The Morning Hark - 26 Jan 2023
Today’s focus …is the BoC the canary in the coal mine for the Fed?
Prices are at 7.15 GMT/2.15 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March futures steady in Asia with them currently trading at 86.20 and 80.40 respectively. Again oil was happy to shrug off inventory builds from the EIA data which showed a six consecutive week of increases. Reports suggest a number of unplanned refinery outages have played a large part in the inventory build. Oil however is keen to look through these “short term” issues and focus instead on a softer rates environment and a China demand story.
EQ - Asia equity futures fully open again after the holidays with the Nikkei flat at 27,373. The Kospi and Hang Seng however are playing catch up with over one percent gains to 326 and 22,482 respectively.
The Nasdaq and S&P futures also firmer with them currently at 11,927 and 4042 respectively.
Seesaw day yesterday with tech woes pointing to a higher likelihood of a global slowdown dragging the indices lower, however, a short squeeze into the close erased all losses on the day.
Gold - Gold Feb futures holding onto yesterday’s gains as it sits comfortably at 1942 having just failed to capture 1950. The softer rates environment spurred on by the BoC pause helped the precious metal find some wings. Topside still at 1955/60. Support continues to be at 1900 then 1870.
FI - US yields a touch lower in Asia with the US2y and US10y trading currently at 4.13% and 3.45%, respectively.
European yields closed little changed yesterday with the German 10y yields at 2.156% and Italian 10y at 3.956%, respectively.
UK gilt yields similarly so, with the 10y closing at 3.244%.
FX - USD subdued overnight with the USD Index currently at 101.70. The majors mixed with JPY, EUR and GBP currently at 129.69, 1.0911 and 1.2386 respectively.
Others - Bitcoin and Ethereum looking perkier again at 23,031 and 1607 respectively.
Central Bank Speakers
Reports yesterday cited Kuroda as saying that the BoJ aims to regain market functionality by tweaking YCC operations while maintaining easy monetary policy.
The BoJ summary of opinions offered little new to chew on. Inflation was expected to slow in H2 of the next fiscal year starting in April. It was still appropriate to maintain the current monetary policy easing including the YCC operations. Whilst the recent expansion of the BoJ’s market operation tools will help create a stable shape for the YC.
ECB wise we were back to the hawks yesterday with Vasle claiming that 50bps hikes for the next two meetings was appropriate.
Makhlouf backed that up with the assertion that rates need to increase dramatically and we need similar magnitude of hikes in February and March as we saw in December of last year from the ECB.
Nagel unsurprisingly insisted that interest rates need to increase even more. Further increases after March would not surprise him as upside risks to inflation still remain.
Bank of Canada Review
Is the BoC the canary in the coal mine for the Fed next week? Was this their playbook?
25bp hike, a pause and some toughish talk from Governor Macklem. Probably stretching it but the Fed I’m sure will be watching with much interest.
They delivered the 25bp hike and the statement was pretty explicit in its messaging. Some highlights:
expects to hold policy at current level barring changes to outlook;
wants to assess impact of cumulative rate hikes;
growing evidence that higher rates are slowing economic activity;
3m core inflation easing which suggests it has peaked;
expects inflation to drop significantly in 2023;
stickier inflation makes for upside risks;
can still revert to hiking;
CPI forecasts: 2023 3.6% and 2024 2.4%; and
GDP forecasts: 2023 1% and 2024 1.8%.
Governor Macklem followed that up with:
the pause was conditional and depends on how the economy plays out;
time to pause was appropriate to assess whether monetary policy was sufficiently restrictive;
bar is higher now than previously for rate hikes;
full effects of hikes to date is still to come; and
not thinking of rate cuts.
Market reaction was an immediate sell off in CAD which dipped over 50bps. Interestingly the rates market is now looking for October cuts from the BoC and rates 50bps lower by year end. Unsurprisingly the US treasury yields dipped in anticipation of a Fed repeat next week.
Crypto
Little of note in crypto land although will draw your attention to the link below concerning the little matter of SBF giving $400m, just before FTX collapsed, to a little-known hedge fund. The NYT broke the story and its mind-boggling to say the least.
A further ripple in the FTX debacle with a mistaken filing by BlockFi alluding to further exposure to the smouldering ruins.
One other matter DCG owned crypto exchange Luno is shedding 35% of its workforce.
TimesTabloid - SBF gave $400m to little known hedge fund
Cointelegraph - BlockFi's exposure to FTX
Imran Lakha's Options Insight Crypto Roundup
The Day Ahead
US q4 GDP is the main order of the day as the US is seen to slow slightly on previous but still record decent trend growth but for how long. As we discussed in The Week Ahead the uplift is expected to come in the main from net trade and inventory builds and as such it’s not seen as sustainable growth. US imports are falling due to a drop off in domestic growth whilst inventories are rising because of a similar deficiency as well as, of course, better supply chains. I’d expect this is the last hurrah as 2023 growth will take back some of those inventory builds and with the general theme of the deteriorating soft data pushing the US further towards recessionary or, at the best, benign growth.
Overnight we get the Tokyo CPI report for January and the upward trend is expected to continue as the series sits at 40 year highs.
Weston Nakamura - The BoJ's new tool
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Marc to Market - Bank of Canada may say Pause, but the Market Hears Finished
- - A Special Preview of Critical Upcoming US Economic Data
ING - Australia: Inflation rise means more rate hikes for the Reserve Bank of Australia
Mish Talk - The Biggest Collapse in M2 Money Supply Since the Great Depression
Notayesmanseconomics - The Reserve Bank of Australia has problems all round as inflation rises again
Follow the latest market narratives through our curated research & commentary channels on Harkster.
All times in GMT (EST+5 / CEST-1 / JST-9)
Thursday
US GDP Growth Rate QoQ Adv q4 consensus 2.6% vs previous 3.2% (13.30 GMT)
US GDP Price Index QoQ Adv q4 consensus 3.3% vs previous 4.4% (13.30 GMT)
US GDP Sales QoQ Adv q4 previous 4.5% (13.30 GMT)
US PCE Prices QoQ Adv q4 previous 4.3% (13.30 GMT)
US GDP PCE Prices QoQ Adv q4 consensus 4% vs previous 4.7% (13.30 GMT)
US Durable Goods MoM Dec consensus 2.5% vs previous -2.1% (13.30 GMT)
US New Home Sales Dec consensus 0.617m vs previous 0.64m (15.00 GMT)
Japan Tokyo CPI YoY Jan previous 4% (23.30 GMT)
Japan Core CPI YoY Jan consensus 4.2% vs previous 4% (23.30 GMT)
Good luck.
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I really liked the detailed commentary of the Bank of Canada decision.
Macklem seems more Forward Thinking, than Powell.....
SBF, stashing some ill-gotten gains away......TOTAL CROOK !!!!