The Morning Hark - 24 Oct 2022
Today’s focus ……The closing chapter in the UK’s Bleak House for now, BoJ intervention, the Fed “pause” and The Week Ahead.
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December down a percent in Asia with the pair currently trading at 92.70 and 84.10 respectively.
EQ - Equity markets in Asia dominated by the sell off in Chinese markets with the Hang Seng currently down close to six percent at 15,272 as investors take flight after President Xi’s tightening of his power base. We are back at levels last seen in 2009. Nikkei and Kospi sidelined in comparison trading currently at 27,027 and 292 respectively.
The Nasdaq and S&P flat overnight in Asia at 11,403 and 3775 respectively as they hold onto their week’s gains. The Fed pause chat was enough for the markets to rip on Friday and much chat that this move has the potential to continue to squeeze. Certainly, the market was short, so position adjustment has played a part as has, as ever, the appalling liquidity. There is no denying that there are tailwinds given the fact we tested the June lows and traded well of them, there is positive seasonality into the mid-term elections, the Fed perceived dovishness, earnings were overall better than expected and the technical close on Friday was positive. I would just be careful if we were to see some more aggressive upside that the Fed would talk this back on the back of those loosening of financial conditions. Keep refreshing the WSJ page! Remember we have been here so many times this year before talking about pivots and it always ends badly. Will this time be any different?
Gold - Gold Dec flat overnight in Asia at 1660 as it holds onto its gains form Friday. Gold was glad to ride the general feel good factor wave that was brought into the US session by a mix of BoJ intervention and the “pause” chat out of Daly and the WSJ. With the USD and US yields yielding to the news gold found its wings again. We have the first resistance now around 1670/75 followed by 1700. Support now 1650.
FI - US yields continuing to push lower in Asia trading with the US2y and 10y now at 4.42% and 4.14% respectively. Both saw sharp declines on Friday after touching recent highs again on the back of the Fed “pause” chatter.
European yields playing catch up this morning on the open trading lower in line with the US with the German and Italian 10y yields at 2.344 and 4.626% respectively.
UK gilts we’d expect a similar pattern for the open with the 10y closing Friday at 4.05%.
FX - Lot of divergence in the FX market but the USD trades flat with the USD Index at 112.17. USDJPY rollercoaster with “intervention” chatter and a swift recovery as it slowly recovers its losses from Friday’s BoJ actions currently at 149.16. AUD and KRW suffering as a China proxy down close to one percent at 0.6328 and 1440 respectively whilst USDCNH up a similar amount at 7.2760. GBP has had some relief with the political news over the weekend now at 1.1345. USDNOK higher on the back of weaker oil at 10.55.
Others - Bitcoin and Ethereum a semblance of life emerging as they follow the risk asset bid tone but hardly inspiring. They currently trade at 19,347 and 1342 respectively.
As we know the BoJ stepped into the FX market in the US session on Friday to stem the tide of JPY weakness. They managed to push USDJPY down from the mid 151’s to the low 146’s in a similar pattern to what we saw back on 22 September when they pushed it down from near 146 towards 140. As we have said before intervention as a tool, in the main, does little more than slow the pace of a move rather than actually turn the tide which tends to need coordinated intervention. There was a lot of talk that the timing of the intervention coming in close proximity to Fed Daly’s comments and the WSJ article, which both talked about a slowing in the Fed hiking path, was more than a coincidence. I think it’s a stretch that it was a “coordinated” action and if the market thought so surely USDJPY would be lower this morning rather than erasing half of the intervention range already in Asia?
This morning saw another sharp dip lower in USDJPY in what is suspected intervention but with no official confirmation. This is a common pattern in markets that have seen recent bouts of intervention when some “normal” selling can have a waterfall effect as traders are panicked into thinking that the BoJ are in again. Let’s wait and see for official confirmation. I post at the bottom a thread by Alf from The Macro Compass who discusses intervention and the mechanics of such moves and the implications that it could have for the US treasury market.
Is Bleak House coming to an end?
Well, well, well we didn’t see that coming. Boris Johnson stepped out of the running for the Conservative party leadership saying that, despite having enough backers and feeling he would have won the membership’s vote, “this is simply not the right time”. Furthermore, he went onto say that he realises that “you can’t govern effectively unless you have a united party in government”.
Reading between the lines, it feels like the public outcry from several Conservative big beasts that he would divide the party, tear it apart and cause civil war ultimately did for him. Although the fact he referred to it being simply not the right time suggests he will be back and I guess he’s hoping that the gap now between Labour and the Conservatives is too large to bridge at the next election and he will be waiting in the wings to pick up the pieces then. Let’s see but for now, let’s hope he does more speaking in foreign lands on well paid speaking engagements rather than rattles his gums back here throwing pelters at the government!
