The Morning Hark - 26 Oct 2023
Today’s focus...Ugly markets spurred on by Google and big tails, back on intervention watch in USDJPY but don’t worry Sam’s back!
Overnight Highlights
Prices are at 7.10 BST/2.10 EST, with changes reflecting movement from midnight BST
Oil - Brent and Crude December futures off a touch in Asia, but holding onto the majority of their gains from yesterday, currently at 89.40 and 84.70 respectively. Middle East tensions rising again after a brief respite at the start of the week as a full scale invasion of Gaza by the Israelis is starting to look imminent. The bid tone in oil was tempered somewhat by the EIA data showing further increases in US crude stockpiles.
EQ - Unsurprisingly Asian equity markets drowning in a sea of red following on from the ugly US session yesterday. Currently the Nikkei and Hang Seng down to 30,570 and 17,030 respectively.
The US indicies similarly lower in Asia with the Nasdaq and S&P futures at 14,300 and 4180 respectively. Ugly day yesterday led by the Megacaps which accounted for over 50% of the losses. Google itself had its biggest sell off since March 2020 after its parent company, Alphabet, posted disappointing q3 earnings. The Nasdaq had its biggest daily fall of the year.
Gold - Gold Dec flatlining in Asia but holding onto its gains from yesterday. Currently at 1996 but still lacking the momentum, thus far, to press on above 2000.
FI - Global yields resuming their bear steepening with the US2y and US10y trading at 5.12% and 4.98% respectively. The dollar “Bills” yield sell off trade was short lived as rising yields returned with aplomb yesterday after an ugly US 5y auction. It priced 20bps above last month’s equivalent posting the highest yield in 16 years with a tail in the top 5 of tails of the last decade! Ain’t gonna get any easier for the US government!
European yields followed the US lead with the German 10y yield closing the day at 2.88% and the Italian 10y yield at 4.91%. Watch that spread again!
UK gilt yields similarly so at 4.61%.
FX - USD’s king again with the USD Index currently up smalls in Asia at 106.78. The JPY, EUR and GBP all suffering with them sitting at 150.55, 1.0545 and 1.2080 respectively.
The USD recovered further yesterday spurred on once again by higher yields and the underlying contrast in the economic data. New highs for the year in the Index and hard to argue with it. ECB looks a sleeper maybe with a mildly hawkish pause so all eyes on GDP.
The AUD after its rally post inflation report has been put firmly in its place back to 0.6290.
USDILS continues with the bid tone at 4.0665.
FX expiries of note today in USDJPY sees about $2.5bn layered between 150.00/20 and the EUR has €1.7bn at 1.0600/10 and on the downside €1.1bn at 1.0540 and 1.05. Elsewhere in USDCAD at 1.38 we have $1.1bn and in the NZD at 0.58 we see NZD1.1bn rolling off.
Others - Bitcoin and Ethereum consolidating their gains with the pair currently at 34,490 and 1795 respectively.
Macro Themes At Play
Recap
German Ifo better than expected with beats across the board, breaking a 5 month losing streak. Expectations and business climate had good beats at 84.7 and 86.9 respectively.
Comments were relatively upbeat considering. Companies were somewhat more satisfied with the current business situation and managers were less pessimistic about the coming months. I guess this was before they saw the PMIs.
US new home sales for September defied expectations with a blockbuster 759k versus 680k expected. Highest in 18 months. People love those 8% mortgages it would seem or more likely the homebuilders are sucking up a large percentage of the increases.
Bank of Canada as widely expected held steady at 5%. Comments wise point to a hawkish hold.
Some of the comments:
Concerned that progress towards price stability is slow and inflationary risks have increased;
Prepared to raise policy rate further if needed;
In addition to elevated mortgage interest costs, inflation in rent and other housing costs remain high;
Labour market remains on tight side and wage pressures persist;
Banks measure of core inflation show little downward momentum; and
Growing evidence that past rate hikes are dampening economic activity.
Projection wise they saw inflation up a touch from previous forecasts at 3.9% (3.7% prev) this year, 3% (2.5%) for 2024 and 2.2% (2.1%) in 2025.
Growth wise go the other way with downward revisions from July’s forecasts. GDP this year now at 1.2% from 1.8%. Next year at 0.9% (1.2%) and for 2025 at 2.5% (2.4%).
BoC Governor Macklem, in the press conference, continued the hawkish tone:
Further easing inflation is likely to be slow and inflationary risks have increased;
I’m worried higher energy prices and persistence in underlying inflation are slowing progress;
We held policy rate steady because we want to allow monetary policy time to cool economy and relieve price pressure;
Inflation is on a higher path than we expected; and
We will continue to assess whether monetary policy is sufficiently restrictive.
