The Morning Hark - 22 Sep 2022
Today’s focus ……Fed’s Powell tells it like it is, the BoJ takes a pass but warns of “stealth” intervention and next up the SNB and BoE.
All prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November up smalls in Asia currently at 90.00 and 83.10 respectively. Oil tried lower post Fed but has regained some of its poise in Asian trading. A restrictive Fed with the spectre of a global recession still makes oil seem a sell on rallies to us despite the supply tightness.
EQ - Equity markets suffering overnight in Asia post Fed with the Hang Seng and Kospi both off well over one percent at 18,073 and 301 respectively. The Nikkei comes off a little more unscathed trading at 26,987 after the BoJ kept their policy rate unchanged in negative territory.
The Nasdaq and S&P continue to slide in the Asian session after yesterday’s post Fed sell off down a further half of one percent at 11,634 and 3788 respectively. S&P support comes in around 3765/70 a breach of which opens up 3700 and further to the year’s lows around 3640.
Gold - Gold Dec futures traded down about half of one percent in Asia at 1666. Nothing to add here with gold likely to trade heavily as the Fed’s aggressive rate path and stronger USD create a strong headwind. Our range held post Fed with us getting close to the 1700 topside on a rather ill-informed spike post rate announcement before it settling back down and back nearer to its recent lows. 1650 remains the next downside support.
FI - US yields continue to push higher in Asia after yesterday’s sharp rally with US yields hitting fresh multi year highs. The US2y and 10y are currently trading at 4.12% and 3.55% respectively, continuing their bear flattening.
European yields softer yesterday closing at 1.894% and 4.136% for the German and Italian 10y yields respectively. UK gilts, however, followed the US curve higher with the 10y now at 3.314 close to 11 year highs.
FX - The USD is well and truly king. USD Index printed a 20 year high overnight at 111.78 with it still remaining elevated at 111.72. The EUR hit a 20y low at 0.9807, GBP a 37y low at 1.1221 and the JPY a 24y low at 145.33 so you get the picture I’m sure. USDCNH broke 7.10, USDNOK through 10.40 and USDKRW trading at levels last seen in the Asian currency crisis. It’s hard to see anything changing with the respective rate profiles of the various protagonists in play. Even when you raise rates by 100bp your currency suffers, if its not the USD, as the SEK showed only too clearly earlier in the week.
Others - Both Bitcoin and Ethereum unsurprisingly suffering in this environment after the knee jerk post rate announcement rally they remain lower at 18,711 and 1262 respectively.
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Pretty much as expected with a 75bp hike, a Powell press conference which was short, sharp and to the hawkish point and an upward shift in the dots. Add to that the expected downgrades on growth (2022: 0.2% from 1.7%, 2023 1.2 vs 1.7 and 2024 1.7% vs 1.9%) and upticks for the inflation profile (headline 2022 5.4% from 5.2%, 2023 2.8% from 2.6% and 2024 2.3% from 2.2%) and we pretty much ticked all the boxes.
So what stands out and has created the market reaction we have witnessed. In no particular order:
there was a consensus by the Feb members around the dots compared to the previous release;
they see unemployment at 4.4% in 2023 and into 2024 a sharp upward revision;
per the dots rates are going to remain above 4% for 2 years;
a large majority of the committee see Fed Funds between 4.5/5% at the end of 2023;
the lagging nature of the housing sector and employment data was not mentioned;
the Fed is split between 100/125bps of hikes for the remaining two meetings of the year which entails, if its the larger hiking path, a 75bp hike a week before the mid-term elections;
no MBS sales on the near or medium term horizon;
a housing recession is likely; and
ultimately and unsurprisingly given the circumstances there was no change from Powell’s Jackson Hole stance.
Some of his soundbites to give you a flavour of the tone:
on housing; “may have to go through correction”;
on a recession; “chances of a soft landing are likely to diminish if policy needs to be more restrictive or for longer”…….or both!;
on balance sheet; “not considering changes to balance sheet plans right now”;
on the pain trade; “amount of pain depends on timeline to 2% inflation goal”; and
and closing off with a touch of warmth for the market; “trust me, our tightening will be enough to bring inflation down to 2%. It will be enough”.
Market reaction was a hawkish take, after a knee jerk joy rally, with rates staying elevated, USD rallying and risk assets all selling off. The USD has hit at least 20 year highs versus the majors, US2y10y inversion is headed to -60bps, stocks are headed towards their year’s lows seen back in June and crypto and gold look soft as. In terms of market pricing the market is being dragged to the Fed’s terminal rate estimate with roughly 4.61% priced in however the market is still insisting on rate cuts in 2023 albeit later that year than it had previously priced. Fed members do not see such cuts until into 2024 so that disconnect remains and that may be the next battlefield as the Fed speakers start to roll out on the docket again. On that note Powell has a chance to reiterate his points again on Friday or even correct the market if it starts to go off script.
