The Morning Hark - 26 Sep 2022
Today’s focus ……British Pound(ed), Market Dysfunction, The Week Ahead and when will “they” step in?
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November saw further declines of over one percent in Asia following their sell off at the end of last week currently trading at 84.60 and 77.70 respectively. Friday was a dark day for oil as the general market turmoil spilled over into the sector with recessionary fears ever rising with the global central banks renewing their commitment to fight inflation. USD strength only added to the toxic price action which saw oil fall some 6% on the day. Nothing much changed overnight with continued vulnerability across all markets.
EQ - Equity markets unsurprisingly traded with a soft tone overnight in Asia with the Nikkei, Hang Seng and Kospi all lower at 26,207, 17,770 and 291 respectively. The Kospi particularly suffering down well over 2% on renewed selling by foreign investors.
The Nasdaq and S&P similarly soft in the Asian session at 11,278 and 3679 respectively.
Gold - Gold Dec futures off smalls in Asia at 1644. During Friday’s debacle gold pretty much held the 1650 level although without getting too far away from it. However early Asia it succumbed to the pressure and once breaking has remained below on the back of the ever continuing surge in the USD. Rallies initially to 1650 and further to 1670 look likely to be sold into with the year’s low now at 1634 the first target then further to 1600.
FI - US yields marching ever higher in Asia with the US2y and 10y are currently trading at 4.32% and 3.78% respectively.
European yields got dragged along by the US move yesterday closing up at 2.027% and 4.354% for the German and Italian 10y yields respectively. UK gilts pressed ever higher as we speak about below after Kwasi’s fiscal package with the 10y closing at 3.82. The futures market is pointing to higher yields across the board in European rates for the cash markets open especially in the UK.
FX - The USD’s relentless march higher continues with it hitting a new recent high to 114.53 overnight before settling back to 113.85. GBP was once again first on Match of the Day with it hitting an all time low at 1.0327 in the early hours on somewhat of a flash crash move as it cut through over 3 big figures in a matter of minutes. It has recovered but still looking rather pale at 1.0610. The JPY back on its weakening trend again trading at 143.95 with the EUR also weaker at 0.9640.
USDCNH hitting over 2 year highs at 7.1738 despite the PBOC sterling in to reinstate the 20% risk reserve for FX forward sales on CNH in effect making it more expensive to short.
USDNOK rising rapidly on the double turbo charge of lower oil and a stronger USD now at 10.72 and continuing to print new highs daily it seems. The USD is riding roughshod over all comers and will there come a time the authorities enough is enough? I guess that all comes down to the US who have been happy to see the USD rise and in effect export inflation. I guess if that move then tips into other markets and becomes disorderly then the US may take note. The Fed is happy to see equity markets crash but as we posted on Friday and still post below there are strains appearing elsewhere. I guess the question is do they believe they will break and if so are they happy for some of these to break? Feels like we are getting closer to an answer one way or another.
Others - Both Bitcoin and Ethereum a touch off this morning ranges at 18,720 and 1284 respectively. It seems amazing to me that these two are not a lot lower given all the turmoil we are seeing in risk markets currently.
As a quick recap from Friday the PMIs in Europe came in on the main disappointingly, as we highlighted on Twitter, however the US had good upside surprises with beats in both manufacturing and particularly in services, although it still remains below the 50 boom/bust line. However, who cares about flash PMIs when the markets are somewhat imploding. US equity markets suffered another down week this time by about 4% across the board with the S&P matching its June trough, the USD Index smashed to new 20 year highs above 113, US yields press to fresh highs last seen well over 10 years ago, oil down 6% and USDJPY has recovered over 50% of its intervention losses but the main show was once again in the UK. Having been the focus of the world’s attention earlier in the week with The Queen’s state funeral the UK became the focus of the market’s attention on Friday with the market reaction to Kwarteng’s fiscal package and boy did it go down like a bowl of wet sick! 10y gilts rallied 37bps on the day reaching 12 year highs at 3.827% with its biggest jump on record. Similar moves across the curve with 2y up 45bps and the 5y over 50bps on the day. GBP took no comfort from the higher rates with GBP collapsing to 1.0840 and pushing towards all time lows. With the stock market also joining in down 2%. The moves have only extended as the new week begins.
