The Morning Hark - 27 Nov 2023

Today’s focus... BoJ’s Ueda questions the Bank’s ability to hit inflation goal sustainably, Chinese health officials try to reassure on virus surge and The Week Ahead.

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Overnight Highlights

Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT

Oil - Oil off close to one percent in the Asian session with Brent and Crude January futures currently at 79.80 and 74.80.

Those three OPEC+ sources were back again claiming that the African producers were coming to a compromise, with OPEC+, on 2024 output levels. Indeed OPEC+ is said to be “tweaking” Angola and Nigeria’s 2024 targets. However sentiment remains gloomy with many analysts suggesting that deeper cuts from OPEC+ would be required to boost oil’s price. Remember last week the IEA said it expected a slight surplus in oil markets in 2024 even if the current OPEC+ output cuts are extended into the new year.

EQ - Asian equity markets off close to one percent to start the week with Hang Seng and Nikkei currently at 17,670 and 33,440 respectively. After a decent month for equities, and with month end in sight, the move looks more a position trimming exercise than for any specific reason.

The US indices off smalls too but remaining close to their recent highs. S&P currently at 4555 whilst the Nasdaq is at 15,955.

Gold - At last some action as gold has broken, and now looking to establish itself, above the 2000 level. Indeed overnight we hit levels last seen back in May and currently Dec futures are sitting at 2010. If we can hold above, then the next targets would be 2020, 2050 and onwards to the year’s highs around the 2085 level.

FI - Global yields very quiet in the Asian session with the US2y and US10y little changed at 4.96% and 4.48% respectively.

Remember the 4.33% remains the downside focus in the US10y with beyond that the 200dma around the 4% level.

European yields closed the week a touch firmer in line with the US. The German 10y closing at 2.64% and the Italian 10y yield similarly at 4.40%.

UK gilt yields closed at 4.28% continuing their firm tone post the UK Autumn Statement.

FX -The USD continued its softer tone from last week in the Asian session with the USD Index leaking a touch more to 103.32. The JPY, EUR and GBP all maintaining their gains with them sitting currently at 149, 1.0950 and 1.2620 respectively.

FX option expiries of note today. EUR sees €1bn at 1.0950. Elsewhere in USDJPY we have $1.6bn rolling off at 150..

Others - Bitcoin and Ethereum little changed at 37,330 and 2050 respectively.

Macro Themes At Play

Recap

Germany Ifo continued to point to a Germany economy on the mend with all measures showing upticks on the previous month’s prints albeit a touch weaker than consensus. Business climate came in at 87.3 its best reading since June.

Some of the comments were interesting given the current situation with the German spending budget and the constitutional court ruling. The institute felt that the economy was probably past the worst of the downturn and maybe even growing slightly. The court ruling seemed to have had no visible effect on the survey. Let’s see how it looks next month.

Canada Retail Sales for September a decent upside surprise with the MoM coming in at 0.6% the best print in 5 months and taking the YoY to 2.7%.

US PMIs produced a mixed bag with manufacturing lower than consensus and the previous month’s reading and once again slipping back below 50 at 49.4. Services however had a small upside beats at 50.8.

Further details on China’s health issues emerged over the weekend with the age group between 5-14 seemingly the most seriously affected. The authorities have encouraged some areas to minimise personnel movement and visits in particular to schools, childcare institutions and nursing homes.

The health minister was keen to stress that the virus was caused by the flu and other known viruses and not by a novel virus. That’s reassuring then!

More details below.

SCMP - China minimises some movement

Reuters - China ministry seeks more fever clinics to combat respiratory illness surge

Central Bank Speakers

This morning the BoJ’s Ueda claimed that the Japanese economy is recovering moderately. He also pointed to encouraging signs in wages and inflation but there remains high uncertainty on whether this cycle will strengthen. He also admitted that he couldn’t say with certainty that inflation will hit the 2% target sustainably.

The ECB’s Lagarde claimed that the ECB had done a lot already on rates and they can now watch. However the battle against inflation is not over but we are seeing progress.

Schnabel suggested that restrictive monetary policy is appropriate until such time as inflation meets target.

de Guindos felt that the current rate level for one enough will tame inflation. However uncertainty remains high and the ECB will be data dependent. Inflation may see upside ticks in next few months but the economic outlook is titled to the downside.

