the exact tools may not be ready in time for full details to be released which I can’t see going down well with the markets. Let’s see. Lagarde has been absent from view of late maybe for a reason.
Finally, UK politics will come to a head this week as we shall get the two lucky winners of the Conservative party leadership election. Once chosen, they’ll be off to the shires (mainly southerly ones) for the summer to hunt for votes. No rest for the wicked they say rather aptly in this case!
Finally, finally earnings season continues with some big hitters up this week. The banks continue on Monday with BoA and Goldmans, Tuesday sees Netflix, Wednesday Tesla and Friday Twitter.
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📅⠀The main highlights for the week ahead in terms of data and speakers:
Saunders (10.00 BST)
RBA Minutes (02.30 BST)
UK Unemployment Rate May consensus 3.8% vs previous 3.8% (07.00 BST)
UK Employment Change June consensus 170k vs previous 177k (07.00 BST)
EU Inflation Headline Rate YoY Final June consensus 8.6% vs previous 8.1% (10.00 BST)
EU Inflation Core Rate YoY Final June consensus 3.7% vs previous 3.8% (10.00 BST)
Bailey (16.00 BST)
RBA Lowe Speech (12.10 BST)
China Loan Prime Rate 1Y consensus vs previous 3.7% (02.15 BST)
UK Headline Inflation Rate YoY June consensus 9.2% vs previous 9.1% (07.00 BST)
UK Core Inflation Rate YoY June consensus 5.8% vs previous 5.9% (07.00 BST)
Canada Inflation Headline Rate YoY Final June consensus 8.3% vs previous 7.7% (13.30 BST)
BoJ Rate Decision no change expected (04.00 BST)
BoJ Quarterly Outlook Report (04.00 BST)
ECB Rate Decision 25bp hike expected (13.30 BST)
US Philadelphia Fed Manufacturing Index Jul consensus 0 vs previous -3.3 (13.30 BST)
US Philadelphia Fed Prices Paid Jul consensus vs previous 64.5 (13.30 BST)
ECB Press Conference (13.45 BST)
Lagarde (15.15 BST)
Australia S&P Global Manufacturing PMI Flash Jul consensus vs previous 56.2 (12.00 BST)
Australia S&P Global Services PMI Flash Jul consensus vs previous 52.6 (12.00 BST)
Japan Headline Inflation Rate YoY June consensus vs previous 2.5% (12.30 BST)
Japan Core Inflation Rate YoY June consensus 2.2% vs previous 2.1% (07.00 BST)
Japan Jibun Bank Manufacturing PMI Flash Jul consensus vs previous 52.7 (01.30 BST)
Japan Jibun Bank Services PMI Flash Jul consensus vs previous 54.2 (01.30 BST)
UK Retail Sales MoM June consensus -0.4% vs previous -0.5% (07.00 BST)
German S&P Global Manufacturing PMI Flash Jul consensus 51 vs previous 52 (08.30 BST)
German S&P Global Services PMI Flash Jul consensus 51.3 vs previous 52.4 (08.30 BST)
EU S&P Global Manufacturing PMI Flash Jul consensus 51 vs previous 52.1 (09.00 BST)
EU S&P Global Services PMI Flash Jul consensus 52 vs previous 53 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Jul consensus 52 vs previous 52.8 (09.30 BST)
UK S&P Global Services PMI Flash Jul consensus 53.1 vs previous 54.3 (09.30 BST)
Canada Retail Sales MoM May consensus 1.6% vs previous 0.9 (13.30 BST)
US S&P Global Manufacturing PMI Flash Jul consensus 52 vs previous 52.7 (14.45 BST)
US S&P Global Services PMI Flash Jul consensus 52.6 vs previous 52.7 (14.45 BST)
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📚⠀Further reading on the current key macro themes:
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Badenoch the only one with any sense who's remotely trustworthy.