The Morning Hark - 26 Oct 2022
Today’s focus ….“Fed pause” rally slowed by Alphabet but can it get past GDP, ECI and PCE? UK fiscal package delay? the BoC 75bps? and Matt Levine’s crypto read.
The latest Case-Shiller housing data in the US has re-energised the Fed pivot narrative and forced a position unwind in US fixed income and the USD. As housing goes, so does the US economy and as the market narrative evolves, so does the Harkster Research Management Platform, where you will now find a dedicated "Housing Market" channel.
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All prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December trim close to a percent overnight in Asia with the pair currently trading at 92.70 and 84.70 respectively. Rollercoaster type day yesterday in oil with the rally helped by the weaker USD and supply concerns fuelled by the Saudi energy minister’s comments. He seemed to pour scorn on the US’s SPR releases claiming that they may cause future pain in the coming months. The rally was short lived however as the USD regained some of its footing whilst data released in the afternoon showed that oil stocks had risen more sharply than had been expected.
EQ - Equity markets in Asia again up a touch this morning with the Hang Seng, Nikkei and Kospi trading currently at 15,280, 27,422 and 295, respectively.
The Nasdaq and S&P giving back overnight in Asia. The S&P a percent lower at 3836 whilst the Nasdaq is close to two percent down at 11,495. Alphabet’s after hours earnings report causing the correction in the US with lower ad revenues contributing to the miss whilst headcount adds will be at half the pace of the previous quarter.
Gold - Gold Dec up smalls overnight in Asia at 1667. Gold flirted with the 1650 support before closing above it in light trading. Back to ranging with the first resistance now around 1670/75 followed by 1700. Support continues at 1650.
FI - Trading yesterday was dominated by yield sell offs with the US yields continuing to ease a touch during the Asia trading session with the US2y and 10y now at 4.43% and 4.07% respectively.
European yields continued on their path lower with the German and Italian 10y yields closing at 2.175% and 4.361% respectively.
UK gilts continued to ease the pressure on the UK with yields selling off again with the 10y closing at 3.631%.
FX - Once again, we come into a day with a flat USD, with the USD Index currently trading at 110.80 as the USD stabilises after yesterday’s steep decline, albeit it remains close to its lows. Yesterday’s sell off was started as the poor housing market data continued the recent “bad is good” data rally for stocks. USDJPY, however, does not want to back away too far with it currently trading at 148 whilst GBP and EUR are flirting with the giddy heights of 1.15 and parity. AUD unsurprisingly firmer after the inflation data at 0.6420 and thanks to the state banks USDCNH lower to 7.2850.
Others - Bitcoin and Ethereum movement at last and a small catch up trade as both broke their recent range tops. Both saw decent acceleration through the 20,000 and 1400 levels and have looked stable above those levels thus far. Currently, they trade at 20,215 and 1497 respectively.
I post at the bottom Matt Levine’s excellent crypto read. It’s 40,000 words, so I won’t summarise other than to say he is always worth reading.
US Economy
Housing data was poor across the board, with in particular the S&P/Case-Shiller house price measure falling 1.6% MoM for August. This type of drop was last seen back in 2009 as concerns grow more and more for the sector.
Richmond Fed also came in a lot lower than expected at -10 versus 0 previously, with, in particular, new orders falling.
Consumer confidence also a downside miss at 102.5 with a delightful combination of higher recessionary fears coupled with concerns for higher inflation.
I guess Thursday and Friday’s data will give us a further lead as to whether this “Fed pause” rally really has legs to run into next week’s FOMC or whether, like so often this year, its a bear rally all dressed up but with nowhere to go but lower?
Remember today sees some further housing data but more importantly the first print for q3 GDP tomorrow followed by Friday’s ECI and Core PCE and hopefully a signal that inflation has started to peak.
I post at the bootm FXMacro Guy’s excellent daily tweet, which most of the above prints but in a lot 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
Confusion reigns in the world of Japanese currency intervention with finance minister Suzuki far from filling the markets with confidence that he is in control of things. Firstly he claimed that there was absolutely no policy contradiction between the MoF buying JPY to support the currency and what the BoJ was doing to protect its ultra easing policy with yield curve controls. A tad worrying to say the least.
Then he alluded to the fact, and this is perhaps wishful thinking, that the intervention that his country had carried out in the FX markets was indeed coordinated with the US. However later, his US counterpart, Yellen claimed that the US hadn’t received any notice from Tokyo regarding this matter. Perhaps lost in translation and all that but it doesn’t leave a warm feeling, and unless it’s a very elaborate double bluff, it looks like we are a bit away from coordinated action. As such, the Japanese can only really slow the pace of the JPY’s decline with little chance of reversing its course.
Speaking of which, the BoJ once again ramped up their bond buying program ahead of Friday’s policy meeting, adding an additional JPY100bn to the armoury. Yields fell sharply across the curve (except the 10y, which remains pinned), with the 20y and 30y yields lower by 8.5bps and 12.5bps, respectively.
