The Morning Hark - 19 Sept 2023

Today’s focus...The week slowly starting to gain some momentum. RBA minutes offered little new. Canadian CPI up later but at least Liz is back!

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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 to edge upwards overnight with them currently sitting at 94.80 and 91.10 respectively. Weak US shale output added to the well known supply concerns. The market remains overbought but shows no sign of any correction with any dips most likely being bought into by the “late to the partiers”.

EQ - Asia equity futures saw a decline in Asia with the Nikkei, Hang Seng and Kospi all in the red at 33,033, 17,940 and 340 respectively. China woes having an influence on proceedings again with the focus again on the beleaguered property sector. This despite Country Garden getting approval from its creditors for an extension to its onshore bond repayments. In addition losses in Japan were lead by chip stocks which have sold off heavily.

The Nasdaq and S&P futures however closer to flat at 15,390 and 4498 respectively.

Gold - Gold Dec futures little changed in Asia sitting currently at 1952. Gold remains supported with the belief that the Fed will remain on hold tomorrow as well the potential US government shutdown at the end of the month.

FI - US yields remaining close to their recent highs with the US2y and US10y trading currently at 5.05% and 4.32% respectively.

European yields once again closed a touch firmer yesterday on the back of the continued hawkish chatter out of the ECB with the German 10y yield closing at 2.71% and the Italian 10y yield at 4.51%.

UK gilt yields similarly a touch firmer with the 10y closing at 4.39%.

FX - Deadly dull in FX land with the USD consolidating. The USD Index currently sitting little changed at 105.18 with the JPY, EUR and GBP currently at 147.80, 1.0678 and 1.2375 respectively.

A few FX expiries of note for today in the JPY we have $1bn at 147 and in the EUR €1bn at 1.07 and between 1.0735/50 with more significantly €3bn at 1.0775. Given the overnight ranges however these levels seem a long way off!

Others - Bitcoin and Ethereum firmer on the day with Bitcoin continuing to consolidate above 26,000 for now at least. Currently the pair sitting at 26,800 and 1635 respectively.

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Fed Watch

WSJ’s Timiraos piece on Monday, ahead of the Fed later on the week, reflected on what history tells when considering the potential for a US soft landing. He points to commentators back in 1990, 2001 and 2007 calling for a soft landing for them only to turn out to be a hard landings of varying degrees. In his article he points to four main potential hurdles for the Fed’s soft landing thesis; too high for too long in terms of the Fed funds rate, a too hot economy, rising oil prices and the old favourite a financial market meltdown. Well tis the season for a markets’ melt!

ECB Speakers

Same old same old from the ECB speakers to start the week.

Guindos claimed that uncertainty remains “over rate hikes effect on activity” whilst certain “parts of underlying inflation are moderating”.

Kazimir was a tad more explicit in his musings. Again reiterated that he hoped September’s hike would be the last in the cycle but couldn’t “rule out further rate increases”. Only March’s staff forecasts can “confirm that we are heading unequivocally towards our inflation goal”. He stressed, in a nod to the markets, that placing bets on rate cuts was “premature” and indeed steered the debate towards the speeding up of the QT program once rate hikes are out of the way.

The Bundesbank monthly report came out with hardly earth shattering news with the headline of a probable contraction for the German economy in q3 and the economy needs an overhaul.

RBA Minutes

Little new to report from the minutes of the September meeting. The board considered a hike but felt that holding rates steady was more appropriate given that they wished time to assess the full impact of the previous hikes in the cycle.

They argued that whilst the recent flow of data was consistent with inflation returning to target within a reasonable time frame, a further tightening may be required should inflation prove to be more persistent than expected. We feel this is in keeping with the board trying to protect against any sell off in the AUD which could, in turn, potentially lead to further upside pressure on fuel prices and force the RBA back to the table.

Overall a pretty much 1.1 version of major central banks currently. Either going into a last hike of the cycle or on a skip/pause with an option to go again if needed.

Market wise all fairly muted with the AUD a touch lower. On the rates front the market sees an under 40% chance of a further hike with cuts now pushed out into late next year.

Truss is back

Just when you thought it was safe to get back in the water….she’s back! Give her her due though she does provide good copy and on a day when there was little of note she provided some amusement. The former PM gave a speech on the economy which I think is the equivalent of me giving a seminar on patchwork quilt making. Anyway she opened up proceedings with a classic; “I’m having a rather more relaxed September than I did last year”. Aren’t we all pet!

She then proceeded to give all the teenager excuses that the blame for all the mess should lie at the door of various other protagonists and not at her temporary residence of no.10.

She blamed the Office of Budgetary Responsibility for a leak which did for her corporation tax cuts. The OBR instantly pushed back on this.

The BoE was at fault for not giving her a heads up on Liability Driven Investment (LDI) and how such investments related to the UK pensions industry. She even claimed that she “literally hadn’t heard what they were until the following Monday” and indeed “if we’d known we’d have done things differently”. Perhaps she could have asked some of Kwasi’s hedge fund mates who seemed to know what to do when the mini budget was being unwound at great haste!

Then came the classic denial that she/they didn’t “crash the economy” pointing to the fact that since she left office mortgage and gilt rates have gone higher than at the time of the mini budget. Factually correct but doesn’t take into account the widening of the gap between mortgage rates and bank rates around the time of the mini budget or the fact that rates in the UK are probably higher than they needed to be due to the mini budget and subsequent fallout.

There’s no reasoning with some people especially Liz it would seem.

The Day Ahead

Things start to pick up a touch today on the data front although the final EU inflation data for August is unlikely to trouble the scorers. However later in the day we have the August inflation report out of Canada where expectations are for another shift higher for the headline print fed by higher energy prices and mortgage interest rate costs. The core measure, given it excludes energy costs, is expected to have a more subdued uptick.

Later in the day some US housing data and a couple of central bank speakers from Europe.

Finally as a heads up early doors on Wednesday we have the China loan rate announcements where no change is expected and just prior to us publishing the UK August inflation report is released. The report is expected to nail down the next day’s BoE rate hike with expectations for a further uptick. MoM readings are expected to rise some 0.7% on both measures with the YoY headline getting back onto a 7% handle although the core YoY is expected to stabilise a touch below that level. ㅤㅤㅤ

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All times in BST (EST+5 / CEST-1 / JST-8)

Tuesday

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 0.3% vs previous 0.6% (13.30 BST)

Canada Core Inflation Rate YoY Aug consensus 3.5% vs previous 3.2% (13.30 BST)

Canada Core Inflation Rate MoM Aug consensus  0.3% vs previous 0.5% (13.30 BST)

US Building Permits Prel Aug consensus 1.443m 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)

ECB Speakers

Wuermeling Bundesbank (13.00 BST)

Elderson (13.30 BST)

Early Wednesday

China Loan Prime Rate 1y consensus 3.45% vs previous 3.45% (02.15 BST)

China Loan Prime Rate 5y consensus 4.2% vs previous 4.2% (02.15 BST)

UK Inflation Rate YoY Aug consensus 7% vs previous 6.8% (07.00 BST)

UK Inflation Rate MoM Aug consensus 0.7% vs previous -0.4% (07.00 BST)

UK Core Inflation Rate YoY Aug consensus 6.8% vs previous 6.9% (07.00 BST)

UK Core Inflation Rate MoM Aug consensus 0.6% vs previous 0.3% (07.00 BST)

 

Good luck.

 

 

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