The Morning Hark - 20 Sep 2022
Today’s focus ……Japanese inflation print puts pressure on BoJ, continuing US housing woes and The Week Ahead again
All prices are at 7.20 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November flat in Asia currently at 92.30 and 85.60 respectively. Oil had quite the roundtrip yesterday with the morning dominated by the spectre of tightening central banks into a weakening global economy weighing on the demand side. However a rosier open for US stocks stemmed the tide and oil swiftly reversed on position adjustment. One point of note was the announcement by the US that it would sell a further 10m barrels of oil from the SPR into the November delivery period.
EQ - Equity markets quiet in Asia with the Nikkei, Hang Seng and Kospi all trading flattish at 27,450, 18,750 and 308 respectively.
Similarly profile for the Nasdaq and S&P in light trading currently at 12,046 and 3926 respectively.
Both indicies have crawled their way back above the critical levels we spoke about last week at 12,000 and 3900, for now at least. Nothing significant in terms of news and very much felt like a positioning adjustment move off the lows in stocks at yesterday’s open.
Gold - Gold Dec futures marking time overnight in Asia at 1680. Gold like most of the markets is awaiting the Fed tomorrow night and remains caught in the crosswinds of the higher US rates profile and USD strength. 1650 the next downside target with topside now lowered into the 1700 area.
FI - US yields steady in Asia with the US2y and 10y yields currently trading at 3.96% and 3.49% respectively as they consolidate close to their recent highs. Indeed both captured multi year highs yesterday with the 10y pushing 11 year highs and the 2y at levels last seen 15 years ago.
European yields followed the US higher yesterday closing at 1.804 and 4.053 for the German and Italian 10y yields respectively.
FX - Unlike US yields the USD was softer throughout yesterday and remains close to its recent range bottom with the USD Index at 109.68. Again the move looks more about position adjustment ahead of the Fed tomorrow as the market pares back on risk. The majors all remain steady versus the USD with the JPY, EUR and GBP at 143.38, 1.0029 and 1.1433 respectively. The Yuan continues to hold above 7 trading at 7.0178 having tested the level earlier in the session. The USDNOK, for now at least, continues to trade happily above 10 currently at 10.23 and we hold out hope we can test the year’s highs up towards 10.35. AUDNZD is something we don’t talk about much but the pair has broken and established itself over the last month or so above a multi year trend line which came in around the 1.10 level. Seems to us that if it can close above 1.15 for the month then a move to levels last seen back in 2013 around 1.25 and beyond to 1.27 should be in play. One to keep on the radar and currently trading at 1.1320.
Others - Both Bitcoin and Ethereum have not enjoyed the best of weekends with the pair posting multi month lows at 18,225 and 1280 respectively. Not the best post merger price action and the technicals certainly don’t look too encouraging with the Fed on the horizon. Currently we see them trading at 19,330 and 1355 recovering somewhat.
One point of note from yesterday was the UK’s FCA warning that FTX is not authorised to provide services in the UK. The notice has caused some confusion with FTX claiming that the notices that the FCA refer to are nothing to do with them and relate to a scam. Despite its claim to be otherwise, nothing ever seems clear in the world of crypto!
Overnight and the day ahead
Overnight China, as expected, left their prime rates unchanged but more intriguingly, especially as we have the BoJ meeting on Super Central Bank Thursday, was the Japanese inflation data for August. Both measures beat expectations and the previous month’s prints with headline now at 3% and core 2.8% and adding to the charge sheet for the BoJ in terms of their negative rates policy. It will be interesting to hear their comments on the YCC policy in light of the inflation profile. Probably they will claim that inflation is not sustainable given the slow growth in wages and weakness in demand but let’s see.
The day ahead sees Canadian inflation data where consensus is looking for a peaking in the cycle. We’ve seen that before!
Also in the US the housing data week continues with housing starts and building permits data for August. Yesterday saw a ninth straight month fall in the NAHB survey as it printed well below the 50 boom/bust line at 46. The run of lower prints is the worst seen since 1985 and bodes ill not only for today’s data but also q3 GDP. Speaking of which we get the Atlanta Fed update tomorrow, currently at 0.5%, so expect much negative chatter in the run up to its release.
We also have two ECB speakers as they continue to roll out the hawkish rhetoric surrounding next month’s meeting. Lagarde set to be the most closely monitored today.
Finally the WSJ’s Timiraos in his latest piece reflected back on Powell’s Jackson Hole statement and in particular to the fact that he rewrote the script in light of the rather exuberant market profile, which if you remember, had started to believe in a peaking for inflation and an upcoming Fed pivot. The revised piece was shorter, more direct and lacked any ambiguity as he morphed into school teacher mode and scolded his class of errant teenagers for going off script. Probably more importantly Timiraos’s piece did not specifically allude to 100bps for this upcoming meeting, yet.