Let’s face it this time has been coming since the GFC. Flushing markets with ever more liquidity even when the central banks and governments have tried to reign it in has only added to the past mistakes. Markets have not been “normal” for many years and at some point they have to come off the drip of free money. It was never going to be pretty but the longer it goes on the harder it will be to wean the markets off the methadone. Markets have not been normal for many years with all this liquidity. The consequences of getting the market back off this liquidity will equally not be normal. Plaza2 will be talked about who knows what else but something has to give.
Lot of speculation around coordinated central bank help for the markets and a potential announcement regarding a Fed announcement regarding FX swap lines pre US open to help liquidity. Lets see how far the market pushes the pressure points. Its a September thing!
A great round-up here of all the central bank action from last week from the as-ever excellent FXMacroGuy. It’s well worth a read just to remind you of the backdrop to what was a week of unprecedented central bank action.
UK Fiscal Package
Kwarteng’s fiscal stimulus package came in at an eye-watering £161bn worth of tax cuts, emergency funding and spending with the real crunch coming in how this would all be funded. Lots of chatter that the stimulus will reignite growth in the UK and as such tax revenues will rise helping to fund the additional borrowing. All well and good on paper but similar type packages in the past have come unstuck. Famously, as has been commented on infinitum in the weekend press, in the 1970’s Barber’s dash for growth budget was a total disaster. Different times of course but the consequences then were that the pound was floated with the obvious knock-on effect of it crashing and the subsequent inflationary spike which lead to little chance of additional growth and hence those revenues. The only thing they did get was a lot of industrial unrest. Indeed if borrowing over 2% of GDP to fund tax cuts was such a good idea why don’t other countries do it and equally why don’t we borrow double that and get double the impact? Being a country reliant on the kindness of strangers, ie foreign investors, confidence is a precious commodity. It would seem that’s in short supply at the moment with this budget following on from the Brexit debacle.
Perhaps an inability to read the room by supposedly intelligent people is being kind to them. It seemed fairly apparent that on the day of the “fiscal event”, the UK gilt market was brittle at best given that the previous day the BoE announced that they were to proceed with their QT program of gilt sales beginning from the start of October. Kwarteng’s package earmarked an additional £62.4bn worth of gilt sales in the 2022/23 fiscal year bringing the total sales to just shy of £194bn. No real surprise then with the reaction we saw.
Where does this leave the markets in the UK? The GBP is reacting sadly in a somewhat emerging market fashion whereby yields are driven higher but the currency sells off in sharp contrast to the dynamic that we are seeing in the US currently. GBP is now down almost 25% ytd a worse performance than many of the emerging market currencies. The move obviously looks stretched but it feels like yields and the currency will only settle when they reach an equilibrium point that becomes acceptable for the markets. For yields that is a rate that becomes acceptable for outside investors to invest in the UK and the currency when it becomes good value. Both look a bit away from those levels for now especially on the rates side. Of course some central bank action either from the BoE or in a coordinated fashion could change that picture but if its only by the BoE, a little like the situation in Japan, the relief will only be temporary.
Remember the UK is a small country reliant on overseas investment and as such will always have to pay for that through higher yields. If those investors start to lose confidence in the UK then those costs will only go up as the UK tries to attract investment. Equally, it relies on the outside for goods and energy and when an external shock, like the war in Ukraine, happens then there is little the country can do to ease the supply side shock. What makes the situation even worse just now is that the BoE and the government are polarised and the BoE will probably have to step in at some point adding to the tension between the two institutions. A weaker GBP will only push import prices higher with the obvious consequences for inflation. At that point this becomes the BoE’s problem. Chatter already about an emergency BoE rate hike in the region of 100bps has emerged. Then what? Another fiscal package to help people’s mortgage and credit card payments?
