The Morning Hark - 2 Dec 2022

Today’s focus …US NFP, Auf Wiedersehen Germany and next stop the Taj Mahal for SBF?

Dec 2, 2022

All prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude January futures flat in the Asian session, with them currently trading at 85.70 and 81.20, respectively. Reports out of the G7 suggest that the Russian oil cap is going to come in at $60 per barrel, and an agreement is close. There is also a suggestion that the cap is “flexible” and has a degree of “discretion”. There is also talk that it will aim to be around 5% below the Russian oil price, although no clarity on whether that is the Urals or the Mediterranean price. We await full confirmation and further details. Remember too, Sunday’s OPEC+ meeting.

EQ - Asia futures taking a step back overnight, with Hang Seng, Kospi and Nikkei all lower at 18,800, 315 and 27,763, respectively.

The Nasdaq and S&P fairing better as they are off a touch but consolidating their post Powell gains overnight, with them trading currently at 12,025 and 4075, respectively.

Gold - Gold Dec flat in Asia as it consolidates its recent gains currently at 1815. Well gold knocked on the door at 1800 and actually found it to be wide open! Helped by a weaker USD and lower yields gold looks set, for now, to be opening up the topside. Next target would appear to be in the 1840 level, with 1800 now downside support and further at 1780.

FI - US yields gained a little of their poise overnight in Asia, with the US2y and US10y currently trading at 4.26% and 3.53%, respectively.

European yields following the US lead and continuing to soften The German 10y yields currently trading at 1.823% and Italian 10y yields at 3.705%.

UK gilts following with the 10y yield closing at 3.105%.

FX - The USD having some much needed respite in Asia. The USD Index is currently trading flat at 104.64. Fairly muted session ahead of payrolls and what has been a long week in FX with the majors all trading flat; JPY, EUR and GBP currently at 134.62,1.0540 and 1.2261, respectively.

Others - Bitcoin and Ethereum consolidating near their recent highs at 16,969 and 1276 respectively.

NFP Preview

Headline 200k expected vs 261k previously. Unemployment to remain steady at 3.7% and average hourly earnings to tick down a touch to 0.3% MoM.

Those looking for a softer print are pointing to the poor ADP print this week, never a great indicator, the 4 week moving average for claims is growing, ISM employment measure for November was lower again and of course, the seemingly endless tech sector job cut headlines.

It’s a tough call as it does feel the “bad is good” style of trading is starting to fade as the market starts to get to terms with the Fed’s slower, higher, longer mantra.

I think a number of 250k and above will see stocks sell off 2%, yields and the USD rally and increase the likelihood of a 75bp in December.

In the 180-250k range, another sell off of perhaps 1%.

The risk on sweet spot I think, would be in the 120-180k range where the Fed will feel comfortable with 50bps, and the equity market gets “certainty” and probably rallies over a percent. US yields will test the downtrend, and the USD will continue its decline.

Below 100k, however, will get people on alert that a recession is incoming and the jobs market is going to tip dramatically. Potentially this is where we will see a change in market sentiment whereby, previously, this would have seen stocks rally hard, I feel now we could see the first steep sell-off on a “bad number”.

Remember the average hourly earnings gauge and of course, as we always say, remember the revisions!

Follow the latest research & commentary on the US labour market via our dedicated payrolls channel on Harkster.

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Central Bank Speakers

Fed speakers were the main focus of the day, and all reiterating the recent three pillars; slower, higher and longer.

Bowman claimed that they were not seeing a significant reduction in inflation. Still at high levels, and we need to see our actions having an impact. Anticipates further rate hikes as we still “have a lot of work to do” but it is “necessary for us to slow the rate of increase” to assess their impact. I expect policy to remain “restrictive for some time”.

Barr claimed the Fed is not thinking of loosening but “it makes sense to raise rates by 50bps” in December and to “slow the pace”. However, the Fed’s policy rate will have to “remain high for a long period of time”.

Williams emphasised that the fed has “a long way to go with rate hikes”, but he said that he is seeing forward indicators that inflation “is turning”. He maintains his view that we need to get the Federal Funds Rate above the inflation rate.

All pretty much of a muchness from Powell’s take on the world. Equities like it!

SBF/CZ/Alameda

He ploughs on regardless with his Princess Diana rebuild tour. GMA viewers once again got the coy look from under the curly barnet with the usual I was too dumb to realise what was going on, and I’m far from a criminal mastermind. At least he did get backed into a corner more often in this sit down than previously.

Next up is a photoshoot opportunity on a bench outside the Taj Mahal on his own, looking lost and forlorn.

Yesterday’s Data

The morning’s PMIs showed a picture of continued contraction across Europe for the manufacturing PMIs. One bright spot was that they all showed an uptick on the previous month’s print. Germany, EU and UK showing 46.2, 47.1 and 46.5 prints, respectively.

US data helped the post Powell rally consolidate with Core PCE softening a touch, as Jay had predicted, with the MoM measure softening to 0.2% versus 0.5% previously leaving the YoY now at 5%.

ISM later wasn’t attractive, with a headline print at 49 showing its lowest print and its first contraction since May 2020. Underlying measures didn’t paint a rosy picture either, with prices paid , 43, at a similar post pandemic low. Employment and new orders also showed steep declines from previously at 48.4 and 47.2, respectively. Remember, we are still in the bad is good when it comes to data and the markets. They seem to have not realised that a recession, higher unemployment and still hefty inflation prints isn’t a great mix for companies, but perhaps they’ll come back to earth after their sleigh ride rally. It feels like we are maybe going to come out of that mindset soon. The ISM miss didn’t get the uptick in stocks that we might have previously seen. Potentially this is a sign of the market accepting the slower, higher, longer mantra and soon reverting to type that a bad number is actually bad. Today’s data may let us know if we are there yet.