Mueller was very upbeat feeling that inflation was clearly showing signs of slowing and on that basis the ECB probably does not need to increase rates any more.

The Week Ahead

1. Australia Monthly CPI. The RBA Governor Bullock was hawkish last week suggesting that headline inflation has the potential to remain above target due to strong domestic demand. However initial expectations are for a fall off in the headline rate but still remaining above 5% and well above the RBA’s target. Potentially, given Bullock’s comments, the prior day’s retail sales data may give us a feel for the CPI print. A continuation of the previous month’s strong growth in that series would suggest we could see some further upward pressure on CPI.

2. RBNZ Rate Decision. Expectations are for rates to remain on hold at 5.5%. Indeed the markets are close to 100% for such a call. However with inflation readings still high I dare say we will get the usual warnings of higher for longer, will not hesitate to raise rates again, etc in the statement and at the presser. A hawkish hold. Westpac - RBNZ Preview

3. German Inflation Report. The softening trend is expected to continue into November with the YoY seen dropping to 3.5%. This is supported by the Bundesbank’s latest monthly report which highlighted that they expect to see inflation “fluctuate around” its current level for the next few months. However they did not exclude headline briefly surging back above 4% although that may be a story for December.

4. China PMIs. China publishes the state’s purchasing managers indices for November followed, the next day, by the private sector equivalent. Expectations are for the numbers to print around the 50 line with no real sign of any consistent upward momentum.

5. Eurozone Flash Inflation Report. The last couple of month’s reports have shown a much welcomed sharper fall in inflation than expected taking headline back below 3% for the first time in over two years. Indeed from August to October we have seen the headline number drop from 5.3% to 2.9%. Expectations are for the trend to continue into November albeit at a slower pace and ticking down to 2.8%. Core, however, is set to remain sticky and keep the ECB on their toes with expectations for the YoY equivalent at 3.9%. As a number of the ECB members have noted they do expect to see some upticks in inflation over the coming months so the journey wont be a straight line. Indeed we have seen evidence of this via the PMIs which have seen increases in input prices.

6. Canada q3 GDP. Expectations are for a fairly benign report with either a small contraction or a flat print on the cards. On the negative side of the debate we have weak q3 retail sales volumes, restaurant sales were also extremely weak for the quarter whilst manufacturing output did little to help the picture. On the plus side net trade data should boost GDP but mainly because of a drop in imports due to the overall weaker demand. All in all not a great backdrop and the payrolls report later in the week is expected to continue the rather gloomy picture as the unemployment rate is expected to tick up to 5.8%.

7. US Core PCE. Fed’s favourite measure and all that. PCE is expected to follow the recent global trend of lower inflation with MoM easing and helping to bring down the YoY for headline and core to 3.1% and 3.5% respectively. Remember the earlier CPI print came in a lot softer than expected and was the catalyst for a steep fall in US yields which loosened the Fed’s financial conditions “get out of jail free card”. A similar response by the markets, to a softer than expected PCE, would have the potential to see a further fall in yields and put the Fed in a rather awkward position if those financial conditions loosen sufficiently to have a negative impact on their improving inflation profile.

8. OPEC+ Meeting. This meeting has already caused a lot of angst in the oil market with its postponement and accompanying sources stories. Like any good cartel I’m sure they’ll sort it out in their best interests. The delay has been put down to the quotas assigned to, in particular, the African producers. However noises over the weekend suggest that an agreement was close to being finalised. The major question will be whether the 1m bpd production cut will be extended into 2024 and possibly even added to given the decline in the oil price over the last month or so. No doubt rumours and counter rumours will abound prior to Thursday’s virtual meeting.

9. US Manufacturing ISM. Not expected to set the world on fire with the regional surveys suggesting a further leak lower. We get Richmond ad Dallas earlier in the week which may give us a steer as to where the main index is headed. Early indications suggest a touch lower print at 46.6.

