The Morning Hark - 25 Oct 2022

Today’s focus ……A new chapter for the UK, PMI shockers and “Fed pause” rally continues.

Oct 25, 2022

All prices are at 7.00 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December up small in Asia with the pair currently trading at 93.20 and 84.70 respectively as they consolidate their late gains from yesterday’s session on the back of the weaker USD despite worries on the demand side especially out of China.

EQ - Equity markets in Asia showed a more positive picture this morning with Chinese markets “recovering” from their sharp sell off yesterday. All the major Asian indices are showing positive gains with the Hang Seng Nikkei and Kospi trading currently at 15,240, 27,250 and 292 respectively.

The Nasdaq and S&P flat overnight in Asia at 11,470 and 3808, respectively, as they hold onto their “Fed pause” gains. Lot of chatter as to whether this is the real deal and whether we shall get confirmation from the Fed next week that a slowing is a coming. Technicals, buyback season returns, seasonality, you name it are all getting rolled out in support for the rally. I’m still a tad sceptical that this is coming so soon and even if they were to slow/pause does this mean we immediately return to a bull market and everything is well with the world? Things never seem to be that simple, do they?

One thing I would say is that equities have once again become disconnected from the rates space showing no real interest in cooling the rally despite the rise in US yields yesterday.

Gold - Gold Dec flat overnight in Asia at 1652. Gold returns to its recent doldrums after getting everyone excited on Friday. Back to ranging with the first resistance now around 1670/75 followed by 1700. Support continues at 1650.

FI - US yields easing a touch in Asia trading after yesterday’s rally with the US2y and 10y now at 4.49% and 4.21% respectively. The bond market still feels that the Fed will remain on its tightening path over the next few meetings to get towards a terminal rate close to 5%. 75bps remains the favoured path for November but December is now a 50/50 play for 75bps down from a 65% chance last week.

European yields followed UK yields lower with the German and Italian 10y yields closing at 2.33% and 4.591% respectively.

UK gilts welcomed the new PM with a strong endorsement of a 31bp yield sell off with the 10y closing at 3.74%.

FX - Once again a lot of divergence in the FX market with the USD flat. The USD Index currently 111.98. USDJPY stubbornly bid at 148.91. The Rishi rally has somewhat fizzled out with GBP trading now at 1.1274. The EUR nailed to the wall at 0.9871. AUD, NZD and KRW all holding up better today with China stabilising currently at 0.6323, 0.5704 and 1435 respectively. USDCNH been the real news with the yuan continuing to slide hitting an all time low at 7.3735. It currently sits at 7.3440.

Others - Bitcoin and Ethereum hmmm…..currently trade at 19,339 and 1349 respectively.

PMIs

Not attractive to say the least.

Germany showed a small beat versus expectations in services PMI to 44.9 but a larger miss in the manufacturing measure to 45.7.

The comments were pointing the finger at higher energy costs and weaker demand. Worryingly the downtrend is growing in pace.

The wider Eurozone showed similar traits with services holding up at 48.2 but manufacturing missing expectations to print lower at 46.6.

Again the commentary was far from encouraging with demand falling sharply with higher inventories and weaker sales. Not a good combination.

The UK missed on both with services now at 47.5 and manufacturing a dismal 45.8.

Commentary had a slightly different tone with the political turmoil contributing to the gloom as well as inflation and the spectre of higher interest rates.

To cap it all the US showed two big misses with services now at 46.6 with manufacturing just dipping under the 50 mark at 49.9.

Again a challenging demand environment was prominent in getting the blame as were inflation worries. More worryingly new orders in the US fell back into contraction and the employment measure was also below 50 for the first time in a couple of years. Additionally, the service sector is starting to cut jobs just as we enter the holiday season.

Overall a terrible backdrop with all measures now across Europe and the US in contraction. The European and UK data points to further negative GDP prints for q4.

As an aside and we like a quirk like this. In every year that a Philadelphia baseball team has won the World Series (they have just reached this year’s World Series to play the Astros) there has been a financial crisis; 1929, 1980, 2008 and potentially 2022?

I post below FXMacro Guy’s excellent daily tweet which covers the PMIs in more detail. Always a great summary of the day’s events in addition to any central bank speakers to help you navigate these markets.

