The Morning Hark - 23 Oct 2023
Today’s focus…Tensions ease but remain just under the surface and The Week Ahead.
Overnight Highlights
Prices are at 6.40 BST/1.40EST, with changes reflecting movement from midnight BST
Oil - Brent and Crude December futures off over one percent in Asia with them currently sitting at 91.30 and 87.10 respectively. Some relief in the oil markets with Israel holding off from the ground offensive and hopes of some diplomatic breakthrough. Feels like some lightening of positioning too but the play remains a buy on dips until any prospects of a breakthrough becomes a reality.
EQ - Asian equity markets remain on the backfoot given the high yield and brittle geo-political backdrop. The Nikkei currently at 31,090.
The US indicies also marking time in Asia with the Nasdaq and S&P futures up smalls at 14,700 and 4259 respectively after their poor close to the week on Friday.
Gold - Gold Dec off smalls from its recent highs in Asia but still well bid. Friday saw it capture the 2000 level, a five month high, with the continued tensions in the Middle East. Currently sitting at 1988.
FI - Global yields continue to hold onto their bid tone. The US2y and US10y trading firmly at 5.13% and 4.98% respectively.
European yields very much in follow the leader mode with the German 10y yield closing the week at 2.89% and the Italian 10y yield at 4.92%.
UK gilt yields similarly bid at 4.66%. The 30y equivalent hit a 25 year high on Friday.
FX - Nothing of note in FX overnight with the USD Index currently flat at 106.29. The JPY, EUR and GBP similarly flat currently at 149.95, 1.0580 and 1.2150 respectively.
USDILS continues with the bid tone at 4.06.
FX expiries of note today sees USDJPY have a $1.6bn at 150 and the same at 149. EUR sees €1bn at 1.06 and 1.0550.
Others - Bitcoin and Ethereum have had a good weekend, as has the altcoin universe with the prospect of escalating tensions in the world and a financial markets blow up due to rising yields being cited as reasons for the green candles. Bitcoin up over two percent overnight to 30,850. Ethereum over four percent higher to 1700.
Macro Themes At Play
Recap
Some dislocation in the market this week with the USD having a losing week despite the backdrop of the turbulent geo-political landscape, higher US yields and better underlying economic data. Oil and gold have taken the cue from the geo-political noise but the USD less so. Catch up week or is this a new trend?
Big downside miss for the UK’s September retail sales which has been pinned on the unseasonably good weather for the month which discouraged the British public to spend on autumnal fashions. I guess beer and barbecues are cheaper!
The Canadian equivalent print had a small beat but nothing to trouble the scorers with.
Central bank speakers
The Fed’s Harker continued with his dovish slant on Friday with some interesting comments. Perhaps getting in ahead of an anticipated strong q3 GDP print this week he was keen to stress that he was “hearing the economy is softening faster than thought”. He also repeated that now was the time to keep rates steady as there is growing evidence that the higher borrowing costs will slow the economy.
Bostic all the usual mantra about caution and rates remaining higher for longer. He did though point to late next year as possibly the time that the Fed will start to cut rates.
Mester a tad more hawkish claiming that the Fed had underestimated inflation until recently and risks remain on the upside. She added that she can’t say if we are at peak rates yet but we are near.
The Week Ahead
Global PMIs. The first look at q4 data for the major economies this week with the flash PMIs for October. Looking back at September’s final prints we see all major economies remaining in contraction for the manufacturing measure but, apart from the EU and UK, all having above 50 prints for the services component. In the main the last couple of weeks have seen stronger data slowly emerging again and we’d expect to see upticks to all measures although the majority of the measures are expected to remain in contraction.
Australia Inflation Report. After last week’s RBA minutes lot of focus on this print with the next RBA rate decision coming at the start of next month. The minutes showed that the RBA have a “low tolerance” for higher inflation and, as such, reiterated their tightening bias. Last week’s employment report showed a cooling in employment change fuelled by a drop in full time workers which was only marginally offset by a large increase in part time workers. This has taken a bit of pressure off the RBA but they remain more focused on the inflation part of the equation and have noted in the past that they will hike again “if inflation is more persistent than expected”. A quarter on quarter uptick is expected although the year on year is expected to see a decent drop.
