The Morning Hark - 23 Nov 2023
Today’s focus...The UK economy is “back on track” just not the HS2 tracks. The Autumn Statement is all about jam today. Worrying developments in the Sam2 story. China...surely not again.
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Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Happy Thanksgiving to all our US readers. We hope you get to spend some quality time with your families and enjoy some turkey and football.
Oil - Oil off about one percent in Asia with Brent and Crude January futures currently sitting at 81 and 76.30 respectively and continuing their nervy price action from another volatile day yesterday.
Initially rumours circulated of delays to this weekend’s OPEC+ meeting causing an initial steep sell off in oil. This was subsequently denied and then again resurrected and is now rescheduled for 30 November. Oil recovered the majority of losses on the rescheduling news. The cause seems to be a disagreement over some members’ oil production figures and the associated quotas. It would appear that the Saudis had concerns, in particular, with some of the African nations (Nigeria and Angola getting the most attention).
The EIA stats showed yet another big build in inventories for US crude. This constitutes 5 weeks of a build and stocks in the US are now at their highest since July.
EQ - As you’d expect on Thanksgiving equity markets very quiet. Asian equity markets have held onto their recent gains with the Nikkei and Hang Seng sitting currently at 33,710 and 17,850 respectively.
The US indices flat overnight but also happy to hold onto their recent gains. S&P currently at 4570 whilst the Nasdaq is at 16,070.
Gold - Nothing to see here in gold again with Dec futures at 1997. As we said yesterday its hard to get excited about the space until we see a proper break one way or other from the 2000 level.
FI - Global yields little changed in Asia. Currently the US2y and US10y trading at 4.90% and 4.40% respectively.
Remember the 4.33% remains the downside focus in the US10y with beyond that the 200dma around the 4% level.
European yields little changed with the German 10y closing at 2.57% and the Italian 10y yield similarly at 4.31%.
UK gilt yields closed at 4.16% rising due to the projected larger borrowing by the UK on the back of the Autumn Statement.
FX -Touch more iInteresting in FX land with the USD a tad softer. Currently the USD Index at 103.63. The JPY, EUR and GBP all relatively unchanged with them sitting currently at 149.10, 1.0910 and 1.2515 respectively.
The main drag on the USD index has come from the AUD and NZD which are both up close to half of one percent at 0.6565 and 0.6060 respectively.
FX option expiries of note today. EUR sees €3bn at 1.09 and €1bn at 1.0896. USDJPY sees $1.5bn at 149. Those won’t please the thirsty FX options desk traders, around the City, desperate to get out to toast Thanksgiving.
Others - Bitcoin and Ethereum enjoying a Thanksgiving rally but still within recent ranges at 37,300 and 2060 respectively.
Macro Themes At Play
Recap
US Durable Goods Orders for October were a disappointment at down 5.4% on the month albeit a very volatile series.
US Michigan Consumer Sentiment final November print slightly better than anticipated at 61.3 but still lower than last month. The inflation expectations not so rosy either with the 5y steady at 3.2% but a further uptick for the 1y to 4.5%.
On that note I post below a great tweet from Jim Bianco where he expands on the fallibilities of the Fed’s obsession with inflation expectations. In addition he touches on their inconsistency around financial conditions a subject which we have alluded to of late.
BiancoResearch - Fed’s problems
Worrying noises out of Japan where the government slashed its view on the economy due to weak demand which they say has weighed on consumer and capital spending. Specifically on capital spending they cut their view for the first time in 2 years claiming that the pace of recovery was “pausing”.
Even more worrying noises out of China where a new “mystery pneumonia” is tearing through China’s schools. Hospitals in Beijing and Liaoning are seemingly overwhelmed. This from ProMed, a global surveillance system that monitors such outbreaks. Back in December 2019 they first alerted the world to Covid. Surely not……
UK Autumn Statement Review
Hunt for Growth stuck to his guns and indeed seemed to set off the starting pistol in what appeared to be a pre-election giveaway budget. In what was estimated to be an over £20bn giveaway he pronounced that the British economy was “back on track” which given the state of the UK railways I dare say thats an accurate description!
He claimed that the package of tax cuts would not harm the “marvellous work” the government has done in halving inflation and that tax cuts were warranted because the OBR have lowered their debt forecast. We discuss below exactly how good the OBR are at forecasting!
The key points were:
The headline grabbing cut of National Insurance by 2% from 12% to 10% (£10bn cost)
The permanent announcement of the “full expensing” of capital allowances (£10bn cost)
Benefits would go up by 6.7% in line with inflation.
Pensions up by 8.5% on the triple lock basis.
Minimum wage was increased by 9.8%.
According to the Revolution Foundation, this amounted to the biggest giveaway budget since 1988, apart from the Kwasi/Liz show of course. I did actually wonder yesterday if this exact budget had been delivered by those two how differently would it have been received? I dare say a lot worse than the reaction we got because of course the adults are back in the room. As you know, we weren’t fans of K&L but double standards and all that. It would seem this budget is a bit of jam today in the hope that there will be some more jam in March if inflation and rates come down. Then we can worry about paying for it after the general election when we will have 5 years to sort it out or, more likely, it wont be our problem at all and good luck Labour sorting the finances out. A touch of scuttling the fleet about it!
As ever Politico’s take on it is always worth a read.
Politico - UK Autumn Statement
The Office for Budget Responsibility revised their forecasts although, given where they were before and where they are now, I’d take them with a very small pinch of salt.
They now estimate CPI in the UK in 2024 to be 2.8% (previously 0.9%) and in 2025 2% (0.1%).
