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The Morning Hark - 2 Feb 2023
Today’s focus …what loosening financial conditions? ECB and BoE up next.
Prices are at 7.20 GMT/2.20 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude April futures steadied the ship in Asia, with them currently trading up smalls at 83.30 and 77.20, respectively. Pre FOMC, the EIA data showed US crude inventories rising for the sixth straight week, pushing them to a 20 month high and forcing oil $3 lower. As expected, OPEC+ did nothing, but the Fed rate decision and Powell’s subsequent press conference helped oil regain some ground.
EQ - Asia equity futures holding onto their gains from the US stock markets rallies yesterday, with the Nikkei, Kospi and Hang Seng currently at 27,395, 326 and 22,077, respectively.
The Nasdaq and S&P futures a touch higher at 12,534 and 4146, respectively as Powell gave the green light to rally after his lack of push back on the loosening financial conditions.
Gold - Gold April futures thanked JPowell as they took out our year’s high and then the next resistance around 1960 with next stop 2000. Topside now at the 2000 level with support rising now to 1950 and beyond at 1920. Currently, we sit at 1972.
FI - US yields off a touch again in Asia after yesterday’s post FOMC sell-off with the US2y and US10y trading currently at 4.09% and 3.39% respectively.
European yields closed little changed yesterday with the German 10y yields closing at 2.283% and Italian 10y yields at 4.169%.
UK gilt yields similarly did little with the 10y closing at 3.31%.
FX - FX quiet after yesterday’s fireworks with the USD off a touch with the USD Index currently sitting at 101. The majors all a touch firmer with JPY, EUR and GBP currently at 128.63, 1.1003 and 1.2387 respectively.
Others - Bitcoin and Ethereum came along for the post Powell ride with both enjoying hefty gains and currently sit at 23,822 and 1669 respectively.
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As expected, the 25bp hike was done, the statement had a small but significant tweak and the press conference suggested more to come in terms of hikes and no rate cuts in 2023. All well and good however the market took great encouragement from Powell’s lack of push back on the loosening of financial conditions and his somewhat muted victory lap on the fact that disinflation had begun.
Statement wise the key line remained in place:
“the Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”.
So the “ongoing” and “appropriate” dovish deletes did not happen however there was a subtle tweak in the next sentence:
“In determining the extent of future increases in the target range”.
Last December “pace” appeared instead of the new ”extent”. Subtle shift, but nonetheless, the market liked it as it points to the fact we are closer to a pause and the Fed are happy to acknowledge that.
Press conference wise the main highlights were:
On future policy:
“we’re talking about a couple more rate hikes to get to appropriately restrictive stance”;
“Fed not exploring pausing then restarting rate hikes”;
“we haven’t made a decision yet on terminal rate, we will look at data between now and March”;
“a pause is not something that the FOMC is on the point of deciding right now”;
“we’re going to be cautious about declaring victory and sending signals that we think the game is won” and
“rate cuts will not be appropriate this year, according to my forecast or that of my colleagues”.
“we need substantial more evidence to be confident about inflation returning to 2%, in particular as we see core non-housing services inflation still running at 4% annualised with no progress there’’;
“inflation more persistent in this sticky category”;
“for the first time, we can declare victory that a disinflationary process has begun”;
“markets expect inflation to come down quicker than we do”; and
“we have to do more”.
On the prospects of a soft landing:
“I continue to think there’s a path to getting inflation back to 2% without a significant economic decline or significant increase in unemployment”.
Finally, on financial conditions:
“since December, financial conditions have remained largely unchanged, its important that the markets do reflect the tightening we are putting in place”.
The key point that the market focused on was the fact that when he was questioned directly about the loosening of financial conditions, he did not, unlike in December, push back and gave a rather wishy washy answer that they had not changed much. If we look at GS’s financial conditions index we can see that we were at a touch below 100 around the December FOMC and now at 99.59, so not sure which FCI he is looking at.
Market wise off to the races with stocks rallying hard with the Nasdaq up 2%, yields and the USD selling off and the EUR hitting 1.10 for the first time since April.
Pricing wise, a terminal rate of around 4.90% is the market’s estimate, and with that peak in place they see 50bps of cuts in the second half of the year. So someone is going to be wrong. Remember, the Fed is 3-0 ahead from last year.
Going forward, the state of play would seem to be we either get a big push back from the Fed speakers or WSJ’s Timiraos in the coming days. If not, then the market will continue to test the Fed on the topside unless we get super hot data which would get the Fed hawks out in force or super weak data, which would ring the recessionary bells and create a panic up that the Fed has done too much and once again lost control of the economy. Tepid data will do just fine for the market……180k NFP please.
As an aside and very left field I know, but Powell has just emerged from Covid and perhaps his rather wishy washy performance is down to some remaining brain fog. Just saying.
A nailed on 50bp hike for the ECB as they feel confident to remain hawkish given the decent q4 data out of the majority of the Eurozone, outwith Germany, and the lower than projected energy costs encountered by the region over the first part of the winter.
