The Morning Hark - 19 Aug 2022
Today’s focus ……Fed talk more of the same, the Three Musketeers and the end of the BBBY trade.
All prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures back off a touch in Asia after their decent rally yesterday with them currently trading at 95.90 and 89.50 respectively. Oil reversed its recent soft trend on the back of stronger than expected US economic data helping to boost optimism on the demand side. OPEC also noted that they could be in a position to cut production if needed which seems to be stating the obvious. Anyway it looks likely that the sector will still see a down week.
EQ - Equity markets mixed overnight in Asia overnight with both the Nikkei and Kospi down smalls at 28,893 and 327 respectively. However, the Hang Seng has bucked the overall trend with up smalls at 19,721 on the back of reports that China is pondering a massive $230bn stimulus package to boost the economy.
The Nasdaq and S&P give up smalls on the session at 13,462 and 4270 respectively. We still bounce between our support zone 4250/70 and the recent break out levels 4290/4300 albeit in fairly quiet sessions. Lots of chatter about the option expiries today which sees over $2tn notional worth of options expire. Tends to be a noisy and not very intuitive price action on such days.
Whilst the main indices were quiet the meme stocks showed the capitulation which brings an end, for now at least, of another sorry saga. BBBY having captured $30 earlier in the week managed to touch $10 in after hours trading yesterday. Seems that MindMed is next on the list as it managed to rack up more buy orders on the day than Apple on its way to a 70% rise on the day.
Gold - Gold Dec futures consolidating in Asia at 1770 after the sell off we saw yesterday. As we’ve discussed on several occasions gold seems to be caught in the headwinds of a stronger dollar and yesterday was a prime example as the USD rallied sharply causing gold to break out on the downside of its recent range. We expect the trend to continue into next week until we get further colour form Powell and the PCE data.
FI - US yields a touch firmer overnight with the US2y and 10y yields currently trading at 3.26% and 2.93% respectively. Well the close above 3.27% for the 2y did it no favours as we find ourselves, for now, back below this level. US yields overall bid post all the Fed chatter.
European yields once again added to their recent rally yesterday closing at 1.102 and 3.327 for the German and Italian 10y yields respectively. The spread is widening once more with the Italian elections starting to garner more attention with the right wing parties starting to worry the markets with their calls to leave the EUR.
In the UK the markets have priced in 200bps of rate hikes in the UK by February and if so, could someone switch the lights off when you leave!
FX - The hawkish Fed talk and better than expected US data helped the USD recapture the 107 level and press on. The USD Index currently trading at 107.60. All the majors suffering as you’d expect led by USDJPY which is trading at 136.32 levels last seen the week of the Fed “pivot”. The EUR is edging back towards parity at 1.0085 and GBP back through 1.20 at 1.1909.
USDCNH now at 6.82.
Others - Bitcoin and Ethereum suffering on the back of some Asian red candles overnight, extending the recent losses and being compounded by more selling on the European open. The pair currently trading at 22,000 and 1763 respectively.
US Data and Fed Talk
First up the Philly Fed survey which had taken on greater significance after its NY equivalent had printed a shocker earlier in the week. However, just to muddy the waters a touch more we got a much better than expected print (6.2 vs -5 expected) with the underlying components also encouraging with new orders better than the previous print and prices paid lower. Next week we get the August flash PMIs as well as the Michigan equivalent so perhaps they shall give a touch more clarity to proceedings.
Talking of clarity, we had a plethora of Fed talk yesterday. The conclusion of which I think brings you to the conclusion more and more that ex Fed Dudley, WSJ Timiraos and Chair Powell are probably the only three people to listen to in matters of the Fed and even then at times that’s a stretch.
Anyway, some of the “highlights”.
Bullard is still keen on a 75bp hike for September but was also keen to stress that he would like to see a front loading of rate hikes this year and saw no reason to drag them out. This, he feels, would give the Fed more flexibility in 2023. He also expressed his view that H2 would see better growth than H1 and his year end target for rates is 3.75/4%. As we spoke of yesterday we feel there are really only two meetings they can hike by year end, September and December, due to the mid-term elections and to reach his year end terminal rate he’d be looking for a further 75bp hike in December. Ambitious?
George had a similar view on year end terminal rates stressing that the case for raising rates “remains strong” and its merely the pace of rate hikes that is a “matter of debate”. Similarly the terminal rate would only be reached when the Fed were “completely convinced” that inflation was conquered and the July CPI print whilst encouraging was too soon for celebration.
Daly however had a different mindset on the year end rate which she believes is a “little above 3%”. She was also keen to stress that the Fed does not want “to overdo policy” and tighten too much although on the same hand she saw tightening continuing into next year.
Kashkari also appeared and stressed the urgent need to tame inflation even if that means we cannot avoid recession.
All much of a muchness on what has been said before by this cast of characters and as I said the Three Musketeers of Timiraos, Dudley and Powell are the ones to focus on. On that basis the latest from them; in his latest WSJ piece Timiraos talks about the disconnect between the market and the Fed and for the Fed to keep financial conditions tight the market will need to heed its words. So basically who is going to win the game of bluff. In Dudley’s latest oped piece in Bloomberg he reflects on Powell’s last Jackson Hole speech and expresses his view that he got everything wrong in it and in effect why should we believe him this time? Perhaps the Three Musketeers is morphing into the Dynamic Duo?
The Day Ahead
Little of note on the day with Canadian retail sales and the Fed’s Barkin speaking not long after. Both seem unlikely to be market moving especially with Powell on the horizon next week at Jackson Hole. This year the theme is “reassessing constraints on the economy and policy” but the full agenda tends not to be released until closer to the event although there is early speculation that Powell will flesh out more of his thoughts on QT. As is traditional, Chair Powell will give the opening remarks on the economic outlook on Friday 26th at 15.00 BST.
One final point of note for next week is that early Monday sees China loan rate announcements which may see some follow through from the China rate cuts we saw earlier this week.
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Canada Retail Sales MoM Jun consensus 0.3% vs previous 2.2% (13.30 BST)
Barkin (14.00 BST)
China Loan Prime Rate 1y previous 3.7% (02.15 BST)
China Loan Prime Rate 5y previous 4.45% (02.15 BST)
Good luck and a good weekend to one and all.
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