10. Fed Speakers. After a lull last week they are back in force again from Tuesday onwards! However we may have to wait for the big man to speak on Friday, that’s when Powell takes to the stage to speak to business leaders in Atlanta, and thus get the full picture of how the Fed is feeling about market developments. By the time he speaks we will have the PCE and ISM data, two of the last major prints prior to the next FOMC. We will also get a potential steep revision of q3 GDP to 5%! In addition this will be Powell’s, and indeed the Fed’s, last opportunity to give the markets some colour on how they are thinking as we head into  the blackout period prior to the 18 December FOMC. Expect more chatter on inflation expectations, real yields, financial conditions and higher for longer. The strong GDP revision should get a nod too. Previously the FOMC members have doused the flames of strong q3 growth with guidance that we should see a weaker last quarter of the year. It’s widely anticipated that the Fed will pass again on any change to rates in December but probably indicate that  they remain vigilant and further hikes cannot be ruled out. Whether the markets pay much attention to them is another matter!

The Day Ahead

Not a great deal in terms of data for the first couple of days of the week. Some October US homes data and Lagarde are about all she wrote today and early doors tomorrow we get Australian retail sales for October.

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Main Highlights Ahead

All times in GMT (EST+5 / CET-1 / JST-9)

The main highlights for the week ahead in terms of data and speakers:

Monday

US New Home Sales Oct consensus 0.721m vs previous 0.759m (15.00 GMT)

ECB Speakers

Lagarde (14.00 GMT)

Tuesday

Australia Retail Sales MoM Prel Oct consensus 0.2% vs previous 0.9% (00.30 GMT)

Fed Speakers

Goolsbee (15.00 GMT)

Waller (15.05 GMT)

Bowman (15.45 GMT)

Barr (18.05 GMT)

Barr (20.30 GMT)

ECB Speakers

McCaul (12.30 GMT)

Lagarde (16.00 GMT)

Lane (18.30 GMT)

BoE Speakers

Ramsden (01.00 GMT)

Haskel (17.00 GMT)

Wednesday

Australia Monthly CPI Indicator Oct consensus 5.2% vs previous 5.6% (00.30 GMT)

RBNZ Interest Rate Decision rates expected to remain on hold at 5.5% (01.00 GMT)

BoJ Adachi Speaks (01.30 GMT)

RBNZ Press Conference (02.00 GMT)

German Inflation Rate MoM Prel Nov consensus -0.2% vs previous 0% (13.00 GMT)

German Inflation Rate YoY Prel Nov consensus 3.5% vs previous 3.8% (13.00 GMT)

US GDP Growth Rate QoQ 2nd est q3  consensus 5% vs previous 2.1% (13.30 GMT)

US PCE Prices QoQ 2nd est q3  consensus % vs previous 2.5% (13.30 GMT)

US Core PCE Prices QoQ 2nd est q3  consensus 2.4% vs previous 3.7% (13.30 GMT)

Japan Industrial Production MoM Prel Oct consensus 0.8% vs previous 0.5% (23.50 GMT)

Japan Industrial Production YoY Prel Oct consensus % vs previous -4.4% (23.50 GMT)

Japan Retail Sales MoM Oct consensus % vs previous -0.1% (23.50 GMT)

Japan Retail Sales YoY Oct consensus 5.9% vs previous 5.8% (23.50 GMT)

Fed Speakers

Mester (18.45 GMT)

Thursday

China NBS Manufacturing PMI Nov consensus 49.8 vs previous 49.5 (01.30 GMT)

China NBS Non Manufacturing PMI Nov consensus  vs previous 50.6 (01.30 GMT)

BoJ Nakamura Speaks (01.30 GMT)

Japan Consumer Confidence Nov consensus  vs previous 35.7 (05.00 GMT)

Japan Construction Orders YoY Oct consensus % vs previous -3% (05.00 GMT)

Germany Retail Sales MoM Oct consensus 0.5% vs previous -0.8% (07.00 GMT)

Germany Retail Sales YoY Oct consensus -1.9% vs previous -4.3% (07.00 GMT)

Swiss Retail Sales MoM Oct consensus % vs previous 0.8% (07.00 GMT)

Swiss Retail Sales YoY Oct consensus % vs previous -0.6% (07.00 GMT)

German Unemployment Rate Nov consensus 5.8% vs previous 5.8% (08.55 GMT)

German Unemployment Change Nov consensus 23k vs previous 30k (08.55 GMT)

EU Inflation Rate MoM Flash Nov consensus % vs previous 0.1% (10.00 GMT)

