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The Morning Hark - 22 Sept 2023
Today’s focus...Higher for longer the new mantra but do you believe them? Flash PMI day.
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Prices are at 7.10 BST/2.10 EST, with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures back on a firmer footing overnight with the pair up over half of one percent currently sitting at 93.90 and 90.30 respectively. The latest tailwind to oil’s strength came in the form of Russia’s “temporary” ban on gasoline diesel exports.
EQ - Asia equity markets starting to stabilise after the recent sell off. The Nikkei, Hang Seng and Kospi all up smalls at 32,250, 17,882 and 334 respectively. The Nasdaq and S&P futures similarly finding a much needed bid with the pair now at 14,900 and 4380 respectively.
Gold - Gold Dec flatlining overnight but looks to be going out of the week on their lows. Currently trading at 1945. Surprised we haven’t seen a touch better bid tone given the latest developments with the US government funding issues. The defence bill failed to pass on Thursday and adding to the uncertainty the Republican House leaders sent the chamber into recess dashing any hopes of a settlement in the coming days. Is this time different?
FI - US yields hit fresh new highs yesterday as the market digested further the Fed’s decision with the 10y hitting levels last seen in 2006. In Asia we have seen them consolidate somewhat with the US2y and US10y trading currently at 5.14% and 4.50% respectively.
European yields followed suit yesterday with the German 10y yield hitting a 12 year high but closing a touch lower at 2.74% and the Italian 10y yield at 4.55%.
UK gilt yields naturally having somewhat of a rollercoaster day but still closing higher at 4.30%.
FX - With this yield environment the USD continues to remain underpinned with the USD Index currently sitting up a touch at 105.52. The JPY, EUR and GBP currently at 148.12, 1.0648 and 1.2278 respectively.
FX expiries of note for today the GBP sees close to £1.1bn rolling off at 1.2250.
Others - Bitcoin couldn’t hold onto the 27,000 level with all the risk off sentiment and has continued its decline overnight down a further one and half percent to 26,650. Ethereum down closer to two percent at 1593.
The Riksbank hiked 25bps as expected taking rates to 4% after its eighth hike in the cycle. Their forward looking rate path points to the potential, albeit small, of a further hike in November with the statement alluding to such when pointing that rates “could be raised further”. However no rate cuts are seen until 2025. Future policy will continue to be heavily influenced by ongoing SEK weakness and the inflation profile.
They also announced details of their reserve FX hedging saying that they will be selling $8bn and €2bn versus the SEK over a 4/6 month time period.
Markets wise the SEK rallied some 7 big figures to 11.81 before rebounding and ending weaker in the day.
Not for me said the gnomes as they held their rates steady at 1.75%. An at the margins surprise for the market and the CHF weakened close to one percent versus the EUR on the announcement. The reasoning provided in the statement pointed to the moderate global growth in q2 and the fact that a more pronounced global slowdown can’t be ruled out. They pointed to a high level of uncertainty but have broken their recent shadowing of ECB hikes. However they did leave the door open for a further hike later in the cycle.
The SNB chairman Jordan claimed, in his press conference, that the battle with inflation was not over. They would be data dependent for the next meeting in December and they are ready to sell FX. Finally when asked whether the SNB had done a hawkish pause like the Fed he forcefully pushed back stating that the SNB do not “use the terminology”.
The Norges followed their Swedish cousins and raised 25bps to 4.25%. However, what was more of a surprise, was them pointing to an additional hike in December and furthermore rates remaining at that level throughout next year with cuts only starting in 2025. A long list of justification for the hike was given including; the higher oil price, generally higher global rates compared to the backdrop at their previous meeting, a tight labour market and the elevated inflation profile.
EURNOK had a decent 5 big figure sell off but the move was short lived. I attach below SEB’s more detailed take on the meeting for those interested.
The knife edge decision came down pin the side of a hold but it was a close run thing with 5 members voting for a hold versus 4 (Cuncliffe, Mann, Haskel and Greene) for a hike.
The minutes suggested the reasoning with a loosening labour market, the August inflation report and falling business sentiment for the hold. On that basis they revised down their GDP forecast for q3 to 0.1% from 0.4%. However a further tightening would be in play if inflation persists. In addition the “restrictive enough for sufficiently long” was wheeled out again.
Bailey’s comments were not all that illuminating as he started that there was no room for complacency and the Bank will take the decisions needed to get inflation to target. In addition inflation had fallen a lot in recent weeks and we think it will continue to do so.
