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The Morning Hark - 20 Nov 2023
Today’s focus... Thanksgiving week starts with a whimper. The Week Ahead. Inflection point or rogue SatNav and surely AI could have predicted what is happening at OpenAI?
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil continues its late week recovery in Asia this morning with Brent and Crude January futures up close to a percent with the pair currently sitting at 81.30 and 76.70 respectively.
As we alluded to on Friday oil had slipped below the level at which supply cuts were announced back in the summer and perhaps the move had become overextended. Lo and behold three OPEC+ sources told Reuters that members, at the upcoming meeting on Nov 26, would be considering whether to deepen oil output cuts. This set oil off on a steep rally on Friday eventually closing up 4% on the day. Over the weekend the story was subsequently denied in the FT but the market would seem to prefer the Reuters account of things. Perhaps more a take on current market positioning rather than the journalism!
EQ - Asian equity markets mixed overnight with the Hang Seng getting some wings from a rebound in Alibaba after its steep decline on Friday. Currently it sits up close to one percent at 17,750. The Nikkei having a mixed day as it hit a 33y intraday high on better earnings data only for what would seem some profit taking leaving it off smalls on the day at 33,340.
The US indices off smalls at the start of the holiday week with the Nasdaq and S&P currently at 15,850 and 4525 respectively.
Worth noting tomorrow sees Nvidia release its quarterly earnings for a peak into the health of AI.
Gold - Yep gold is at it again Asia as it takes a pass and gold flatlines with Dec futures currently at 1984.
FI - Global yields relatively unchanged in a quiet Asian session with the US2y and US10y currently trading at 4.89% and 4.46% respectively. Friday saw a steep sell off in yields as the market once again got ahead of itself pricing in earlier and earlier Fed rate cuts. The afternoon saw a reversal as the Fed speakers attempted to put the genie back in the bottle with some of the usual hawkish sound bites.
The 4.33% remains the downside focus in the US10y with the market having come close to touching it on Friday. Beyond that the 200dma is around the 4% level.
European yields closed the week off smalls with the German 10y closing at 2.59% and the Italian 10y yield similarly at 4.36%.
UK gilt yields likewise with it closing at 4.10%.
FX - Interesting that the USD took the Friday morning sell off to heart but didn’t seem to pay much attention to the Fed speakers and continued to leak lower. Potentially says more about positioning and also the move in USDJPY. Anyway the USD Index currently at 103.70. The JPY, EUR and GBP all up a touch in Asia with them sitting currently at 149.20, 1.0915 and 1.2480 respectively.
AUD hits a 3 month high as both the NZD and it enjoying the weaker USD theme. Currently the pair at 0.6020 and 0.6545 respectively.
As we said on Friday if this yield play continues then surely USDJPY is the next to go? Early signs but they are encouraging and with the Fed trying hard to push back on market expectations for rate cuts it wont be a straight line. However it does feel like the supertanker that is USDJPY is coming to a halt rather than turning just yet.
Others - Bitcoin and Ethereum seem to like this general market environment with them both up close to two percent at 37,200 and 2000 respectively. Still sitting comfortably in their recent broad ranges.
Macro Themes At Play
EU Inflation Report for October was all bang in line so nothing to see here.
US housing data came in better than expected with both building permits and housing starts beating both previous and expectations for October.
So will we look back at last week as an inflection point for markets? Softer CPI in US prompted the market to scamper to sell yields; ruling out any further Fed hikes and starting to price in ever earlier rate cuts. The move proved contagious with European market’s following with the ECB in particular in for a busy 2024, if markets are to be believed!
Deutsche Bank analysts have pointed to six previous occasions where the market have anticipated the Fed turning dovish during this hiking cycle. Several have been related to factors out with the control of the Fed; back in March the banking crisis, the previous September was due to the UK Kwasi/Liz budget and of course the conflict in Ukraine. The more “Fed related” occasions have been over concerns that the US economy is not strong enough to handle the aggressive hiking of the Fed.
This time feels a bit different with the Fed more transparent that they are on hold for now, albeit with the hawkish sound bites, but we have also witnessed some of the data starting to turn.
