The Morning Hark - 23 Sep 2022
Today’s focus ……Central Bank overdose, BoJ intervention, UK mini-budget, flash PMIs and Powell take 2
All prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November down smalls in Asia currently at 90 and 83 respectively. Oil is heading for its fourth straight down week after markets took stock of the Fed’s latest ratcheting up of the pain trade and the subsequent growing risk of a hard landing in the US. Whilst the demand side fears remain so does the tightness on the supply side of the equation with no apparent breakthrough for the Iranian nuclear deal in sight and the escalation of the conflict in Ukraine still underpinning the market. Seems a slow grind lower is the play albeit with periods of volatile noise.
EQ - Equity markets quiet overnight in Asia with the Nikkei, Hang Seng and Kospi all off a touch at 26,752, 18,037 and 298 respectively.
The Nasdaq and S&P similarly soft in the Asian session at 11,534 and 3765 respectively. S&P support comes in around this level with a breach opening up 3700 and further to the year’s lows around 3640.
Gold - Gold Dec futures flat in Asia at 1680. Nothing to add here with 1650 remaining the next downside support and 1700 the established resistance on the topside.
FI - US yields curve reversed and bear steepened sharply yesterday which continued overnight in Asia with the US10y up over 20bps since the FOMC. The US2y and 10y are currently trading at 4.14% and 3.70% respectively.
European yields got dragged along by the US move yesterday closing up at 1.968% and 4.187% for the German and Italian 10y yields respectively. UK gilts pressed ever higher with the news that the BoE will start their sales in just over a week with the 10y now at 3.498 closing at an 11 year high.
FX - Despite the BoJ’s best efforts the USD remains top of the pile. The USD Index remains very much elevated at 111.38. The EUR and GBP remain close to their recent lows at 0.9812 and 1.1225 respectively. Obviously USDJPY is lower than our opening levels post BoJ intervention trading currently at 142.28 although that’s a percent higher than the low during the intervention period. USDCNH remains around the 7.10 level, USDNOK remains easily above 10.40 and USDKRW is still on a 1400 handle. It’s also interesting to note that the three major central banks in Europe; UK, Switzerland and Norway, who all hiked rates yesterday all finished the day with a lower currency continuing a common theme of late unless of course you are the USD.
Others - Both Bitcoin and Ethereum a touch better bid this morning but still well within their recent ranges at 19,336 and 1343 respectively.
Monitor our live feeds of articles on the top central banks here, aggregating commentary and research from a wide range of sources.
As we anticipated a 50bp hike with suitably hawkish comments in the statement. What we hadn’t anticipated was the 5/3/1 split in terms of hike magnitude 50/75/25. Must have been a spicy meeting if central bank meetings can ever be such.
Anyway Ramsden, Mann and Haskel were somewhat predictably hawkish with the 25bp hike belonging to the new member Dingra.
Hawkish rhetoric was there to see with them claiming to “respond forcefully as necessary if inflation pressures look more persistent”.
From a forecast point of view they have taken their inflation peak down on the back of the government’s energy capping initiative from 13% to 11% whilst downgrading their growth forecasts for q3 to -0.1% from the previous 0.4% which, if correct, would technically place the UK in recession.
On Gilt sales, there was a unanimous vote to begin the selling from October at around £10bn a quarter as we said in our week ahead preview the timing is going to be interesting given the chancellor’s fiscal stimulus package, revealed later today, which needs to be paid for somehow and funnily enough Gilt sales could do some of that heavy lifting too.
Markets wise despite the expensive vol FX had a muted response. Gilt yields unsurprisingly rallied to new highs and levels last seen back in 2011. The market also dialled back a touch on their tightening which we thought was a trifle too high. The market now expects a further 143bps as opposed to the earlier 157bps. Still looks a bit rich to us too.
Later in the day one of the hawks, Haskel, made a couple of interesting comments. With regard to GBP he claimed that “I do not worry that much about it” despite it wallowing at 37 year lows. In addition are the cracks appearing already as the honeymoon period with the new government seems to be over. In terms of the government’s fiscal package he stated that “having a fiscal expansion in the context of tight supply is, I’m afraid, very difficult” and with regard to the opposing camps he said “we are in a difficult, uncomfortable, position”.
Again as we expected the SNB hiked by 75bp taking official rates back into positive territory and leaving only the BoJ holding out in negative rates land. They followed it up with comments that further increases would be necessary to ensure price stability over the medium term and Governor Jordan warned that they could indeed do “interim rate decisions” in future if required. Remember they only meet quarterly unlike the other major central banks. On the currency, they said that there was no set level for CHF intervention to either weaken or strengthen the currency.
This move did get markets going with the CHF selling off over 2% against the EUR as the majority of the market had been looking for a 100bp hike.
