The Morning Hark - 18 Oct 2022
Today’s focus ……Trussonomincs RIP…..is she next? and the UK u-turn brings joy to the markets.
All prices are at 7.15 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 92.40 and 85.30 respectively and back at our opening levels from yesterday. Oil remains caught in the crosswinds of global slowdown stories versus the tightness in supply. Oil dipped overnight on the back of a story the White House was going to release a further 10/15m barrels of oil from the SPR in order to dampen the price. In addition, they were going to release details of how they plan to replenish the reserves which have been depleted over the last few months.
EQ - Equity markets in the main in Asia are happy to join the bull party which continued with vigour in the US session. The Nikkei and Kospi are up over one percent at 27,177 and 293 respectively. The Hang Seng obviously didn’t get the invite as it is down small at 16,826.
The Nasdaq and S&P continue their rally with a further close to two percent climb overnight in Asia at 11,294 and 3743 respectively. The positive mood music out of the UK helped the US markets and the move was extended by positive earnings and growth stocks, in particular, leading the way. First resistance on the topside getting close at 3770/75. Earnings today from Netflix, Goldmans and Johnson&Johnson.
Gold - Gold Dec flat in Asia at 1660. Nothing to see here for now with 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 again in Asia trading with the US2y and 10y currently at 4.42% and 3.98% respectively.
European yields followed the UK lower yesterday with the German and Italian 10y yields closing at 2.271% and 4.679% respectively.
UK gilts lead the way lower across the curve with the 10y closing at 3.974 a full 40bps lower on the day.
FX - The USD continues its softer tone in Asia with the USD Index trading at 112.02. NZD over a percent higher on the back of the higher CPI data and better risk sentiment at 0.5697. Other risk currencies performing well with the AUD currently at 0.6315 and KRW at 1422. The EUR and GBP up a touch too at 0.9853 and 1.1356 respectively. USDJPY remains close to its recent 32y high now at 148.89. The rally was accompanied by the usual jawboning from officials but no intervention to report and given the speed of the rise it would be a surprise to see them in until we take 150 out. Chinese state banks were once again said to be active in the market selling USDs with USDCNH currently at 7.1991.
Others - Bitcoin and Ethereum same old story with them trading at 19,559 and 1334 respectively.
UK soap opera continues
“Trussonomics” RIP. In one fell swoop, the new chancellor wiped the fiscal package from the pages of history pretty much u-turning on the whole lot. All that’s left is some scorched earth, a shattered pensions industry, gilt yields still remaining well above their pre-fiscal package levels and the government’s credibility in tatters.
It’s probably easier to recap what survives from the fiscal package with cuts to stamp duty on house purchases and the scrapping of the national insurance rise remaining in place. In addition, the plan to remove the cap on bankers’ bonuses would also remain. What is catching the most attention is the energy price cap which is now being guaranteed only until April, rather than the two years previously promised, after which time it will be targeted and capped. This has got estimates of bills doubling to £5,000. Chancellor Hunt went on to say that there would be further tax rises and spending cut packages in future decisions of “eye-watering difficulty”. The package certainly helped on the fiscal side although it would appear that at least a further £10bn of cuts is needed to balance the books the details of will be confirmed on 31 October.
The markets response in general was positive with GBP having its best day in two and a half years and gilt yields falling albeit still above the levels we were trading at prior to the original fiscal packages release. The markets have repriced the GBP rate curve with approximately 100bps of hikes being priced out of the curve by the year end.
The UK is far from out of the woods and it remains to be seen if Truss can survive. She is in effect a PM with no power, no mandate and no policy. She’s hardly earning her salary on that basis. Indeed 5 MPs have now come out publicly asking her to resign with many more calling the same tune anonymously. Interestingly she was supposedly meeting the chair of the influential 1922 committee rather than answering Labour’s emergency questions in parliament. A fresh poll today puts Labour a whopping 36% ahead of the Conservatives and rather bizarrely probably makes her slightly more secure as Conservative MPs look to preserve their livelihood! By all accounts, she seems determined to press ahead although she looks more bewildered by the day.
The BoE also stepped in with further announcements yesterday with the TECRF (temporary repo facility) said to remain in place until 10 November whilst further access to liquidity would be provided in the long and short-term repo facilities, the discount window as well as the international swap lines. They also announced that their corporate bond sales would resume next week.
Reports this morning suggest that the Bank, showing some common sense, will delay its sell program for gilts until such time as greater stability returns to the market. They may have to wait a while for that though but the news has certainly helped the risk sentiment.
I post Politico at the bottom for more details.
The minutes suggested that a variety of arguments were debated in favour of a further 50bp hike but in the end they opted for the smaller 25bp hike. It was a finely balanced decision with the uncertain environment tipping them towards a smaller increase this time. Further hikes are in the pipeline, but their magnitude will be very much data dependent.
The Day Ahead
The China data dump was cancelled yesterday with no reason given or indeed a new date for their release. With National Congress continuing perhaps a below target growth figure was not in keeping with the tone of the Congress.
NZ inflation for q3 rose sharply to 2.2% higher than both expected (1.6%) and the previous print (1.7%) making the YoY now at 7.2%.
This morning sees ZEW sentiment numbers out of Germany and the wider Eurozone, with both expected to show a further downgrade in sentiment. The US has some second-tier data in the afternoon with some central bank speakers to round off the day.
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EU ZEW Economic Sentiment Index Oct previous -60.7 (10.00 BST)
German ZEW Economic Sentiment Index Oct consensus -65.7 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 0.2% vs previous 0.1% (14.15 BST)
US Capacity Utilisation Sept consensus 80% vs previous 80% (14.15 BST)
Makhlouf (14.40 BST)
Schnabel (17.00 BST)
Nagel (18.00 BST)
Bostic (19.00 BST)
Kashkari (22.30 BST)
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Unelected chairman Hunt doing the bidding of the WEF.
Apparently Philip Lowe got laughed out of the building at a meeting of central bankers when he informed the he still had to contend with 1/4ly CPI data. When all other developed countries moved to monthly 30 years ago.
The ABS is releasing the first monthly CPI figures on October 26. Backdated to 2018. Probably some insights there. And maybe some more volatility as more data rolls in. Maybe they were waiting for this data before they pulled the .5% trigger. Could be some cold showers on October 26.