The Morning Hark - 21 Sept 2023
Today’s focus...Higher for longer as Powell trims his dots, CentralBankCentral today with 4 out of Europe and Lagarde tells us how it is later in the day
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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 further step back overnight post Fed few with the pair currently sitting at 92.90 and 89 respectively. Rather rollercoaster of a day for oil with profit taking pre Fed sending it lower only for data to show larger draws on stockpiles than had been anticipated sending oil back through the highs of the day only for Powell’s hawkish pause to send it back from whence it came.
EQ - Asia equity continuing their post Fed softness in Asia with the Nikkei, Hang Seng and Kospi all down at 32,388, 17,660 and 334 respectively. The Nasdaq and S&P futures also continued lower with the pair now at 15,090 and 4433 respectively.
Gold - Gold Dec continued its post Fed rout with it currently down one percent at 1948. However the potential US government shutdown continues to underpin the precious metal.
FI - US yields hit 17 year highs post Fed and Asia has seen them consolidate the move with the US2y and US10y trading currently at 5.18% and 4.43% respectively.
European yields took a step back from their recent rally yesterday led by the UK with the German 10y yield closing at 2.70% and the Italian 10y yield at 4.46%.
UK gilt yields considerably lower post the August inflation report with the 10y closing at 4.21%.
FX - As you’d expect post Fed the USD continues to remain underpinned with the USD Index currently sitting up close to half a percent at at 105.60. The JPY, EUR and GBP currently at 148.35, 1.0636 and 1.2317 respectively. AUD and NZD the main losers in the risk off environment with them down currently at 0.6406 and 0.5902 respectively.
FX expiries of note for today the EUR sees close to €2bn rolling off at 1.06.
Others - Bitcoin has done well to hold the 27,000 for now at least despite the hawkish Fed sitting currently at 27,050. Ethereum down a touch at 1622.
Fed Review
All about the dots as it so often is. Anyway starting with the statement where there were some small subtle changes with the economic outlook being upgraded from “moderate” to “solid”. Job gains were described as having “slowed” but remain strong whilst inflation remained unchanged.
The dots were held steady for 2023 with the upper limit remaining at 5.75% and implying one further hike for the year. The real action was in the 24 dots which saw a reduction in the magnitude of cuts from 100 to 50bps leaving the upper limit at 5.25%. 2025 was unchanged with 125bps of cuts taking the upper limit to 4%. This was very much the focus for the market that the higher for longer was being justified with the dot plan. US 2y yields rallied hard to 17 year highs and the swaps curve started to push out cuts into late q3/q4 of next year.
The economic projections seemed to be a bit of the tail wagging the dog as they seemed very much to fit nicely with the Fed’s dots.
Growth was upgraded in 2023 to 2.1% (from 1%) and in 2024 to 1.5% (1.1%) and left unchanged at 1.8% for 2025.
Core PCE ticked up for 2023 to 3.9% (from 3.7%) but 2024 was left unchanged at 2.6% with 2025 showing a slight uptick to 2.3% (2.2%)
Finally the unemployment rate were all revised down 2023 to 3.8% (from 4.1%) with 2024 and 2025 both going to 4.1% from 4.5%.
The conclusion from these projections suggest that the Fed see no recession with growth upgraded in the near term. However inflation is expected to see an upside blip going into the end of the year perhaps as a nod to the oil rally and will remain sticky. Or another way of looking at it higher for longer so we better ramp up our forecasts.
Powell’s press conference was a justification of the higher for longer stance but he seemed a tad confused and muddled at getting his message across. Some of the money lines:
“If economy comes in stronger than expected it means we have to more to bring down inflation”
“Neutral interest rate may be higher”
“Tend to look through short term moves in energy prices”
“Over tightening/Under tightening becoming more equal”
“Higher energy prices when sustained can affect inflation”
“I wouldn’t call a soft landing a baseline expectation”
“It may be that the neutral rate has risen”
“Fairly close to where we need to get to”
On the neutral comment does this mean that actually “target” is now 3% not 2%?
Also if a soft landing is not baseline what are these projections telling us?
Overall the market took it as a hawkish pause with US yields and the USD rallying with stocks taking a step back. As we all know these dots and projections are rarely right why should this time be any different.
Riksbank Preview
The Riksbank kick the day off with a further 3 European central bank rate announcements to follow. An additional 25bp hike is widely expected taking rates in Sweden to 4%. The case for the hike remains fairly compelling with an inflation profile that remains elevated, and well above target, the weak Krona continuing to be a thorn in the side of the Bank (EURSEK knocked on 12 recently) with its weakness referenced by several Board members of late. Finally, of course, there is a perceived need to keep up with last week’s ECB hike. Focus will turn quickly to the rate profile and the probability of a further hike in November (around 50% chance) and the timing of any future rate cuts which look more likely to get pushed back into the second half of 2024.
SNB Preview
This is less of a foregone conclusion for the Alpine gnomes. The market is marginally in favour of a sixth consecutive 25bp hike taking Swiss rates to 2% but its a close call. Recent comments from Board members have been on the hawkish side and there’s always the keeping up with the ECB argument to throw into the mix. However the doves point to an economy which has stagnated in the last quarter, wage growth which remains relatively anchored and inflation at much lower levels than in the rest of Europe as well as being in the SNB’s 0/2% target range. Close call but given the hawkish nature of the Board we expect one last hike for the cycle.