Well Japan’s top FX “diplomat” Kanda wasn’t bluffing as the MoF and BoJ entered the currency markets and intervened to support the ever weakening JPY. Having printed a new high at 145.90 and having spent a decent amount of time above 145 the Japanese authorities acted forcefully initially pushing USDJPY down almost 5 big figures before again entering the market and printing a new low at 140.35. Hardly “stealth” intervention as it said on the tin but nevertheless successful as far as it went. This was the first time they have intervened to buy their currency since 1998. I guess there were some clues in Kanda’s earlier remarks when he cited volatile and disorderly markets two key adjectives that tend to precursor intervention. The comments post intervention were far from convincing though. The claimed they had taken “decisive action” and they will continue to monitor the situation with a “high sense of urgency”. They also noted that FX moves had been “sudden and one-sided” which is probably only half true at best. We expect continuing “bouts” of intervention in the coming days but with diminishing returns.
The ECB and SNB have denied any involvement. Equally the US Treasury hardly gave the BoJ a ringing endorsement with their comments; “we understand Japan’s action, which it states aims to reduce heightened volatility of the JPY”. So it seems almost certain that they acted on their own which as we have said infinitum will not work other than the initial knee jerk price action and of course offering traders better levels to sell the JPY.
Their policies are totally contradictory with the one hand capping rates whilst the other is supporting their currency.
One twist in the tail is how they are going to fund the intervention. They are said to have around $110bn in USD reserves held at the Fed but they also hold approximately $1.2th worth of US treasuries. Could they start to sell these in an attempt to fund their intervention? Seems counterintuitive given such actions push rates higher in the US adding to the rate differential between the two countries which is the major reason why we are here in the first place.
Anyway, elsewhere in central bank land yesterday:
Taiwan - 12.5bp hike
Norway - 50bp hike
Saudi - 75bp hike
Indonesia - 50bp hike
Philippines - 50bp hike
Turkey - 100bp CUT
South Africa - 75bp hike
Brazil - unchanged
Powell is on the tapes later in the day and it will be interesting to see if he has anything to say on the market reaction to the FOMC. It seems that the penny has dropped for the market at last in terms of the Fed’s seriousness with regard to inflation but does he want that penny to drop further?
I post below some interesting articles with regard to the FOMC and Powell’s subsequent press conference. The Greg Ip piece in the WSJ discusses “the penny drop”, as ever the excellent Alf’s Macro Compass compares Powell’s words with those of Draghi’s “whatever it takes” press conference from 2012 and finally an article that looks at what may break in markets and which subsequently may get the Fed to pivot (out with inflation slowing).
Global flash PMIs will be monitored for any signs of life in the major economies with most measures expected to remain below or at best flirt with the 50 boom/bust line. Australia started the day off with a slight beat for both services and manufacturing which was encouraging. Let’s see.
UK budget/non-budget fiscal statement is up at a reported 9.30 BST when the new chancellor Kwarteng gets his first chance to impress. Politico’s views below.
Couple of ECB speakers to note and both on the hawkish side of the debate.
Finally Powell later in the day where also Brainard and Bowman will speak.
Also remember too Italian elections on Sunday which have been somewhat lost in all the central bank excitement this week. Focus will be on the size of the right wing coalition’s majority the bigger this is the wider the BTP spread.
Monitor our live feeds of articles on the top central banks here.
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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)
German S&P Global Manufacturing PMI Flash Sept consensus 48.3 vs previous 49.1 (08.30 BST)
German S&P Global Services PMI Flash Sept consensus 47.2 vs previous 47.7 (08.30 BST)
EU S&P Global Manufacturing PMI Flash Sept consensus 48.7 vs previous 49.6 (09.00 BST)
EU S&P Global Services PMI Flash Sept consensus 49 vs previous 49.8 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Sept consensus 47.5 vs previous 47.3 (09.30 BST)
UK S&P Global Services PMI Flash Sept consensus 50 vs previous 50.9 (09.30 BST)
UK mini-budget (09.30 BST)
Canada Retail Sales MoM Jul consensus -2% vs previous 1.1% (13.30 BST)
US S&P Global Manufacturing PMI Flash Sept consensus 51.1 vs previous 51.5 (14.45 BST)
US S&P Global Services PMI Flash Sept consensus 45 vs previous 43.7 (14.45 BST)
Powell (19.00 BST)
Kazaks (09.00 BST)
Nagel (16.30 BST)
Japan Jibun Bank Manufacturing PMI Flash Sept previous 51.5 (01.30 BST)
Japan Jibun Bank Services PMI Flash Sept previous 49.5 (01.30 BST)
Good luck and a good weekend to one and all.
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No Morning Hark today? (9/26)
Hope the Right Wing takes over in Italy.....