The Morning Hark - 27 Oct 2023
Today’s focus...Bumper GDP, snooze ECB, Sam’s dress rehearsal for the real thing but it was Dan what dun it! And a whodunnit….who has retained the document retention policy?
Overnight Highlights
Prices are at 6.45 BST/1.45 EST, with changes reflecting movement from midnight BST
Oil - Brent and Crude December futures rallying in Asia with both showing a close to two percent gain currently sitting at 89.50 and 84.70 respectively. Yesterday saw oil sell off as Middle East tensions seemed to be cooling somewhat with Israel’s imminent invasion of Gaza not being as imminent as first thought. However that move was reversed overnight as we saw the US becoming more involved in the conflict as reports suggest that they have hit Iranian linked targets in Syria in retaliation for recent attacks on US troops by the Iranians
EQ - Asian equity markets finding some much needed relief after the recent ugly sell offs. Currently the Nikkei and Hang Seng up well over one percent at 30,950 and 17,380 respectively.
The US indicies similarly bid in Asia with the Nasdaq and S&P futures up close to one percent at 14,310 and 4180 respectively. Ugly day again yesterday with Meta the driver this time on weaker advertising demand. However the sell off in yields has helped the indices regain some poise as they limp towards the weekend.
Gold - Gold Dec flatlining again in Asia. Currently at 1997 but still lacking the momentum, thus far, to press on above 2000.
FI - Global yields provided some welcome relief to the markets as US yields sold off post the 7y auction yesterday. The previous day’s ugly 5y was consigned to memory as the 7y showed the best bid to cover ratio since March 2020. Go figure. The US2y and US10y currently trading at 5.05% and 4.87% respectively.
European yields backed off a touch with the German 10y yield closing the day at 2.87% and the Italian 10y yield at 4.86%. Very quiet though considering its was an ECB day.
UK gilt yields similarly dead at 4.61%.
FX - USD remains king with the USD Index currently flat in a quiet Asian session at 106.55. The JPY, EUR and GBP all steady at 150.20, 1.0565 and 1.2135 respectively.
USDILS pushing new highs again with the escalation in tensions at 4.0850.
FX expiries of note today in USDJPY sees $4.5bn at 150. The EUR has €2bn at 1.0540/50 and on the downside €2bn at 1.0500/10.
Others - Bitcoin and Ethereum holding in well given the turmoil elsewhere this week. They continue to consolidate their gains with the pair currently at 34,100 and 1795 respectively.
Macro Themes At Play
Recap
ECB was, as expected, a sleeper. No change, no mention of PEPP reinvestments or minimum reserve requirements, a unanimous vote and, believe it or not, no ECB sources stories posted on Reuters an hour or so after the event. What’s the world coming to?
From the statement it would appear they are data dependent going into the December meeting;
“ECB’s interest rate decisions will be based on its assessment of inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation and strength of monetary transmission”.
While the decision and statement were on the dovish side it felt that Lagarde, despite flagging weakening growth multiple times, was trying to be a little bit more hawkish. Some of her money lines:
Not going to say we are at peak rates;
Growth has weakened and PMIs not indicative of vigour;
Holding doesn’t mean we wont hike;
Not the time for forward guidance;
Rate cuts were not discussed, would be premature;
Risks to growth are to the downside; and
Domestic price pressures are still strong.
Overall as non an event as possible for an ECB meeting.
Focus will shift to December where we will get some commentary on PEPP reinvestment and the minimum reserve requirements and more importantly the staff projections which as things stand will have lower growth and inflation forecasts. If so Lagarde’s press conference will be a touch tougher than yesterday’s as she tries to bat away the questions regarding rate cuts.
ECB or BoE first to cut? Who’s your money on?
US GDP we did flag the danger was on the topside and so it proved as QoQ growth came in at 4.9% for q3. Impressive indeed with consumer demand driving the blockbuster number indeed private consumption is back to levels last seen prior to the Fed hiking cycle.
The number is obviously good for growth and jobs but as far as the Fed is concerned a touch troubling in terms of inflation. One consideration for them will be if the spending is driven by the drawing down of savings and as such will naturally dry up.
A reacceleration or a last fling? Over to you Jay.
Durables came in a lot stronger too posting a MoM growth of 4.7% versus 1.7% expected and -0.5% previous.
Central Bank Speakers
ECB’s de Guindos was emphasising the ECB’s vigilance with the rise in yields being looked at “very carefully”.
BoC’s Macklem was emphasising the stance of the Bank when claiming that the “economy is not overheated anymore and if inflation cools as projected we won’t have to raise rates further”.
BoJ Intervention
Still hovering above 150 in USDJPY so thought it was worthwhile leaving in our comment’s from yesterday’s piece for those that missed them.
