The Morning Hark - 26 Aug 2022
Today’s focus ……US personal income and Deflators 13.30BST, Michigan consumer confidence followed by Chair Powell at Jackson Hole 15.00BST
All prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil –Both contracts were lower yesterday following some hawkish Fedspeak from Bostic and George but bounced in Asia with Brent and Crude October futures both up around 1% at 100.30 and 93.55. The Black Sea terminals have all passed inspection and loading can go back to capacity.
EQ –So far today the Nikkei and Hang Seng are up at 28,628 and 20,080. The Kospi 200 futures lead the way again and are up 0.85% at 324
Yesterday US indices shrugged off Hawkish FOMC chatter to finish higher on the day. SO far this morning they are flat with S&P at 4190 and NASDAQ at 13110
US listed Chinese stocks fared well yesterday as talks progress between US and China regarding the long drawn-out audit issues.
Gold - Gold Dec futures are slightly weaker today at 1770. A dip yesterday on George’s comments didn’t last long and it ended the day up around 7$. Jackson Hole is the obvious risk event for Gold today.
FI – US yields are higher in Asia at 3.3800% and 3.0550% for the US2yr and US10yr respectively. A jump in yields yesterday after Fed speakers didn’t last but gave an indication of how Powell might lean today. George made the comment that rates may have to go above 4% and stay there a while, dismissing market pricing of cuts coming early next year. Tokyo CPI released earlier this morning beat expectations with the YOY printing 2.9% versus 2.7% expected. The core numbers both beat by 0.1%
FX – The USD is top of the pile in Asia today with NZD the largest loser in the majors. Another aggressively low USDCNH fix as China fight the weakening Yuan. This does feel like a smoothing operation though as they cannot be adding stimulus and not expecting some weakness.
A 20 pip range in EURUSD is nothing to write home about and like everything else, the FX market is eyeing PCE data and Mr Powell’s speech.
Others – Ethereum and Bitcoin both lower again today with Eth at 1,662 and BTC at 21,315, basically bobbing around with risk without anything to drive them outside of macro econ news.
News – Putin wants a 10% increase in armed forces to take Russian troops to over 2mio. A recruitment drive will be put in place which will include people currently in prison.
UK raises energy price cap to £3,549 as expected and energy regulator OFGEM states it will get worse through 2023 with another 50% increase by next June. The current rise was 80% but was predicted to be 42% back in May. Therefore the 50% increase now predicted by June 2023 may not be worth the paper it is written on. The UK consumer will be paralysed by this.
The day ahead and final thoughts on Jackson Hole
Quite the day ahead as we get the Fed’s favourite measure of inflation the PCE price index for July and after the much talked about “peaking” we saw for the July CPI report it will be of much interest to the market as it tries to establish if this report was an outlier or if indeed we have put in a peak for inflation. Initial estimates suggest that we will see a slight softening in the report, and this will give encouragement that with inflation peaking the Fed’s aggressiveness has peaked and let’s jump on a risk rally again. As we have said before several times this measure will have more significance to the September meeting outcome than anything Powell will say ninety minutes later.
At the same time as Powell stands up, we get the final Michigan sentiment survey for August with the preliminary having printed at a healthy 55.1 siding with the strong Philly survey rather than the weaker NY and Richmond editions we’ve seen of late.
I think it’s also worth noting that next week brings month end, the ISMs and the August US employment report as we head into the Labour Day weekend so again huge prints in framing the near term landscape for markets in the run up to the September FOMC.
Of course, the main highlight is Jackson Hole and I post the full agenda below albeit the markets will be focused purely on Powell’s speech.
The warmup acts did a pretty good job at emphasising the hawkish side of the debate.
Bullard once again stressed his preference for a front loading of rates into year end to get Fed Funds up to 3.75/4% which, in his view, will give the Fed more flexibility going into 2023.
George went even further saying that rates may have to be lifted beyond 4% for some time to tame inflation.
Whilst Harker tried to stress that even if they did go 50 in September that didn’t mean they were turning dovish and used the stat that since 1983 the Fed have raised 86 times and 75 of those occasions have been below 50bps.
Also take note that prior to Powell today we will get Harker, Bullard and Bostic all interviewed in the lead up to the main event whilst Mester is scheduled after Powell; I assume just in case the market doesn’t get the message?
Look out for other interviews scheduled or otherwise throughout the day.
So to Powell it does seem the messages they are trying to get across, and which Powell will touch on in parts, are whether its 50 or 75bps in September the policy remains hawkish camp and whatever the terminal rate they reach, which seems more and more likely to be in the 3.75/4% level, that level will be maintained for a length of time appropriate to ensure that inflation returns to target. If that means the whole of 2023 so be it.
If we refer to a quote from the July minutes; “once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent” that pretty much sums up what the officials have being trying to stress in the lead up to Jackson Hole.
That opens up several more questions of course; is 3.75/4% the terminal rate, will inflation take the whole of next year to gravitate back to target, is target 2% or will it be elevated to a new normal, will the Fed be able to hold their nerve throughout 2023 and what happens if the economy doesn’t have the soft landing, but inflation remains elevated? All for the future of course but worth bearing in mind.
We expect Powell to be on the margins hawkish in his comments without of course giving forward guidance. This could be framed as a discussion on inflation and emphasising the need to tame it no matter the implications to the economy or indeed by merely not mentioning the economy and its recent signs of weakness. The restrictive for longer theme could also be used to emphasis the hawk and of course if he wanted to go full hawk he could explicitly say that the market is under-pricing the Fed and financial conditions need to tighten further.
We also expect some comments and colour on QT especially as the policy starts to move into full gear next month and indeed could he use this as an additional tool to temper market enthusiasm?
One point to note is the MOVE measure which we have spoken about previously in The Morning Hark. It is at elevated levels, indeed levels which have only been seen in 3 previous occasions for late August, so rates markets are expecting fireworks. We tend to disagree, yes we expect volatility and noise around the event but any move we’d expect to see a swift reversal of as we go into next week as markets, with their short memories, will start to focus on and preposition for the next big risk events of ISM and NFP.
Either way and whatever happens I wish you all luck.
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US Personal Income MoM Jul consensus 0.6% vs previous 0.6% (13.30 BST)
US Personal Spending MoM Jul consensus 0.5% vs previous 1.1% (13.30 BST)
US PCE Price Index MoM Jul consensus 0.0% vs previous 1% (13.30 BST)
US Core PCE Price Index MoM Jul consensus 0.2% vs previous 0.6% (13.30 BST)
US PCE Price Index YoY Jul consensus 6.4% vs previous 6.8% (13.30 BST)
US Core PCE Price Index YoY Jul consensus 4.7% vs previous 4.8% (13.30 BST)
US Michigan Consumer Sentiment Final Aug consensus 55.4 vs previous 55.1 (15.00 BST)
US Michigan Inflation Expectations Final Aug consensus 5.0% vs previous 5.0% (15.00 BST)
US Michigan 5y Inflation Expectations Final Aug consensus 3.0% vs previous 3.0% (15.00 BST)
Powell (15.00 BST)
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