The Morning Hark - 22 Nov 2023

Today’s focus... Fed talks tough but the market doesn’t listen again. UK Autumn Statement what’s the giveaway? Binance takes its medicine and Sam2 is back with (checks notes) Larry Summers!

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Overnight Highlights

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

Oil - Oil off smalls in Asia with Brent and Crude January futures currently sitting at 82.20 and 77.50 respectively.

The IEA’s head of oil markets was doing his best to support the market yesterday as he described global stocks at low levels. Hence you increase the risk of volatility if there are surprises on either side of the supply/demand side argument. He maintained that even if OPEC+ extended their supply cuts into next year there will remain a slight surplus in global markets.

US crude stocks again rose according to the API stats published yesterday. A much higher build than had been expected.

EQ - Asian equity markets mixed overnight with the Nikkei up a touch at 33,440 close to its recent highs. However the Hang Seng is a touch lower at 17,700. Both little changed from where we opened yesterday.

The US indices flat overnight and holding onto the majority of their recent gains. S&P currently at 4547 whilst the Nasdaq is at 15,955.

The much anticipated Nvidia results didn’t disappoint with a blowout report beating expectations. However the shares dipped on a more downbeat China sales outlook despite expected revenues, for the next quarter, being above market expectations. Tough crowd!

Gold - Asia again quiet as gold sits on the 2000 level. Again upside is slow above this level and retreated from above there post FOMC minutes. Hard to get excited about the space until we see a proper break one way or other from this level.

FI - Global yields little changed in Asia and fairly muted over the Fed minutes release too.  Currently the US2y and US10y trading at 4.88% and 4.42% respectively.

Remember the 4.33% remains the downside focus in the US10y with beyond that the 200dma around the 4% level.

European yields touch softer yesterday following the recent theme but subdued markets. German 10y closing at 2.57% and the Italian 10y yield similarly at 4.31%.

UK gilt yields likewise with them closing at 4.10%.

FX - Interesting that the USD somewhat decoupled from the other US markets which maybe says more about the JPY and EUR running out of steam after their recent good run. The EUR was always going to find 1.10 a tough nut to crack and its ever weakening pace as it approached that level was never a good sign that it would be breached. Likewise USDJPY one of our favourites, given how the yields are playing out, has come a long way and seems to be feeling it. As we pointed out yesterday it seems some profit taking has taken place ahead of the Thanksgiving weekend as a lightening up of positioning has played a part in the USD move.

Currently the USD Index at 103.78. The JPY, EUR and GBP all taking a step back with them sitting currently at 148.95, 1.09 and 1.2515 respectively.

FX option expiries of note today. EUR sees €1.6bn at 1.0925 and €1.2bn at 1.0940.

Others - Bitcoin and Ethereum lower overnight but given the turmoil in the space all pretty stable in their recent ranges at 36,500 and 1995 respectively.

Macro Themes At Play

Recap

First and foremost some good news on the Israel/Hamas conflict. A 4 day ceasefire has been agreed which involves Hamas releasing 50 or so hostages and the Israelis releasing some 150 prisoners from their prisons. It also can be extended by a further day for every additional 10 hostages that Hamas releases. Let’s hope its the beginning of some sort of long term peaceful resolution.

One story that has been bubbling away and we haven’t touched on is regarding the freezing of spending commitments by the German top court. This will in effect freeze €60bn of spending throwing the country into a budgetary crisis. The money was to be transferred from funds originally earmarked for tackling the pandemic to projects to boost the German economy and climate change. Just as it seemed Germany was turning a corner its potentially going back to the sick bay. More below.

NYT - Germany freezes government spending

Canada Inflation Report for October easing a touch on the YoYs with headline now at 3.1% and core 2.7% continuing the general global trend that we have seen of late.

US Existing Home Sales for October did not follow last week’s better housing data and crashed to its slowest level of sales since 2010. Unsurprisingly higher mortgage rates is getting its collar felt as the main culprit alongside a dearth of houses.

Fed Minutes Review

So as we thought a more hawkish tone shone on the meeting by the minutes but nothing earth shatteringly new.

