The Morning Hark - 27 Oct 2022
Today’s focus ….“Fed pause” rally Meta doesn’t Matter, the BoC fuelling the global pivot fire and next up the ECB and US GDP.
All prices are at 7.35 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December flat overnight in Asia with the pair currently trading at 95.90 and 87.70, respectively, consolidating their gains from yesterday. The weak USD has underpinned the oil move of late and this was fuelled further by reports out of the US which showed crude exports surged to a record high and raised hopes for global demand despite the economic back drop of higher inflation and interest rates.
EQ - Equity markets showed a mixed bag in Asia with the Nikkei off a touch at 27,287. However, the Kospi up well over one percent at 300, fuelled by foreign inflows and the Hang send equally stronger at 15,515.
The Nasdaq and S&P up a touch overnight in Asia with the S&P and Nasdaq currently trading at 3860 and 11,488, respectively. Rollercoaster yesterday for the US indices but we are pretty much back to our opening levels from yesterday’s European open. The “Fed pause” rally got some more help from the dovish BoC but got derailed somewhat by Meta’s results which were pretty dismal and alluded to “near- term challenges on revenue” but given the decline in the stock, some 20%, the overall indices did well to hold in.
Gold - Gold Dec flat overnight in Asia at 1667. Our first resistance level around the 1670/75 zone seems to be a decent short term sell zone but there’s little downside to talk of either to be honest. Dull for now further resistance at 1700. Support continues at 1650.
FI - US yields starting to stabilise a touch in Asia after their recent sell off with the US2y and 10y currently trading at 4.43% and 4.02% respectively.
European yields continued on their path lower with the German and Italian 10y yields closing at 2.117% and 4.326% respectively ahead of the ECB.
UK gilts continued to ease the pressure on the UK with yields selling off again with the 10y closing at 3.575%.
FX - The USD continues its slide with the USD Index currently trading at 109.76. No place to hide for the USD with all the majors stronger with the JPY, EUR and GBP currently trading at 145.80, 1.0055 and 1.1595 respectively. USDCNH continues lower relieving some pressure at 7.2275.
Others - Bitcoin and Ethereum starting to play ball again as signs of life reappear. Both currencies remain well above their breakout levels at 20,000 and 1400 with them currently trading at 20,762 and 1560 respectively. For those that missed it yesterday I repost at the bottom, Matt Levine’s excellent crypto read. It’s a long un but a good un.
The ECB at today’s meeting are widely excepted to deliver a hawkish 75bps hike. Indeed it has been telegraphed so strongly that any disappointment would push the EUR back towards testing its recent lows, something the ECB could well be doing without.
The hike is despite the doom and gloom surrounding the recent economic data out of the Eurozone with, indeed, this week’s data showing a further contraction in the region’s PMIs. As a nod to the doves they could state that, although further hikes will be needed to fight inflation, their magnitude will be very much data dependent which would be very much in line with the “global pivot” hot trend just now but let’s see.
So with 75bps pretty much in the price, what to look out for?
Lagarde’s press conference and, specifically her thoughts on the policy path for the remaining meeting of the year in December and beyond will be a key focus. Especially as several of her cohorts have mentioned, as indeed she has, that hikes will be needed at the next “several meetings”. Remember at September’s press conference, she very helpfully alluded to hikes taking place at more than 2 meetings but less than 5.
If she were to dare to mention “recession” this would suggest that future rate hikes will probably be at a slower pace and a lower magnitude than previously. Similarly, if she were to hint at additional moves beyond February that would tilt the scales towards the hawkish side.
Other topics of concern will include; balance sheet reduction, which was reported to have been discussed at their general counsel meeting earlier in the month. Suggestions are that the reinvestment language may be “tweaked” at this meeting before an announcement of the plan in one of the next two meetings followed by a full launch in the spring of 2023.
TLTRO may also be tweaked given the “arb” opportunities the banks now have, via this mechanism, with the recent rate hikes. Finally, any signal as to a level for the terminal rate will be useful as the market gets its head around exactly where we are in the hiking cycle.
No new staff forecasts which will accompany the December rate announcement.
So potential scenarios with our base case, with a hawkish 75bps hike and no further indication on rate path, would see the EUR sell off smalls on a “buy the rumour sell the fact basis” especially given the EUR’s recent rise on the Fed pause rally.
Dovish surprises; the mention of a recession, the chances of a TPI activation rising, inflation risks remaining in the near term but they expect a return to target in the medium term or the more explosive 50bp hike on the worsening economic outlook. Any, and especially the last one, should see the EUR sell off a good 2%. Especially as its recent resurgence has been much more focused on the USD side of the trade as the “Fed pause” trade has gained momentum.
Hawkish surprises would be any number of; 75bp hike and more large increases to come, talk of hikes further out the calendar, inflation risks remain to the upside and we expect it will remain high in the medium term and balance sheet reduction is being discussed. Any such chatter could see a good 1% rise in the single currency.
