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The Morning Hark - 18 Sept 2023
Today’s focus...Quiet start to a busy week and of course The Week Ahead
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Prices are at 7.25 BST/2.25 EST, with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures continuing their upward trend overnight with them currently sitting at 94.60 and 90.70 respectively. Oil is now close to a 10 month high underpinned by the recent supply cuts from Saudi Arabia and Russia. In addition the rally is underpinned by the general US’s resilient economy and optimism (false or otherwise) of continued stimulus from the Chinese authorities to try to spur demand.
The CTA community has, unsurprisingly, been a big player in the squeeze with them allocating close to 3% into the sector of late.
EQ - Asia equity futures muted in Asia with the Nikkei flat at 33,058 and the Hang Seng a touch softer at 18,032.
The Nasdaq and S&P futures also flat sitting currently at 15,414 and 4505 respectively.
Gold - Gold Dec futures up smalls in Asia sitting currently at 1930. Gold remains supported with the belief that the Fed will remain on hold this week and a touch of a safe haven feel about it with another potential US government shutdown being muted. The latest escapade for the US lawmakers regards negotiations over defence spending as well as broader fiscal spending cuts. We know how this generally plays out; lot of bravado and grandstanding before a resolution is found. End of the month is the deadline so expect more headlines.
FI - US yields remaining close to their recent highs with the US2y and US10y trading currently at 5.05% and 4.35% respectively.
European yields closed a touch firmer on Friday with the generally hawkish chatter out of the ECB post Thursday’s hike with the German 10y yield closing at 2.68% and the Italian 10y yield at 4.45%.
UK gilt yields similarly a touch firmer with the 10y closing at 4.36%.
FX - Not a lot to report in FX land with the USD consolidating. The USD Index currently sitting at 105.20. The majors a touch stronger with JPY, EUR and GBP currently at 147.60, 1.0677 and 1.24 respectively. Couple of FX expiries of note for today in the JPY which may be worth keeping an eye on with a yard rolling off at 148 and $2.5bn between 148.35/50 whilst down below $1bn at 147.
Others - Bitcoin and Ethereum firmer on the day with Bitcoin seemingly happy to consolidate above 26,000 for now. Currently the pair sitting at 26,675 and 1631 respectively.
General market feel
The week ahead holds a lot of central bank action and in my mind there’s a general complacency regarding where exactly we are in the rate cycle. The majority of the central banks will hike (the Fed and BoJ the likely high profile outliers) but consensus suggests that peak rates are pretty much baked in the cake. However this does not take into account the recent rise in oil prices and what that entails for inflation expectations. All in all this round of central bank meetings feels all a little bit too “pat on the back” for my liking. History generally tells us that things never pan out that smoothly.
Central Bank Speakers
ECB’s Lagarde was on the tapes on Friday reiterating her support for the ECB’s rate hike and emphasised that rate cuts had not been discussed and any further action from the ECB would be on a data dependent basis.
Equally Sinkus was expressing his hopes that Thursday’s rate hike would be the last of the current cycle.
Kazak insisted that the ECB actions on Thursday should not be seen as a “dovish hike”.
The FT reported ECB sources suggesting that December was still in play for a further hike if inflation continues to trend above forecast.
The market, however, seems keen for the cuts with 75bps now priced in for 2024. Let’s see.
A Monday morning wouldn’t be complete without an Evergrande story. This time the beleaguered Chinese property developer is embroiled in a story regarding its private wealth management arm with reports that police have detained some employees from the unit with regard to a pending investigation. Its stock took a knee jerk 25% drop on the news before finding some support.
