The Morning Hark - 22 Aug 2022
Today’s focus ……Iran deal on or off, busy week of data ahead and Jackson Hole sleeper?
All prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures over one percent lower in Asia continuing the sector’s slide after the sharp rally we saw in early trading on Friday. Currently we are trading at 95.10 and 88.90 respectively. The oil rally fuelled after the better than expected US data, a potential OPEC production cut and a general pick up in demand was abruptly halted by news reports from Al Jazeera late on Friday that an Iran nuclear deal was “imminent”. Supposedly the US has softened its stance on the immediate lifting of sanctions and this seems to have been literally the oil that’s greased the wheels for a deal. If the report is to be believed the deal will be carried out in four stages over a couple of 60 day periods and will allow the Iranians to restart the export of its oil reserves. In addition CNN reported that the Iranians did their part by dropping their demands surrounding the listing of the Iranian Revolutionary Guard Corps as a terrorist organisation by the US. Still no full confirmation of a deal but the market is understandably softer. Let’s see. I post a couple of articles fleshing out more details below.
EQ - Equity markets mixed bag again overnight in Asia overnight with the Nikkei close to flat at 28,725, the Kospi down over one percent at 323 and the Hang Seng up one percent at 19,734. The Hang Seng was buoyed by further rate cuts in China with the 1y loan prime rate being trimmed by 5bp and the 5y trimmed 15bps.
The Nasdaq and S&P give up half of one percent in the Asian session currently trading at 13,163 and 4205 respectively. Our support zone 4250/70 eventually gave way on Friday as the euphoric relief rally at last ran out of steam. Feels like for there to be any chance of recapturing the recent highs 4200 would have to hold. Nasdaq support appears in the 12,900 region. May be worth watching Bitcoin as it certainly lead the move lower on Friday and whilst its stabilised for now it still looks shaky.
Gold - Gold Dec futures down small in Asia at 1755 continuing their softness from the end of last week. Gold has little defence in the face of higher US yields and the resurgent USD. 1750 and 1720 the supports before the year’s low around the 1700 level. There’s not been much love for the precious metal since we took out 1800 which remains the resell zone.
FI - US yields flat overnight with the US2y and 10y yields currently trading at 3.27% and 2.98% respectively. Lo and behold we are back to our 3.27% for the 2y! The 10y has been the better performer over the last few sessions with the general curve steepening as it recaptured the 3% level for the first time in over a month and the inversion now back below 30bps.
European yields once again added to their recent rally to finish the week closing at 1.231 and 3.498 for the German and Italian 10y yields respectively. The spread continues to widen as we enter a week where we expect a further deterioration in the areas PMIs and focus starts to shift to the ECB in early September followed by the Italian elections later in the month.
FX - The USD is flat in Asia but consolidating its gains from Friday as rate differentials start to play once again in its favour. Having taken its time to recapture 107 the USD Index took little time to take back 108 with it currently trading 108.22. All the majors are on the backfoot as you’d expect lead by USDJPY which is trading at 137.07 levels last seen the week of the Fed “pivot”. The EUR is edging back towards parity at 1.0031 and GBP back through 1.20 and some at 1.1822.
USDCNH now at 6.8410 and levels last seen two years ago.
Others - Bitcoin and Ethereum stabilised somewhat after Friday’s sell off but certainly the move has shaken confidence again in the space and it doesn’t feel like this downdraft is over. The pair currently trading at 21,436 and 1600 respectively.
I post at the bottom an excellent long read from The New Yorker on the Three Arrows Capital saga. Although a large part of the narrative is already known the article brings it all together with some other interesting details and insights. One conclusion that always seems to jump into my mind is everything changes but nothing changes in terms of due diligence, proper risk protocols and the fear of missing out on a supposed good thing whether you are in the old or new worlds of finance.
The Week Ahead
Jackson Hole Symposium. Often seen as a Fed meeting in disguise kicks off on Thursday evening followed by two days of speeches and discussions. The market’s focus will of course be on Fed Chair Powell’s speech (15.00 BST Friday) given the current 50/75bp hike debate. However Kansas City Fed’s Hoenig flagged in an interview on Friday that Powell will want to remain as flexible as possible given the amount of important data that remains between his speech and the next rate announcement. Indeed July’s PCE will have just printed followed by, in the first two weeks of September August prints for NFP and CPI. It would seem ludicrous for Powell to commit prior to seeing these prints. Will he give any colour on the Bullard’s “faster front loading” strategy in terms of rate hikes? Or reference WSJ’s Timiraos recent theme of the need for tighter financial conditions? Push back on 2023 rate cuts especially given the platform is often used for longer term horizon policy measures? Having just jettisoned forward guidance and gone to a data led meeting to meeting policy it seems to me, if he stays true to his words, that he won’t have a huge amount of subject matter for the market to get its teeth into? Maybe more on the QT policy going forward given the acceleration expected in the policy from next month? Dull one? Let’s see. Either way they’ll be plenty of column inches devoted to it but I have a hunch that the market will garner more direction from the earlier PCE print than Powell’s speech.
Global Flash PMIs. Tuesday sees the release of the August flash PMIs with the majority of the major economies on the perceived 50 recession cusp, or indeed already below it, the prints will give us a further feel for the exact state of play in each region. We’d expect Germany/Europe to remain in recessionary territory and in particular the manufacturing sector, similarly the UK should show a further decline. However will the US see a reversal of its recent downward trend? In addition in the US we have the Richmond and Michigan regional surveys which hopefully give us more of an indication of where the regional surveys are headed after the extreme contrast in the reports we got out of the NY and Philly surveys last week.
