The Morning Hark - 28 Oct 2022

Today’s focus ….Dovish(ish) ECB, US GDP beats but under the hood it bleeds, “Fed pause” rally paused and all eyes on US inflation measures.

Oct 28, 2022

All prices are at 7.40 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December dipping a percent overnight in Asia with the pair currently trading at 96 and 87.90, respectively, although basically back to where we started yesterday. Weaker USD has helped oil all week, but it looks like some profit taking later in the day helped by a stabilising USD and some trimming of positions ahead of US oil company earnings later today.

EQ - A sea of red for equity markets with all the major Asian indices lower. The Nikkei, Hang Seng and Kospi all off well over a percent, with the HK index off closer to 4%, at 27,020, 14,855 and 296, respectively. All suffering after the sell off in the big tech stocks in the US.

The Nasdaq and S&P continued their softness overnight in Asia with the S&P and Nasdaq currently trading at 3790 and 11,118 respectively. Amazon results reflected an economy that is watching its pocket with much lower sales guidance for revenues. Indeed their revenue growth forecast of 4.8% is the lowest in the company’s history. Whilst Apple’s results were solid, especially in comparison to Amazon and Meta, the market focused on their projections. Mac revenues are expected to decline substantially in the holiday quarter and q1 revenues will decelerate compared to the September quarter. This was enough to temper some of the “Fed pause” enthusiasm, for now at least, all eyes on the US numbers today and what is looking like a pivotal week to come.

Gold - Gold Dec flat overnight in Asia at 1662. Nothing new here our first resistance level around the 1670/75 zone and further at 1700. Nearby support continues at 1650.

FI - US yields firmed up in Asia a touch after yesterday’s sell off with the US2y and 10y currently trading at 4.32% and 3.94%, respectively. The US Democrats are tripping over themselves to write letters to Powell advising him to step off the rate hike path and the US GDP data, despite the headline, did little for the Fed’s defence. Anyway also looks like a technical move in rates after the break of 4% in the 10y, which was retested and failed. Today will be an interesting close. Below 3.9% in the 10y and we could be seeing 3.6% sooner than we think.

European yields sold off post ECB as the market focused on the more dovish comments in the statement and from Lagarde. German 10y yields pushed back through 2% but ECB sources story walked back the dovish tone hence rates have stabilised and as we speak German yields are back above 2% at 2.03%. Similar story for the Italian 10y yield which closed lower at 4.034% but are currently up at 4.10%.

UK gilts followed their US and European counterparts with yields selling off with the 10y closing at 3.408%.

FX - Quiet FX session in Asia with the USD stabilising with the USD Index at 110.61. Yesterday saw a steady grind higher for the USD helped by an overextended market and the ECB’s dovishness pushing the EUR back through parity. All the majors softer overall with the JPY, EUR and GBP currently trading at 146.38, 0.9972 and 1.1540 respectively.

Others - Bitcoin and Ethereum started to play ball again, then decided to stop as the cooling of the risk rally has taken the shine off the sector as we trade back down to 20,292 and 1515, respectively.

ECB Review

Key highlights:

Raised 75bps taking the refi rate to 2%
Inflation remains high and will remain above target for an extended period of time
Expects interest rates to rise further in the next meetings but dropped “several” in the statement, although Lagarde used it in the press conference!
Rate decisions will be made on a meeting-by-meeting basis
On QE, they will continue to reinvest proceeds until at least the end of 2024
TLTRO from the 23 November until maturity will be indexed on the prevailing average ECB interest rates. In effect, it’s in the banks favour to strut to repay these loans

Furthermore Lagarde’s highlights (literally):

Economic activity likely slowed significantly and will likely slow further over the next 2 quarters
Downside risks to economic outlook
Upside risks to inflation profile
Made substantial progress in its inflation fight
Deliberately did not discuss QT at this meeting but will be in December
She did mention the “r” word noting that there was a higher likelihood of a recession

Overall the market took it as a dovish hike with European rates selling off prior to the “sources” chatter. Terminal rate has been traded down to around the 2.5% mark but Lagarde continues to show her communication skills are far from her strong point.

So European rates sold off, which was not in the script and lo and behold right on cue the ECB sources came tumbling through the door. They expressed surprise by the market’s reaction to the announcement with both bond and bank stocks rallying. They also clarified that when Lagarde talked about making “progress” this did not indicate a slower pace of rate rises. They did also mention that 3 committee members had voted for a more modest 50bps.

Ultimately they want financial conditions to stay tight however the market is in party mode and it’s going to be tough to shake that out of them.