The Week Ahead
Italian Elections. So the centre-right coalition led by Meloni’s Brothers of Italy party looks almost certain to have a sizeable working majority to run the country. Exit polls suggest the coalition has around 43% of the vote with Meloni’s party the largest single party with the centre-left on around 27% and 5Star around 15%. The Italian electoral system favours coalition parties and as such that should see a sizeable majority for her in both the Lower House and the Senate. Over the campaigning period she has somewhat softened her stance with regard to the EU and claims to want to stick to the Recovery and Resilience Plan and echoed ex-PM Draghi’s comments on the budget deficit. This may well be the case but her partners in the coalition may not take such a EU friendly view and certainly Salvini, the League’s leader, is said to be in favour of increasing the deficit. The EU president Von Der Leyen warned that if things go in a difficult direct “we have the tools” in terms of the election result. In effect funding would be cut if there were some violation of the EU laws. Time will tell. The widely held view is that the wider the margin of victory the wider the BTP spreads. Let’s see what the markets think over the coming days.
EU Flash Inflation data. Friday sees the release of the flash CPI data in Europe for September and a crucial first look at the CPI print prior to the October ECB meeting. All signs point to a continued acceleration in the series with both headline and core expected to rise sharply once again, YoY to 9.6% and 4.7% respectively, adding to the hawks appetite for a further 75bp hike at the October meeting. Remember the ECB inflation forecasts saw a 8.1% year end rate with risks to the upside. We should get a good feel for the print from Thursday’s German flash print for September which is touted to show an eye-watering rise to 9.5% YoY from 7.9% previously.
US data. Tuesday and Wednesday sees housing data in the form of new and pending home sales and given that Powell gave a nod to the potential for a housing recession in the US at last week’s FOMC these data prints will garner a lot more focus than they would normally. Thursday brings the final q2 print for GDP which is expected to confirm that the US has had two quarters of negative growth to start 2022 and the latest Atlanta Fed estimate for q3 is slowly headed in that direction. Its last print was estimating growth of only 0.3% for q3 down from a high of 2.6% at the start of September. Finally Friday the Fed’s favourite inflation gauge the PCE Index for August which estimates a slight tick up from previous months. If we get an upside surprise like the one we saw with the CPI prints for August get ready to switch the lights off with regard to the markets!
Central Bank Speakers. At last count well over 30 central bank speakers from the major central banks we focus on. I can’t remember such a plethora of speakers in one week. These may well have been long scheduled but it does feel like they want to be front and centre during this time of market turmoil. Do not be surprised to see this list growing or indeed some unscheduled soundbites from some of the big hitters if things continue to spiral in a disorderly direction. The way the markets have started the week we are edging every closer to emergency central bank meetings and emergency policy action.
German IFO for September which is expected to show a further tick down across all measures. Central bank speakers are the other focus with the BoJ, ECB, Fed and BoE all well represented. Most importantly however will be the price action and how far the pressure points get tested and what if any action the powers that be will take. As someone quipped this morning getting a room in the Plaza hotel New York this week may be tough!
