The Morning Hark - 2 Nov 2022

Today’s focus …Only show in town; The FOMC

Nov 2, 2022

All prices are at 7.30 GMT with changes reflecting movement from midnight GMT

Oil - Brent and Crude December up one percent overnight in Asia with the pair currently trading at 94.70 and 89, respectively. Oil was supported yesterday on the rumours that an end to the Chinese covid zero policy was closer and fuelled further by a larger than expected draw in the US crude inventory data. In addition, reports of an imminent attack on Saudi Arabia by Iran was also playing a part in underpinning the market.

EQ - A healthy gain once again for the Hang Seng which saw a further three percent gain to 15,832 as it still holds onto the hope of a lifting of covid restrictions. Kospi and Nikkei flat in the session at 304 and 27,633 respectively.

The Nasdaq and S&P stable overnight in Asia with them currently trading at 3868 and 11,341 respectively. The pair took a step back yesterday on the back of the hotter job data keeping the pressure on the Fed to maintain an aggressive stance into the year end.

Gold - Gold Dec up smalls in Asia at 1654 and above our trading pivot for now at least. The Fed will hopefully give us some near term direction for gold with, for now, the wider range remaining 1675/1620.

FI - US yields paring some of their recent gains ahead of the Fed with the US2y and 10y trading at 4.52% and 4.05% respectively.

European yields had a quieter session yesterday with European rates remaining stable. The German 10y yields trading currently at 2.127% and Italian 10y yield currently trading at 4.263%.

UK gilts off smalls yesterday with 10y yields closing at 3.464%.

FX - The USD stable with the USD Index flat 111.36. USDJPY close to half a percent lower at 147.37. The EUR and GBP happy to tread water at 0.9875 and 1.1490 respectively.

Others - Bitcoin and Ethereum awaiting news this evening, currently trading at 20,413 and 1563, respectively. I post at the bottom, Options Insight deep dive on the crypto market this week below. A great read as ever!

FOMC Preview

The Fed are expected to announce a fourth consecutive 75bp hike on Wednesday with markets pricing in an over 85% likelihood of such a hike. However, when we look further down the curve there is more uncertainty with the December meeting is looking more a 50/50 call between a 50 or a further 75bp hike. On that basis, all the “excitement” will be generated from the accompanying statement and in particular Chair Powell’s press conference. Will he take the Jackson Hole approach? Scold the naughty teenagers for getting ahead of themselves once again and deliver a short, sharp rebuke whilst making it very clear that the Fed is not for turning and will “keep at it” until it sees a consistent and sustainable downtrend in inflation. Or will he lose his nerve?

Friday’s data did little to encourage either side, to be honest, with ECI and Core PCE delivering a very indecisive outcome for either, although you would have to think that it does nothing for the “fed pausers” with Core still above 5%. In addition, the UMich survey showed both near term and 5y inflation expectations had risen something which we know the Fed frowns upon. Obviously, the market was whipped up, a couple of Fridays back, by the WSJ Timiraos article and Fed Daly’s comments regarding a slower pace of rate hikes and, in particular, the fact this could be a hot topic at today’s FOMC meeting. It appeared that Timiraos started to walk back those comments over the weekend when he suggested that household savings would continue to underpin demand for quite some time yet. Later he claimed that the Fed would rather do more and risk a recession than go undercooked and risk inflation remaining persistent for years to come.

As we spoke about in the Week Ahead, it feels sensible that the Fed would have a debate surrounding a downshift in both the pace and magnitude of future rate hikes. However, the crux of the matter is that Fed debating such a matter does not mean there will be any imminent action on the outcome of that debate. However, the market sees a debate as a sign that action is indeed imminent.

Chair Powell has made no secret of such a debate. In his recent FOMC press conferences, he alluded to such an event “at some point, as the stance of monetary policy tightens further, it will become necessary to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation”. So this is not new news in terms that a slower pace will occur at some point. If he were to give more detail today as to when this “some point” maybe then the doves would fly!

Similarly, the statements of late have alluded to “ongoing increases in the target range will be appropriate” and any softening with more dovish language (eg. some further increases may be required) will be jumped on.