BoJ Intervention
As we are now sitting comfortably above 150 in USDJPY I thought it would be worth reposting the quick intervention escalation path we looked at back in September. I post it below for your reference.
Also the ever excellent Weston Nakamura’s piece which explores in more detail the mechanics of intervention, the make up of previous periods of intervention and what we can learn from them. Its a long piece but really well worth the read.
Weston Nakamura - Yentervention
Escalation Path
As we get closer to 150 in USDJPY. I thought it would be useful to reflect back on the escalation path of FX intervention from the jawboning to the actual physical intervention. A lot of these are old news but often good just to have a refresher.
Language such as “monitoring developments in currency markets”
“Sudden/abrupt/rapid” movements in currency markets are “undesirable”. In addition markets are “not reflecting fundamentals”.
“Excessive” is introduced next to describe the price movements alongside “clearly” in addition to referring to FX moves as “speculative”.
Readying for action is normally reflected with the phrase “we are ready to take decisive action” which would suggest some action is imminent.
Price checking is the step prior to actual intervention whereby the BoJ will call round selected Japanese banks and ask for a level of USDJPY. Even though they do not deal the act of them asking normally makes the banks, who have been contacted, sell USDJPY in anticipation of intervention and they will also spread the news around the market to encourage more selling.
Same as 5 but this time the BoJ actually do sell USDJPY. This may happen in waves.
Finally co-ordinated intervention with other major central banks involved. This would generally happen early NY hours to include the US. This obviously has the most effect on the markets.
As we have said many times in the past, intervention has the best chance of turning the tide when it is coordinated and we see no incentive for the US to get involved at present especially as fundamentals actually do not support such a move. Given there is an over 5% difference between US and Japanese rates it would be hard to justify any help from the US as supporting economic fundamentals.
SBF Trial
He’s back and what! After a week off the trial reconvenes today with the news that SBF will rise from his chair and testify. Seems like an old snake eye’s last throw of the dice. Thus far his defence team have done little to help him so, as any good narcissist would do, I’ll take control and do it myself!
Pure box office and it may even happen today! The prosecution is coming to the end of their witnesses and are expected to rest early today with the defence getting started after lunch. The defence claims to have 6 expert witnesses who presumably are experts in legalising $8bn balance sheet holes?
The Day Ahead
ECB similar to the BoC sleeper. No change expected. Lagarde touch hawkish in the presser with inflation still sticky and caution over the economy moving forward.
For a deeper dive on today’s meeting I’d refer you to our excellent sister publication; Harkster Previews.
US GDP the blockbuster number tipped for 4.3% but remember the Atlanta Fed tracker is over 1% higher so chances for an upside surprise.
Strong durables expected too although housing data, as ever, will dampen enthusiasm.
Three central bankers in the afternoon and early doors tomorrow morning Tokyo CPI for October should give us a feel for the nationwide release in a couple of weeks.
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Main Highlights Ahead
All times in BST (EST+5 / CEST-1 / JST-8)
The main highlights for the day ahead in terms of data and speakers:
Thursday
ECB Interest Rate Decision rates expected to remain on hold at 4.5% (13.15 BST)
US Durable Goods MoM Sept consensus 1.7% vs previous 0.2% (13.30 BST)
US GDP Growth Rate QoQ adv q3 consensus 4.3% vs previous 2.1% (13.30 BST)
US GDP Price Index QoQ adv q3 consensus 2.5% vs previous 1.7% (13.30 BST)
US PCE Prices QoQ adv q3 consensus 2.1% vs previous 2.5% (13.30 BST)
US Core PCE Prices QoQ adv q3 consensus 2.5% vs previous 3.7% (13.30 BST)
ECB Press Conference (13.45 BST)
US Pending Home Sales MoM Sept consensus -1.8% % vs previous -7.1% (15.00 BST)
US Pending Home Sales YoY Sept consensus -16% vs previous -18.7% (15.00 BST)
Fed Speakers
Waller (14.00 BST)
ECB Speakers
Lagarde (15.15 BST)
BoE Speakers
Cunliffe (17.45 BST)
Early Friday
Tokyo CPI YoY Oct consensus 2.7% vs previous 2.8% (00.30 BST)
Tokyo Core CPI YoY Oct consensus 2.5% vs previous 2.5% (00.30 BST)
Good luck.
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Good to see the Hark back and giving a good run down first thing in morning. Always excellent info and entertaining