The Morning Hark - 24 Nov 2022

Today’s focus …What about Japan!, Fed Minutes taken as dovish, Riksbank up next, SBF’s speaking gig and Czech food prices!!

Nov 24

All prices are at 7.40 GMT/2.40 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude January futures down about half of one percent overnight in the Asian session, with them currently trading at 84.90 and 77.60, respectively. Oil took a backward step yesterday on the back of the realisation that any Russian oil cap would be set at a much higher level than expected and as such, reduces the chances of the Russian’s having to cut production. Talks are ongoing. China covid woes as ever a headwind, although the weaker USD has helped a touch to stem the tide lower.

EQ - The Asia major muted overnight and all trading flat, with the Hang Seng, Nikkei and Kospi futures currently trading at 17,666, 28,383 and 318, respectively.

The Nasdaq and S&P up a touch in Asia, trading now at 4044 and 11,907, respectively and holding onto their gains from yesterday. Rollercoaster day with a mixed bag of US data; initial claims printing their highest level in over 3 years, UMich survey beating expectations and inflation expectations a touch more muted, new home sales surprisingly strong but the flash PMIs showing steep declines, especially in the manufacturing component. Ultimately the Fed minutes took all comers and helped stocks retain their rally.

Gold - Gold Dec up smalls in Asia at 1756. There it goes again off on its travels and then stalling. The FOMC minutes were the catalyst for gold to recapture the 1750 level, but once again, there is little momentum to get excited about. 1750 then becomes a short term pivot with support below at our noisy zone 1720/25. Up top 1780 first followed by 1800.

FI - US yields had a similar rollercoaster as stocks yesterday and their sell off has continued into the Asian session with the US2y and 10y currently trading at 4.47% and 3.69%, respectively. European yields following the US lower with German 10y yields trading currently at 1.863% and Italian 10y yields at 3.735%.

UK gilts similar pattern with the 10y yield closing at 3.01% and at one point dipping below 3% for the first time since early September.

FX - Same story in FX with the USD continuing to slide, which sees the USD Index currently trading at 105.75. The majors all stronger with USDJPY, EUR and GBP currently trading at 138.70, 1.0427 and 1.2088, respectively. The other big mover overnight was USD/KRW, which had the double boost of a better risk environment and a 25bp hike form the BoK which sees it sitting currently at 1326.

Others - Bitcoin and Ethereum happy to participate in the bounce too and especially Ethereum which has shrugged off the recent selling pressure and recovered to 1212 with Bitcoin now 16,692.

Riksbank Meeting

The Riksbank have the opportunity to spice up Thanksgiving for us as they meet for their last policy meeting of the year. At their last meeting, they hit the market full between the eyes with a 100bp hike and once again an aggressive stance is expected. However, probably a full percent is more of an outlier this time round. Since that meeting inflation has beaten the Bank’s expectations by 50bps and the labour market has remained resilient. In addition, the ECB’s 75bp hike at the last meeting has put pressure on the Riksbank to stay at the very least in step, given their self-imposed policy to stay ahead of the Eurozone central bank. On that basis, we see a 75bp hike as the base case. There is also the small matter of the monetary policy report where we will see the bank’s thoughts on the interest rate path moving forward.

One word of warning for the last meeting, with the hawkish 100bp hike, EURSEK had an initial 9 figure sell-off reaction, as you would expect, before spiking back higher and trading for the majority of the remainder of the day above the price we were trading at the announcement. Today has the potential to be even more volatile given the holiday markets. Good luck.

Fed Minutes Review

Something for everyone from what I could see but of course the market wanted to focus on the dovish comments and take to the skies.

From the dovish angle:

time lags were mentioned in the context of the risk of too much hiking similar to the statement at the time;
it was appropriate to slow the pace of rate hikes soon which was supported by a substantial majority of the members; and
inflation showing little signs of abating but remember this comment was prior to the CPI print later in November, which indeed did show a slowing even if it is only one print.

From the hawks:

many noted that service inflation had picked up and this tends to be stickier;
some participants pointed to potentially higher energy prices due to geo-political risks;
various participants (Powell and Bullard at the least you’d imagine) felt that the ultimate level of Fed Funds would be somewhat higher than had been previously thought; and
few participants (again Powell probably one of these) felt it would be advantageous to wait until the stance of policy was clearly restrictive before altering course.

One other point of note they did mention that they were monitoring non-banks’ hidden leverage and would be prepared to address market disruptions without altering course on policy.

Hard to pick the bones out of all that tbh. It would seem the themes, which we have spoken about at length before, that they introduced to the conversation, at the time of the meeting, remain in place; a slowing of the pace of hikes is coming, the terminal rate will be higher than previously thought, and it will remain in place for longer. Whether the market is reading that as a “sheep in wolf’s clothing” policy whereby the wolf’s clothing mantra (higher terminal and for longer) will be discarded once they get the market “used” to a slower pace of rate hikes, I don’t know, but I guess it could be one theory.