One word of warning, and obviously depending on what the ECB say, the US data comes out between the policy announcement and the press conference and as such, the US GDP data may give the USD direction, which has the potential to overshadow somewhat the ECB.
US GDP Preview
Recession/no recession will certainly not be the talk of the town for this release. After two negative quarters, and the accompanying debate regarding a recession, this quarter will be firmly in the positive camp.
Consensus is for a rosy 2.4% QoQ increase in growth, indeed JPM is looking for a 3% handle, fuelled in the main by the narrowing of the trade deficit helped both by the stronger export side and a shrinking in imports. However, that is expected to be the main driver, and the imports element of it points to a less than healthy US consumer.
Elsewhere we expect less robust growth with housing especially expected to drag on the back of the higher mortgage rates as the Fed hikes feed through into the wider economy. All in all, the headline will grab the immediate attention, but as ever, the devil will be in the detail.
A new chapter in UK politics continues
So Halloween is cancelled and we get the “take 2” fiscal package announcement now on 17 November to give PM Sunak and team enough time to digest exactly how big the black hole is and what they propose to do about it. Again reports in the papers today surrounding tax increases which we spoke about yesterday and which seem inevitable.
One issue with the delay is that the package now comes after the BoE’s MPC meeting happens next Thursday. This then leaves the Bank shooting somewhat blind as they will have little to work on in terms of the government’s forecasts and numbers as they try to assess their latest rate hike magnitude. Will they then err on the side of caution next week and, with the next MPC meeting coming on 15 December, almost combine the two meetings as an overall “package” to factor in the fiscal package?
Sunak is already starting to steer into dangerous territory as he does a u-turn on Truss’s fracking proposals and puts them back on the shelf for now. The reinstated Home Secretary Braverman looks like giving him few headaches too. The press are seemingly keen to probe into any previous misdemeanours and the ex Conservative Party chairperson Berry took little time in getting his view across when he claimed that there “were multiple breaches in ministerial code” during her brief stint as Home Secretary the first time round. One to watch.
Bank of Canada Review
Well that wasn’t expected. All the talk in the lead up to the announcement was the market edging further and further towards a 75bps hike, but instead we got a dovish 50bp from the BoC.
This was grasped upon by the wider market as a further sign of a global pivot by the central banks, remember the RBA’s 25bp earlier in the month, and some of the statement and Governor Macklem’s comments were anticipated/wished to be replicated by next week’s FOMC statement and Chair Powell’s statement.
The flip side of that argument would be after yesterday’s Australian CPI report, the RBA’s 25bp looks a tad undercooked. In addition, a 50bp hike is still a hawkish hike albeit not as hawkish as 75bp. The market wants to hear what it wants to hear and that’s fair enough.
The statement suggests that despite the slowing pace, there would be further rate hikes and that QT was complimenting the rate path. However, there were signs that inflation was coming down, and there was a significant slowing down of the economy hence future rate hikes would be very much data-dependent.
Macklem’s press conference had echo’s of the Fed Daly’s speech from Friday, which did not go unnoticed by the market, when he alluded to the fact that the tightening phase will draw to a close and the old over/under tightening argument was again rolled out.
Interesting price action with USDCAD knee jerk higher into 1.3650 with a swift return back to pre-announcement levels to 1,3550 fuelled by the predominant “Fed pause” theme. One maybe to bear in mind for the ECB news today.
I post at the bottom FXMacro Guy’s excellent daily tweet, which touches on the BoC decision. He has also done an excellent thread on the Bank’s Monetary Policy Outlook. Finally, his weekly has a great ECB crib sheet which is essential reading prior to today’s meeting. All round great resources.
The Day Ahead
A couple of big hitters for a super Thursday with the ECB Rate announcement and subsequent press conference. Whilst right bang in the middle of the two we get the first print of US GDP for q3.
Early doors on Friday we get some Japanese data with the September unemployment rate and Tokyo CPI for October. Then just prior to the European open, we get the BoJ interest rate decision and their quarterly outlook report. Governor Kuroda will have a press conference at some point after the two releases.
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ECB Interest Rate Decision 75bp hike expected taking rates to 2% (13.15 BST)
US Durable Goods Orders MoM Sept consensus 0.6% vs previous -0.2% (13.30 BST)
US GDP Growth Rate QoQ Adv q3 consensus 2.4% vs previous -0.6% (13.30 BST)
ECB Press Conference (13.45 BST)
Lagarde (15.15 BST)
Wood (16.30 BST)
Japan Unemployment Rate Sept consensus 2.5% vs previous 2.5% (00.30 BST)
Japan Tokyo CPI YoY Oct previous 2.8% (00.30 BST)
Japan Tokyo Core CPI YoY Oct consensus 3.1% vs previous 2.8% (00.30 BST)
BoJ Interest Rate Decision no change expected (04.00 BST)
BoJ Quarterly Outlook Report (04.00 BST)
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