One fly in the ointment last night would be his comments on housing. Housing recessions and economic recessions tend to go hand in hand hence if this indeeds does happen, as the majority of the incoming housing data seems to be pointing to, how will this effect the rate path and especially the need for earlier rate cuts. Perhaps the market will start to hang its hat more and more on such a thesis in its justification for those “early” rate cuts. Over to you Jerome (again) Friday.
The BoE’s thunder has been somewhat taken from it by the new chancellor’s emergency fiscal statement scheduled for tomorrow but it will still be a pivotal meeting for the Bank. The market is split in terms of expectations for the rate hike with pretty much a 50/50 call for 50 or 75bps in terms of the hike. We believe the Bank will err on the side of caution and want to have full visibility of the emergency fiscal measures the government is planning before committing to heightened rate hikes. However as a warning to markets we believe they will stress their continued hawkish stance.
The household bills freeze has taken the pressure off the Bank as it contemplates the inflation outlook. Estimates suggest that inflation will be lowered by the emergency package by anywhere between 2-5% and hence the urgency for more aggressive hikes has waned somewhat. In addition the next meeting at the start of November will also include updates for their economic projections and as such afford the Bank more opportunity to explain its reasoning if indeed it does go large.
Current market pricing would suggest we are going to get some fireworks in the GBP pit post announcement. The current split of the 50/50 for 50 or 75 should cause enough volatility but added to that we have 1w GBP vol trading on a 15% handle. In addition the market is pricing in a terminal rate of 4.5% for the middle of next year which seems a tad rich with forecasters in a more reasonable 3.5/5% range. In addition GBP is at 37 year lows so what possibly could go wrong!
Up earlier in the day the SNB rides into town for its quarterly monetary policy meeting. Back in June they hiked by 50bps in a pre-emptive move to gain first mover advantage over the ECB and again we see them doing a similar thing this time around with a 75bps hike. The SNB have spent years fighting deflation but now with inflation printing 3.5% they are battling to get it back below 2% and into their target zone. Whilst the inflation rate is low, in comparison to their neighbours, they do not want to see inflation becoming entrenched and are front loading on that basis. Such a magnitude of hike will bring the SNB into positive rate territory leaving only the BoJ with negative rates.
The other market focus will be on any comments from the SNB regarding the CHF. Since June they have been keen to stress the need for a strong franc and we see them continuing this policy as a tool to combat inflation. We see them trying to guide EURCHF lower by about 5% per annum.
Another step up in rhetoric overnight as the JPY hit another fresh low for the move to 145.33 levels last seen back in 1998. Japan’s top FX “diplomat” Kanda was candid in his remarks claiming that “markets are making very volatile moves” and further that “we cannot tolerate excess volatility and disorderly moves”. As for intervention he claimed that they will “most certainly” do so when necessary and it may even be “stealth” intervention!
As we have said many times before intervention has the best chance of turning the tide when it is coordinated and we see no incentive for the US to get involved at present and also when fundamentals actually support such a move. Given what we have seen the two central banks do over the last 12 hours or so, with the Fed hiking 75bps and the BoJ keeping their negative interest rate regime, that is definitely not the case.
I still post below the FxMacroGuy’s excellent intervention escalation path tweet which, as ever, is well worth a read.
BoJ Governor Kuroda is speaking as we publish.
ECB’s Schnabel in an interview has some strong comments to make. “we have to continue raising interest rates” from a low base and the “Eurozone economy likely to stagnate not shrink”. Again she stressed that the ECB was split between a 50 and 75bp hike for October. We get some more speakers from the ECB later in the day. Deutsche Bank would disagree with her recession assessment after its revision for EU GDP next year projecting a -2.2% a sharp downward revison from their previous forecast.
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SNB Interest Rate Decision 75bp hike expected (08.30 BST)
BoE Interest Rate Decision 50bp hike expected (12.00 BST)
BoE MPC Meeting Minutes (12.00 BST)
Fernandez-Bollo (09.10 BST)
Tuominen (09.45 BST)
Schnabel (16.00 BST)
Australia S&P Global Manufacturing PMI Flash Sept consensus vs previous 53.8 (00.00 BST)
Australia S&P Global Services PMI Flash Sept consensus vs previous 50.2 (00.00 BST)
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