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
Curiouser and curiouser. Never under estimate the ability of a narcissist to surprise. Whilst SBF did take the stand there was another bizarre turning as Judge Kaplan dismissed the jury and held what was in effect a dress rehearsal for today’s proceedings. Having heard the gist of the defence’s approach, the prosecutions attacks and SBF’s witterings he will decide what is permissible for the jury to hear and make his judgement on that prior to today’s episode of the SBF show.
The defence seems to rest on a document called “document retention policy” which of course they somehow can’t find despite its title! This document was drafted by lawyers for Alameda and FTX and this in effect was the umbrella under which SBF acted. He claims that at all times he acted on his attorney’s advice which for a narcissist seems to go against the grain.
Part of this alleged document was the policy where Signal messages between the leaders of the empire would be auto-deleted.
In effect little old Sam was so busy building the company in an ever exploding sector that he had no time to think about what he may or may not be doing and was just acting on what turned out to be bad legal advice.
The real baddie, it would appear, according to Sam, was FTX’s chief regulatory officer Dan Friedburg. It was “him what dun it” according to Sam.
Good old Dan was in charge of the document retention policy, agreements for FTX customer deposits and the North Dimension (part of Alameda) bank account forms. Seems to be a smoking gun there which begs the question why isn’t Dan not up in the dock? Although, sadly for you Sam, this doesn’t explain the $8bn squirrelling away of client funds. Indeed when he was asked directly whether Alameda was allowed to spend FTX customer deposits he replied “I wouldn’t put it that way, but to some degree, yes”.
Some great Kaplan gold yesterday as unsurprisingly he was getting rather frustrated at SBF’s answers; “the witness has what I’ll simply call an interesting way of answering questions”.
However on this momentous day the highlight of the day had to come from Sam himself. The prosecution asked directly was it “his understanding of safeguarding customer assets included not embezzling these funds”
Defence immediately cried “objection”;
Judge Kaplan “sustained”;
SBF “yes”!
The defence laughed and explained to SBF that as the judge sustained there was no need to answer that question and added “haven’t you been sitting here for 4 weeks?”.
Sam retorted that he felt it needed to be answered!
The real question in all this is how people actually gave this guy money and a lot of it at that. Hindsight and all that I guess.
Sad to say all this fun will not last as the closing statements are set to come next week. In all seriousness our commentary, as you may have noticed, is very tongue in cheek but we realise that it is a person’s life we are talking about here and we should always remember that even though he is a narcissistic ego maniac!
Laura Shin’s excellent companion podcast reviewing yesterday’s events in full below for those with a further need to scratch that itch. There’s a lot to scratch!
The Day Ahead
Tokyo CPI for October hotter than expected with core coming in YoY at 2.7% versus 2.5% expected and headline even hotter at 3.3% versus 2.8% expected. First lift in this series in 4 months will certainly give food for thought ahead of the BoJ meeting next week.
PCE, the Fed’s favourite takes centre stage for a market that feels like its crawling to the finish line. Last week the Fed’s Barkin was explicit that he was focused on inflation as the key print for the direction of rates despite the recent strong labour and growth data. As such today’s data should have significance for the Fed’s decision making process for next week’s FOMC. Once again though Powell seems to have taken any momentum, the market had for a November hike, out of play with his speech late last week and it would take a real outlier from Friday’s number to put it back on the agenda again. Although maybe less of an outlier now after yesterday’s GDP figure.
Final October UMich late in the day for those inflation expectations.
At least we have a long weekend for the European readers as we return to GMT with the clocks going back an hour on Sunday. The US has another week to wait however.
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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:
Friday
US PCE Price Index MoM Sept consensus 0.3% vs previous 0.4% (13.30 BST)
US PCE Prices Index YoY Sept consensus 3.4% vs previous 3.5% (13.30 BST)
US Core PCE Price Index MoM Sept consensus 0.3% vs previous 0.1% (13.30 BST)
US Core PCE Prices Index YoY Sept consensus 3.7% vs previous 3.9% (13.30 BST)
US Personal Spending MoM Sept consensus 0.5% vs previous 0.4% (13.30 BST)
US Personal Income MoM Sept consensus 0.4% vs previous 0.4% (13.30 BST)
US Michigan Consumer Sentiment final Oct consensus 63 vs previous 68.1 (15.00 BST)
US Michigan Inflation Expectations final Oct consensus 3.8% vs previous 3.2% (15.00 BST)
US Michigan 5y Inflation Expectations final Oct consensus 3% vs previous 2.8% (15.00 BST)
Fed Speakers
Barr (14.00 BST)
Good luck and a good weekend to one and all.
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Excellent!