BoJ Intervention

The futility of it all must slowly be dawning on the BoJ. Solo intervention is a fool’s errand historically but in these current markets even more so and having spent in excess of $50bn the JPY remains knocking on 150. Estimates suggest that they spent around $36bn on Friday alone in defending the JPY. I get the feeling this will only end when something major cracks elsewhere in the markets which has systemic risk and forces coordinated intervention across all markets. What that is is up for question; US housing market? US treasury market? Italian spreads? the UK returning to the Bleak House days?

I post at the bottom a good summary of recent events on the intervention from Zerohedge.

A new chapter in UK politics

Well here’s hoping that the last seven weeks or so fade quickly from our memory and we wake up one day realising it was all just a bad dream. Although I still think that Truss grimace, on Thursday outside No10 at the end of her resignation speech, will live long in my memory sadly!

As we suspected Mordaunt withdrew from the race, as she basically failed to get the required number of backers to get her to the next stage, leaving Sunak as the only candidate. He becomes the leader of the Conservative Party and indeed Prime Minister of the UK. Some prize for getting 200 or so people to back him!

Anyway we are where we are. The adults have returned to the room and the UK markets seem to like it. Indeed the 2y gilt’s yield had its sharpest decline in 30 years. In addition, the peak in UK rates is now back a touch below 5% from 6% just only last week. The deputy Governor of the BoE Ramsden was also keen to point out, to the Treasury Committee today, that credibility was returning to the UK markets after gilt yields reaction at the beginning of the week. Although he was also keen to hint that it “has to be followed through” with a nod to next week’s fiscal package.

Life continues as normal in Westminster. Sunak immediately says there will be no general election, the right-leaning ERG group of the Conservative Party cannot collectively endorse Sunak and Greenpeace protestors disrupt parliament. All we now need is some cabinet resignations and we’re back to square one!

I guess the next thing on his agenda will be to confirm the fiscal package release date for next Monday or will he look to delay it? Given its importance and the fact that he was confirmed PM yesterday, rather than having to wait until the end of the week for the members’ vote, would suggest that he will have enough time to ratify it for its proposed date. Next up will be his cabinet reshuffle and surely he will look to unite the party with appointments from both sides rather than do a Truss who stuck with her loyalists and shunned everyone else. Most of all from a market’s perspective he will surely retain Hunt as his chancellor.

Procedurally he will have a visitation with The King today and address the country around 11.35 BST as he will be officially confirmed PM today.

I post at the bottom a twitter thread from Chris Whittall of IFR which covers in great detail the Gilt market.

China’s 20th Communist Party Congress

The aftermath continues with the Yuan hitting all time lows versus the USD above 7.37.

The recent moves in the currency have only been surpassed by the devaluation day back in the summer of 2015 as the chat continues that the Chinese authorities are carrying out a stealth devaluation as we speak.

The Day Ahead

The IFO survey out of Germany grabs the attention in the morning with a continued deterioration in sentiment expected for the October print.

In the afternoon the Richmond Fed regional survey is the “highlight”.

Early doors Wednesday we have Australian inflation data with the quarterly read expected to cool somewhat to 1.6% from 1.8% in the previous quarter. Remember the ABS has recently introduced a monthly CPI although there are issues at extrapolating the monthly to the quarterlies.

I post at the bottom a Niall Ferguson op-ed for Bloomberg where he cheers up on this early Autumnal morning with a warning how this “Cold War II” could easily tip into WWIII. Probably one for after breakfast.

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Tuesday

German IFO Business Climate Oct consensus 83.3 vs previous 84.3 (09.00 BST)

German IFO Expectations Oct consensus 75 vs previous 75.2 (09.00 BST)

German IFO Current Conditions Oct consensus 92.4 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)

Early Wednesday

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% (01.30 BST)

Good luck.

Scott Grannis - China's dismal prospects
Macro Ops - 100% Recession Odds… [DIRTY DOZEN]
Macrodesiac - 🔔 The Yen Intervention Trade
James Picerno - Macro Briefing: 24 October 2022
Going John Galt - $19 CHINATECH: RETESTING CYCLE LOWS

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SHANON YMOUS

Great coverage as always. Good news to see Conservative's have finaly chosen the least worst candidate for PM and that Victorian buffoon (rees-mogg), and his half baked ideas, have been removed from a position of influence. Lets hope the UK now has a fighting chance 🤞

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