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German IFO Business Climate Sept consensus 87 vs previous 88.5 (09.00 BST)
German IFO Current Conditions Sept consensus 96 vs previous 97.5 (09.00 BST)
German IFO Expectations Sept consensus 79 vs previous 80.3 (09.00 BST)
Kuroda (06.30 BST)
Amamiya (07.30 BST)
Guindos (08.00 BST)
Nagel (08.00 and 18.00 BST)
Panetta (08.30 BST)
Lagarde (14.00 BST)
Collins (15.00 BST)
Bostic (17.00 BST)
Logan (17.30 BST)
Mester (21.00 BST)
Tenreyro (17.00 BST)
US Durable Goods Orders MoM Aug consensus -0.5% vs previous 0% (13.30 BST)
US New Home Sales Aug consensus 0.5M vs previous 0.511M (15.00 BST)
Evans (11.15 BST)
Bullard (14.55 BST)
Lagarde (12.30 BST)
Guindos (14.00 BST)
Japan BoJ Monetary Policy Meeting Minutes (00.50 BST)
US Pending Home Sales MoM Aug consensus -1% vs previous -1% (15.00 BST)
Daly (01.35 BST)
Bostic (13.35 BST)
Bullard (15.10 BST)
Evans (19.00 BST)
Lagarde (08.15 BST)
Elderson (16.00 BST)
Cunliffe (09.15 BST)
Dhingra (19.00 BST)
German Inflation Rate YoY Prel Sept consensus 9.5% vs previous 7.9% (13.00 BST)
Canada GDP MoM Jul consensus -0.1% vs previous 0.1% (13.30 BST)
US GDP Growth Rate QoQ Final q2 consensus -0.6% vs previous -1.6% (13.30 BST)
US PCE Prices QoQ Final q2 consensus vs previous 7.1% (13.30 BST)
US Core PCE Prices QoQ Final q2 consensus 4.4% vs previous 5.2% (13.30 BST)
Panetta (08.00 BST)
Guindos (09.00 BST)
Elderson (09.15 BST)
McCaul (11.45 BST)
Lane (18.00 BST)
Ramsden (12.30 BST)
Mester (18.00 BST)
Daly (21.45 BST)
Japan Unemployment Rate Aug consensus 2.5% vs previous 2.6% (00.30 BST)
Japan Retail Sales YoY Aug consensus 2.8% vs previous 2.4% (00.50 BST)
Japan Industrial Production MoM Prel Aug consensus 0.2% vs previous 0.8% (00.50 BST)
China NBS Manufacturing PMI Sept consensus vs previous 49.4 (02.30 BST)
China NBS Non-Manufacturing PMI Sept consensus vs previous 52.6 (02.30 BST)
China Caixin Manufacturing PMI Sept consensus vs previous 49.5 (02.30 BST)
German Retail sales MoM Aug consensus -1% vs previous 1.9% (07.00 BST)
UK GDP growth Rate QoQ Final q2 consensus -0.1% vs previous 0.8% (07.00 BST)
German Unemployment Rate Sept consensus 5.5% vs previous 5.5% (08.55 BST)
EU Inflation Rate YoY Flash Sept consensus 9.6% vs previous 9.1% (10.00 BST)
EU Core Inflation Rate YoY Flash Sept consensus 4.7% vs previous 4.3% (10.00 BST)
EU Unemployment Rate Aug consensus 6.6% vs previous 6.6% (10.00 BST)
US Personal Income MoM Aug consensus 0.3% vs previous 0.2% (13.30 BST)
US Personal Spending MoM Aug consensus 0.2% vs previous 0.1% (13.30 BST)
US PCE Price Index MoM Aug consensus vs previous -0.1% (13.30 BST)
US PCE Price Index YoY Aug consensus vs previous 6.3% (13.30 BST)
US Core PCE Price Index MoM Aug consensus 0.4% vs previous 0.1% (13.30 BST)
US Core PCE Price Index YoY Aug consensus 4.7% vs previous 4.6% (13.30 BST)
US Chicago PMI Sept consensus 52 vs previous 52.2 (14.55 BST)
US Michigan Consumer Sentiment Final Sept consensus 59.5 vs previous 58.2 (15.00 BST)
US Michigan Inflation Expectations Final Sept consensus vs previous 4.8% (15.00 BST)
US Michigan 5y Inflation Expectations Final Sept consensus vs previous 2.9% (15.00 BST)
Elderson (12.00 BST)
Schnabel (15.30 BST)
Brainard (14.00 BST)
Williams (21.15 BST)
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