The Week Ahead
FOMC rate decision. Despite a higher than expected monthly core CPI reading this week and the persistently sticky prices paid measures for the PMIs a further hike from the Fed seems to have been all but taken off the table. So the next question is; will this meeting be a skip or a pause? Given the backdrop of this week’s inflation print, showing inflation remaining well above target, and growth continuing to trend higher than expected it would seem that skip is the word and November will remain in play for potentially that last one hike in the cycle. Indeed the Fed’s Waller and Williams have both recently described the US economy as in a “good place”. We’d expect Powell’s press conference to remain on script with an emphasis on the data dependency keeping the door open for a further hike but in general having a positive slant on the general health of the US economy. The only fly in the ointment that he may allude to is the rising oil price and the knock on effects it will have for inflation expectations. One other point of note of course is the updated staff projections. Overall we see the dots relatively unchanged with the 2023 median dot remaining at 5.625% hence implying one further hike. For 2024 and 25 we see them staying at 4.625% (implying 100bps of cuts next year) and beyond at 3.375%. The economic forecasts will continue to point to that much vaunted soft landing with the inflation and unemployment forecasts expected to left unchanged but GDP pushed a touch higher given consumer spending and the general resilience of the US economy. In conclusion one of the quieter Fed meetings of late from a market point of view.
BoE rate decision. One for the road? The BoE is expected to make it 15 in a row and take rates to a 15 year high at 5.5%. You get the feeling, given the recent mutterings from Bailey and co, that they’d love to follow in the footsteps of the ECB and make it a dovish hike but there remain a number of dark clouds hovering. Wage growth remains stubbornly high and whilst inflation is well off its peak it remains significantly above target. In addition growth, which had shown signs of life, lost momentum again in July leaving the Bank once again in the dilemma of having persistent inflation coupled with flagging growth. Nevertheless a more consensus 25bp hike looks in order. We’d expect the more hawkish members of the committee to step back into line for a 25bp hike although the more dovish members may prevent a full consensus. We’d also expect the minutes to suggest a “FedLite” higher for longer approach with any further moves in rates very much data dependent but as yet no pre-commitment. Is a pause plausible? Well never underestimate the ability of the “Odious Toad” and his committee members to throw a curve ball. They may choose to copy the Fed rather than the ECB and pause with a nod to the next meeting in November which includes the assessment of economic outlook but it would be a surprise. A hike for the road seems more in keeping and maybe, having done so, they will square the circle and be the first major Central Bank to start cutting rates, having been the first to start hiking, in a desperate attempt to avoid that hard landing? One further point of note is the Bank will give their annual review of the quantitive tightening programme whereby the Bank is reducing their balance sheet by £80bn pa through a combination of gilt sales and no reinvestment of funds from maturities. Despite Truss/Kwarteng’s best efforts the programme has run smoothly, albeit at a higher cost. On that basis, and given the Bank will look to be cutting rates into next year, it is fair to assume that an increase in their target sales would be in order. £100bn seems a nice round number to go with?
BoJ rate decision. A “live” meeting? Last month’s widening of the YCC control band has aroused the interests of the market that moves are afoot. Indeed Governor Ueda’s comments regarding a possible end to the Bank’s ultra loose monetary policy have aroused those interests further but enthusiasm was tempered at the tail end of last week when members of the BoJ pushed back on the press speculation surrounding his comments. Nevertheless given core inflation remains well above the Bank’s target, and looks to remain underpinned given the recent weakness of the Yen and spike in oil prices, there certainly remains a strong case for a shift in stance. However as we have learnt over the months and years what the Western world wants and what the BoJ does are very much oil and water.
China rate announcement. Nothing to see here……..It would seem the PBOC have their hands full with the continued “manipulation/support” of the Yuan to initiate a counterproductive, but seemingly much needed, cut in rates. Indeed, on that point, a report in the Nikkei today suggests that the top developers in China have lost close to $3bn due to the weakening Yuan. As the West’s investment community sit on the sidelines awaiting for some economic stimulus in the form of a bazooka it would seem it won’t start this week as the PBOC look unlikely to deliver.