EU Inflation Rate YoY Flash Nov consensus 2.8% vs previous 2.9% (10.00 GMT)

EU Core Inflation Rate YoY Flash Nov consensus 3.9% vs previous 4.2% (10.00 GMT)

EU Unemployment Rate Oct consensus 6.5% vs previous 6.5% (10.00 GMT)

Canada GDP Growth Rate QoQ q3  consensus % vs previous 0% (13.30 GMT)

Canada GDP Growth Rate Annualised q3  consensus 0.2% vs previous -0.2% (13.30 GMT)

Canada GDP MoM Sept  consensus 0% vs previous 0% (13.30 GMT)

Canada GDP MoM Prel Oct  consensus % vs previous 0% (13.30 GMT)

US PCE Price Index MoM Oct consensus 0.1% vs previous 0.4% (13.30 GMT)

US PCE Price Index YoY Oct consensus 3.1% vs previous 3.4% (13.30 GMT)

US Core PCE Price Index MoM Oct consensus 0.2% vs previous 0.3% (13.30 GMT)

US Core PCE Price Index YoY Oct consensus 3.5% vs previous 3.7% (13.30 GMT)

US Personal Income MoM Oct consensus 0.2% vs previous 0.3% (13.30 GMT)

US Personal Spending MoM Oct consensus 0.2% vs previous 0.7% (13.30 GMT)

US Chicago PMI Nov consensus 45 vs previous 44 (14.45 GMT)

US Pending Home Sales MoM Oct consensus -1.5% vs previous 1.1% (15.00 GMT)

US Pending Home Sales YoY Oct consensus % vs previous -11% (15.00 GMT)

Australia Judo Bank Manufacturing PMI Final Nov consensus  vs previous 48.2 (22.00 GMT)

Japan Unemployment Rate Oct consensus 2.6% vs previous 2.6% (23.30 GMT)

Japan Capital Spending YoY q3 consensus % vs previous 4.5% (23.50 GMT)

ECB Speakers

Lagarde (13.30 GMT)

Enria (13.45 GMT)

McCaul (14.15 GMT)

Jochnick (15.45 GMT)

BoE  Speakers

Greene (16.00 GMT)

Friday

Japan Jibun Bank Manufacturing PMI Final Nov consensus 48.1 vs previous 48.7 (00.30 GMT)

China Caixin Manufacturing PMI Nov consensus 49.7 vs previous 49.5 (01.45 GMT)

Swiss GDP Growth Rate QoQ q3 consensus 0% vs previous 0% (08.00 GMT)

Swiss GDP Growth Rate YoY q3 consensus % vs previous 0.5% (08.00 GMT)

Swiss procure.ch Manufacturing PMI Nov consensus  vs previous 40.6 (08.30 GMT)

Germany HCOB Manufacturing PMI Final Nov consensus 42.3 vs previous 40.8 (08.55 GMT)

EU HCOB Manufacturing PMI Final Nov consensus 43.8 vs previous 43.1 (09.00 GMT)

UK S&P Global Manufacturing PMI Nov consensus 46.6 vs previous 44.8 (09.30 GMT)

Canada Unemployment Rate Nov consensus 5.8% vs previous 5.7% (13.30 GMT)

Canada Employment Change Nov consensus 14k vs previous 17.5k (13.30 GMT)

Canada Average Hourly Earnings Nov consensus  vs previous 5% (13.30 GMT)

Canada S&P Global Manufacturing PMI Nov consensus vs previous 48.6 (14.30 GMT)

US S&P Global Manufacturing PMI Final Nov consensus  vs previous 50 (14.45 GMT)

US ISM Manufacturing PMI Nov consensus 47.6 vs previous 46.7 (15.00 GMT)

US ISM Manufacturing New Orders Nov consensus vs previous 45.5 (15.00 GMT)

US ISM Manufacturing Employment Nov consensus vs previous 46.8 (15.00 GMT)

US ISM Manufacturing Prices Nov consensus vs previous 45.1 (15.00 GMT)

Fed Speakers

Barr (08.00 GMT)

Goolsbee (15.00 GMT)

Powell (16.00 GMT)

ECB Speakers

Elderson (10.00 GMT)

Lagarde (11.30 GMT)

Enria (11.30 GMT)

Good luck.

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