A new chapter in UK politics continues
So Hunt remains, so that’s one box ticked thankfully although there is speculation that the Halloween fiscal package could get delayed as Sunak ponders even more tax increases and squeezes on public spending than had been originally proposed. I’m guessing his theory is that if he gets the bad news out of the way early, he can firstly distance himself from the Truss regime by basically going to the other side of the fiscal ship (austerity) and reassure markets that the Truss days of amateur economics are over. Secondly, by getting the bad news out of the way now, he may be able to offer up some relief in the form of tax cuts nearer a general election. Good luck with that! Either way, he can disguise the increased burden on the UK by blaming the previous regime’s mistakes. This is sadly the associated cost of those blunders, and remember I did warn you.
Politically the clear out was efficient, deep and seemed initially, at least, to go without too much drama. There were no less than 11 minister resignations/sackings and luckily Rees Mogg was one of them. The cabinet seats were filled with actually a lot of Truss familiar faces and he seems to have appeased some of Johnson’s old cronies too whilst giving a leg up to the other side of the party with Gove appearing round the table once again.
One worry would be Mordaunt who didn’t look best pleased at receiving the same seat as before at the table when she was hoping to move round a bit closer to the power. It remains to be seen if she can garner enough support to put any pressure on Sunak, however, as her power base seems to be based more in the membership rather than the parliamentary party. Perhaps a take down for her as she took an age to work out actually she had no chance of getting to 100 backers!
Finally, BoE’s Pill couldn’t resist one last pop at Truss in his comments in a speech yesterday then he noted that we might have benefitted if “other institutions” had respected the UK institutional framework in recent weeks.
China
Couple of things to highlight after the Congress closed I post at the bottom a piece from the South China Morning Post on why some of the appointments made by President Xi point to a growing security concern for the West as he promoted two top security officials to the upper reaches of the Party.
Secondly a great history lesson on the Chinese currency and the many forms it has taken over the years from Jens Nordvig. Well worth a read to give you the background on the currency as its current version pushes ever lower.
As for markets, it was reported yesterday that the Chinese regulator surveyed market participants on their views on and cause of the sharp Yuan losses over the last few days. Unsurprisingly State Banks were seen, in what is an unusual move for the domestic banks, selling USDs to support the yuan in London and New York time.
Bank of Canada Preview
Expectations are edging ever more towards a 75bp hike on Wednesday. The chances are now over 70% as opposed to the 50% chance preCPI print. 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.
The Day Ahead
Australian quarterly inflation report overnight and it came in higher than expected for all measures. QoQ matched the previous quarters print and was higher than expected at 1.8% whilst YoY blew both previous and consensus away at 7.3%. No relief from Core either which hit 6.1% a 32y high for inflation down under. Main drivers remain housing and food. Similar theme to US with house prices looking like they may be on the verge of tipping over but rentals starting to gain momentum and as we know that’s where the stickiness can come from.
This will put a lot of pressure on the RBA to return to the 50bp hiking program after last week’s lower 25bp hike.
Bank of Canada front and centre this afternoon with the rate decision followed by the press conference an hour later.
Some US housing data is the only other thing of note which is expected to carry on from yesterday’s disappointing data.
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Wednesday
Bank of Canada Interest Rate Decision 75bp hike expected taking rates to 4% (15.00 BST)
US New Home Sales Sept consensus 0.585M vs previous 0.685M (15.00 BST)
Bank of Canada Press conference (16.00 BST)
Good luck.
Brent Donnelly - am/FX: Housing and Cycles
Macro Ops - 100% Recession Odds… [DIRTY DOZEN]
BNY Mellon - Morning Briefing - October 25 2022
Concoda - Michael Burry Goes Long Concoda
UniCredit - Chart of the Week - Resilient hiring gives the ECB room to hike by another 75bp
Discover more market commentary & research from 500+ curated sources on Harkster →
FXMacro Guy Weekly Review and Daily Tweet
Substack - Review of Week 43/2022
Twitter - Tuesday market recap thread
US Recession Watch
Twitter - Christophe Barraud - Key signals to expect a recession
Zero Hedge - 5 Signs That The Housing Crash Is Escalating A Lot Faster Than Many Experts Anticipated
Ashenden Finance - Eyes on the Treasuries
China and its currency
Zero Hedge - China After The Party Congress: What Now?
South China Morning Post - Security mission in focus with Xi Jinping’s key Communist Party appointments
Twitter - Jens Nordvig - A brief history of the Chinese Currency (RMB,CNY,CNH)
Other articles of interest
Branko Milanovic - Let’s go back to mercantilism and trade blocs!
Zero Hedge - Ferguson: How Cold War II Could Turn Into World War III
BoJ Intervention
Zero Hedge - Did The BoJ Just Blow $50 Billion For Nothing...
UK
Politico - London Playbook: Rishi vs. Keir — Suella of a lot of trouble — Meet the new Cabinet
Twitter - PriapusIQ - Chris Whittall - The fragility of Gilt markets in seven charts
Crypto
Bloomberg - Matt Levine - The Crypto Story
Discover more market commentary & research from 500+ curated sources on Harkster.
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I still think UK politics is a horror show even if the markets have calmed. CCP loving zero covid zealot Hunt as chancellor a good thing? Word is Sunak has reinstated the ban on fracking, just as the WEF would have wanted. Long blankets!