Nikkei - Top developers take hit from weakening Yuan
Skandi rate decisions. Both the Norges and Riksbank are expected to stay in step with the ECB and hike a further 25bps. The Norges Bank has seen a recent welcome dip in the inflation prints with the recent regional surveys pointing to a soft landing for the economy. However with a weak currency, higher oil and the ECB delivering last week we would expect the Norges Bank to deliver a last 25bp hike for the cycle. Similarly the Riksbank have seen a recent dip in inflation in August however stripping out energy we still remain above the Bank’s forecast. In addition the Krona remains weak and the ECB hiked so a 25bp hike looks the play. Peak rates are looming but we’d expect the Riksbank to leave November in play on a data dependent basis.
SNB rate decision. Less of a certainty than the other major central banks meeting this week but a 25bp hike is expected from the SNB. Inflation has fallen back into the target range but with recent hawkish deliberations from the decision makers and the ECB hike last week tilts it more to a further hike.
Inflation prints. Inflation data from several corners of the globe; Canada, UK and Japan. Whilst the headline prints may show a return to upside pressure we’d expect to see a continued easing off from the peaks for the core measures.
PMIs. Friday brings the flash September PMIs and a first feel for how the major global economies are fairing going into the last few months of the year. August flash prints disappointed to the downside and undermined confidence in the global soft landing paradigm. Similar type prints for September would underscore that theory.
Elsewhere. Further Central Bank meetings in South Africa, Taiwan, Philippines and Indonesia where rates look to remain on hold. Brazil are expected to cut the Selic rate but consensus is mixed on the magnitude of cut with some talk of a 75bp cut beyond the more consensus play of 50bps. Turkey’s Central Bank however is expected to deliver a further hike on Thursday to an eye-watering 30%. Poland of the regionals probably has the most interesting week with a slew of data especially given the backdrop of the recent larger than expected rate cut from the Poles at the beginning of the month. Industrial production is set to continue to weaken in the face of German underperformance, deflation looks set to deepen, employment should continue to stall and despite double digit growth in wages, which is challenging CPI’s hopes of returning to target anytime soon, the consumer remains reluctant to spend. All of course within the shadow of the fiercely contested upcoming parliamentary elections in the middle of next month.
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All times in BST (EST+5 / CEST-1 / JST-8)
Guindos (10.00 BST)
Panetta (16.00 BST)
Mauderer Bundesbank (22.00 BST)
Australia RBA Minutes third month of rates at 4.1% in Gov Lowe’s last meeting (02.30 BST)
EU Inflation Rate YoY Final Aug consensus 5.3% vs previous 5.3% (10.00 BST)
EU Inflation Rate MoM Final Aug consensus 0.6% vs previous -0.1% (10.00 BST)
EU Core Inflation Rate YoY Final Aug consensus 5.3% vs previous 5.5% (10.00 BST)
Canada Inflation Rate YoY Aug consensus 3.8% vs previous 3.3% (13.30 BST)
Canada Inflation Rate MoM Aug consensus 0.2% vs previous 0.6% (13.30 BST)
Canada Core Inflation Rate YoY Aug consensus % vs previous 3.2% (13.30 BST)
Canada Core Inflation Rate MoM Aug consensus % vs previous 0.5% (13.30 BST)
US Building Permits Prel Aug consensus 1.44m vs previous 1.443m (13.30 BST)