It’s not only a big week ahead for the markets its a huge last few months of the year with several key macro events on the horizon:
25 Sept: Italian Elections - expected swing to the right to the anti EU parties with obvious consequences for the EU as a whole
16 Oct: China CCP Politburo - the every 5 year set piece event where we’d expect covid policy and fiscal boost measures to be to the fore
8 Nov: US Mid term elections - bellwether of how well Biden is doing and the state of the Republican Party as we head into the Presidential elections in 2 years time
15 Nov: G20 - Will Putin attend
5 Dec: G7 Russian price cap deadline - what measures will actually be imposed
On top of that of course we have a further two Fed meetings after this week, the continuing war in Ukraine, what lies in store for the European energy crisis and even a World Cup!
For those who missed Sunday’s week ahead preview and calendar I post it below again.
The Week Ahead
FOMC rate decision. 75 or 100bps? Post the hot CPI data the spectre of a 100bp hike has risen considerably peaking around a 40% chance in the middle of last week. That expectation has since subsided somewhat to a 20% with an 80% chance of a 75bp hike. The reasoning behind the calls for 100 are fairly apparent with the stubborn inflationary backdrop with hopes of a peak in July firmly dispelled by the August print along with the persistent strength of the labour market. Furthermore a 100bp hike shows the market the Fed is not for turning and they will not stop until the pain trade exhausts inflation. However as we have said before the service side of the economy is fuelling inflation at present and in particular rents which is a hard sector to control short of capping rents or building new homes. Neither of which are an easy thing to implement in the short term. 75bps with a hawkish tilt for the remaining meetings, on a data dependent basis, seems a more plausible approach from our point of view. The China slowdown story becomes ever more prominent, the strong dollar took a breather but is now back on track again, the energy crisis in Europe and the ever growing strains on the US housing market all give the Fed food for thought in their deliberation. Probably more stark is the fragility of the equity markets which saw their biggest weekly percentage decline in three months last week and despite the Fed saying they want to inflict pain there’s a difference between inflicting pain and inflicting a full blown crash. The fragility of the market, despite what the Fed may say, is still a concern and with all the other issues that the world is facing a full blown crash is not one to add to the list. We side with 75bps and potentially the same again in November if the data warrants it. In addition to the announcement we shall get an update of their economic projections. We’d expect growth projections to be revised downwards with the inflation side of the debate still showing a stickiness. Market focus will also be drawn to the year end and the terminal rate for Fed Funds. The “Dot Plan” is expected to show increases in the pair to around the 4% and 5% respectively (up from 3.4% and 3.8% previously). Again this shows a disconnect with the market which still anticipates rate cuts next year on the basis that the higher and faster you raise the quicker you have to cut. Rounding off we have of course Chair Powell’s press conference. In case he doesn’t get his message over he has a chance to “redirect” markets with a speech on Friday.
BoE and a mini-budget. Busy week ahead for the UK although it starts with a moment for reflection on Monday for The Queen’s State Funeral. Later in the week the BoE rate decision on Thursday and on Friday the new chancellor Kwarteng announces a mini-budget to tackle the UK’s cost of living crisis. The BoE is anticipated to raise rates by 50bps although there is still a lingering thought that 75bps may be more appropriate. The wind has been taken out of the sails of the hawks with the announcement of the government’s energy price cap which is commonly believed to shave a few percentage points off the near term CPI prints. However the medium term outlook for inflation, with such a “handout”, remains at risk but the urgency, for now, to act aggressively has been dissipated and hence we think they’ll go for a 50bp hike. Given their announcement comes the day after the Fed there is a possibility that if the Fed “go large” the BoE will follow suit with a larger hike but neither are base case for now. Further hikes are expected in the last two meeting of the year to get rates to 3% by year end. Also worth noting there will be an announcement on the confirmation vote for the Gilts sale programme as part of the Bank’s QT measures. The mini-budget comes the day after as the new chancellor presents his proposal to counter the cost of living crisis. Initial thoughts have centred on; a reversal of the National Insurance increase which came into effect earlier this year, to not proceed with the corporation tax rise proposed for next April, other measures which are touted are business rate cuts, a potential reduction in VAT as well as bringing forward the pledged income tax cut of 1% promised by his predecessor. These measures are on top of the emergency energy bailout package which is capping household energy bills for 2 years bringing the overall cost to around £170bn. How this is paid for is going to be interesting; loans? Gilt sales? Or a combination of the two? Given the BoE will be embarking on their sale of Gilts in the near future could be interesting to see who gets to market first for a bit of front running!
BoJ rate announcement. These meetings have lost their shine of late compared to the frenzy around the early summer meetings when there was much speculation as to whether the bank would abandon their Yield Curve Control policy. Those seem distant memories and we expect the bank to reaffirm its commitment to the policy and keep rates unchanged. Upward revisions to q2 GDP, CPI inching its way higher, albeit from a very low base, and a depreciating JPY are not expected to make the BoJ alter their stance. Recent chat from officials from the BoJ, MoF and government all point to a concern at the JPY’s weakness and hence we may get some firmer language from the BoJ statement and Governor Kuroda’s press conference but as we’ve said before we think action is a long way off and any intervention has to be coordinated to have a lasting effect. Let’s face it if one bank is looking to potential raise by 100bps whilst the other one is expected to keep rates negatives the fundamentals tell you where the respective currencies are going.
