The Morning Hark - 21 Oct 2022
Today’s focus ……The Next Chapter in the UK’s Bleak House but never fear a bronzed BoJo is riding to the rescue. What could possibly go wrong?
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December flat in Asia with the pair currently trading at 92.40 and 84.50 respectively with little of new note to report.
EQ - Equity markets off a touch in Asia overnight with the Nikkei, Hang Seng and Kospi currently trading at 26,890, 16,240 and 289 respectively.
The Nasdaq and S&P again continue to trade softly overnight in Asia at 11,025 and 3665 respectively. The equity market after its recent euphoric rally seems to be getting the message that the bond market has been leading the way for most of the year. The Fed are not stopping on their higher rate path with initial claims again showing that a strong labour market remains in play and the hawkish Fed’s Harker drumming in the message the euphoria is slowly ebbing away.
Gold - Gold Dec down close to one percent overnight in Asia at 1626 as we slowly dribble back down to the year’s lows around the 1620 level. Higher US yields doing for the precious metal. 1650 the near term resistance. I think gold only gets interesting if we take 1600 out.
FI - US yields pushing ever higher in Asia trading bear steepening with the US2y and 10y now at 4.62% and 4.26% respectively both hitting multi year highs. Markets are now pricing in the terminal rate above 5% for the early part of next year.
European yields remain bid also with the German and Italian 10y yields closing at 2.402% and 4.727% respectively.
UK gilts similar pattern with the 10y closing at 3.91%.
FX - The USD firm on the back of the higher US yields with the USD Index trading at 113.09. USDJPY testing the nerves of the Japanese authorities pressing to fresh highs and currently at 150.40. The move has not been disorderly which potentially suggests that the authorities have been selling USDs into the rally as a “smoothing operation” rather than “noisy” intervention which they know is a fool’s errand. Risk off so NZD and AUD suffering at 0.5655 and 0.6270 respectively. The GBP post Liz rally has fizzled out as the leftovers are seen as far from appealing for the UK, illustrated on point with this morning’s retail sales print. GBP currently at 1.1196. Pass the gruel please.
Others - Bitcoin and Ethereum, why do I continue to bother at 19,052 and 1289 respectively.
US Recession Watch
Lot more chatter on US recessionary fears of late and I post below three pieces at the bottom, which highlight some things to keep an eye on moving forward. Christophe Barraud’s tweet highlights the signals he looks at when looking for an impending recession, Alf from The Macro Compass’s tweet regarding the Conference Board Leading Index and finally a ZeroHedge piece on the US housing market.
UK political soap opera - the end of a chapter but not the book
We come to the end of a chapter as the six week Truss reign is over. She has her critics but she packed a lot in during her brief stay in Downing Street. Having been ushered in by a Queen, she was ushered out by a King. She presided over a state funeral, sacked two of the big beast department heads, authorised a budget that eventually cost the country billions of GBPs, represented the country on the world stage at the prestigious UN and the less so European Political Community, kissed and made up with President Macron but eventually those pesky global headwinds and an iceberg lettuce did for her. It was a brief speech which was heavy on blame; Putin’s illegal war, cost of living crisis, low economic growth but light on apologies and ended with a grin/grimace which quite frankly put me off my Pret sandwich.
What now? Well a quick and to the point leadership contest that will be completed within the week with a new leader in place prior to the 31 October fiscal statement.
It all starts on Monday when nominations for the leadership close at 2pm. To try and streamline the process candidates will need to have 100 nominations (normally this is around the 20 mark). Remember there are currently 357 Tory MPs so by my math the most nominations there can be is three and it’s entirely possible that there will only be two and of course, if there is only one, then they will be the lucky winner of the keys to No.10.
If there are more than one, then there will be a ballot of MPs and a result announced around 6pm. If there are three in the first ballot, then the two remaining will go onto a further “indicative” vote that evening with the winner being announced at around 9pm. Unless one of the candidates steps aside, for what would be in effect a coronation, then the members will be consulted via an online vote which will more than likely have to end next Friday so that a new leader can be announced over that weekend in time for the Halloween fiscal package announcement.
It’s pretty clear that the party would rather keep the “blue rinse Southern shire dwelling members” well away from the decision-making process this time. Remember last time Sunak was the choice of the MPs but it was the shires wot won it for Liz.