For another excellent take on the inflation profile and whether we are seeing a peak emerging, I refer you to the piece below from Stephen Kirchner of Institutional Economics. He comes at the inflation issue by taking a look at the shipping industry, and specifically, the spot freight rates from the major routes around the world. Fascinating piece and made all the better with its nostalgic reference to the “shipping news” in its title.

Institutional Economics

Is inflation peaking? The shipping news

The continued moderation in US CPI inflation over October was a welcome sign that global inflation pressures may have peaked and financial markets responded accordingly. The release came alongside a …

2 months ago · 3 likes · 3 comments · Stephen Kirchner

The Day Ahead

Overnight we got the Australian retail sales print for October, which showed a decline as it contracted 0.2% versus 0.6% previously

The RBA’s Lowe spoke overnight also. Some interesting quotes:

policy lags are “very likely to be longer this cycle”;
these lags are responsible for the recent “downshift” from the RBA;
inflation expectations are extremely well anchored;
domestic spending is “resilient” despite higher rates;
the bank aims to slow inflation without negatively impacting the economy “too much”; and
central banks will face “much greater variation in inflation”.

The variation in future inflation is now starting to be a theme from the central bankers.

ECB’s Lagarde also spoke but with little new of note to bore you with.

Quiet morning but the afternoon livens up with the Canadian employment report, but the main focus, of course, will be the US labour report.

Smattering of central bank speakers too throughout the day, and for those really keen overnight Sunday and into the early hours of Monday we get the services PMIs out of Australia, Japan and China.

Remember to look out for the FXMacro Guy’s excellent weekly review, which should hit the stands tomorrow, and of course, TMH’s own Saturday Hark Back for a look back at the big themes of the week gone by.

The World Cup ⚽️🏆

The gift that keeps on giving. Okay, of course, we can debate the wrongs of how and why it’s being staged in Qatar, but we cannot deny the entertainment value of this World Cup! The early games were fairly dull, with the oldies of Belgium being put out of their misery and sent home after a draw with Croatia, which sees the Croats advance. In the other game, Morocco beat Canada to top the group.

The drama all came in the late games again, with all looking rather mundane as the Spanish and Germans took early leads in their games and both looked set, at halftime, to advance. However, the second half blew all those notions out of the water, with at one point Japan and Costa Rica in the top two spots. Germany recovered to win their game, but all that achieved was demoting Costa Rica and letting Spain advance. So it’s back to the Christmas fairs for the Germans. Costa Rica return home with some happy memories, and Spain and Japan advance. The games were not without controversy as the Germans appeared, like in 1966, to have been outdone by a goal-line controversy, but it would “appear” that the Japanese managed to keep the ball in play before scoring the crucial goal by the thinnest of margins thanks to some help from VAR. Where was that in 1966!

Today sees the last two groups, G and H, starting off with the grudge match to end all grudge matches; Ghana v Uruguay. If you remember back to the World Cup in 2010, a controversial handball by the arch-villain, Luis Suarez, prevented Ghana from reaching the semi-finals, with them eventually succumbing to Uruguay on penalties. Memories live long in football, and with Suarez still a part of the Uruguay squad, albeit a slower and slightly more portly version (aren’t we all!) It’s lined up for a spicy one, especially as it basically winner takes all. In the other game, the flatter to deceive Portuguese take on South Korea. Portugal are assured of their place in the last 16 but will probably want to top the group to avoid Brazil in the next round. The South Koreans have a slim chance of progressing.

In the later games, Brazil take on Cameroon, with the latter needing a win to have any chance of qualifying. Similarly, Serbia need to win their game versus Switzerland to have any chance of progressing, so we should have, famous last words, a couple of open games.

The weekend sees the first of the round of last 16 games. We open Saturday with the Netherlands taking on the USA. Still not sure what I make of either of those two teams. The late game is Argentina versus Australia, where I can’t wait to see 5ft 7inch Messi running at 6ft 6 Souttar in the Australian defence. Sunday sees France, and hopefully their A team this time, take on the dour Poles, who have added little sparkle to proceedings as yet. Finally, England take on Senegal, which should be a step up in opponent for the English although Guy’s suspension for Senegal will be a big loss for them.

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All times in GMT (EST+5 / CEST-1 / JST-9)

Friday

Canada Unemployment Rate Nov consensus 5.2% vs previous 5.2% (13.30 GMT)

Canada Employment Change Nov consensus 5k vs previous 108.3k (13.30 GMT)

Canada Average Hourly Wages YoY Nov previous 5.5% (13.30 GMT)

US Unemployment Rate Nov consensus 3.7% vs previous 3.7% (13.30 GMT)

US NFP Nov consensus 200k vs previous 261k (13.30 GMT)

US Average Hourly Earnings MoM Nov consensus 0.3% vs previous 0.4% (13.30 GMT)

ECB Speakers

de Guindos (12.00 GMT)
Nagel (13.30 GMT)

Fed Speakers

Evans (15.15 GMT)

World Cup

Ghana v Uruguay (15.00 GMT)

South Korea v Portugal (15.00 GMT)

Cameron v Brazil (19.00 GMT)

Serbia v Switzerland (19.00 GMT)

Saturday

World Cup - Round of Last 16

Netherlands V USA (15.00 GMT)

Argentina v Australia (19.00 GMT)

Sunday

World Cup - Round of Last 16

France v Poland (15.00 GMT)

England v Senegal (19.00 GMT)

Good luck and a good weekend to one and all.

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