Norges Preview
For the Norges see the Riksbank in what looks like a very similar backdrop and decision. A further 25bp hike is expected to take rates to 4.25% with the reasoning being very similar to their Swedish cousins. A weak currency, keeping up with the ECB and an elevated inflation profile with risks to the upside should see them pull the trigger again. However the outlook for further hikes is less certain and whilst leaving the door open for further hikes, if nothing else to help the NOK, this may well be the last in the cycle. Market will also be keen to grasp any hints at any potential rate cut timing.
BoE Preview
Well as seems ever the case in the UK just when you think you’re on a sure thing a spanner hits the works. This time that spanner came in the form of yesterday’s much needed good news in the form of the August inflation report. The headline number printed an 18 month low and core is down to 6.2%. That wasn’t in the script for Bailey & co although if there was a press conference I’m sure Bailey would be trumpeting that as a huge vindication of his policy path and slapping himself on his back no end. Anyway thankfully there is no presser so at least we are spared that sight.
Back to the decision and lets look at the economic backdrop pre yesterday’s number. We have unemployment rising with a labour market tightness showing signs of easing but wage growth still too high for the Bank’s liking. On that basis the call was for a further 25bp hike taking rates to 5.5% and a post financial crisis high with the minutes suggesting a data dependent approach to further hikes. Remember the last statement was following a FedLite path with the need for rates to remain “sufficiently high for sufficiently long”.
Yesterday’s print has clouded that view and the chance of a Fed September Skip has risen to above 50% from 20% earlier in the week. Equally any chance of further hikes beyond 5.5% have diminished to below 20%. Goldmans were swift out of the blocks to call for the Bank to remain on hold and as such we have seen UK rates peak for this cycle.
Tight call but we think they will make it one last hike for the cycle and make it clear, in the minutes, they are following the Fed higher for longer. It will be interesting to see the market’s take on how credible a story that is. Fed cuts were pushed out into much later in 2024 with the revised dots and projections on growth. However the Bank only has the minutes to “guide” markets with so that may be worth keeping a close eye on.
ECB Speakers
deCos was relatively balanced with his comments yesterday. He acknowledged inflation was still too high and the ECB couldn’t afford persistently high inflation. However he did note that the risks are more balanced and holding rates at 4% was consistent with the ECB’s 2% price target.
Makhlouf suggested that March was too early for the first ECB rate cut and December’s projections would give the Bank a “better sense of the 2024 rate profile”.
Overnight
Overnight NZ GDP q2 printed with a pleasant upside surprise and a first growth number in nearly a year. Beats for QoQ q2 printing at 0.9% (0.5% expected) with the YoY at 1.8% (1.2%).
The Day Ahead
Fair amount on the slate today with Riksbank, SNB and Norges all expected to follow the ECB’s lead from last week and hike 25bps. The BoE will probably follow suit but yesterday’s inflation print has made that less of a consensus call.
US data wise Philly Fed survey for September and some housing data.
As is their want a couple of ECB speeches with Lagarde being the highlight.
As a heads up early doors Friday we start to get the flash PMIs coming out with Australia and Japan leading the way. In addition the August Japan inflation report and then the BoJ rate decision. Finally just before we print tomorrow we get August’s UK retail sales report.
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All times in BST (EST+5 / CEST-1 / JST-8)
Thursday
Riksbank Rate Decision a further 25bp hike expected taking rates to 4% (08.30 BST)
Riksbank Monetary Policy Report (08.30 BST)
SNB Rate Decision a further 25bp hike expected taking rates to 2% (08.30 BST)
Norges Bank Rate Decision a further 25bp hike expected taking rates to 4.25% (09.00 BST)
Norges Bank Press Conference (09.30 BST)
BoE Interest Rate Decision 25bp hike expected taking rates to 5.5% (12.00 BST)
BoE Meeting Minutes (12.00 BST)
US Philadelphia Fed Manufacturing Index Sep consensus -0.7 vs previous 12 (13.30 BST)
US Philly Fed Employment Sep consensus vs previous -6 (13.30 BST)
US Philly Fed New Orders Sep consensus vs previous 16 (13.30 BST)
US Philly Fed Prices Paid Sep consensus vs previous 20.8 (13.30 BST)
US Existing Home Sales Aug consensus 4.1m vs previous 4.07m (15.00 BST)
ECB Speakers
Lagarde (15.00 BST)
Schnabel (15.40 BST)
Early Friday
Australia Judo Bank Manufacturing PMI Flash Sept consensus vs previous 49.6 (00.00 BST)
Australia Judo Bank Services PMI Flash Sept consensus vs previous 47.8 (00.00 BST)
Japan Inflation Rate YoY Aug consensus % vs previous 3.3% (00.30 BST)
Japan Inflation Rate MoM Dec consensus % vs previous 0.4% (00.30 BST)
Japan Core Inflation Rate YoY Dec consensus 3% vs previous 3.1% (00.30 BST)
Japan Jibun Bank Manufacturing PMI Flash Sept consensus 49.9 vs previous 49.7 (01.30 BST)
Japan Jibun Bank Services PMI Flash Sept consensus vs previous 54.3 (01.30 BST)
BoJ Interest Rate Decision rates expected to remain on hold at -0.1% (04.00 BST)
UK Retail Sales MoM Aug consensus 0.5% vs previous -1.2% (07.00 BST)
UK Retail Sales YoY Aug consensus -1.2% vs previous -3.2% (07.00 BST)
Good luck.
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