The Morning Hark - 21 Sep 2022
Today’s focus ……All eyes on the dots
All prices are at 7.15 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November up smalls in Asia currently at 91.30 and 84.60 respectively. Oil lower yesterday on fears that an aggressive Fed will choke off any semblance of global demand for oil as global yields pushed higher throughout the day. Today has seen the focus on the tight supply side with trading light as we go into the Fed announcement.
EQ - Equity markets softer in Asia in quiet trading with the Nikkei, Hang Seng and Kospi all off close to half of one percent at 27,128, 18,550 and 305 respectively responding to the US losses yesterday.
The Nasdaq and S&P continue to trade softly in the Asian session after yesterday’s sell off at 11,903 and 3870 respectively and back through our important pivot levels again at 12,0000 and 3900.
Gold - Gold Dec futures marking time overnight in Asia trading up smalls at 1677. Nothing to add here as we await tonight’s news. 1650 remains the next downside target with topside now lowered into the 1700 area.
FI - US yields off smalls in Asia after yesterday’s sharp rally which saw US yields hit multi year highs with the US2y getting to within a shade of 4% and a fifteen year high whilst the 10y printed 3.60% an eleven year high. They are currently trading at 3.95% and 3.54% respectively.
European yields similarly bid yesterday closing at 1.928% and 4.191% for the German and Italian 10y yields respectively. Again we saw multi year highs with the German 10y printing 1.937 the highest since 2013.
FX - The USD is back on the front foot again dragged back up by the bid US yield tone. The USD Index is currently at 110.38. The majors all softer versus the USD with the JPY, EUR and GBP at 143.76, 0.9933 and 1.1357 respectively. The Yuan continues its tale of woe trading now at 7.0540. USDNOK rang our bell and printed a fresh high for the year at 10.3835 so we are happy to reduce some risk and see how it looks post Fed.
Others - Both Bitcoin and Ethereum softer with the risk off tone trading at 18,895 and 1330 respectively.
Some more bad news in the crypto space as Wintermute, a market making firm, admitted to a $160m hack emanating from its defi operations although it says it remains solvent.
Fed preview
The long anticipated September FOMC is upon us with still a lingering chance of a 100bp hike. The last FOMC meeting was back in late July when the Fed hiked 75bps and dropped the forward guidance tool and hence the market went off on a rally in anticipation that a Fed pivot was imminent and at the very least the peak in rate hike magnitude was in. Fed officials then took the next few weeks to reverse these thoughts insisting that the inflation fight would be met forcefully and they were fully committed to getting the inflation rate back down to 2% no matter the pain that that may inflict. This culminated in Chair Powell’s Jackson Hole “revised” speech, which we spoke of yesterday, where he scolded the market like naughty teenagers with a short, given the market’s attention span is low at best, and to the point, so it would get “it” sending markets into a spiral. Stocks have sold off some 10% from their mid August highs with the US10y about 100bps higher.
So what to expect from today’s meeting the first “non forward guidance” one? 100bps is now down to about a 17% chance and, as we talked about in The Week Ahead, we believe they will go 75bps, Powell will be short and to the point hawkish and we see them being more aggressive in their outlook for the terminal rate; the higher faster for longer play. Indeed the WSJ’s Timiraos seemed to endorse the 75bp hike in his piece yesterday stating that a third 75bp in a row was now “widely anticipated” and the focus will be much more on the terminal rate and the economic projections. Speaking of which we believe that the economic projections will go in a familiar direction with growth lower and inflation higher from the previous estimates back in June. As a recap the projections from June saw CPI at 4.3% for 2022, 2.7% for 2023 and 2.3% for 2024. GDP estimates back then came in at 1.7%, 1.7% and 1.9% for the respective periods.
The rate projection will be potentially where the major discrepancy between the Fed and the markets will come with the Fed’s new projections for the upper band pushing to 4.25% by year end and a terminal rate to 4.5% in the early part of 2023 and indeed remaining in restrictive territory throughout 2023 and most of the year after. The previous dots suggested 3.4% and 3.8% for 2022/23 respectively. The market is now coming into line with the Fed with market pricing now showing terminal rate at 4.49% in q1 next year. However if the dots were to show a higher terminal rate then how the market takes that will be interesting. The market is itching to price in cuts off of a higher terminal rate something which the Fed continually pushes back on. Will the game of bluff stay in place or will the market start to move into line with the Fed? Whatever happens if we get a dot profile above 4.5% stocks will not like it. It’s all eyes on the dots.
Overnight and previous day highlights
Yesterday the Riksbank decided to spice up central bank week with an unexpected 100bp hike to take rates to 1.75% their biggest ever hike under the current monetary policy regime. The reason given was to get to the terminal rate as fast as possible with analysts expecting one further hike to get towards the 2.50% level. Interesting price action for EURSEK which saw the knee jerk sell off with a swift reversal resulting in a weaker SEK in what was a very Bank of Canadaesque price action after their recent hawkish rate announcements.
Speaking of Canada we got our potential peak in Canadian CPI with both headline and core lower than both expectations and previous months readings. Headline showed a healthy drop to 7% from 7.6% previously with core now below 6% at 5.8% from a previous print of 6.1%. The miss came from shelter and gasoline printing lower although groceries are still rising at their fastest pace in over 40 years. Deputy Governor Beaudry was on the tapes later and was encouraged that inflation was “heading in the right direction” but it remains still “too high”. He pledged to continue to do whatever was needed to bring it back to target.
The UK Treasury Committee threw the cat among the pigeons for the new chancellor Kwarteng when it requested assurances that the government publishes its OBR forecasts alongside the emergency mini-budget on Friday ie. how are you paying for it and how does the balance sheet look after the measures are implemented?
US housing data brought mixed results with housing starts having a big gain (1.575M vs 1.445M expected) but permits had almost an equal percentage miss (1.517M vs 1.61M).
The day ahead
Obviously, the Fed is the main focus for the day with only some US housing data and one ECB speaker to entertain us until then.
Putin’s delayed speech is hitting the tapes with the West taking the brunt of his ire and announcing a “partial military mobilisation”. Also his statement that Russia will use “all available means” to defend Russian territory is a worrying escalation and a veiled threat for the use of nuclear weapons.
Remember too, in the early hours tomorrow we have the BoJ rate announcement where we expect no change in policy, a continued endorsement of the YCC policy and a nod to the weak JPY.
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Wednesday
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)
Early Thursday
BoJ Interest Rate Decision no change expected (04.00 BST)
Good luck.
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Right on !!!
Appreciate the shoutout! 🤝