US Inflation. Friday sees the Fed’s favourite measure of inflation the PCE price index for July and after the much talked about “peaking” we saw for the July CPI report it will be of much interest to the market as it tries to establish if this report was an outlier or if indeed we have put in a peak for inflation. Initial estimates suggest that we will see a slight softening in the report and this will give encouragement that with inflation peaking the Fed’s aggressiveness has peaked and let’s jump on a risk rally again. The timing of the print and subsequent reaction may be muted however until such time as Powell has spoken some 90 minutes later.
German data. The sick man of Europe sees some important prints this week with the flash PMIs which we discuss above above as well as Thursday’s IFO survey and the q2 GDP final print. Neither look likely to give Germany much comfort with weakness expected across all components for the IFO and the GDP measure expected to flirt with a negative print.
US GDP. Thursday sees the second print for q2. As you remember the first one managed to change the definition of a recession and caused much head scratching. The revision is expected to half the contraction seen in the US for the quarter but still looks likely to be sufficiently negative that when the final reading is released it will confirm a second negative quarter in a row. I’m sure the debate on recession definition will rear its head again which may fill in some time waiting for Powell if nothing else.
ECB Minutes. Minutes from the July meeting are set to be released on Thursday. Remember this was the meeting where the ECB “surprised” most market participants with a 50bp hike, rather than a 25bp one which brought rates in the Eurozone back to zero. Similar to the Fed it also opted out of forward guidance and moved to a more data driven and meeting by meeting approach. They completed the set by outlining their anti fragmentation tool designed to prevent borrowing costs widening significantly between the stronger and weaker countries of the Eurozone. Been quite a while since this meeting and much bad data has flowed under the bridges of the Rhine and elsewhere since then so not sure how significant the minutes will be in a market moving way.
The day ahead is blank on the data front although I would point out that early tomorrow morning we start the flash PMIs off with Australia and Japan.
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Australia S&P Global Manufacturing PMI Flash Aug consensus vs previous 55.7 (00.00 BST)
Australia S&P Global Services PMI Flash Aug consensus vs previous 50.9 (00.00 BST)
Japan Jibun Bank Manufacturing PMI Flash Aug consensus vs previous 52.1 (01.30 BST)
Japan Jibun Bank Services PMI Flash Aug consensus vs previous 50.3 (01.30 BST)
German S&P Global Manufacturing PMI Flash Aug consensus 48.3 vs previous 49.3 (08.30 BST)
German S&P Global Services PMI Flash Aug consensus 49 vs previous 49.7 (08.30 BST)
EU S&P Global Manufacturing PMI Flash Aug consensus 49 vs previous 49.8 (09.00 BST)
EU S&P Global Services PMI Flash Aug consensus 50.5 vs previous 51.2 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Aug consensus 51.3 vs previous 52.1 (09.30 BST)
UK S&P Global Services PMI Flash Aug consensus 52 vs previous 52.6 (09.30 BST)
US S&P Global Manufacturing PMI Flash Aug consensus 51.9 vs previous 52.2 (14.45 BST)
US S&P Global Services PMI Flash Aug consensus 49.1vs previous 47.3 (14.45 BST)
EU Consumer Confidence Flash Aug consensus -28 vs previous -27 (15.00 BST)
Richmond Fed Manufacturing Index Aug consensus vs previous 0 (15.00 BST)
Panetta (12.00 BST)
US Durable Goods Orders MoM Jul consensus 0.5% vs previous 1.9% (13.30 BST)
US Pending Home Sales MoM Jul consensus -3.8% vs previous -8.6% (15.00 BST)
Kashkari (00.00 BST)
German GDP Growth Rate QoQ Final q2 consensus 0% vs previous 0.8% (07.00 BST)
German IFO Business Climate Aug consensus 86.7 vs previous 88.6 (09.00 BST)
German IFO Current Conditions Aug consensus 96 vs previous 97.7 (09.00 BST)
German IFO Expectations Aug consensus 78.6 vs previous 80.3 (09.00 BST)
US GDP Growth Rate QoQ 2nd Est q2 consensus -0.8% vs previous -1.6% (13.30 BST)
US PCE Prices QoQ 2nd Est q2 consensus 7.1% vs previous 7.1% (13.30 BST)
US Core PCE Prices QoQ 2nd Est q2 consensus 4.4% vs previous 5.2% (13.30 BST)
Nakamura (02.30 BST)
Japan Tokyo Core CPI YoY Aug consensus 2.5% vs previous 2.3% (00.30 BST)
Japan Tokyo CPI YoY Aug consensus vs previous 2.5% (00.30 BST)
US Personal Income MoM Jul consensus 0.6% vs previous 0.6% (13.30 BST)
US Personal Spending MoM Jul consensus 0.4% vs previous 1.1% (13.30 BST)
US PCE Price Index MoM Jul consensus vs previous 1% (13.30 BST)
US Core PCE Price Index MoM Jul consensus 0.3% vs previous 0.6% (13.30 BST)
US PCE Price Index YoY Jul consensus vs previous 6.8% (13.30 BST)
US Core PCE Price Index YoY Jul consensus 4.7% vs previous 4.8% (13.30 BST)
US Michigan Consumer Sentiment Final Aug consensus 55.2 vs previous 51.5 (15.00 BST)
US Michigan Inflation Expectations Final Aug consensus vs previous 5.2% (15.00 BST)
US Michigan 5y Inflation Expectations Final Aug consensus vs previous 2.9% (15.00 BST)
Powell (15.00 BST)
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