So what to expect:

From a dovish point of view, potentially:

A nod to slowing data and, in particular the housing sector;
Tweaking of the statement with regard to future interest rate hikes as we discuss above;
An acknowledgement, as again we talk about above, that there was/is a debate surrounding a downshift and a lower magnitude of hike is a possibility in future meetings; and/or
A nod to the 300bp hikes over the last 4 meetings and it may be appropriate to slow and assess how those hikes will affect the wider economy.

From a hawkish point of view, potentially:

A nod to how financial conditions have loosened of late;
Data remains not conducive to a slowing in pace of rate hikes with inflation stubbornly high, core inflation sticky and the labour market remaining robust;
An acknowledgement that inflation expectations have risen again; and
A Jackson Hole short sharp rebuke with a confirmation that The Fed will “keep at it”.

To us, it appears that the market is its own worst enemy in terms of its reaction to the Daly and WSJ stories getting well ahead of itself and leaving Powell almost no option but to remain on script and pushback. As we said in the Week Ahead, between tonight’s meeting and the December FOMC, the Fed will have full visibility of two further labour reports, two CPI prints as well as the October PCE print. A fair chunk of data to assess whether there is a sufficient slowing in the pace of inflation and the labour market is moderating enough to allow an adjustment to the future rate profile. In addition, with all the political storm brewing, on their role in creating the current inflationary and economic backdrop, they will want to strengthen their commitment to their mandate and raise by 75bps and remain strong until after the mid-term elections next week. Finally, remember that the December FOMC will also be accompanied by the latest staff projections. This offers the Fed a better opportunity, if they so choose, to introduce more openly talk of a lower magnitude of hike under cover of a higher dot profile.

One further outlier is the make up of the voting members of the Fed. There will be new voters as of next year and there is much speculation that on the margin the incoming voters are less hawkish than the outgoing members. As such the hawks may consider they have only two more “hawkish” meetings prior to the changing of the guard so they may feel the need to back load the front loading on their way out the door.

In summary, we think 75bps, an acknowledgement that a debate is ongoing surrounding a slowing in the rate cycle but that any action is not imminent, they remain data-dependent and rates will probably have to stay higher for longer with no cuts in sight in 2023.

From a playbook point of view, it does feel like the FX and FI markets are more priced in for a hawkish Fed, so we see little move for them in comparison to the equity sector in such an event. If we get a hawkish 75bp hike we’d expect S&P to sell off 2% or so. A dovish 75bp hike, we’d expect a 3%+ up move in the S&P with both FI and the USD selling off with the USD having further to fall in relative terms.

US Data

Manufacturing ISM had little cheer to offer whilst the headline remained in expansion, at 50.2 and beat consensus. It took a further dip from last month and is now growing at its slowest rate in over 2 years. New orders and prices remain in contraction whilst employment scraped onto the 50 line. The PMI offered little with a big drop from the previous month, but it did beat expectations and remained above the 50 boom/bust at 50.4.

The JOLTS employment report again showed a “hotter than they’d like” backdrop for the labour market with openings rising to 477k whilst layoffs edged lower. Timiraos was keen to point out in his tweet, which we highlighted yesterday and repost below, that the Fed would like to see the ratio of vacancies to unemployed workers decline but this report suggests an uptick for the ratio.

One comedic moment to lighten the mood, but which I’m sure cost some traders some money, was Biden’s economic advisor’s faux pax. He stated that Biden had endorsed the Fed’s policy pivot. Leading to all manner of mayhem before the quote was corrected to Biden-endorsed Fed pivot to tighten this year. Oh boy it’d be funny if it wasn’t true!

RBA Lowe

Did Governor Lowe give Chair Powell a steer on how to deliver a potential pivot? His comments post the meeting gave the market an honest and direct response to the market. He stated that rates need to go higher and will be needed to tame inflation but that the RBA was not on a pre-set path. There also needs to be a balance between doing too much and too little in terms of rate hikes. Most importantly he gave the market some food for thought in terms of future monetary policy saying they may hike rates at a faster pace or indeed pause.

Housing data overnight supported the lower magnitude of hike with most measures released showing downside misses.

Central Bank Speakers

Some interesting points to note from some of the central bank chatter over the last few hours.

