The Morning Hark - 20 Sept 2023

Today’s focus...China holds steady, UK inflation shocker (to the downside!), a Fed preview and the SBF clan are back in the headlines.

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Prices are at 7.05 BST/2.05 EST, with changes reflecting movement from midnight BST

Oil - Brent and Crude November futures took a step back overnight for the first time in a few weeks with the pair currently sitting at 93.50 and 89.70 respectively. The move seems likely to be position adjustment ahead of the Fed tonight as traders book some profits into the announcement. The move was despite data yesterday showing a bigger than expected draw on US oil stockpiles.

EQ - Asia equity futures soft in Asia with the Nikkei, Hang Seng and Kospi all in the red smalls at 32,840, 17,960 and 340 respectively. The Nasdaq and S&P futures however closer to flat at 15,355 and 4487 respectively.

Gold - Gold Dec futures little changed in Asia sitting currently at 1952. The potential US government shutdown continues to underpin the precious metal with McCarthy struggling to get any agreement ahead of the 1 Oct deadline. We have been here before remember….

FI - US yields pushing the door on the recent highs with the US2y and US10y trading currently at 5.09% and 4.36% respectively ahead of the Fed.

European yields once again closed a touch firmer yesterday on the back of the continued hawkish chatter out of the ECB with the German 10y yield closing at 2.74% and the Italian 10y yield at 4.53%.

UK gilt yields however a touch softer with the 10y closing at 4.34%.

FX - As you’d expect pre Fed quiet in the FX space. The USD Index currently sitting little changed at 105.17 with the JPY, EUR and GBP currently at 147.90, 1.0687 and 1.2355 respectively. GBP just taken a dip on the low inflation print.

FX expiries of note for today in GBP we have £1bn at 1.24 and the CAD sees $1bn around the 1.35 level.

Others - Bitcoin continuing to consolidate above 26,000 and has taken out 27,000 and getting as high as 27,400 although currently it trades around the 27,010 level. The move seems to have been driven by the futures market with a substantial uptick in open interest coinciding with the move. Ethereum remains little changed at 1635.

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FOMC Preview

The Fed September Skip is upon us with an “on hold” outcome a near certainty. Whilst the backdrop for the Fed still shows a robust underlying economy and a slowly moderating, but still well above trend, inflation profile they will point to a cooling labour market as the main driver for the skip especially as they wish to assess the lagging effects of the hiking cycle on the wider economy.

The labour market has seen the headline NFP three month moving average more than half from above 300,000 per month to a more trend growth level towards 150,000. Equally job vacancies have declined with the ratio of vacancies to those unemployed falling back from the 2 level to a more manageable 1.5.

Powell’s press conference is expected to stick to the script with a nod to slowly cooling inflation and the labour market starting to trend in the direction the Fed want. However he will stress that they will remain vigilant on the data front and gauge any further tweaks to policy on that basis hence leaving the door open to a further hike. It will be interesting if he opines, or is indeed asked, about oil’s recent rally and for the potential for that trend to feed into higher inflation expectations and in the longer term its historical implications as a drag on growth.

Finally there will be a new set of staff projections. The previous set was back in June and since then we have seen inflation generally downtrending, growth remaining resilient and a cooling in the labour market. On that basis we would expect the dots profile for 2023 to remain in place with the median dot showing terminal rates at 5.625% hence pricing in one further hike in the cycle. The vote for such a move, for reference back in June, was 12 vs 6. JPM sees a 1/3 chance of this hike being removed.

Where there may be more interest though is in the 2024 expectations where June showed around 100bps of cuts for the year. If the Fed is to believed that they are on a “higher for longer” course then potentially that profile may be trimmed somewhat. The flip side to that argument would point to the Fed’s “skip strategy” and how that has drawn out the hiking cycle albeit in a moderating fashion and this should be taken into account in “higher for longer” runway hence the 100bps of cuts in 2024 remain appropriate.

Remember, as we have stressed many times before here, generally rate hiking cycles are longer and more drawn out than cutting cycles which tend to be a lot sharper.; stairs up, elevator down. Will this time be any different?

As for the economic estimates; growth seems likely to get a leg up with the inflation and unemployment profiles to remain relatively untouched.

As things stand the market is looking at a less than 50% chance that the Fed will follow through with a further hike in the remaining two meetings of the year.

I attach an excellent deep dive into the economic projections from EmployAmerica which goes into great detail how the economy and other financial measures have panned out over the past few months since the release of the June projections and how tonight’s new projections may look.