US Housing Starts Aug consensus 1.44m vs previous 1.452m (13.30 BST)
Canada BoC Kozicki speaks (19.00 BST)
Wuermeling Bundesbank (13.00 BST)
Elderson (13.30 BST)
China Loan Prime Rate 1y consensus % vs previous 3.45% (02.15 BST)
China Loan Prime Rate 5y consensus % vs previous 4.2% (02.15 BST)
UK Inflation Rate YoY Aug consensus 7.1% vs previous 6.8% (07.00 BST)
UK Inflation Rate MoM Dec consensus 0.7% vs previous -0.4% (07.00 BST)
UK Core Inflation Rate YoY Dec consensus 6.8% vs previous 6.9% (07.00 BST)
UK Core Inflation Rate MoM Dec consensus 0.7% vs previous 0.3% (07.00 BST)
BoC Summary of Deliberations Sept meeting rates were held at 5% (18.30 BST)
FOMC Interest Rate Decision rates expected to remain on hold at 5.50% (19.00 BST)
FOMC Projections (19.00 BST)
Chair Powell Press Conference (19.30 BST)
NZ GDP Growth Rate QoQ q2 consensus 0.4% vs previous -0.1% (23.45 BST)
NZ GDP Growth Rate YoY q2 consensus 1.2% vs previous 2.2% (23.45 BST)
Panetta (08.00 BST)
Enria (08.30 BST)
Schnabel (10.00 BST)
Jochnick (10.50 BST)
McCaul (13.00 BST)
Elderson (13.30 BST)
Mauderer Bundesbank (19.00 BST)
Riksbank Rate Decision a further 25bp hike expected taking rates to 4% (08.30 BST)
Riksbank Monetary Policy Report (08.30 BST)
SNB Rate Decision a further 25bp hike expected taking rates to 2% (08.30 BST)
Norges Bank Rate Decision a further 25bp hike expected taking rates to 4.25% (09.00 BST)
Norges Bank Press Conference (09.30 BST)
BoE Interest Rate Decision 25bp hike expected taking rates to 5.5% (12.00 BST)
BoE Meeting Minutes (12.00 BST)
US Philadelphia Fed Manufacturing Index Sep consensus -1 vs previous 12 (13.30 BST)
US Philly Fed Employment Sep consensus vs previous -6 (13.30 BST)
US Philly Fed New Orders Sep consensus vs previous 16 (13.30 BST)
US Philly Fed Prices Paid Sep consensus vs previous 20.8 (13.30 BST)
US Existing Home Sales Aug consensus 4.1m vs previous 4.07m (15.00 BST)
Lagarde (15.00 BST)
Schnabel (15.40 BST)
Australia Judo Bank Manufacturing PMI Flash Sept consensus vs previous 49.6 (00.00 BST)
Australia Judo Bank Services PMI Flash Sept consensus vs previous 47.8 (00.00 BST)
Japan Inflation Rate YoY Aug consensus % vs previous 3.3% (00.30 BST)
Japan Inflation Rate MoM Dec consensus % vs previous 0.4% (00.30 BST)
Japan Core Inflation Rate YoY Dec consensus 3% vs previous 3.1% (00.30 BST)
Japan Jibun Bank Manufacturing PMI Flash Sept consensus vs previous 49.7 (01.30 BST)
Japan Jibun Bank Services PMI Flash Sept consensus vs previous 54.3 (01.30 BST)
BoJ Interest Rate Decision rates expected to remain on hold at -0.1% (04.00 BST)
UK Retail Sales MoM Aug consensus 0.5% vs previous -1.2% (07.00 BST)
UK Retail Sales YoY Aug consensus -1.2% vs previous -3.2% (07.00 BST)
German HCOB Manufacturing PMI Flash Sept consensus 39.5 vs previous 39.1 (08.30 BST)
German HCOB Services PMI Flash Sept consensus 47.1 vs previous 47.3 (08.30 BST)
EU HCOB Manufacturing PMI Flash Sept consensus 44 vs previous 43.5(09.00 BST)
EU HCOB Services PMI Flash Sept consensus 47.5 vs previous 47.9 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Sept consensus 43 vs previous 43 (09.30 BST)
UK S&P Global Services PMI Flash Sept consensus 49 vs previous 49.5 (09.30 BST)
Canada Retail Sales MoM Jul consensus 0.4% vs previous 0.1% (13.30 BST)
Canada Retail Sales YoY Jul consensus % vs previous -0.6% (13.30 BST)
US S&P Global Manufacturing PMI Flash Sept consensus 47.9 vs previous 47.9 (14.45 BST)
US S&P Global Services PMI Flash Sept consensus 50.3 vs previous 50.5 (14.45 BST)
Guindos (12.00 BST)
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