The Morning Hark - 28 July 2022
Today’s focus…..FOMC review. German state inflation data over the morning before German CPI 13.00BST. US GDP adv + PCE at 13.30BST. ECB’s Visco talks at 14.00BST. Biden talks about economy at 19.15BST
Daily roundup - all prices are at 7.30 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil/Gas – Brent and Crude moving higher on the day at 107.50 and 98.40 respectively. Oil moved higher yesterday with the larger than expected drawdown in EIA inventories. The FOMC delivered their 75bp but then Powell became more dovish at the presser and fears of a FED led slowdown diminished. The move has continued this morning although we are off the highs.
Gas was again in the news with the market fearing more Russian supply cuts while the slowing delivery was described in terms of annual maintenance by the suppliers.
EQ – Equities in Asia were mixed today after FOMC presser with Nikkei up at 27,815 while Hang Seng is down small at 20,575 and the KOSPI is flat at 2435.
The US futures are both slightly lower with the Nasdaq and S&P trading at 12,575 and 4020 respectively.
Equities traded higher Wednesday during Chair Powell’s press conference, liking the idea that the FOMC are now “data dependant” and will decide increases “meeting by meeting”. Fear of a Fed led recession are abating. The markets have given some of those gains back this morning as the euphoria slows down and the realisation that US GDP is due today.
Big day for earnings after the close with Apple, Amazon and Mastercard among others to report.
Gold – Gold traded up $17 Wednesday and to its high (small resistance level) at $1745 during the FOMC press conference. It currently trades at $1738 up about $2.5 in Asia.
FI - US yields in Asia are stable with the 10yr sitting at 2.8000 and 2yr at 2.9980. The 10yr future is currently down 8 ticks from when the FOMC interest rate rise was announced.
Within the curve 8bp have been removed for the September Fed meeting since yesterday. US GDP could be the game changer today.
German state inflation is out today with the combined German CPI at 13.00BST. Initial prints are showing higher inflation, 1.1% versus -0.1% expected. The following sell offs in Bunds are not holding and moves retrace.
FX – JPY is the big winner today in Asia moving up on US equity selling and hitting its high of 135.10 around the Tokyo fix. Stop losses look to have been triggered as US-Japan yields diffs weakened.
USD has generally sold off across the board this morning, although apart from the JPY, moves are small. Eur is stable as continued Gas supply issue weigh on the currency and high inflation out of Germany battle it out for supremacy.
Others –Bitcoin and ETH steady today without the Asia selling we have seen recently, trading at 23,170 and 1645 respectively. ETH is challenging the series of highs 1635-1660 and it looks like a breakout level.
Chair Powell pretty much ticked all the boxes and more that the market was looking for with:
a 75bp hike;
an admission that we are at neutral, stating that we are at “levels broadly in line with our estimates of neutral interest rates”;
in effect ditching forward guidance with “after front loading our hiking cycle until now we will be much more data dependent going forward”, they will also give “less clear” guidance going forward and they are going to a “meeting to meeting” stance;
additionally, he highlighted the lag in the rate hikes the Fed had already delivered noting that there was “probably some significant additional tightening in pipeline”.
With labour markets still tight and commodity price pressures still to play out in the economy, inflation was still to be dealt with but that the FED were looking for inflation to abate in the coming months and that any further rate increases “depends on data”.
Headlines of note were:
“Likely will be appropriate to slow pace of increases as rates get more restrictive”
“We expect a period of below trend economic growth”
“Committee feels we need to get to moderately restrictive levels”
“3-3.5%” is a moderately restrictive level
“Time to go to a meeting by meeting basis. Not provide clear guidance as before”
“Path to soft landing has narrowed” but “don’t think we are currently in recession”
All of which was taken as dovish by the markets and the celebrations started with the opinion that the Fed’s peak hawkishness and tightening is behind us. The market still looks for further hikes for the rest of the year with a 50bp and then 2 x 25bps priced in for the remainder of the year but sees 70bps of cuts for 2023.
Nasdaq and S&P loved the news with rallies of over 4% and 2.5% respectively, Crypto took off with Bitcoin and Ethereum capturing the 23,000 and 1600 levels, the USD weakened, and EM said thank you and US front end rates sold off. With the signal that forward guidance was over, the data dependent slant for future meetings and with inflation and growth both slowing the market is pricing accordingly. One word of caution is that recent huge FOMC up days in equities have tended to revert lower fairly swiftly. Perhaps this will be different as the market feels that this is a pivotal moment for this current hiking cycle as they smell an upcoming “Fed pivot”? Beware of Fed speakers talking some of the dovish news back in coming days if they feel the markets are getting ahead of themselves.
Some other points to note from his speech:
Powell saw that the slowdown in q2 was “notable” and some evidence that “labour demand may be slowing a bit” but “I do not think that the US is currently in a recession” alluding to the strong job growth and wage measures as evidence of no recession despite their lagging nature. It’s funny how he was happy to highlight the lagging nature of rates on the tightening front but not the lagging nature of the US employment market in previous recessions.
he admitted to erring on inflation and rate hikes as he claimed that “I don’t think I would keep policy so accommodative again when inflation was already picking up as we did in 2021”;
also made some comments on the rest of the week’s upcoming data. For today’s GDP print “I tend to take the first GDP reports with grain of salt”, also noted that Friday’s ECI will be “important” and the same day’s PCE gauge as “better at capturing inflation”.
I guess we watch Fed speakers and the incoming data from now on with the next two days’ data important on the inflation front and of course the payrolls report next Friday.
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📅⠀The main highlights for the week ahead in terms of data and speakers:
German Inflation YoY Prel Jul consensus 7.4% vs previous 7.6% (13.00 BST)
US GDP QoQ Adv q2 consensus 0.5% vs previous -1.6% (13.30 BST)
US GDP Price Index QoQ Adv q2 consensus 8% vs previous 8.3% (13.30 BST)
US Core PCE Prices QoQ Adv q2 consensus 4.4% vs previous 5.2% (13.30 BST)
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📚⠀Further reading on the current key macro themes:
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Nice work, thank you!