The Morning Hark - 27 Sep 2022

Today’s focus ……UK calm for now, Market Dysfunction take 2 and Central Bank speakers continue

Sep 27, 2022

Harkster will be attending a conference in Amsterdam over the next couple of days, so dispatches from the front line and for TMH may be briefer than normal. Thanks, as always, for your continued support.

All prices are at 7.45 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude November saw oil stabilise and rally smalls overnight in Asia with the better risk profile currently trading at 85.20 and 78 respectively. The recessionary fears and surging USD storm clouds lifted a tad from the oil markets overnight as OPEC+ officials said they were monitoring the situation in markets and would take necessary action to maintain price stability. Watch this space. Still looks a sell on rallies to me for now.

EQ - Equity markets off a touch overnight in Asia with the Nikkei, Hang Seng and Kospi all slightly lower at 26,367, 17,881 and 289 respectively.

The Nasdaq and S&P however have bounced over one percent in the Asian session at 11,461 and 3710 respectively.

Gold - Gold Dec futures up smalls in Asia at 1643. Continued softness in gold given the US yield and USD profile. Touched a 2.5 year low overnight at 1629 with 1600 now the obvious next target for the downside. Topside into 1650 and further to 1670.

FI - US yields remain close to their recent high prints, albeit off a touch, in Asia with the US2y and 10y currently trading at 4.28% and 3.84% respectively.

European yields had sharp moves higher again yesterday closing up at 2.114% and 4.553% for the German and Italian 10y yields respectively. UK gilts pressed ever higher with the continued fallout from the UK’s fiscal package with the 10y closing at 4.282. Both the Italian and UK spreads versus their German equivalent stretching to extreme levels especially in the case of the UK.

FX - The USD taking a breather overnight with the USD softer across the board with the USD Index now at 113.42. All the majors having a little bit more room to relax, although far from out of the woods, with the JPY, EUR and GBP currently at 144.25, 0.9657 and 1.0803 respectively.

With the better risk tone AUD and NZD higher by a percent or so at 0.6510 and 0.5720 respectively. USDNOK has had some relief too with the better bid in oil but still elevated at 10.72. USDCNH a little lower at 7.1550 but still saw its highest fixing in 2 years and is approaching multi year highs at 7.1965.

Others - Both Bitcoin and Ethereum survived the turmoil of yesterday with surprisingly very few scars and indeed trade higher with the better risk tone overnight. Trading currently at 20,240 and 1388 respectively.

Market Dysfunction

The day started with a historic low for GBP and continued to tick off lots of new highs in the various market pressure points.

GBP FX 3m volatilities were pressing towards the 22% levels last seen back in the Brexit days.

10y gilts hit levels last seen back in 2010 with its biggest daily move on record. The market is now pricing in UK rates at 6% by November next year. The UK/German 10y spread reached well beyond 200bps to its highest level in 30 years.

Elsewhere post the Italian elections we saw the BTP spread widen to its greatest spread in over three months (link at the bottom to a great thread from Alf from The Macro Compass on what he sees for the Italian markets over the next few months).

The MOVE index, the bond market volatility measures which we have spoken about previously, hit its highest level since 2009 and one of the highest levels in 30 years.

S&P were showing 5 pip ticks at one point yesterday afternoon.

Overnight the BoJ stepped in to do an unscheduled bond buying operation to support the 0.25% level in the 10y as well as in longer duration bonds. In the meantime the 20y touched 1% for the first time since 2015. In addition they also did JPY400bn worth of outright CP purchases. Whilst we are on the BoJ they did an estimated JPY3tn worth of JPY intervention in the FX market last Thursday.

Also overnight the PBOC did their largest short term cash injection into the market in 7 months. In addition sources claim they spoke with various financial institutions to help stabilise the markets and discourage trading activity that could cause big fluctuations.

Taiwan meanwhile was considering FX controls or indeed a ban on short selling stocks.

Hardly normal everyday stuff.

Central Bank Speakers

BoJ’s Kuroda remains happily in negative rate never-never land with his resounding statement that the BoJ won’t hesitate to add to easing if needed and believes that the BoJ’s easy monetary policy will continue into 2023 and 2024.

In ECB land, Guindos saw inflation increasing broadly and EU growth slowing in Q3 with rate hikes data dependent going forward which would appear sensible.