I post at the bottom, Alf from The Macro Compass’s twitter thread which discusses the ECB decision and more of the technicalities, particularly surrounding the TLTRO, in much greater detail. I also post his longer piece, which also touches on the ECB but also the wider market.

US GDP Review

Headline number was impressive as it beat expectations at 2.6% vs 2.4%. However, more than 100% of those gains can be attributed to the trade gap narrowing, as we discussed yesterday.

As we said the devil is in the detail.

Some real shockers in the detail too, especially in the housing sector where residential investment plunged over 25% as interest rate rises started to kick in over the quarter.

Brief summary would be growth up, prices ticked down a touch but the labour component remains strong. All in all not much in the data to suggest the Fed will be blown off course from its 75bps next week. Whether it’s enough alone for the much vaunted “Fed pause” is debatable.

A new chapter in UK politics continues

Little of major note out of the UK as things start to settle down again post Truss. The Braverman debate looks set to run and I’m sure there will be much weekend press coverage on the subject.

Speaking of the press the FT reports today that Sunak is looking to raise taxes and cut spending to the tune of £50bn in the upcoming fiscal package. As we said earlier in the week, go big early, blame it on the Truss and Kwasi show and hope for an uptick in growth allowing tax cuts pre election. Best laid plans and all that.

The Day Ahead

Japanese data surprised on both counts with the unemployment rate ticking up to 2.6% in September whilst Tokyo CPI came in much stronger than expected with headline at 3.5% and core at 3.4% a 33y record high.

Meanwhile back in BoJ land, they did not surprise in keeping rates unchanged in negative territory. Also, as was flagged earlier, they have raised their inflation forecast for the fiscal year end (March 2023) to 2.9%. We await Governor Kuroda’s wise words on the world.

We get some German data with the q3 flash GDP read and preliminary inflation for October which should not provide much relief for the “poor man” of Europe.

Bigger news however in the afternoon when attention shifts to US inflation with the quarterly ECI read, which is expected to tick down a touch whilst the Fed’s favourite core PCE, like the mainstream CPI print, expected to rise again, taking us above 5%.

With the mood the market is in, it feels like we need good upside misses for these prints to have any chance of derailing the “Fed pause” trade.

I post at the bottom a great roundtable from Imran Lakha’s Options Insight discussing the prospects for Macro through q4. It’s really well worth an hour or so of your time. Great insight as ever.

Finally, I post below FXMacro Guy’s excellent daily tweet, which has some further insight on the ECB and US GDP release. Also, look out for his weekly, which will hit the tapes sometime tomorrow. A comprehensive round up of the week and great weekend read, which will set you up for what is looking like a huge week for markets next week.

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Friday

German GDP Growth Rate QoQ Flash q3 consensus -0.2% vs previous 0.1% (09.00 BST)

German Inflation Rate MoM Prel Oct consensus 0.6% vs previous 1.9% (13.00 BST)

German Inflation Rate YoY Prel Oct consensus 10.1% vs previous 10% (13.00 BST)

Canada GDP MoM Aug consensus 0% vs previous 0.1% (13.30 BST)

US Employment Cost Index QoQ q3 consensus 1.2% vs previous 1.3% (13.30 BST)

Personal Income MoM Sept consensus 0.3% vs previous 0.3% (13.30 BST)

US Personal Spending MoM Sept consensus 0.4% vs previous 0.4% (13.30 BST)

US PCE Price Index MoM Sept previous 0.3% (13.30 BST)

US PCE Price Index YoY Sept previous 6.2% (13.30 BST)

US Core PCE Price Index MoM Sept consensus 0.5% vs previous 0.6% (13.30 BST)

US Core PCE Price Index YoY Sept consensus 5.2% vs previous 4.9% (13.30 BST)

US Pending Home Sales MoM Sept consensus -5% vs previous -2% (15.00 BST)

US Michigan Consumer Sentiment Final Oct consensus 59.8 vs previous 58.6 (15.00 BST)

US Michigan Inflation Expectations Final Oct previous 4.7% (15.00 BST)

US Michigan 5y Inflation Expectations Final Oct previous 2.7% (15.00 BST)

Good luck and a good weekend one and all.

The Macro Compass - A Sudden Change of Heart?
ING - FX Daily: Dollar corrective forces at work
Going John Galt - $20 ANOTHER BEAR MARKET RALLY?
The Gryning Times - Oil - From a Higher Base
Pepperstone - USD down again but huge event risk looms large

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