Runners and Riders
Rishi Sunak and Penny Mordaunt are most likely the front runners. With further down the pecking order Kemi Badenoch, who came from nowhere in the previous contest and faired well, may run again, Ben Wallace and Suella Braverman may also throw their hats in the ring.
Then of course there is the Shakespeare quoting, Winston Churchill loving, blonde bomber himself BoJo! Flying back early all newly bronzed from his US speaking trip sponsored Caribbean beach holiday to rescue the party. With all that’s gone on would it really surprise anyone if on Halloween he rocks up with his Lady Macbeth, Carrie, and settles back into No.10? I’m feeling the nail more than halfway through the wall so we may as well have some entertainment in the last few chapters of the book as we make our merry way to the World’s poor house.
Two things in his favour, whether you like him or not, firstly he knows how to win, whether that be the last election or Brexit, and secondly, he’s not Liz Truss.
The Tory bible that is The Daily Telegraph has a front page full of Boris and his supposed olive branch to Sunak to join forces and create a “unity pact”. The appeal is pitched as the only conceivable way the Conservatives could defeat Labour in the next election. Whether you like it or not, that is probably one of the most truthful statements we have had from the Boris camp in quite some while.
Since Boris is finished with the popcorn there’s plenty for us as we kick back and watch the mayhem ensue as the candidates jockey for their 100 threshold numbers over the next few days.
I post Politico at the bottom which is obviously essential reading and I would direct you to The Harkster app for more articles on the contest and especially The Sunday Crunch from Politico which this week will be a must-read.
Central Bank Speakers
Some interesting comments from the speakers that we encountered yesterday.
The BoE’s Broadbent saw that there was a clear justification for tighter policy going forward. However, he felt that with the market pricing in 5.25% rates there would be a material hit to demand in the UK. Indeed he went further suggesting a 5% hit and questioned whether the market pricing was justified. Remember he is the deputy governor so in effect he is suggesting that he would rather undershoot market pricing and err on the side of a weaker GBP and potentially higher inflation than the higher rates environment and the consequences that would have for mortgage and corporate rates and hence the general economy. One to watch.
On the Fed’s side, Harker claimed, unsurprisingly, that the Fed is not done raising rates due to persistently high inflation and rates would be well above 4% by year end. The Fed needs to keep raising rates “for a while”. Again we got the pause reference when he referred to them stopping hiking next year to assess the policy impact. However, a sustained drop in inflation would be needed for any policy change.
One further item on the central bank agenda. The Fed’s Bullard has had a good look at himself after it was reported in the NYT that he had spoken at a private event. He very openly declared that he “will think differently about this in future”.
Once again, please take a look at the FXMacro Guy’s daily tweet (posted at the bottom) which gives a great summary of yesterday’s events and central bank speakers. Also for your essential weekend reading make sure you look out for his weekly which you can subscribe to on the link below and hits the tapes sometime tomorrow. Believe it or not, for all the work that it entails, it is not only cheaper than an iceberg lettuce it is FREE!
The Day Ahead
Overnight we had Japanese inflation data for September which came in as expected with Headline and Core at 3% YoY the first time it has hit that level in over 30 years.
Just out UK retail sales for September adding more to the gloom in the UK with both MoM and YoY prints lower than expected. Indeed YoY close to -7% for the year.
Very little on the docket for the day with Canadian retail sales, one Fed speaker and no doubt some jostling for position for the next leader of the Conservative Party.
Worth bearing in mind some early morning data on Monday to start the week with the flash PMIs out of Australia and Japan prior to the European open.
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Canada Retail Sales MoM Aug consensus 0.2% vs previous -2.5% (13.30 BST)
Williams (14.10 BST)
Late Sunday/Early Monday
Australia S&P Global Manufacturing PMI Flash Oct previous 53.5 (23.00 BST)
Australia S&P Global Services PMI Flash Oct previous 50.6 (23.00 BST)
Japan Jibun Bank Manufacturing PMI Flash Oct previous 50.8 (01.30 BST)
Japan Jibun Bank Services PMI Flash Oct previous 52.2 (01.30 BST)
Good luck and a good weekend to one and all.
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The world is an absolute mess, thanks to idiotic politicians, like Biden, Boris and Truss.
It's like a curse of weak misguided fools, leading a bunch of moronic Left Wing sycophants.
Your commentary on the UK political soap opera is entertaining. I wonder when political leaders are going to realize they can no longer promise growth by borrowing money without a plan to repay it, just for starters!
When you say gold gets interesting if 1600 is taken out, what do you see as "interesting"?