So this leaves us with two candidates and with Sunak well ahead it would not be a surprise if Mordaunt steps aside pre the nominations closing time at 2pm and gives him a clear run. All in all a calming result for now for UK markets and certainly less traumatic and fractional if Boris had remained in play. Time will tell, but for now, it looks like the soap opera, that was UK politics, is coming to a close and the adults are back in charge.
I post Politico at the bottom which is obviously essential reading.
China’s 20th Communist Party Congress
I post below a number of summaries of the Congress and the implications for the markets and the wider world as well as some commentary on some of the rather “unsavoury” scenes involving the former President Hu Jintao’s ejection from the Congress over the weekend.
Markets initial reaction has been negative to Xi’s tightening of his grip on power with investors seemingly spooked by the extent of the power grab. This despite the delayed data dump release which showed a “surprise” much better than expected Chinese q3 GDP figure at 3.9% which beat expectations and dwarfed the previous quarter’s print. There was also a stronger than expected industrial production measure although retail sales were a disappointment and the unemployment rate ticked up.
Central Bank Speakers
Only one place to start here and it’s obviously the Fed’s Daly comments and of course the pseudo Fed Timiraos’s column in the WSJ. Both of which came as a bookend to what is the start of the Fed quiet period ahead of next week’s FOMC.
Interestingly, we had been highlighting all week the Fed speakers had all commented on a “pause” and specifically the timing and circumstances of such an event. Perhaps they felt they needed a stronger message to get the market’s attention that there is potentially a change in tack on the horizon for the Fed. The WSJ article confirmed 75bps is all but done for next week making it 4 meetings in a row that such a magnitude of hikes has been delivered. However, the meeting is also going to focus on the outlook for the December meeting and whether they want to deliver a fifth hike of that size or whether they want to start dialling down to 50bps. The market has very short memories. In years gone by in a 25bp step market a 50bp hike would have been seen to be uber hawkish, but I guess now recency bias has deleted that from the memory.
Daly remember is a noted dove and is a non-voter but nevertheless, the timing of her comments right on the cusp of the quiet period is surely significant. The old “it’s as dangerous to over tighten as it is to under tighten” phrase was rolled out. However the main point of focus was the point she made about “we will do a step-down, not to pause, but to 50bps or 25bps increments”. Surely this is nothing new? The sensible thing was surely that they would dial down to smaller steps before pausing and then going on a cutting cycle. Given the front loading of the hikes it seems sensible that they want to step off the accelerator and let the hikes flow down into the economy fully.
The issue they have is whilst they wish to remain hawkish and believe they still are by hiking 50bps. The market looks throw that and into the pause/cut phase. If this is done too sharply stocks rally and we get a loosening of financial conditions which the Fed then has to react to. That remains the issue. They have to get across to the market that even by going 50bps in December they still remain hawkish and indeed future data may get them to ratchet back up to 75bps if need be. The issue is, will the market believe them?
Ultimately a pivot to the Fed is them starting to cut but to the market, a slowdown in hiking will more than suffice. Remember to there is that small matter of QT to factor in.
Once again please take a look at the bottom at the FXMacro Guy’s daily tweet which is larger than usual which he posted yesterday. It’s a quick but comprehensive summary of the week’s events and central bank speakers. Also, I post his weekly and, although it is shorter than normal, it’s really important given we have 3 central bank meetings this week. He has great crib sheets for each of the banks; BoC, ECB and BoJ with all the recent comments from the various central banks. It’s free and easy to use so spread the word!
The Week Ahead
Bank of Canada. Expectations are edging towards a 75bp hike on Wednesday but it’s a close call between that and a 50bp hike. The Bank has delivered 300bps of hikes since February so there was a thought they would do 50bps this time and start to reflect on the follow through on the upcoming data of these hikes. However, September’s CPI print, and in particular the core measure, has changed market opinion. The core print came in stronger in both the YoY (6% from 5.8%) and MoM (0.4% from 0%) versus August’s prints. Comments from the BoC suggest that there is a growing fear that core inflation is becoming entrenched and they will want to deal with that by hiking 75bps. One further point in support of such a hike is Governor Macklem’s comments regarding the weakening CAD versus the USD when he suggested that they will have to do more work on interest rates if that weakness were to persist. Given it seems nailed on that the Fed will do 75bps next week a similar move by the BoC seems more plausible.