Anyway, the market is taking the dovish side and happy to wing it for now. Stocks rallying and the USD and US yields backing off. Remember the 200 dma we flagged yesterday would be the obvious target for S&Ps around 4075 also if we were to mirror the “maddening” rally of the summer then the peak would see us capture 4100. The terminal rate now is back down to around 5% as opposed to its recent 5.25% level and 50bps for December is about an 80% chance now.

Remember US holiday today and pretty much tomorrow too, so moves could get well extended on light volumes. Finally, of course, if things do get out of hand Powell speaks on Wednesday, ahead of the quiet period, if a JH-type rebuke for the market is needed.

ECB Minutes Preview

Remember, the meeting came with a 75bp hike, but the “several meetings” phrase, with regard to further hikes, was dropped, although Lagarde confusingly “reinstated it” in her press conference comments. The terms and conditions for the TLTRO were altered and banks were offered voluntary early redemption dates. The remuneration for minimum reserves was set at the ECB’s deposit facility rate (previously the main refi rate), but QT policy was not altered. All in all, feels like a sleeper.

SBF/CZ/Alameda

Little of major note other than the, far from surprising, revelation that SBF’s PR agency had close ties to the NYT and potentially helps to understand their recent “soft” piece on him. Speaking of the NYT believe it or not but our Sam will be speaking at a summit next Wednesday sponsored by the said paper who feel that he has a lot of questions to answer and as such should be allowed the platform to answer them. Call me old-fashioned but I thought that was what the courts were for? Remember when Madoff owned up to having been a tad naughty back in the day he was led away in cuffs after a couple of days. Oh, how times change or perhaps Bernie wasn’t so generous with his political donations?

Other News

China covid woes continue with now record highs recorded on the mainland. We have always doubted the stories surrounding, and the associated equity market euphoria, the lifting of the zero policy in China and by the day we seem to be getting further and further from that eventuality.

On a more positive note the PBOC issued further guidelines to support the ailing property market.

The EU Russian oil cap negotiations drag on with little surprise there. The cap price is the sticking point with leaks suggesting some delegates stating that $70 is too low whilst others, mainly Poland and the Baltics, suggesting that $65 is too high. So I guess we have a market then 70/65!
For context, Russian oil is currently trading between $62/67 depending on its location within the country.

Biden is reported to be looking at stricter rules for non-banks with the thought that hedge funds, asset managers and other non-banks would fall into the “systemically important” labels that apply currently only to banks.

Czech food prices, and I know we don’t often venture into the Czech Republic, but, I thought it worth mentioning the food price statistics out of the country, which, at best are eye-watering! Prices soared by more than a quarter in the month of October on the back of higher energy prices and the fact that the country exports large quantities of food products abroad leaving shortages at home. I post a deeper dive at the bottom, which is well worth a read, especially if you are tucking into a Thanksgiving turkey!

To spoil all the fun, Israeli intelligence has warned that Iran is mulling over a terrorist attack during the World Cup. Is that because they failed to qualify and want to spoil the party? Let’s hope, of course, that this is not the case.

The Day Ahead

Japanese Flash PMIs showed a steep decline, particularly in the services component, with it now sitting on the boom/bust line at 50 versus 53.2 previously. Whilst manufacturing did dip into contraction at 49.4 from 50.7 previously.

Riksbank meeting and Ifo help us wile away the hours of the morning before we get the ECB minutes.

Some ECB and BoE speakers to try and keep us entertained before late in the evening Japanese Core CPI for November.

Football-wise, after Japan’s great shock win over the Germans and Spain’s magnificent 7, it’s time for the Brazilians to take to the stage against the Serbians whilst free agent Ronaldo and his Portuguese teammates take on Ghana which should be the pick of the games today. Earlier the Swiss take on Cameroon, and Uruguay take on South Korea.

Interesting fact of the day, despite averaging 2.75 goals per game, as yet, there have been no goals scored from outside the box at the World Cup.

Being Thanksgiving there are also a number of big NFL games to feast on in the evening.

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All times in GMT (EST+5 / CEST-1 / JST-9)

Thursday

Riksbank Interest Rate Decision 75bp hike expected taking rates to 2.5% (08.30 GMT)

Germany Ifo Business Climate Nov consensus 85 vs previous 84.3 (09.00 GMT)

ECB Meeting Minutes (12.30 GMT)

Japan Tokyo Core CPI Rate YoY Nov consensus 3.5% vs previous 3.4% (23.50 GMT)

BoE Speakers

Ramsden (09.45 GMT)
Pill (10.30 GMT)
Mann (13.45 GMT)

ECB Speakers

Guindos (11.15 GMT)
Schnabel (13.00 GMT)
Enria (13.15 GMT)
Nagel (16.00 GMT)

World Cup

Switzerland v Cameroon (10.00 GMT)

Uruguay v South Korea (13.00 GMT)

Portugal v Ghana (16.00 GMT)

Brazil v Serbia (19.00 GMT)

NFL Thanksgiving Games

Buffalo Bills v Detroit Lions (17.30 GMT)

NY Giants v Dallas Cowboys (21.30 GMT)

New England Patriots v Minnesota Vikings (01.20 GMT)

Good Luck and a Happy Thanksgiving to all our readers who are celebrating.

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The Morning Hark