Obviously the CPI print but we also got a moderating labour report at the start of the month. Initial claims were weaker again, industrial production at a 2 year low and a cooling ISM.
All well and good but with the yield sell off those marvellous tighter financial conditions, that the Fed was so happy to lean on, have slowly, or not so much in this latest move, leaked away. Yes it does feel like we are at an important juncture but like with my SatNav sometimes you get directed down the wrong fork! It could be that we have to retrace our steps a few times again before eventually moving on in the right direction!
Central Bank Speakers
The ECB’s Villeroy felt that halting the rate hiking cycle was “fully justified”. He added that inflation has reduced considerably.
Holzmann maintained that the second quarter of next year was “a bit too soon” for the first rate cut. He doesn’t want markets to think that the ECB wont hike rates again if required.
Nagel stressed that there can be no talk of over tightening. He was unsure if we have seen the peak in interest rates and equally it would be unwise to be cutting rates too soon. He remains optimistic that the Eurozone will avoid a hard landing.
Wunsch said that the ECB needs to be comfortable that were going to 2% inflation before cutting rates. However the ECB may have to tighten more in case of a oil shock.
The Fed’s Collins conceded that the evidence is pointing to inflation easing but was not ready to say that the rate hiking cycle was over. All the usual stuff regarding the labour market rebalancing, the Fed needing to stay the course on inflation and its too soon to declare victory on inflation. Still believes that financial conditions are working in the Fed’s favour.
Daly claimed that the Fed needs to have “boldness to wait” in these uncertain times and have patience to make “measured adjustments”. Ultimately the Fed’s debate is centred on what constitutes sufficiently restrictive and how long to maintain that stance.
Goolsbee meanwhile was touting house price inflation as the “overwhelmingly important thing” on whether the Fed is clearly going to be on a path to 2% inflation. Basically watch the shelter component of CPI.
Overall he saw inflation improving but still too high but there has been a strong rebound in labour supply. He also pointed to a big gap between what the economic data is showing and how the consumer and businesses feel about the economy.
Overall the Fed speakers were pushing back a tad on the market’s recent yield sell off; higher for longer, are we sufficiently restrictive, etc with Goolsbee’s nod to the shelter component of CPI a new beachhead which we haven’t seen for a while.
The BoE’s Ramsden would not rule out having to respond to evidence of more persistent inflationary pressures by raising rates further. He is also less concerned about medium term inflation expectations becoming de-anchored. CPI wise he saw 4% by March as achievable without any further shocks.
The Week Ahead
RBA Minutes. As a recap the 7th November RBA raised rates, as expected, by 25bps to 4.35% whilst tweaking forward guidance, on whether further hikes were needed, was both dependent on incoming data and the evolving assessment of risks. Overall this was taken as a touch more dovish than previous RBA statements. They also pointed to inflation having peaked but remaining too high. They did consider holding rates steady but felt they needed the additional hike as an insurance against the inflation back drop especially in light of the economy being a bit stronger than had previously forecast.
Canadian CPI. Last inflation print prior to the 6th December BoC meeting. A drop in gasoline prices is expected to subdue the MoM print for October and have a dramatic effect on the YoY where expectations are for a low 3% print and edging inflation slowly back towards the 2% target rate. We expect to see the continuing global trend of inflation easing although we’d expect not as much of the fireworks we have witnessed of late with the US and UK equivalent prints. Interestingly Macklem speaks the day after the release with his timely subject matter; “the cost of high inflation”. What do we reckon all a bit too convenient? Double bluff? I guess a high print and he can reinforce the Bank’s concerns on the inflation profile and maintain that there is still work to do. A low one and he can push back on the market’s reaction telling it not to get ahead of itself and that caution is still warranted.