The majority of ECB speakers of late have been canvassing for a 50bp hike and Lagarde has been very explicit that the market’s pricing has been undercooked in terms of rate hikes and with core inflation remaining sticky they are keen to “stay the course”.
The rate decision for March is where the main focus of attention will be.
The statement and press conference will be picked over for clues as to how far and how fast the ECB intends to be with their rate hiking profile. Lagarde in December was keen to telegraph ahead and the market will take a hawkish stance if she again telegraphs a similar rate rise for March and further rises to come into the middle of the year. If she slides back into a more meeting by meeting data dependent mode then the doves will be out in force. We’d imagine with inflation around 9% in the Eurozone that the more aggressive stance will be the more appropriate.
The other main point of note for the meeting will be the promised more details on the Asset Purchase Programme tapering. We already know the intended €15bn monthly roll off but further details may emerge of the distribution of the tapering across the various asset classes. Potentially more importantly will be the split across the jurisdictions of the EU and how that will effect the spreads. A more aggressive split which is more periphery heavy may threaten the recent stability we have seen of late in the BTP/Bund spreads, which could see us widening out again beyond 200bps.
As ever, watch out for ECB sources in the coming days and remember too that Lagarde speaks twice after her scheduled press conference.
Bank of England face a slightly different conundrum than that of the ECB. Whilst inflation, like in the Eurozone, remains sticky and especially Core, the economic data has come in a lot softer than in mainland Europe and as such, the 50bp hike is not so nailed on. However, given the inflationary landscape of the UK, we believe the BoE has little choice but to hike by 50bps. Wage growth surprised to the upside this month and services CPI remains stubbornly high. Whilst the minutes of the December meeting alluded to a potential downshift by the Bank the inflationary data has trumped that view, and we believe the Bank will opt for a tenth hike in the cycle and a second consecutive 50bp hike. However, to soften the blow, we’d expect them to again flag a downshift is likely in the coming meetings and they still need time to see the full effect of the rate hiking cycle on the underlying economy.
Further uncertainty surrounds the BoE decision due to the fact we have had little chatter from the BoE compared to the ECB and hence guidance has been sparse on the ground. Take a look at the FXMacro Guy’s central bank crib sheet, and that contrast becomes very apparent. Pill was probably the most interesting of those that did speak when he alluded to the UK having the worst of the inflation profiles of the US and EU in one with the structural labour shortages (US) pushing wages up whilst inflation was being additionally fuelled by the energy shock (EU).
The meeting will also offer an opportunity for the Bank to give its views on the economy with its monetary outlook report. Slightly rosier one this time around given the last one, back in November, was published under the clouds of a lot of political upheaval and uncertainty. Outwith the various scandals that never seem to be far away, the political landscape is a lot calmer and rather boring, compared to then, and given that gas prices have softened a great deal, there is the potential for the Bank to both upgrade their GDP forecasts a touch whilst tempering their inflationary ones.
One last point the vote split will be a hoot as ever. December’s meeting had 1 vote for 75bps (Mann), 6 for 50 and 2 for no change (Tenreyro and Dhingra). We’d expect the only change this time around would be the 75bp hike disappears and there is a vote for 25bps. The split could give us the best indication of the members’ intentions moving forward.
Yesterday’s Points of Note
European manufacturing PMIs passed with little incident and saw small upticks for Germany and the UK, although still well in the contraction zone.
Flash Eurozone inflation for January should a bigger than expected drop to 8.5% versus 9.2% previously and 9% consensus. However, as we said yesterday, there needs to be an Asterix on the print as the German component of the print has been statistically estimated due to the delay in the German print for the month. In addition, the Core measure remained sticky matching last month’s YoY print at 5.2% and indeed printing higher than consensus forecasts. Meanwhile unemployment in the zone ticked up to 6.6%.
Mixed bag of US data yesterday, with JOLTS showing a strong hand with job openings back close to the record levels which we saw last year. However, the manufacturing ISM showed a further decline to 47.4 lower than both previous and consensus. The underlying did nothing to lighten the mood with new orders declining for a fifth straight month. Both the prices and employment measures beat estimates but growth remains slow.
The Day Ahead
Obviously, the two major central bank meetings are the main focus of the day, with US factory orders the only other data print.
Overnight we get the final services PMI prints for January out of Australia, Japan and China.
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All times in GMT (EST+5 / CEST-1 / JST-9)
BoE Interest Rate Decision expected to raise 50bps to 4% (12.00 GMT)
BoE MPC Meeting Minutes (12.00 GMT)
BoE Monetary Policy Report (12.00 GMT)
ECB Interest Rate Decision expected to raise 50bps to 2.5% (13.15 GMT)
ECB Press Conference (13.45 GMT)
US Factory Orders MoM Dec consensus 2.2% vs previous -1.8% (15.00 GMT)
Australia Judo Bank Services PMI Final Jan previous 47.3 (22.00 GMT)
Lagarde (15.15 and 18.30 GMT)
Japan Jibun Bank Services PMI Final Jan previous 51.1 (00.30 GMT)
China Caixin Services PMI Final Jan previous 48 (01.45 GMT)
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