Bank of Canada Rate Decision. In the last week or so we have had three major set pieces which will influence this week’s Bank decision. Macklem’s hawkish speech stoked the fires with his explicit flagging that a hike is very much on the table at this meeting. Secondly we got the Bank of Canada’s third quarter survey which tempered expectations a touch on the rate front with inflation expectations easing alongside a more cautious business outlook. The third piece was the inflation report which showed a noticeable cooling on the month pushing headline and core below 4% and 3% respectively. The quarterly survey on top of the inflation report, on the margins, probably allows the BoC to pause with a retained bias to raise rates further if needed. Prior to the CPI print the chance of a hike had risen close to 45% but the print has slashed those chances with, at present, approximately a 15% chance priced in. Probably the press conference an hour or so after the decision will be of more interest.
ECB Rate Decision. Dull and easy? Is it ever thus with the ECB and no doubt a sources story will appear mid Thursday afternoon to put the cat among the pigeons. Anyway from the outside looking in it would seem one of the more straightforward meetings of the year. The ECB commentary has been fairly unified in the higher for longer mantra with the ECB in pause mode until such time as the data tells them otherwise. The landscape has changed in two key elements since the last ECB. We have seen the run up in global yields, in itself a tightening of policy. The other obviously is the Gaza conflict which has added to the uncertainty on the geopolitical front which is expected to have a dampening effect on the European growth outlook. On the flip side to that is the subsequent rally in oil which has put pressure on inflation and inflation expectations. A confusing picture and one that makes it more likely the ECB sits on its hands with a pause but keeps its options open for a December move with a slight tightening bias. December also gives them the advantage, if they do want to move, of another set of staff projections helping the ECB to join the dots for the markets. FXMacro Guy produces great central bank prep with recaps of the previous meeting, data since that meeting and comments. Essential reading for the central bank meetings ahead. His subscriber piece has every major central bank but his lite version this week has the ECB. Take a look its well worth the read and well worth upgrading for 100% coverage. FXMacro Guy - Lite
US PCE. Fed’s favourite inflation gauge and last major print ahead of the FOMC next week. Last week the Fed’s Barkin was explicit that he was focused on inflation as the key print for the direction of rates despite the recent strong labour and inflation reports. As such this week’s PCE should have significance in the Fed’s decision making process for next week’s FOMC. Once again though Powell seems to have taken any momentum, the market had for a November hike, out of play with his speech late last week and it would take a real outlier from Friday’s number to put it back on the agenda again.
US GDP. A stellar number is expected with an annualised 4.3% print expected. Recent Fed speakers have downplayed growth as a big influence on the Fed instead siding more with the inflation story. Many indeed have given a nod to the third quarters more resilient numbers but have tempered that with their expectations for a slowing last quarter of the year. There is room for an upside surprise with the much vaunted Atlanta Fed GDP tracker registering at 5.4%.
The Day Ahead
Couple of interesting articles overnight with the Japanese Kyodo news agency saying that the Japanese PM sets a 3y goal to revive the inflation hit economy as wages continue to lag.
Also the Chinese, according to Bloomberg, intend to hold their twice a decade financial policy gathering next week setting priorities for the next 5 years which I guess is what you’d do on a twice a decade get together?