In the BoC Governor Macklem’s senate testimony, there appeared a definite shift in their rhetoric of late. Whilst noting that rates would be raised further, there was a distinctly dovish tone in his statement when claiming that we are closer to the end of the cycle. For the first time it appeared that risks to inflation had now become more balanced and that, speaking of balancing, the over/under tightening tightrope was once again mentioned. For those of an interest I post the opening statement at the bottom.

ECB’s Nagel was keen to get the motors running when he claimed that the EU balance sheet reduction should begin at the beginning of next year.

BoJ’s Kuroda still banging the same drum claiming that using YCC was still the “most appropriate policy right now” in an effort to put downward pressure on the yield curve.

Right in step was the FM Suzuki, who was getting tucked into excessive currency moves claiming that they will be “dealt with appropriately” and excessive FX moves caused by those pesky speculative traders “cannot be tolerated”. Good luck with that chaps.

PBOC governor was more understated when he claimed that the “China exchange rate will remain relatively stable”.

UK

No clown stories today, just some grown-up news. The UK’s QT program got underway yesterday with the BoE’s first gilt sale. They sold £750m worth of short dates and the sale went through successfully with little over reaction from the markets. So far, so good.

What was not so good, however, was the manufacturing PMI which, whilst just beating consensus, showed a sharp drop down to 46.2 from the previous month’s print. Similar to the US, it’s the fastest slowdown in over 2 years with all the usual contributory factors playing their part; inflation worries, weak demand, recessionary fears and rising uncertainty.

The Day Ahead

A pretty quiet day until we get the Fed’s interest rate decision and Chair Powell’s press conference in the early evening European time. Little else of note other than German and EU Oct manufacturing PMI and the German unemployment rate as well as some ECB speakers.

One thing in the US pre-Fed which may be worth taking note of is the US Refunding announcement (12.30 GMT). The US Treasury is expected to leave the majority of its coupon auction sizes unchanged. A key issue for the market in the short term surrounds any decision on treasury buybacks which would potentially help liquidity in the US treasury space however we deem this unlikely in the current environment.

Late in the evening and into the early hours of Thursday we have the Australian and Chinese services PMIs for October as well as the RBA’s Kearns speaking.

Also, as we go to print it may be worth taking a look at the Swiss CPI data, especially with the SNB on their hiking mission, for October which is expected to take a tick up for the MoM print.

Finally, I post at the bottom, FXMacro Guy’s excellent daily recap tweet, which is a great summary of yesterday’s events. I also post his valuable weekly, which is full of great insight and information. Please take time to read and subscribe to the newsletter, which contains really useful crib sheets on the central bank speakers. Remember, the weekly has the Fed crib sheet of all recent Fed speakers a great tool ahead of this evening’s announcement. Also, congratulations to FXMacro Guy for capturing over 2,000 subscriptions to his newsletter. Well deserved!

Remember to give this post a ‘Like’ at the bottom of the page if you found it useful. It only takes a few seconds and helps our free commentary reach a wider audience.

Wednesday

Germany S&P Global Manufacturing PMI Final Oct consensus 45.7 vs previous 47.8 (08.55 GMT)

German Unemployment Rate Oct consensus 5.5% vs previous 5.5% (08.55 GMT)

EU S&P Global Manufacturing PMI Final Oct consensus 46.6 vs previous 48.4 (09.00 GMT)

Fed Interest Rate Decision 75bp hike expected taking rates to 4% (18.00 GMT)

Chair Powell Press Conference (18.30 GMT)

Australia S&P Global Services PMI Final Oct previous 50.6 (22.00 GMT)

ECB Speakers

Makhlouf (09.00 GMT)
Villeroy (14.00 GMT)
Nagel (18.00 GMT)

Early Thursday

China Caixin Services PMI Oct previous 49.3 (01.45 GMT)

RBA Kearns speaks (05.00 GMT)

Switzerland Inflation Rate YoY Oct consensus 3.2% previous 3.3% (07.30 GMT)

Switzerland Inflation Rate MoM Oct consensus 0.2% previous -0.2% (07.30 GMT)

Good luck.

Mr. Blonde - Know When to Fold 'Em
TKer - Stocks usually bottom before everything else
Doomberg - Exit Stage Left 🔒
Saxo Markets - FX Update: FOMC to spoil the party or to unintentionally spike the punch bowl?
SEB - Continued EUR demand

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