ECB. Much anticipated ECB meeting on Thursday is widely excepted to deliver a hawkish 75bps hike. Indeed it has been telegraphed so strongly that any disappointment would send the EUR well through its recent lows something the ECB could well be doing without. This despite the doom and gloom surrounding the economic data in the Eurozone with today’s data expected to show a further contraction for the PMIs. So with 75bps pretty much in the price what to look out for? Lagarde’s press conference and her thoughts on the policy path for the remaining meeting of the year in December and beyond especially as several of her cohorts, as indeed she has done, have mentioned that hikes will be needed at the next “several meetings”. Other topics of concern will include; balance sheet reduction which was alluded to have been discussed at their general counsel meeting earlier in the month. Suggestions are that the reinvestment language may be “tweaked” at this meeting before an announcement of the plan in one of the next two meetings followed by a launch in the spring of 2023. TLTRO may also be tweaked given the “arb” opportunities the banks now have, via this mechanism, given the recent rate hikes. Finally, any signal as to a level for the terminal rate will be useful as the market gets its head around exactly where we are in the hiking cycle.
BoJ. The final G7 rate meeting of the week comes form the Bank of Japan on Friday. No change anticipated with the Japanese happy to remain the only major country firmly in negative rate territory. To be frank they seem very comfortable there and they are not for a turning no matter what those bond vigilantes or currency speculators throw at them. Probably of more interest will be their new quarterly outlook report which is expected to show a fiscal year end CPI forecast close to 3% from its prior 2.3%. Despite this the BoJ seems set fair on their easy monetary policy path with Kuroda recently suggesting that CPI will return to the target 2% level later next year so there is no need for a policy change. Given that and the precarious nature of the Japanese economy all recent commentary from the Bank has been in supporting the economy with no change in the easing policy.
UK Leadership Contest. This week and hopefully today will see the country move onto its third PM of the year, without having to go to the membership of the party, which looks more likely now with Boris’s departure. His departure and what would appear to be a Sunak coronation should calm the markets, especially in this newly found risk euphoria. Boris lives to fight another day and I guess that coupled with the fact that the Conservatives have a tough year ahead in the lead up to a general election keeps political uncertainty alive in the UK albeit in a lot calmer place than we were a week ago. The market will not deliver back its trust that quickly it will have to earned and that will start next Monday. Remember that’s the day that sees the chancellor, and we assume it will still be Hunt, deliver his Halloween fiscal package and lets hope its the one that should have been delivered back on the 23 September and no further nasty surprises please! Talk over the weekend that he will be raising taxes mainly from the higher earners to the sum of some £20bn so I’m guessing he won’t be getting invites to hedge fund cocktail parties anytime soon!
US Data and WSJ leaks? Couple of big data points in the week with the advanced release of q3 GDP in the US, on Thursday, which is expected to show a positive reading after two quarters of negative prints and that much debated “technical” recession/non-recession. Whichever way you fall on that debate this quarters numbers will get a good uptick from the factors that had caused such negativity previously namely the volatility from trade and inventories. The second piece of data is of course the Fed’s favourite measures of inflation; core PCE and the ECI measure which we get on Friday. The YoY is expected to follow the main Core CPI measure and again show an uplift breaching the 5% level and confirming the Fed’s intentions for a further 75bps hike next week. The ECI is expected show a slight downtick. Finally given the market euphoria on Friday’s NY session after the WSJ and Daly comments it may be worth watching Timiraos for any further comments especially if stocks start to get well ahead of themselves prior to next week’s FOMC.
The Day Ahead
Overnight we had Japanese and Australian flash PMIs for October.
Australia came in lower over both measures than September’s prints. Manufacturing now at 52.8 with Services into contraction territory at 49.
Slightly better out of Japan with services showing a beat at 53 whilst manufacturing a small miss at 50.7.
Day ahead dominated by the global flash PMIs for October. Expectations for a further decline across all major countries and across all measures albeit, in the main, small declines.
Headline watch ahead of the leadership vote for the next leader, and hence PM, of the Conservative Party although would appear to be less of a player now.
Couple of items to point out, posted at the bottom for your perusal. I post, in the US recession watch, another twitter thread from the excellent Eric Basmajian on the US housing market. Also in that section a further article on the strains in the US treasury market from Ashenden Finance.
In addition in other articles of interest I post Alf from The Macro Compass’s twitter thread on his discussions from his London trip with 3 hedge fund managers. Fascinating insight! Finally a thought-provoking piece from Branko Milanovic which discusses a new world order in the face of the end of globalisation. Really interesting and a great follow up read to the Weekend FT article from Rana Faroohar where she discusses her new book on that topic.