FOMC Minutes. Difficult to get too excited about these minutes given the amount of Fed chatter we have had since the early November meeting. As a recap rates on hold with the statement still pointing to the potential for additional hikes if required and upgrading the economic growth assessment to “solid” from “strong”. In addition a nod was given to the tightening financial conditions. Since the meeting we have had a selection box of data which in the main plays into the Fed’s hands; a labour report moderating, a slowing inflation profile but industrial production at a 2 year low and weak ISMs. On the back of that the market has surmised that rates have peaked and cuts are expected sometime in the late spring. We’d expect to see some of this market perceived dovishness from the Powell press conference and market reaction to be pushed back on. The usual push back money lines; higher for longer, would raise rates again if required, etc. Given the recent sell off in yields any comments surrounding tightening financial conditions will be read with interest. Remember too this was the “dot plot estimates are out of date” almost immediately presser so, again any chatter on that may raise a smile. Ultimately it feels that this week’s second tier US data as well as price action will have more sway than anything said here. Remember to liquidity should start to deteriorate from the Wednesday US session onwards as the US hunkers down for turkey, family and football.
UK Autumn Statement. One of the two fiscal annual set pieces for the UK government and potentially the penultimate one prior to next year’s anticipated general election. A surprisingly better fiscal backdrop has given Chancellor Hunt some small room for manoeuvre with the weekend press full of stories regarding potential giveaways. Take your pick out of the cuts on offer; inheritance tax (which seems to be the favourite), income tax, corporation tax, stamp duty and a rise in the VAT threshold for small businesses. He may also flag potential pledges for the party’s election manifesto which may include ditching inheritance tax all together. Don’t expect the Kwasi/Liz fireworks rather the dull but prudent delivery of a £15bn giveaway. All in all we’d expect an upbeat assessment of the UK economy, justified or not, and most of what powder he has kept dry for the March budget which is expected to be the last throw of the dice in terms of fiscal measures prior to the election. However be rest assured that Hunt will not jeopardise all the “government’s good work on inflation” with any irresponsible giveaways!
Riksbank. Touch of a toss up about this. With the holders pointing to an inflation profile pretty much in line with the Riksbank’s forecasts and continuing on a downward trajectory whilst keeping their powder dry for an early 2024 hike. On the other side of the debate the raisers point to the inflation profile still being a touch above forecast and a weakening SEK tipping the balance for a 25bps hike. Hawkish hold anyone?
ECB Minutes. The ECB delivered a much expected and unanimous pause in the hiking cycle and Lagarde gave a downbeat assessment of the economic landscape for the Eurozone. As ever the ECB minutes do little to get the pulse racing. Data in the week seems more important for the “in vogue” rate cut predictions than this history lesson.
Global PMIs. Not the best set of prints expected globally as weak consumption and concerns regarding external demand weigh on the major economies of the world. The Eurozone is seen as remaining in contractionary territory as we push through a weak last quarter of the year. The one recent upside was the better ZEW surveys we saw last week especially in Germany which suggested that the economy had finally bottomed out. However this glimmer of hope is all a bit too soon for this print to have any meaningful impact. Similarly for the UK where subdued activity is expected to keep the UK below 50 for both measures albeit at higher levels than the Eurozone. On the US side, Friday’s print is seen as doing little to help the Thanksgiving dinner indigestion with both measures expected to soften and manufacturing, after a month on the 50 line, expected to dip back below again. Pass the gaviscon!
Japan CPI. Small increases in electricity and gas prices as well as the recent Tokyo inflation report point to a further uptick for the nationwide measures although all very much at a snail’s pace. Ueda’s musings, rememberer those tough reads, emphasised next Spring’s round of wage negotiations as the key to a higher inflation profile. If USDJPY continues to soften then the market may lean into these numbers more than they otherwise might.
The Day Ahead
As expected the PBOC left rates unchanged at 3.45% and 4.2% for the 1y and 5y respectively.
Rest of the day feels like its time to find that book again as we have nothing on the data front and a smattering of central bank speakers to open up the holiday shortened Thanksgiving week.
You could of course lose yourself in the saga that is OpenAI.
Whether its true or not I did get a giggle out of this tweet!