Little of note on the day with Australian and Japanese PMIs for October printing overnight, the first of the major global economies to break
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Main Highlights Ahead
All times in BST (EST+5 / CEST-1 / JST-8)
The main highlights for the week ahead in terms of data and speakers:
Monday
Australia Judo Bank Manufacturing PMI Flash Oct consensus 48.6 vs previous 48.7 (23.00 BST)
Australia Judo Bank Services PMI Flash Oct consensus 51.1 vs previous 51.8 (23.00 BST)
Tuesday
Japan Jibun Bank Manufacturing PMI Flash Oct consensus 49 vs previous 48.5 (01.30 BST)
Japan Jibun Bank Services PMI Flash Oct consensus 52.9 vs previous 53.8 (01.30 BST)
UK Unemployment Rate Aug consensus 4.3% vs previous 4.3% (07.00 BST)
UK Employment Change Jul consensus -198k vs previous -207k (07.00 BST)
Germany HCOB Manufacturing PMI Flash Oct consensus 40 vs previous 39.6 (08.30 BST)
Germany HCOB Services PMI Flash Oct consensus 50 vs previous 50.3 (08.30 BST)
RBA Bullock speaks (09.00 BST)
EU HCOB Manufacturing PMI Flash Oct consensus 43.7 vs previous 43.4 (09.00 BST)
EU HCOB Services PMI Flash Oct consensus 48.7 vs previous 48.7 (09.00 BST)
UK S&P Global/CIPS Manufacturing PMI Flash Oct consensus 45 vs previous 44.3 (09.30 BST)
UK S&P Global/CIPS Services PMI Flash Oct consensus 49.5 vs previous 49.3 (09.30 BST)
US S&P Global Manufacturing PMI Flash Oct consensus 49.5 vs previous 49.8 (14.45 BST)
US S&P Global Services PMI Flash Oct consensus 49.9 vs previous 50.1 (14.45 BST)
ECB Speakers
Lagarde (13.30 BST)
Wednesday
Australia Inflation Rate QoQ q3 consensus 1.1% vs previous 0.8% (01.30 BST)
Australia Inflation Rate YoY q3 consensus 5.3% vs previous 6% (01.30 BST)
Australia Monthly CPI Indicator Sept consensus 5.4% vs previous 5.2% (01.30 BST)
Germany Ifo Business Climate Oct consensus 85.9 vs previous 85.7 (09.00 BST)
Germany Ifo Expectations Oct consensus 83.3 vs previous 82.9 (09.00 BST)
BoC Monetary Policy Report (15.00 BST)
BoC Interest Rate Decision rates expected to remain on hold at 5% (15.00 BST)
US New Home Sales Sept consensus 0.68m vs previous 0.675m (15.00 BST)
BoC Press Conference (16.00 BST)
RBA Bullock speaks (23.00 BST)
RBA Kent speaks (23.00 BST)
Fed Speakers
Powell (21.35 BST)
ECB Speakers
Lagarde (18.00 BST)
Thursday
ECB Interest Rate Decision rates expected to remain on hold at 4.5% (13.15 BST)
US Durable Goods MoM Sept consensus 1.5% vs previous 0.2% (13.30 BST)
US GDP Growth Rate QoQ adv q3 consensus 4.2% vs previous 2.1% (13.30 BST)
US GDP Price Index QoQ adv q3 consensus 2.5% vs previous 1.7% (13.30 BST)
US PCE Prices QoQ adv q3 consensus 2.1% vs previous 2.5% (13.30 BST)
US Core PCE Prices QoQ adv q3 consensus 2.5% vs previous 3.7% (13.30 BST)
ECB Press Conference (13.45 BST)
US Pending Home Sales MoM Sept consensus -1.3% % vs previous -7.1% (15.00 BST)
US Pending Home Sales YoY Sept consensus -16% vs previous -18.7% (15.00 BST)
Fed Speakers
Waller (14.00 BST)
ECB Speakers
Lagarde (15.15 BST)
BoE Speakers
Cunliffe (17.45 BST)
Friday
Tokyo CPI YoY Oct consensus 2.7% vs previous 2.8% (00.30 BST)
Tokyo Core CPI YoY Oct consensus 2.5% vs previous 2.5% (00.30 BST)
US PCE Price Index MoM Sept consensus 0.3% vs previous 0.4% (13.30 BST)
US PCE Prices Index YoY Sept consensus 3.4% vs previous 3.5% (13.30 BST)
US Core PCE Price Index MoM Sept consensus 0.3% vs previous 0.1% (13.30 BST)
US Core PCE Prices Index YoY Sept consensus 3.7% vs previous 3.9% (13.30 BST)
US Personal Spending MoM Sept consensus 0.5% vs previous 0.4% (13.30 BST)
US Personal Income MoM Sept consensus 0.4% vs previous 0.4% (13.30 BST)
US Michigan Consumer Sentiment final Oct consensus 63 vs previous 68.1 (15.00 BST)
US Michigan Inflation Expectations final Oct consensus 3.8% vs previous 3.2% (15.00 BST)
US Michigan 5y Inflation Expectations final Oct consensus 3% vs previous 2.8% (15.00 BST)
Fed Speakers
Barr (14.00 BST)
Good luck.
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