The Morning Hark - 19 Jan 2023
Today’s focus …US data “bad is bad” is back, lot of hawkish central bank chat and another day to forget for crypto.
Prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March off one percent in Asia with them currently trading at 84.20 and 78.90 respectively. The world looked a better place earlier in the day yesterday as the IEA report suggested record demand for oil fuelled by the reopening of China. However, later in the day, as markets turned on the poor US data dump, fears of a global recession started to hit the oil sector hard. This was fuelled further by the API stats that showed another unexpected inventory build in the US for the second consecutive week.
EQ - Asia equity futures mixed overnight with the Hang Seng and Kospi up smalls trading at 21,593 and 315 respectively. The Nikkei, however off a touch at 26,327.
The Nasdaq and S&P futures off tiny in Asia with them currently at 11,451 and 3937 respectively. US stocks took a battering yesterday with a return to “bad is bad” for data prints in addition to hawkish Fed chat and a generally overextended market which saw the S&P have its worst day in a month.
Gold - Gold Feb futures flat overnight at 1910 with all upside momentum having stalled; we await the next catalyst for a move for the precious metal. Topside remains at year’s high at 1931 and beyond 1955/60. Support now at 1900 then 1870.
FI - US yields continuing lower in Asia after their post data and Fed chatter sell off yesterday. The US2y and US10y trading currently at 4.05% and 3.33%, respectively. We are back at levels last seen back in September.
European yields closed lower yesterday in step with the US markets and despite a more hawkish tone from the ECB speakers after the previous ECB sources story. The German 10y yields closing at 2.025% and Italian 10y at 3.734%.
UK gilt yields little changed with the 10y closing at 3.318%.
FX - The JPY continued to rally overnight and is back stronger than it was pre BoJ announcement. The combination of the JPY’s safe haven status in a recessionary world and a doubting market over the BoJ’s rate policy giving it legs again as it currently sits at 128.12. AUD is close to one percent lower after the poor labour report at 0.6882. The USD flat with the USD Index at 102.24. Whilst the EUR and GBP steady at 1.0795 and 1.2322 respectively.
Others - Bitcoin and Ethereum took a step back yesterday with the DoJ enforcement announcement and the fear that it may be a big player but has recovered some of its poise to sit currently at 20,828 and 1530 respectively.
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Central Bank Speakers
Plenty to go round and, on the whole, a hawkish bunch both at the Fed and ECB.
Mester was of the opinion that rates need to rise a little bit more to get over 5%.
Bullard urged his colleagues not to stall on the remaining rate increases. He was open to a further 50bp hike in February and felt the terminal rate should be in the 5.25/50% range.
Harker whilst admitting the Fed was nearing the end game in terms of the hiking cycle, it would be some time before the Fed starts to cuts rates and the terminal rate was over 5%.
Logan spoke about how a higher peak in rates could offset the effects of easing financial conditions and she opened up the possibility that when the Fed does pause they may need to hike again as risks will remain two sided.
ECB wise; Villeroy said that it was too early to speculate what the ECB will do, in terms of rate decisions, for the March meeting. Wanted to see the ECB reach the terminal rate by the summer but the pace of hikes this year was less important than last year. Lagarde’s 50bp guidance was still valid.
Rehn meanwhile stressed that significant rate hikes were justified to keep inflation expectations under control in the near term.
Another far from stellar day in crypto world yesterday. Consenys cut over 10% of their workforce, Kraken had some withdrawal issues, Coinbase halted operations in Japan, CoinDesk was exploring a partial or total sale and more reports emerged on Genesis nearing bankruptcy.
Late in the day it emerged that the US DoJ was going to process an enforcement action on a crypto exchange. Lot of speculation it may be the “big one” but, whilst it did start with “Bi”, it wasn’t the big one it was that “well known” venue Bitzlato which was seen as a money laundering venue for illicit Russian finance. I guess 3AC, Celsius, Luna all got a pass this round?
Cointelegraph - Bitzlato faces enforcement actions
Look back at yesterday’s data
Only one place to focus on, and that’s the US which saw a data dump that ultimately saw a dump in the markets.
Retail sales dipped the most in a year, especially significant since this was December although potentially, we see a rebound next month, given the weather-related issues in the US back at the tail end of last year.
The industry measures weren’t attractive at all with misses across the board with manufacturing and industrial production as well as capacity utilisation all missing expectations and the previous months prints.