SNB rate announcement. The SNB also meet on Thursday and are expected to continue to push rates higher after their hike in June. This time expectations are for a 75bp hike with an outside chance of 100bps either way this will take Swiss rates back into positive territory for the first time in 8 years. Inflation continues to rise in Switzerland although from a much lower base than its European neighbours. Although the Swiss franc remains strong the SNB appears to be calm about its levels but failing to keep in step with the ECB may lead to a sharp depreciation in the currency something which would raise concerns for the Bank.
Other Central Bank Decisions. A raft of other central bank announcements for the coming week with almost all expected to hike. PBOC starts the week off but, despite the weakness in the Chinese data and the overhang from Covid lockdowns, are expected to keep rates unchanged especially after their surprise cut last month across various of their rate measures. Remember the CCP Politburo is on the horizon and any major stimulus packages are expected to be announced then. Next up the Swedish Riksbank where the market expects a 75bp hike with an outside chance of a larger hike on the back of the recent hot CPI print and the ECB’s recent aggressiveness. Thursday brings the Norges Bank who are expected to match last month’s hike of 50bps this despite a downtick in CPI for August. The Bank has made clear that they want to front load hikes to prevent the opportunity for inflation to become entrenched. Also on Thursday we get rate announcements from the Turkish central bank and the South African Reserve Bank. The markets expect the Turks to hold rates steady at 13% with an outside chance of a cut whilst the South Africans are expected to raise rates by 75bps matching their last hike.
PMIs. Friday brings the flash September PMIs and a first feel for how the major global economies are fairing going onto the last few months of the year. Europe and the UK are expected to struggle back about the 50 boom/bust line. In the US we expect manufacturing to remain above the 50 line but services despite an uptick will remain well below.
One last point as ever, I post below the FxMacroGuy’s excellent weekly piece and as is customary, for such a central bank heavy week, he has included all the recent chatter from all the various major central bank speakers we have heard from over the last few weeks. Well worth having in your back pocket in the run up to what will be a very busy week.
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Tuesday
Canada Inflation Rate YoY Aug consensus 7.3% vs previous 7.6% (13.30 BST)
Canada Core Inflation Rate YoY Aug previous 6.1% (13.30 BST)
US Housing Starts Aug consensus 1.445M vs previous 1.446M (13.30 BST)
US Building Permits Aug consensus 1.61M vs previous 1.685M (13.30 BST)
BoC Beaudry speaks (20.45 BST)
ECB Speakers
McCaul (16.45 BST)
Lagarde (18.00 BST)
Wednesday
RBA Bullock speaks (03.00 BST)
US Existing Home Sales Aug consensus 4.7M vs previous 4.81M (15.00 BST)
FOMC Interest Rate Decision 75bps hike fully priced in (19.00 BST)
FOMC Economic Projections (19.00 BST)
Fed Chair Powell Press Conference (19.30 BST)
ECB Speakers
Guindos (08.00 BST)
Thursday
BoJ Interest Rate Decision no change expected (04.00 BST)
SNB Interest Rate Decision 75bp hike expected (08.30 BST)
BoE Interest Rate Decision 50bp hike expected (12.00 BST)
BoE MPC Meeting Minutes (12.00 BST)
ECB Speakers
Fernandez-Bollo (09.10 BST)
Tuominen (09.45 BST)
Schnabel (16.00 BST)
Friday
Australia S&P Global Manufacturing PMI Flash Sept consensus vs previous 53.8 (00.00 BST)
Australia S&P Global Services PMI Flash Sept consensus vs previous 50.2 (00.00 BST)
German S&P Global Manufacturing PMI Flash Sept consensus 48.3 vs previous 49.1 (08.30 BST)
German S&P Global Services PMI Flash Sept consensus 47.2 vs previous 47.7 (08.30 BST)
EU S&P Global Manufacturing PMI Flash Sept consensus 48.7 vs previous 49.6 (09.00 BST)
EU S&P Global Services PMI Flash Sept consensus 49 vs previous 49.8 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Sept consensus 47.5 vs previous 47.3 (09.30 BST)
UK S&P Global Services PMI Flash Sept consensus 50 vs previous 50.9 (09.30 BST)
Canada Retail Sales MoM Jul consensus -2% vs previous 1.1% (13.30 BST)
US S&P Global Manufacturing PMI Flash Sept consensus 51.1 vs previous 51.5 (14.45 BST)
US S&P Global Services PMI Flash Sept consensus 45 vs previous 43.7 (14.45 BST)
Fed Speakers
Powell (19.00 BST)
Early Monday
Japan Jibun Bank Manufacturing PMI Flash Sept consensus vs previous 51.5 (01.30 BST)
Japan Jibun Bank Services PMI Flash Sept consensus vs previous 49.5 (01.30 BST)
Good luck.
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Fantastic read. Yesterday did not feel the same without you Harkster :)