Key points of note:

Unanimous vote to hold rates steady both by the voting and non-voting members.

Clarification too that members wish to hold rates high until they are convinced that they have control of inflation.

All members agreed that rates should remain at restrictive levels for “some time”.

“Carefully” seemed to be a watch word used as they proceed into the next phase of the rate cycle and debate whether to continue to hold rates steady or hike further.

Risks are continued to be seen to the upside in terms of inflation.

Warnings were noted around consumer spending.

They also felt that the current economic strength would start to fade over the coming quarters.

Finally there was a nod to those tighter financial conditions which a bit like these minutes have long since gone!

Market wise rate expectations remain little changed with the first cut likely in May of next year with a full cut now priced for June.

UK Autumn Statement

What a difference a year makes. A year ago he was standing up as Hunt the Repairman after the  Kwasi/Liz show! This year he stands up today as the Hunt for Growth. Or so he hopes.

With the much trumpeting of inflation halving the Government seem in a much more upbeat mood regarding the UK economy and the public finances and given Sunak’s speech on Monday a giveaway is a coming.

Steady now, there’s not that much to give away and, remember too, they have to make it last for the March Budget which is expected to be the pre-general election supermarket sweep giveaway. Nevertheless they have found some headroom in the finances due to lower public borrowing this year of close to £17bn. Hence they are very graciously able to lavish the lucky UK public with some well deserved tax cuts! Estimates suggest he will work with around a £15bn budget but what will he do with it?

• Tax/national insurance cuts - this now seems the firm favourite given Sunak’s speech on Monday;

• Business tax cuts - well if he is Hunt for Growth then this is where he could make some difference;

• Inheritance tax - hot favourite at the tail end of last week seems to have tailed off badly over the last few days with many in the party worrying that this would be seen, once again, as a giveaway to the rich;

• Benefits - expected to be raised in line with inflation; and

• Pensions - again in line with the triple lock principle (don’t ask!).

There is also expected to be a big play at getting people back to work and off benefits where possible in what is expected to be a big overhaul of the welfare system. That’s been said before! In addition there will no doubt be the age old “we shall save money by boosting efficiency in government departments”. That always works well PPP and all that!

Then of course the Office for Budget Responsibility will publish their new set of forecasts which given where they pitched them last time will make for gloomy reading. Back in March the OBR gave us the startling predictions of GDP in 2024 and 2025 at 1.8% and 2.5% with CPI dipping to 0.9% in 2024 and 0.1% in 2025. Makes the BoE’s forecasts look like gold!

Anyway ill stop there as I can see our non-UK readers glazing over. Suffice to say as always the “Not A Yes Man’s Economics” hits the spot with his assessment of the OBR. Worth a read while you are whiling away the hours pre-Hunt.

NotAYesMan’sEconomics - OBR

Central Bank Speakers

The ECB’s Simkus stressed that there was no need to speak about a further rate hike in December but internal inflation pressures remain strong. MArket expectations for ECB rate cuts are too optimistic.

Schnabel is still seeing the transmission of policy to bank lending. She also noted that the economy could be hit by new supply side shocks again.

Centeno claimed that there was a high probability that the ECB had reached peak rates.

The BoE’s Bailey maintained that the Bank was still concerned by the potential for persistent inflation and the market is putting too much weight on current data releases. It is sensible to keep rates where they are. Risks care still to the upside. The Bank sees inflation ending a little lower than it had expected but not by much and expects to see further declines in food inflation in q1 of next year.

Mann stuck to her guns with her assertion that the Bank’s pause has led to an easing of financial conditions. She is also more optimistic on the demand outlook than the BoE’s forecasts. Also that high inflation risks are influencing wage setting and hence she sees strong wage and services inflation throughout 2024. In case you didn’t get the point she stated that she would like to see rates higher than they are now.

Ramsden meanwhile wanted to emphasis that the Bank is very clear in distancing itself from market rate expectations. Additionally a restrictive stance was warranted for an extended period and a further hike cannot be ruled out.