In addition, of course, the ever excellent FXMacroGuy’s essential central bank summary pages which include; the last two FOMC statements, minutes, Fed speak and much more. All free in his Lite version but there’s even more in his new subscription offering which is eye-wateringly good value for money for a huge amount of invaluable research!

EmployAmerica - Sept FOMC preview

FXMacroGuy - Fed prep

ECB Speakers

Villeroy happy to share that the ECB is not at the point of cutting rates yet and he saw the need for inflation to get back to 2% before rates can start to fall again. In the meantime the ECB will maintain rates at 4% for as long as needed.

Cad Inflation Report

Headline YoY inflation rose for the second month in a row and broke back onto a 4% handle. The report showed a broad range of measures contributed to that rise indicating that underlying inflation pressures continue to persist. Deputy Governor Kozicki alluded to such in her speech later in the day. Whilst pointing to signs that the Bank’s monetary policy was working she gave a nod to the persistent nature of underlying inflation and suggested that the Bank may have to raise rates again.

The BoC next meet in late October and there will be a full month of data to digest including the September CPI report as well as labour and wages report. As things stand however the Bank’s credibility looks shaky as they try to muddle through on the old “lagging effect” policy and their hand may be forced into raising once again.

Yesterday’s Data

Europe’s final August inflation report came in a touch softer than anticipated but nothing to write home about in terms of market movement.

OECD revised its growth estimates for the world. Raising global growth estimates for 2023 to 3% (from 2.7%) mainly helped by Japan and US upgrades. However they trimmed EU and China growth and see Germany falling into contraction for the year. Report attached for those interested.

OECD - Economic outlook - Sept

Crypto

SBF has been a long time favourite in these pages and it would be amiss of us to not give his parents a shout out too. They have been hitting the headlines in the past few days for all the wrong reasons. Firstly they are being sued as part of the FTX bankruptcy case to try to retrieve $26m ($10m in cash the rest in property) which has been allegedly “fraudulently transferred and misappropriated”. Remember this coming from a couple who are “legal scholars” at Stanford Law School and, get this, she is an expert on ethics and he a tax specialist.

Other allegations suggest they were embroiled in Democrat “dark money” and illegal election tactics. Apple doesn’t fall far from the tree and all that I guess.

More to come I’m sure as their son takes to the stage for his upcoming trial.

Just Released

China held there loan rates steady as expected. Although the the Shanghai Securities News cited analysts suggesting that the PBOC has room to cut the RRR for banks as well as interest rates this year if needed to help prop up the ailing Chinese economy.

UK August inflation report will be met with some cheer at the Old Lady with the report coming in substantially softer across all measures. Headline YoY now at 6.7% and more encouragingly the Core YoY measure is now at 6.2% the level we saw back in the early part of the year before we got a rebound back above 7%. All in all food for thought for Bailey & co. Could they do a September Skip too?

The Day Ahead

FOMC the main focus of the day with rates expected to remain on hold and any future changes in policy being data dependent. Powell’s presser seems likely to be “on script” with the main focus probably falling on the economic projections and those dots.

Elsewhere the Bank of Canada deliberations from their September meeting where they kept rates steady and maintained a data dependent slant for any future changes to monetary policy. The deliberations will take on greater significance given yesterday’s topside inflation report miss. Finally late in the evening we get New Zealand’s q2 GDP where growth is seen as picking up with QoQ expected to break back into positive territory after two quarters of contractions. All a bit backward looking though.

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All times in BST (EST+5 / CEST-1 / JST-8)

Wednesday

BoC Summary of Deliberations Sept meeting rates were held at 5% (18.30 BST)

FOMC Interest Rate Decision rates expected to remain on hold at 5.50% (19.00 BST)

FOMC Projections (19.00 BST)

Chair Powell Press Conference (19.30 BST)

NZ GDP Growth Rate QoQ q2 consensus 0.5% vs previous -0.1% (23.45 BST)

NZ GDP Growth Rate YoY q2 consensus 1.2% vs previous 2.2% (23.45 BST)

ECB Speakers

Panetta (08.00 BST)

Enria (08.30 BST)

Schnabel (10.00 BST)

Jochnick (10.50 BST)

McCaul (13.00 BST)

Elderson (13.30 BST)

Mauderer Bundesbank (19.00 BST)

Lane (23.45 BST)

Good luck.

 

 

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