GDP for what its worth down to 0.7% in 2024 (previously 1.8%) and in 2025 1.4% (2.5%).
Makes you wonder how this lot stay in jobs.
For some further OBR context I repost this article, for those that didn’t get a chance to read it yesterday, from the “Not A Yes Man’s Economics” which, as ever, hits the spot with his assessment.
A small fly in the Conservative’s jam may be the revelations that David Cameron used, the now collapsed and disgraced, Greensill Capital’s private jets to travel around. Surely not! Several are reported to have been from Oxfordshire, near Cameron’s Cotswold abode, to Newquay close to Cameron’s Cornwall holiday home. Well it is a four hour drive after all! What’s a man to do.
Not all that shocking news albeit a bit grubby but what would you expect. However if he was an employee of the firm rather than an advisor then this would be deemed a benefit in kind. On that basis HMRC are on the case although I’d imagine there are quite a few rugs in the Foreign Office that such stories can be swept under. More below for those that care.
The Guardian - David Cameron/Greensill Capital
Central Bank Speakers
The ECB’s de Guindos suggested that it was premature to be discussing rate hikes. However the markets’ soft landing hopes may be a bit optimistic and the ECB’s data dependent and policy communication are very clear.
Nagel pointed to German growth being flattish this year and a little bit better next year. He also was confident that a compromise solution could be found when asked about stability pact reform. He also believed that we are close to a level seen as terminal rate and that rates will stay where they are for a while. However he could not tell if the ECB will raise rates again.
The RBA’s Bullock felt that it would take time to bring demand driven inflation back to 2/3% goal. More substantial tightening is the correct policy response.
The BoC’s Macklem suggested that interest rates may now be restrictive enough. He saw the economy approaching balance and expects it to remain weak for the next few quarters which should result in further downward pressure on inflation. However he did state that if high inflation persists the Bank is prepared to raise rates further.
Risks remain to the upside for inflation which is still too high and has been slower to come down than the Bank had hoped. Equally inflation expectations have been slow to come down which is concerning.
This is not the time to be thinking of cutting rates despite the latest CPI number being encouraging good news. However we do not have to wait for inflation to hit 2% before we start cutting rates although we do need to wait until its clear that were on that path.
OpenAI
So Sam2 is back, everyone’s friends again and they can all get back typing on their super computers and build really smart things that we can be in awe about.
But wait Reuters broke a story overnight suggesting that several OpenAI researchers, ahead of the weekend debacle, warned the board of a discovery that they said could threaten humanity. More below but as we keep saying there will be more to run on this.
Reuters - OpenAI researchers warning
The Day Ahead
Overnight we got the Australian flash PMIs for November and not a good start with both manufacturing and services lower than October’s reading. The readings are now close to 3 and 2 year lows respectively.
Norwegian q3 GDP just printed ugly. MoM showed a contraction of 0.5% which left the YoY at -1.9%.
Later in the morning the other major European countries flash PMIs with Germany, Eurozone and the UK all spreading the gloom.
That knife edge Riksbank rate decision also this morning.
ECB minutes basically close the day with what is expected to be a really quiet afternoon session with the US out for Thanksgiving and most of London down a City boozer.
Overnight into Friday we get the Japanese inflation report for October as well as their flash PMI prints for November.
Quiet day ahead and in prep for it I was drawn to this article in Bitcoin Magazine regarding George Orwell and 1984 especially as I had just listened to the excellent The Rest is History podcast on said author. Bitcoin believer/Orwell fan or neither I think the article strikes a cord and the podcast series has many very interesting topics.
Bitcoin Magazine - Why you should read 1984 again
The Rest is History Podcast- George Orwell
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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:
Thursday
US Thanksgiving Holiday
Germany HCOB Manufacturing PMI Flash Nov consensus 41.2 vs previous 40.8 (08.30 GMT)
Germany HCOB Services PMI Flash Nov consensus 48.5 vs previous 48.2 (08.30 GMT)
Riksbank Rate Decision rates to remain on hold at 4%? Close call (08.30 GMT)
Riksbank Monetary Policy Report (08.30 GMT)
EU HCOB Manufacturing PMI Flash Nov consensus 43.4 vs previous 43.1 (09.00 GMT)
EU HCOB Services PMI Flash Nov consensus 48.1 vs previous 47.8 (09.00 GMT)
UK S&P Global Manufacturing PMI Flash Nov consensus 45 vs previous 44.8 (09.30 GMT)
UK S&P Global Services PMI Flash Nov consensus 49.5 vs previous 49.5 (09.30 GMT)
ECB Minutes rates on hold. Lagarde downbeat (12.30 GMT)
Japan Inflation Rate MoM Oct consensus % vs previous 0.3% (23.30 GMT)
Japan Inflation Rate YoY Oct consensus % vs previous 3% (23.30 GMT)
Japan Core Inflation Rate YoY Oct consensus 3% vs previous 2.8% (23.30 GMT)
ECB Speakers
Schnabel (19.30 GMT)
Early Friday
Japan Jibun Bank Manufacturing PMI Flash Nov consensus 48.8 vs previous 48.7 (00.30 GMT)
Japan Jibum Bank Services PMI Flash Nov consensus vs previous 51.6 (00.30 GMT)
Germany GDP Growth Rate QoQ Final q3 consensus -0.1% vs previous 0.1% (07.00 GMT)
Germany GDP Growth Rate YoY Final q3 consensus -0.3% vs previous 0% (07.00 GMT)
Good luck.
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