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the week ahead in terms of data and speakers:
RBA Bullock Speaks (23.00 GMT)
RBA Schwartz Speaks (23.45 GMT)
Lane (05.00 GMT)
Bailey (18.45 GMT)
RBA Minutes raised 25bps to 4.35% with a data dependent mode for further hikes (00.30 GMT)
Canada Inflation Rate MoM Oct consensus 0.1% vs previous -0.1% (13.30 GMT)
Canada Inflation Rate YoY Oct consensus 3.2% vs previous 3.8% (13.30 GMT)
Canada Core Inflation Rate MoM Oct consensus % vs previous -0.1% (13.30 GMT)
Canada Core Inflation Rate YoY Oct consensus % vs previous 2.8% (13.30 GMT)
US Existing Home Sales Oct consensus 3.9m vs previous 3.96m (15.00 GMT)
FOMC Minutes rates on hold, dot-plot out of date, no rate cuts discussed, higher for longer (19.00 GMT)
McCaul (13.45 GMT)
Lagarde (16.00 GMT)
Schnabel (17.15 GMT)
Bailey (10.15 GMT)
Ramsden (10.15 GMT)
Haskel (10.15 GMT)
Mann (10.15 GMT)
RBA Bullock Speaks (08.35 GMT)
US Durable Goods Orders MoM Oct consensus -3.2% vs previous 4.7% (13.30 GMT)
US Michigan Consumer Sentiment Final Nov consensus 60.5 vs previous 63.8 (15.00 GMT)
US Michigan Inflation Expectations Final Nov consensus 4.4% vs previous 4.2% (15.00 GMT)
US Michigan 5y Inflation Expectations Final Nov consensus 3.2% vs previous 3% (15.00 GMT)
BoC Macklem Speaks (16.45 GMT)
Australia Judo Bank Manufacturing PMI Flash Nov consensus vs previous 48.2 (22.00 GMT)
Australia Judo Bank Services PMI Flash Nov consensus vs previous 47.9 (22.00 GMT)
UK Autumn Statement
Elderson (14.10 GMT)
US Thanksgiving Holiday
Norway GDP Growth Rate QoQ q3 consensus 0.2% vs previous 0% (07.00 GMT)
Norway GDP Growth Rate YoY q3 consensus % vs previous 0.7% (07.00 GMT)
Germany HCOB Manufacturing PMI Flash Nov consensus 41.2 vs previous 40.8 (08.30 GMT)
Germany HCOB Services PMI Flash Nov consensus 48.5 vs previous 48.2 (08.30 GMT)
Riksbank Rate Decision rates to remain on hold at 4%? Close call (08.30 GMT)
Riksbank Monetary Policy Report (08.30 GMT)
EU HCOB Manufacturing PMI Flash Nov consensus 43.4 vs previous 43.1 (09.00 GMT)
EU HCOB Services PMI Flash Nov consensus 48.1 vs previous 47.8 (09.00 GMT)
UK S&P Global Manufacturing PMI Flash Nov consensus 45 vs previous 44.8 (09.30 GMT)
UK S&P Global Services PMI Flash Nov consensus 49.5 vs previous 49.5 (09.30 GMT)
ECB Minutes rates on hold. Lagarde downbeat (12.30 GMT)
Japan Inflation Rate MoM Oct consensus % vs previous 0.3% (23.30 GMT)
Japan Inflation Rate YoY Oct consensus % vs previous 3% (23.30 GMT)
Japan Core Inflation Rate YoY Oct consensus 3% vs previous 2.8% (23.30 GMT)
Schnabel (19.30 GMT)
Japan Jibun Bank Manufacturing PMI Flash Nov consensus vs previous 48.7 (00.30 GMT)
Japan Jibum Bank Services PMI Flash Nov consensus vs previous 51.6 (00.30 GMT)
Germany GDP Growth Rate QoQ Final q3 consensus -0.1% vs previous 0.1% (07.00 GMT)
Germany GDP Growth Rate YoY Final q3 consensus -0.3% vs previous 0% (07.00 GMT)
Germany Ifo Business Climate consensus 87.5 vs previous 86.9 (09.00 GMT)
Canada Retail Sales MoM Sept consensus 0% vs previous -0.1% (13.30 GMT)
Canada Retail Sales YoY Sept consensus % vs previous 1.6% (13.30 GMT)
US S&P Global Manufacturing PMI Flash Nov consensus 49.8 vs previous 50 (13.30 GMT)
US S&P Global Services PMI Flash Nov consensus 50.3 vs previous 50.6 (13.30 GMT)
Nagel (09.00 GMT)
Lagarde (09.00 GMT)
Lagarde (10.00 GMT)
de Guindos (14.00 GMT)
de Cos (12.00 GMT)
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