The Morning Hark - 29 Aug 2022
Today’s focus ……Jackson Hole recap, ECB revving up their engines and The Week Ahead
All prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures up half of one percent in Asia trading at 99.40 and 93.00 respectively. Little new of note in the sector with oil trading in a relatively tight range over the last few sessions.
EQ - Equity markets in Asia overnight all lower continuing the US markets’ slide post Powell. The Nikkei and Hang Seng both down close to one percent at 27,928 and 19,901 respectively. The tech heavy Kospi suffering more down over two percent at 316.
The Nasdaq and S&P both giving up a further one percent in the Asian session currently trading at 12,472 and 4026 respectively. The support zones on Friday were far from supportive as the market went into a post Powell free fall. We are sitting currently on some support here in the 4020 level but more evidently at the 4000 level. Below that 3860 is closest in sight. Topside sell zone around the 4100/20 level will be jumped on. Nasdaq wise 12,400 should have some interest for buyers and 12,000 beyond there. Sell zone broadly speaking into the 13,000/200 level.
Gold - Gold Dec futures down close to one percent in Asia at 1736 continuing their softness from the end of last week. Gold suffering again in the face of higher US yields and the strong USD. 1720 the nearest support before the year’s low around the 1700 level. Near term resistance in the 1750/55 noisy zone.
FI - US yields opened higher and continued their bid tone with US2y and 10y yields currently trading at 3.47% and 3.11% respectively. Having finally got over the 3.27% hurdle, which we continued to gravitate towards, the 2y is now sitting pretty much on the year’s high with 3.75% in its sight. Similarly the 10y has well and truly taken out the 3% level and we would look for it to remain bid until such time as data starts to feed in weaker.
European yields finished the week stronger at 1.39 and 3.681 for the German and Italian 10y yields respectively. Given all the ECB chatter we would expect the trend to continue with European rates opening much higher. However the spread between the two benchmarks continues to widen a worrying sign ahead of the ECB next week.
FX - All hail the king USD as it continues its rise in Asia up a further half of one percent with the USD Index now at 109.24. None of the majors were spared with the JPY, EUR and GBP all suffering currently trading at 138.75, 0.9942 and 1.1676 respectively. Indeed GBP printed a new year’s low. Goldmans poured more woe on the beleaguered UK with a downgrade of forecasts (which still look a tad optimistic) and a call for the UK to enter recession in q4.
Our old friend the CNH continues its slow steady progress down towards 7 with another high print above 6.93 with it currently trading off a touch at 6.9278.
Others - Bitcoin and Ethereum unsurprisingly in the current environment trading softer at 19,855 and 1455 respectively.
Jackson Hole “put” to bed for another year.
Well as we anticipated a hawkish tone with little else in terms of new news. The warm up acts did their job of prepping the audience and the listening world as Powell reiterated that inflation will be tamed at all costs and rates will remain higher for longer. The money lines appear to be that Fed policy will bring “some pain to households and businesses” and further that “failure to restore price stability would mean far greater pain” and furthermore Powell “cautions strongly against prematurely loosening policy”.
He was strong in emphasising his point and indeed he opened with the unusual stance of “my remarks will be shorter, my focus narrower, and my message more direct”. That must have taken some saying from a central banker! However when you step back those words are significant it felt like there was a lot of frustration from Powell with the markets that the recent equity rally had loosened financial conditions and hence made his job a lot harder and on the rates side his frustration lay with the market’s insistence for cuts in 2023.
It seems that the equity market got the message at last as we’ve been saying of late the rally seemed on borrowed time the main US indices sold off well over 2%. Interestingly the US rates market after an initial spike higher came off into the close with the 10y actually closing a touch lower from Powell’s opening levels and the 2y pretty much unchanged. Although the Asian open has but a bottom on that trade.
So there we have it. The July Fed perceived “pivot” is well and truly consigned to history. Expect more hawkish talk from the Fed even if we see weakening data until such time as inflation starts to print consistently on a downward trajectory. As he said taming inflation may entail a “sustained period of below trend growth”. There was some good news on the inflation front just before he spoke with PCE for July showing a similar trend to its CPI cousin with a decline and apparent peaking. Previously the Fed have hiked until they get rates above the level of PCE so with a 4% mismatch on the handles it would appear we have a way to go. Indeed Mester followed up her boss’s comments with more hawkish rhetoric later in the day insisting that whilst inflation will fall in 2023 it will not reach 2% by the end of that year. Equally she is not convinced inflation has peaked and she feels that rates will need to get a little above 4% and hold there for all of 2023.
The markets get the higher rates sooner part but where the disconnect comes, and indeed where the battle will be fought, is the hold for 2023 piece of the puzzle. Of course to muddy the waters even more for that puzzle we shall have the continuing QT program by the Fed which gets up to full steam this coming month. Let’s see how all that pans out. We’ve come a long way both on Friday and overnight so ahead of the important data at the tail end of the week we perhaps we get some retracement.
I post at the bottom some interesting takes on Powell’s speech. Credit Suisse’s Pozsar is very much of the opinion that Powell has to crash the markets to contain the equity markets, Alf’s excellent The Macro Compass as ever gives a concise deep dive into the speech and its implications for the macro landscape. Finally the FX Macro Guy’s usual great book of work which is his Weekly. This week he has a whole section on the speech itself and an excellent summary of the other Fed speakers’ comments around the event.
Not to be outdone, the ECB participants at the symposium and over the weekend were keen to get into the hawkish chatter.
Villeroy stated that there is a need for a “significant” interest rate hike in September.
Schnabel saw the need for the Council to act forcefully versus inflation so as to maintain trust and indeed even to tighten into a recession.
Kazak pondered that both 50 and 75bp hikes were on the table and it had to be at least 50bps.