Haskel felt that the decline in the headline CPI is not a good guide to the general inflation trend.

Crypto

Well that was quick. A deal is done Binance will be charged, fined as will CZ. Maybe the Justice Department are sitting there going damn it we should  have gone for $6bn?

The charges; conspiracy to transact an unlicensed money transmitting business and failure to maintain an effective anti money laundering program, conducting an unlicensed money transmitting business and  international emergency powers act. The fine will total $4.3bn

In addition CEO CZ will step down from his position (he can come back in 3 years) and admit violating US laws on anti-money laundering requirements as part of the deal. He will also pay a $50m fine.

And another Sam is involved! So I guess he has to become Sam3. Samuel Lee, the former compliance chief, is set to face charges too. What is it with that name just now (apologies to our Sam readers).

Some of the digital asset experts have analysed Binance’s holdings and estimate that there will be little effect on the crypto markets in terms of selling. Binance looks  able to fund the fines without selling crypto. Net net it should be bullish for the space with a further dark cloud lifted from the landscape.

OpenAI

So it seems that Sam2 is getting asked back to OpenAI as discussions are supposedly ongoing with the board. Make your mind up mate! What do they always say; never go back?

Word has it that OpenAI are placing a wide search for new directors as part of the package to get Sam2 back.

Surely it won’t be hard to find a handful of more competent directors than they had before? The previous lot in their wisdom blew up a $80bn company in the space of a weekend! How hard can it be?

Applications to #idiotsneednotapply

And its just broken Sam2 is back. Confirmed back as CEO. Could this be any more surreal? Well actually yes because remember those new directors they were looking for. Well it seems some idiots did apply!

Larry Summers!

Elsewhere Brett Taylor (Google, Twitter, Salesforce) and Adam D’Angelo (Quora).

I get a feeling this one isn’t finished!

For those that missed it yesterday this article, on some of the lobbying for AI in Washington and some of the links to the OpenAI story, is a great read.

Politico -  Open Philanthropy shaping AI Regulation

The Day Ahead

Little ahead of the UK Autumn Statement other than the RBA Governor Bullock speaking although given the minutes and her speech the other night I’m not sure she will add anything new to the debate.

Later in the day the ever volatile US Durable Goods series for October and the final UMich survey for November with the ever popular inflation expectations.

BoC Macklem gets to speak just as most of the US will be heading off to the airport/cars to travel home for Thanksgiving. Remember the speech is on the “cost of high inflation” so, after yesterday’s CPI print, I dare say there will be a fair amount of tempering market enthusiasm with claims that inflation is far from beaten.

Overnight the Australians get the flash PMIs for November started and just as we prints the Norwegians let us know their GDP reading for q3.

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Main Highlights Ahead

All times in GMT (EST+5 / CET-1 / JST-9)

The main highlights for the day ahead in terms of data and speakers:

Wednesday

RBA Bullock Speaks (08.35 GMT)

UK Autumn Statement (approx 12.30 GMT)

US Durable Goods Orders MoM Oct consensus -3.1% vs previous 4.7% (13.30 GMT)

US Michigan Consumer Sentiment Final Nov consensus 60.5 vs previous 63.8 (15.00 GMT)

US Michigan Inflation Expectations Final Nov consensus 4.4% vs previous 4.2% (15.00 GMT)

US Michigan 5y Inflation Expectations Final Nov consensus 3.2% vs previous 3% (15.00 GMT)

BoC Macklem Speaks (16.45 GMT)

Australia Judo Bank Manufacturing PMI Flash Nov consensus  vs previous 48.2 (22.00 GMT)

Australia Judo Bank Services PMI Flash Nov consensus  vs previous 47.9 (22.00 GMT)

ECB Speakers

Elderson (14.10 GMT)

Early Thursday

US Thanksgiving Holiday

Norway GDP Growth Rate QoQ  q3 consensus 0.3% vs previous 0% (07.00 GMT)

Norway GDP Growth Rate YoY q3 consensus % vs previous 0.7% (07.00 GMT)

Good luck.

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