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Germany S&P Global Manufacturing PMI Flash Oct consensus 47 vs previous 47.8 (08.30 BST)
Germany S&P Global Services PMI Flash Oct consensus 44.7 vs previous 45 (08.30 BST)
EU S&P Global Manufacturing PMI Flash Oct consensus 47.8 vs previous 48.4 (09.00 BST)
EU S&P Global Services PMI Flash Oct consensus 48.2 vs previous 48.8 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Oct consensus 48 vs previous 48.4 (09.30 BST)
UK S&P Global Services PMI Flash Oct consensus 49 vs previous 50 (09.30 BST)
US S&P Global Manufacturing PMI Flash Oct consensus 51 vs previous 52 (14.45 BST)
US S&P Global Services PMI Flash Oct consensus 49.2 vs previous 49.3 (14.45 BST)
German IFO Business Climate Oct consensus 83.3 vs previous 84.3 (09.00 BST)
German IFO Expectations Oct consensus 74.9 vs previous 75.2 (09.00 BST)
German IFO Current Conditions Oct consensus 92.5 vs previous 94.5 (09.00 BST)
US Richmond Fed Manufacturing Index Oct consensus vs previous 0 (15.00 BST)
US Richmond Fed Services Index Oct consensus vs previous 0 (15.00 BST)
Australia Inflation Rate YoY q3 consensus 7% vs previous 6.1% (01.30 BST)
Australia Inflation Rate QoQ q3 consensus 1.6% vs previous 1.8% (07.00 BST)
Bank of Canada Interest Rate Decision 75bp hike expected taking rates to 4% (15.00 BST)
US New Home Sales Sept consensus 0.59M vs previous 0.685M (15.00 BST)
Bank of Canada Press conference (16.00 BST)
ECB Interest Rate Decision 75bp hike expected taking rates to 2% (13.15 BST)
US Durable Goods Orders MoM Sept consensus 0.5% vs previous -0.2% (13.30 BST)
US GDP Growth Rate QoQ Adv q3 consensus 2.1% vs previous -0.6% (13.30 BST)
ECB Press Conference (13.45 BST)
Lagarde (15.15 BST)
Wood (16.30 BST)
Japan Unemployment Rate Sept consensus 2.5% vs previous 2.5% (00.30 BST)
Japan Tokyo CPI YoY Oct consensus % vs previous 2.8% (00.30 BST)
Japan Tokyo Core CPI YoY Oct consensus 3.1% vs previous 2.8% (00.30 BST)
BoJ Interest Rate Decision no change expected (04.00 BST)
BoJ Quarterly Outlook Report (04.00 BST)
German GDP Growth Rate QoQ Flash q3 consensus -0.2% vs previous 0.1% (09.00 BST)
German Inflation Rate MoM Prel Oct consensus 0.6% vs previous 1.9% (13.00 BST)
German Inflation Rate YoY Prel Oct consensus 10.1% vs previous 10% (13.00 BST)
Canada GDP MoM Aug consensus 0.1% vs previous 0.1% (13.30 BST)
US Employment Cost Index QoQ q3 consensus 1.2% vs previous 1.3% (13.30 BST)
Personal Income MoM Sept consensus 0.3% vs previous 0.3% (13.30 BST)
US Personal Spending MoM Sept consensus 0.4% vs previous 0.4% (13.30 BST)
US PCE Price Index MoM Sept consensus % vs previous 0.3% (13.30 BST)
US PCE Price Index YoY Sept consensus % vs previous 6.2% (13.30 BST)
US Core PCE Price Index MoM Sept consensus 0.5% vs previous 0.6% (13.30 BST)
US Core PCE Price Index YoY Sept consensus 5.2% vs previous 4.9% (13.30 BST)
US Pending Home Sales MoM Sept consensus -5% vs previous -2% (15.00 BST)
US Michigan Consumer Sentiment Final Oct consensus 59.8 vs previous 58.6 (15.00 BST)
US Michigan Inflation Expectations Final Oct consensus vs previous 4.7% (15.00 BST)
US Michigan 5y Inflation Expectations Final Oct consensus vs previous 2.7% (15.00 BST)
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You were 'right on the money' when you said; "this leaves us with two candidates and with Sunak well ahead it would not be a surprise if Mordaunt steps aside pre the nominations..."
I have trouble believing the Chinese data numbers......I really don't trust the Xi Regime...