Yes, all could be weather related, but it was interesting the shift in market psyche with bad data actually translation into bad market performance and had people start talking about recession again rather than that “unicorn shaped” soft landing.
One bright spot was a further drop off in Headline and Core PPI in step with last week’s CPI.
The Day Ahead
January consumer inflation expectations rose in Australia and that added to the bad news that the labour report for December brought. The unemployment rate ticked up to 3.5% whilst part time jobs contracted sharply and full time dropped from previous levels. Rates traders are now starting to anticipate a RBA pause in the coming meeting.
The morning highlights are the Norges Bank rate decision and the ECB minutes.
The minutes for the December meeting are released on Thursday. The meeting had the ECB step down from 75bps to a 50bp magnitude of hike but accompanied the lower hike with strong wording that interest rates will still have to “rise significantly at a steady pace to reach levels that are sufficiently restrictive”. There was also the announcement that the APP portfolio would shrink by Eur15bn pm from March until the end of q2 and then reviewed. In addition, there was the release of the staff forecast projections. In the press conference, Lagarde was keen to stress that more hikes were on the way and there was a broad majority view that the ECB should persevere with the fight with inflation. Sources post-meeting suggested that a third of Board members wished a further 75bps so any further colour on this debate, from the minutes, would be insightful. However, yesterday’s story with regard to a pause in March have put the cat among the pigeons on the hawkish push so lets see what emerges.
Its stick or twist a further 25bps for the Norges Bank? The Bank signalled a further rise in rates in q1 the question is will they go this early or hold back for now. The December headline inflation print had a decent drop to 5.9% YoY but Core ticked up a notch to 5.8% so quite the dilemma for the Bank. At the margins we think they’ll take the plunge and get rates to 3% at this meeting and pause but its a close call.
After yesterday’s US data debacle its all eyes on US housing today and also the Philly Fed survey. Expectations are low to say the least.
A plethora of Fed and ECB speakers throughout the day to warm us up on this chilly London day. Lagarde, Collins and Williams to name but a few.
Overnight we get a couple of important prints with Japan’s inflation report for December which is expected to hit a 40 year high at 4% and later the China rate decision form the PBoC where rates are expected to remain on hold.
I post below the excellent weekly newsletter from Heard on the Trading Floor. Great in depth insights and observations on the equity and credit markets. Although here at TMH, we do not focus heavily on the credit side it is always good to come at markets from a different perspective. Indeed HOTF is very much aligned with a lot of our thoughts. In particular on the “obvious dismissal by the market that higher for longer will be a thing”. Great read and I would highly recommend it.
Heard on the Trading Floor - Mr Bear where are thou?
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All times in GMT (EST+5 / CEST-1 / JST-9)
Norges Bank Interest Rate Decision 25bp hike expected taking rates to 3% (09.00 GMT)
ECB Monetary Policy Meeting Minutes (12.30 GMT)
US Building Permits Prel Dec consensus 1.37m vs previous 1.351m (13.30 GMT)
US Housing Starts Dec consensus 1.359m vs previous 1.427m (13.30 GMT)
US Philadelphia Fed Manufacturing Index Jan consensus -11 vs previous -13.8 (13.30 GMT)
US Philly Fed Employment Jan previous -1.8 (13.30 GMT)
US Philly Fed New Orders Jan previous -25.8 (13.30 GMT)
US Philly Fed Prices Paid Jan previous 26.4 (13.30 GMT)
Japan Inflation Rate YoY Dec previous 3.8% (23.30 GMT)
Japan Inflation Rate MoM Dec previous 0.3% (23.30 GMT)
Japan Core Inflation Rate YoY Dec consensus 4% vs previous 3.7% (23.30 GMT)
Collins (14.00 GMT)
Brainard (18.15 GMT)
Williams (23.35 GMT)
Lagarde (10.30 GMT)
Knot (14.00 GMT)
Schnabel (17.00 GMT)
China Loan Prime Rate 1y previous 3.65% (01.15 GMT)
China Loan Prime Rate 5y previous 3.9% (01.15 GMT)
UK Retail Sales MoM Dec consensus 0.5% vs previous -0.4% (07.00 GMT)
UK Retail Sales YoY Dec consensus -4.4% vs previous -5.9% (07.00 GMT)
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