Knot wanted to see interest rate hikes every 6 weeks until such time as inflation is under control.
Holzmann stated that for September a 75bps hike should be up for debate.
Rehn said that the next ECB step will be “significant”.
All very clear and there seems to be a realisation that, with pressure on energy prices looking unlikely to abate any time soon and with a weakening EUR, inflation looks well set to be around for some time and indeed has far from peaked in the Eurozone. As we have said before there’s not a lot to like about the EUR and with the potential for a right wing coalition coming to power in Italy, by the end of the September, the political noise regarding the cost of living crisis and higher interest rates will only amplify.
I post at the bottom a very good visual, from Bloomberg posted by Christophe Barraud, of the Council members plotting their degree of influence and their respective rate stance. On that basis on an initial look it appears a tough task to get a 75bp hike through.
The Week Ahead
Fed speakers following on from JH. More of the same I guess from the Fed speakers this week as we expect them to drill home, as they did prior to Powell’s Friday showpiece, that rates are going higher for longer and don’t expect any reprieve in 2023 with rate cuts. The real battle remains in the fixed income space where the market is far from convinced that the Fed can sit on their hands throughout the whole of next year without twitching and signalling a cut.
Global Final PMIs and US ISM. The final PMI prints for the major global economies are all released on Thursday with the majority of the economies teetering on the brink of the 50 boom/bust line with of course the UK propping up that particular leaderboard. US ISM is released later that day and whilst the regional surveys have been volatile, as we have discussed in these pages over the last week or so, the trend remains on the down path. On that basis the Markit Manufacturing PMI has shown a fifth straight down month. The strong USD and general global growth weakness points to a lower reading which could knock on the boom/bust 50 line.
US NFP. Friday sees the US August payroll report and as one of the two key measures for the Fed it will have a lot for the market to ponder over in the lead up to the September FOMC. Remember last month’s print was a blockbuster and almost double the market’s estimates. At the time we had highlighted a tendency for the forecasters to underestimate the headline number and once again forecasters are migrating back to a number close to 300k. Average earnings are also expected to show a peaking in this series with earnings dropping back to 0.4% MoM. Then again are we back to the “bad data is good data” in terms of risk assets?
German and EU data. The sick man of Europe once again sees some important prints this week with the unemployment and inflation reports for August as well as the final manufacturing PMIs and indeed July’s retail sales measure. The EU pretty much shadows these releases and given all the recent ECB hawkish chatter ahead of their September meeting these measures should put a little more colour on the economic landscape for Europe. The colour however maybe black or a darker shade of grey as we don’t expect much joy from these prints.
On the day no data but a couple of central bank speakers where we expect more of the same hawkish rhetoric.
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Brainard (19.15 BST)
Lane (14.00 BST)
Japan Unemployment Rate Jul consensus 2.6% vs previous 2.6% (00.30 BST)
German Inflation Rate YoY Prel Aug consensus 7.8% vs previous 7.5% (13.00 BST)
US Consumer Confidence Aug consensus 97.5 vs previous 95.7 (15.00 BST)
Barkin (13.00 BST)
Williams (16.00 BST)
Japan Industrial Production MoM Prel Jul consensus -0.5% vs previous 8.9% (00.50 BST)
Japan Retail Sales YoY Jul consensus 1.9% vs previous 1.5% (00.50 BST)
China NBS Manufacturing PMI Aug consensus 49.2 vs previous 49 (02.30 BST)
China NBS Non-Manufacturing PMI Aug consensus vs previous 53.8 (02.30 BST)
German Unemployment Rate Aug consensus 5.5% vs previous 5.4% (08.55 BST)
EU Inflation Rate YoY Flash Aug consensus 9% vs previous 8.9% (10.00 BST)
EU Core Inflation Rate YoY Flash Aug consensus 4.1% vs previous 4% (10.00 BST)
Canada GDP Growth Rate QoQ q2 consensus vs previous 0.8% (13.30 BST)
Canada GDP Growth Rate Annualised q2 consensus 4.5% vs previous 3.1% (13.30 BST)
US Chicago PMI Aug consensus 52.1 vs previous 52.1 (14.45 BST)
Mester (13.00 BST)
Bostic (23.30 BST)
Australia S&P Global Manufacturing PMI Final Aug consensus vs previous 55.7 (00.00 BST)
Japan Jibun Bank Manufacturing PMI Final Aug consensus vs previous 52.1 (01.30 BST)
China Caixin Manufacturing PMI Aug consensus 50.2 vs previous 50.4 (02.45 BST)
German Retail Sales MoM Jul consensus -0.4% vs previous -1.6% (07.00 BST)
German S&P Global Manufacturing PMI Final Aug consensus 49.8 vs previous 49.3 (08.55 BST)
EU S&P Global Manufacturing PMI Final Aug consensus 49.7 vs previous 49.8 (09.00 BST)
UK S&P Global Manufacturing PMI Final Aug consensus 46 vs previous 52.1 (09.30 BST)
EU Unemployment Rate Jul consensus 6.6% vs previous 6.6% (10.00 BST)
Canada S&P Global Manufacturing PMI Aug consensus vs previous 52.5 (14.30 BST)
US S&P Global Manufacturing PMI Final Aug consensus 51.3 vs previous 52.2 (14.45 BST)
US ISM Manufacturing PMI Aug consensus 52 vs previous 52.8 (15.00 BST)
Bostic (20.30 BST)
US NFP Aug consensus 285k vs previous 528k (13.30 BST)
US Unemployment Rate Aug consensus 3.5% vs previous 3.5% (13.30 BST)
US Average Hourly Earnings MoM Aug consensus 0.4% vs previous 0.5% (13.30 BST)
US Factory Orders MoM Jul consensus 0.2% vs previous 2% (15.00 BST)
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