Sinkus rather unhelpfully stated that 50bps in October was the least they would do.

Lagarde had some nondescript comments with the obvious depreciating EUR not helping the inflation profile and that they would raise rates over the next several meetings. More interestingly, she joined the common cause of central bankers v governments by stating that wide fiscal measures are not helping monetary policy. Finally a conundrum as she stated that the ECB’s QT program would only commence once rates had normalised, in effect hit neutral, however in the same breath she actually can’t say where neutral is but she’s determined to get there. So that’s okay then.

Markets are now all in for a 75bp hike in November.

Fed’s Collins said she was “seeking clear and compelling signs of inflation falling” and “further monetary policy tightening needed”.

For a more comprehensive round-up of all the speakers, and there was a lot, I refer you to the link at the bottom to FXMacro Guy’s tweet, rounding it up as ever in the most comprehensive manner.

Monitor our live feeds of articles on the top central banks here.

UK Fiscal Package Fallout

The much touted BoE statement was far from the comfort blanket the market was wanting but when all you’ve got to offer is sack cloth what did you expect? Very much a stiff upper lip statement that the Bank is “monitoring developments in financial markets very closely” which some might argue is part of their remit? In addition, they “will not hesitate to change interest rates by as much as needed to return inflation to the 2% target” again ditto re their remit.

So far from a resounding confidence boost for the UK and subsequently GBP had a knee jerk sell off. What can they actually do. Intervention to stop the GBP falling, as we have seen with the JPY and we have argued for a long time, when done on your own lacks the follow through especially given the low level of reserves the UK has to use. Raise rates? Yes that would be something but guessing it would have to be something substantial and as we saw back in the dark days of the ERM debacle (almost 30 year to the day) raising rates aggressively in a panic move often can have the opposite effect. Could they signal that they are delaying their QT gilts sale for a period of months to ease some pressure in that market? Or will they need help from the other “major” central banks? Surely only if markets get so dysfunctional that there is a systemic risk to the whole system. Oh well looks like just try and muddle through throw some rate rises at it and hope for the best?

In the UK Kwarteng will announce a medium term fiscal plan on November 23 which will include more details on the government’s fiscal rules including ensuring that debt falls as a share of GDP in the medium term. He has also requested that the OBR sets out a full forecast alongside the fiscal plan and there will be a further budget in the spring with full OBR forecasts too if we are all still around then.

Today’s focus

Yet more central bank speakers and probably some market dysfunction to go with it. Main highlights will be Powell (although topic is digital currencies) and Lagarde with poor Pill from the BoE being fed to the market wolves trying to explain the BoE’s view on current market developments at high noon today.

Data wise not a huge amount with US durables and housing data, which as we highlighted in yesterday’s piece, will garner more attention than usual given Powell’s nod to a housing recession last week.

Early hours tomorrow, we get the BOJ minutes from last week’s meeting in never-never land.

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Tuesday

US Durable Goods Orders MoM Aug consensus -0.4% vs previous 0% (13.30 BST)

US New Home Sales Aug consensus 0.5M vs previous 0.511M (15.00 BST)

Fed Speakers

Evans (11.15 BST)
Powell (12.15 BST)
Bullard (14.55 BST)
Kashkari (18.00 BST)

ECB Speakers

Centeno (11.50 BST)
Villeroy (12.00 BST)
Lagarde (12.30 BST)
Panetta (12.30 BST)
Guindos (14.15 BST)

BoE Speakers

Pill (12.00 BST)

Early Wednesday

Japan BoJ Monetary Policy Meeting Minutes (00.50 BST)

Good luck.

Mr. Blonde - Testing Times
Macro Ops - A Mutant Selling Deformity…
SEB - OPEC+ will likely decide to cut production on 5 Oct
ING - FX Daily: Race to the bottom
Blain's Morning Porridge - The UK’s Monumental Policy Mistake – how bad will it get?

Discover more market commentary & research from 500+ curated sources on Harkster →

Powell and the Markets

Zero Hedge - Here Are Some Things The Fed Will Break If It 'Contains Inflation'
EPB Research - Is the bond market broken?

FX Macro Guy - Central Bank Review

Substack - Outlook for Week 39/2022
Twitter - Relevant stuff that happened today

Italy and what’s next

Macro Alf - A short thread

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The Weekly Hark