The Morning Hark - 26 Sept 2023

Today’s focus …Price action the key with little of note on the docket. Central Bankers continue the higher for longer theme as global yields push to multi year highs. US Government breakthrough?

Prices are at 7.05 BST/2.05 EST, with changes reflecting movement from midnight BST

Oil - Brent and Crude December futures took a small step back overnight with the pair currently sitting at 91.30 and 87.70 respectively. Tighter supply seems to have been pushed to the side for now with the demand side coming back into focus. The US led higher for longer mantra on rates which has pushed global yields higher, a stronger USD as well as continuing concerns surrounding China’s economic outlook have been the main drivers of the softer price.

EQ - Asia equity markets continuing to sell off with the US indicies in the face of higher yields. The Nikkei, Hang Seng and Kospi futures all down close to one percent at 32,100, 17,625 and 329 respectively. The property developer, Evergrande, once again in the news and not helping sentiment as its former CEO and CFO are arrested as it misses a $550m onshore bond payment.

The Nasdaq and S&P futures continuing to sell off with the pair now at 14,860 and 4361 respectively.

Gold - Gold Dec continuing to lose its shine overnight as it trades at 1932. For now, at least, the stronger USD and higher US yields are providing stronger headwinds than the potential for a US government shutdown.

FI - US yields continuing with the bear flattening theme with the US2y and US10y trading currently at 5.14% and 4.56% respectively. We are now seeing daily new highs as the US yield curves reach levels last seen in the mid 2000s. The market is pricing in ever higher borrowing costs and are betting on them staying higher for longer after we have come through an unprecedented period of low rates. With US debt now well above $33tn maybe the Fed higher for longer mantra is playing with fire. US10y yields have risen over 35% in 4 months. 30y mortgage rates in the US unsurprisingly have followed suit and corporate debt costs have risen. Feels like something has to break at some point. Anyway I post a couple of useful articles below. The ever excellent Concoda has a piece on the money market plumbing system which lays it out in a very clear and easy to understand manner. Also JPMorgan’s take on the rising fiscal deficit. Well worth a read and listen to.

Similar tone across the world with the Canada 10y hitting 15 year highs.

European yields going with the flow with the German 10y yield closing at 2.80% and the Italian 10y yield at 4.65%.

UK gilt yields similar story with them closing at 4.33%.

Concoda - Money Market Brief

JPMorgan - Implications of a rising federal deficit

FX - With this yield environment the USD continues to remain underpinned with the USD Index currently sitting up a touch at 106.05. Remember a close above 106 should see a further leg in USD strength. The JPY, EUR and GBP all on the backfoot currently at 149, 1.0584 and 1.2190 respectively.

FX expiries of note today. The EUR sees €1.7bn roll off at 1.06 and in USDCAD $1.3bn at 1.35; currently at 1.3475.

Others - Bitcoin and Ethereum managing to retain key levels overnight. Currently the pair at 26,325 and 1593 respectively.

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Date Recap

German Ifo came in pretty much in line but still managed to post its fifth straight monthly decline and the lowest in almost 18 years.

Central bank speakers

ECB’s Kazak felt that “September’s hike may allow an October pause”.

Villeroy more on the dovish side of the debate; “ECB should focus on persistence not pushing rates up” and “sees risk ECB could do too much in the future”. Although sees no cuts for a “sufficiently long time”. Alluding to the oil price spike they will monitor the situation for any “ effects on inflation expectations and wages”.

de Cos was keen to emphasis that the bank “must avoid both insufficient and excessive tightening”.

Lagarde emphasised again that the ECB is not talking about rate cuts.

She also admitted that recent indicators are pointing to further weakness in q3 but recession is not part of their baseline.

She also noted that domestic pressures remain strong.

Schnabel saying much the same pointing to activity in the EU area as “clearly moderating”. She also noted that there is not yet an “all-clear” for the inflation problem.

BoJ’s Ueda stated that the Bank will not directly target FX in guiding monetary policy. He continued that they will consider scrapping yield curve control if sustainable stable achievement of 2% price target is in sight. However we do not have a clear image on how to tweak YCC including the 10y yield target.

The Fed’s Goolsbee rolled out the new higher for longer mantra with his quip that “at some point the question shifts from how high to raise rates to how long they will stay there” as well as “it feels like rates will have to stay higher for longer than markets had expected”.

On inflation he felt that its current path was “unusual” given its fall without unemployment rising but suggested that this may be a lagging effect.

In addition he was clear on target inflation not changing when he said that it can’t be changed until the target is reached.

Interestingly he touched on the inverted yield curve and pointed at the potential for differences in the post pandemic economy as a potential cause.

Finally he saw risks to a soft landing for the economy but bigger risks of inflation staying too high.

The Day Ahead

Once again little to get excited about data wise with some tier 2 US data and a couple of regional surveys in the US. Couple of central bankers who will no doubt bang the higher for longer drum. US government drama will no doubt garner attention later in the day. McCarthy claimed yesterday that the House will vote on the appropriations bill today. There was also a Bloomberg report which suggested a short term stop gap deal between the two parties was close to buy them some more time (4/6 weeks) to find a more permanent solution. Let’s see.

As we said in yesterday’s note price will be the driver this week so all eyes on oil, global yields and the USD.

Couple of things to note early doors tomorrow with the BoJ minutes of last week’s meeting which should be a history lesson and the Australia CPI indicator for August.

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All times in BST (EST+5 / CEST-1 / JST-8)

Tuesday

US CB Consumer Confidence Aug consensus 105.6 vs previous 106.1 (15.00 BST)

US New Home Sales Aug consensus 0.7m vs previous 0.714m (15.00 BST)

Fed Speakers

Bowman (18.30 BST)

ECB Speakers

Lane (08.00 BST)

Early Wednesday

BoJ Monetary Policy Meeting Minutes rates kept on hold at -0.1% (00.50 BST)

Australia Monthly CPI Indicator Aug consensus 5.2% vs previous 4.9% (02.30 BST)Good luck.

 

 

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