Interestingly, and worryingly, one member felt that there was a growing risk falling output will require sharper rate cuts.
On the QT front they raised their sales target to £100bn from the current annual sales figure of $80bn.
Market wise we saw GBP take a tumble but nothing of real note and peak rate for the UK are getting rowed back in below 5.4%. Markets now see around a 70% chance of a further hike form the BoE.
Higher for longer seems all the rage with both the Skandi central banks and the BoE yesterday suggesting so in line with the earlier Fed. The SNB seems more out on a limb and I guess why not when you consider their inflation profile. Seems a stretch to think that the central banks will sit on their hands for a year and do nothing either way on rates but lets see.
Nagel hawkish as ever with his comments on inflation which he felt was not falling at the desired pace and remains too high. On the rates front he was unclear if we had reached peak rates but whether they were or not they needed to remain sufficiently high for sufficiently long.
Kazak agreed with Nagel on the rates front claiming that they need to remain restrictive for quite a while and cuts would only be considered when inflation forecasts were consistently undershooting target.
Vujcic sees no further hikes if the Bank’s outlook holds.
Stournas felt the ECB had reached peak and next move would involve cuts but would remain at peak for a few months.
Knot is not expecting a rate hike at the next policy meeting.
Shocker of a Philly Fed survey. Headline big miss at -13.5 with previous at +12 and -1 expected. Components not much good either with prices paid up continuing their trend upwards, new orders back into negative territory and employment stagnating in negative territory. Volatile series but not a good look.
Australia kicked off flash PMI day with a mixed bag with manufacturing decline further into contraction at 48.2 its seventh month in a row below the 50 line. However services having a big leap back into expansionary mode, after a couple of months below 50, to 50.5.
Busy night for Japan with their PMIs both showing declines from the previous month with manufacturing and services printing at 48.6 and 53.3 respectively.
Japan August inflation report show’d mixed signals with headline YoY declining to 3.2% but core ticking up from previous and expected to 3.1%.
BoJ as was widely expected held rates steady at -0.1% with no change to forward guidance.
Statement wise all much of a muchness. They see a decline in YoY CPI and will continue to monitor financial and FX markets closely as they impact the Japanese economy.
In the meantime finance minister Suzuki got his jawboning out prior to the BoJ. He stated that he had been in contact with overseas currency authorities and would not rule out any options for response to excessive FX volatility. He said that they were closely watching FX moves with a high sense of urgency. Seems to be ramping up the rhetoric.
We await Ueda’s press conference.
Just out UK retail sales for August and they show a small miss in terms of expectations but a rebound from July’s soggy affair.
The Day Ahead
All about the flash PMIs from the rest of the world. Germany expected to remain the sick man of Europe but to consolidate nears its lows. Europe expected to show a slight uptick in manufacturing but a step back in services. The UK similar consolidation in the lows. All measures are expected to remain below the boom/bust 50 level. The US similar pattern of consolidation although at least its services component is expected to remain above 50.
Reminder August’s PMIs were on the whole shockers and rocked confidence in the soft landing scenario. After Powell’s take yesterday do we expect a rebound? Remember the Fed had the PMIs ahead of their deliberations. Equally the BoE saw the PMI before they held yesterday which may offer some clues as to what to expect.
We also get Canadian retail sales for July and the first Fed speaker post FOMC.
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All times in BST (EST+5 / CEST-1 / JST-8)
German HCOB Manufacturing PMI Flash Sept consensus 39.5 vs previous 39.1 (08.30 BST)
German HCOB Services PMI Flash Sept consensus 47.2 vs previous 47.3 (08.30 BST)
EU HCOB Manufacturing PMI Flash Sept consensus 44 vs previous 43.5 (09.00 BST)
EU HCOB Services PMI Flash Sept consensus 47.7 vs previous 47.9 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Sept consensus 43 vs previous 43 (09.30 BST)
UK S&P Global Services PMI Flash Sept consensus 49.2 vs previous 49.5 (09.30 BST)
Canada Retail Sales MoM Jul consensus 0.4% vs previous 0.1% (13.30 BST)
Canada Retail Sales YoY Jul consensus % vs previous -0.6% (13.30 BST)
US S&P Global Manufacturing PMI Flash Sept consensus 48 vs previous 47.9 (14.45 BST)
US S&P Global Services PMI Flash Sept consensus 50.6 vs previous 50.5 (14.45 BST)
Cook (13.50 BST)
Guindos (12.00 BST)
Good luck and a good weekend to one and all.
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