The Morning Hark - 25 Aug 2022
Today’s focus ……German IFO 09.00BST, ECB minutes 12.30BST and US GDP 13.30BST. Jackson Hole looms large, look out for headlines from arriving officials.
All prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil –Brent and Crude October futures closed higher for the third day yesterday and continue to rally this morning to trade at 101.95 and 95.40 respectively. This week has seen the news of OPEC oil cuts gaining traction amidst the US-Iran nuclear deal and yesterday EIA data showed a drawdown in inventories.
EQ – Hong Kong was hit today with a tropical storm which has now moved across into mainland China. This halted the morning session at the HKEX. On the day the Nikkei and Hang Seng are up at 28,582 and 19,695. The Kospi 200 futures are up 1.00% at 323, undeterred by the BOK raising rates by 25BP which to be fair was as expected.
Stocks had a good jump at the European open although reasons behind it are not clear.
Gold - Gold Dec futures are $6 stronger today. $1774 looks like a minor technical to take out on the day before we can push higher, although the day ahead does not inspire much confidence in a big a move.
FI – US yields have been quiet in Asia losing a little to sit at 3.3820% and 3.1050% for the US2yr and US10yr respectively.
BOJ Nakamura spoke overnight calling for the BOJ to continue easing policy and stating they are only halfway there in terms of their achievements so far.
Bund/BTP spreads open the day at 2.3000 which looks quite pivotal. A move lower through that level may have some room to run.
FX – The USD lost ground in Asia with USDJPY being sold at the fix and struggling to recover since. NZD sold off on a lower than expected retail sales number but has recovered its poise.
In early London trading EURUSD took out the overnight high and has pushed on 30 pips, to print a high of 1.0024
All in all, a pretty quiet session and the markets attention is now firmly on PCE and Powell speech tomorrow.
USDCNH tried to push higher today only to be hit on a headline, warning Chinese banks to not sell CNH aggressively. This was followed by a large downside surprise in the fix price of around 120 pips. A clear warning to speculators!
Others – Ethereum and Bitcoin both lower again today with Eth at 1,695 and BTC at 21,640
Data update and some early thoughts on Jackson Hole
Following on from the disappointing US PMI and housing data, durable goods data yesterday sent mixed signals with a flat reading for the month, which was below expectations, but a rise in the core orders above what was forecast and indeed showed a fifth straight positive print. Hardly the follow through hard data we want to see to confirm the deteriorating PMIs but equally not exactly data to set the pulses racing.
In addition, the Atlanta Fed revised down their q3 GDP estimates to 1.4% from 1.6%.
Today sees the 2nd estimate for US GDP q2 where expectations are for a halving of the previous quarter’s -1.6% to -0.7% and a slight trimming from the first estimate for q2 of -0.9%.
As we touched on earlier in the week there have been a lot of column inches devoted to Jackson Hole and as you can imagine lots of divergent views.
Let’s look at the landscape of what the Fed is facing from a data point of view. The last payrolls report was very strong, CPI appears to be in the early stages of peaking but still remains well above the normal and is peaking (if it is) from an extreme height, the housing sector is collapsing and seems to be entering a recession, soft data like the PMIs look to be rolling over but as yet its slow to translate into the hard data and we have the backdrop of midterm elections in a little over two months.
From a markets’ point of view the USD is ripping on rate differentials, yields have started to tick up again, oil well off its years highs but remains at historically high levels and despite the recent correction equities seem to have a mind of their own and refuse to hear the Fed’s hawk talk. Equally whilst the rates market has started to take its medicine again there still remains a disconnect between the Fed and the rates market in terms of the outlook for 2023 whereby the Fed’s recent talk has been insistent that no cuts will appear in that year whilst the market, although tempered somewhat, believes this not to be the case.
Will Chair Powell use this platform to address this disconnect?
What does appear to be the case, and which we have mentioned before, with forward guidance jettisoned we see no reason for Powell to give any indication on where he is leaning in terms of a 50 or 75bps hike for the meeting in four weeks’ time especially with the big August data prints of NFP and CPI still to come. As we said on Monday in terms of the September meeting the PCE print ninety minutes prior to him talking on Friday will have much more significance to that decision than anything Powell says.
So that’s what he won’t say so what will he say and what’s more will it affect the markets and indeed, after exFed Bloomberg mouthpiece Dudley pointed out that nothing in his 2021 appearance actually transpired, should we listen?
Much talk has hinted that he will address the coming uptick in pace for QT by the Fed and how that will affect the balance sheet. So, could he discuss how the shrinking of the balance sheet will effect Fed policy going forward into 2023? It’s certainly a subject that, compared to the frenzied over analysis of Fed hikes and their magnitude, is pretty much brushed aside by the markets incorrectly in our view.
Perhaps given the subject of the symposium is “Reassessing constraints on the economy and policy” he will give his thoughts on the path of inflation for the coming year through 2023 or indeed relate it back to the 1970’s period of high inflation and look at any similarities or differences between now and then?
Indeed, the Fed whisperer Timiraos of the WSJ hinted at much of the above in his latest appearance on CNBC when he said that Jackson Hole was not a platform for “spot guidance” for the September meeting but much more of an opportunity to map out the Fed’s thoughts for the next 6/12/18 months.
On that basis what will he say? Probably more of the same in terms of the Fed and their willingness to take some pain in terms of employment and equity valuations (although so far they’ve seen little of that), that recessionary risks are rising but a soft landing is still possible however no matter what they are committed to getting inflation down and under control and back to target. That of course raises the question what is “target”? Is it still 2% do they dare raise the target say to 3%? Is the new norm 5%? Think it’s too early for that one and the way the market is perched that could be way too much of a dove.
Perhaps, if he is serious on the pain trade, he gives a nod to how financial conditions have eased somewhat over the last few months and how this makes the Fed’s job a lot harder and as such rates may have to rise further if such conditions remain.
Finally on rates he has previously touched on a potential slowing pace but so far, he hasn’t touched on the duration of the slowing pace and whether rates will stay higher for longer as some of his colleagues have alluded to of late.
As we say for the September meeting PCE will have more bearing on short term rates and the market’s direction. Powell will be for the future and I’m sure there will be a lot of noise and volatility around his speech but when the dust settles will he have given the market anything new to chew on and even if he does will the market just do what it wants anyway? Some early thoughts to chew on but as it comes at 3pm on a holiday weekend in the UK a lot of people will be hoping for a sleeper.
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German IFO Business Climate Aug consensus 86.8 vs previous 88.6 (09.00 BST)
German IFO Current Conditions Aug consensus 96 vs previous 97.7 (09.00 BST)
German IFO Expectations Aug consensus 79.0 vs previous 80.3 (09.00 BST)
ECB Minutes for July meeting
US GDP Growth Rate QoQ 2nd Est q2 consensus -0.7% vs previous -0.9% (13.30 BST)
US PCE Prices QoQ 2nd Est q2 consensus 8.7% vs previous 8.7% (13.30 BST)
US Core PCE Prices QoQ 2nd Est q2 consensus 4.4% vs previous 4.4% (13.30 BST)
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