The Morning Hark - 29 Nov 2022

Today’s focus …Hawkish Fed Hors D’oeuvres pre Powell tomorrow, Robinhood shares eyed by many a FTX creditor and the final World Cup group games begin today as the round of last 16 starts to take shape

Nov 29, 2022

All prices are at 7.45 GMT/2.45 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude January futures up a further two percent in the Asian session, with them currently trading at 84.90 and 78.70, respectively. China covid woes have been upstaged by hopes that the recent oil price weakness would encourage OPEC+ to cut production more. The current oil price is below where we were when OPEC delivered its October supply cut and this has given the idea some legs. Let’s see. EU talks continue today on the Russian cap unsurprisingly.

EQ - Asia futures mixed with the Hang Seng leading the way higher on the rebound and up some three percent at 18,182 whilst the Kospi futures are up a good one percent at 316. The China rally was based on hopes that an announcement from the health agency would give greater positive guidance on the new covid controls, which are just out and chat of speeding up vaccinations for the elderly. I give up! The Nikkei, however a touch softer at 28,083.

The Nasdaq and S&P continue to bounce and have unwound around half of the hawkish Fed chatter sell-off in Asia trading currently at 11,675 and 3983, respectively. Downside danger zone for the S&P would be a close below 3950.

Gold - Gold Dec up close to one percent in Asia at 1752. The hawkish Fed chatter put paid to gold’s sortie into the upper echelons of its recent range, sending it back down through our trading pivot. However, that was short-lived as the reversal in stocks and general risk helped gold regain our trading pivot. However nothing new here. 1750 is our short term pivot with support below at our noisy zone 1720/25. Up top 1780 first followed by 1800.

FI - US yields off overnight in Asia, in line with risk markets rebounding, with the US2y and US10y currently trading at 4.44% and 3.68%, respectively.

European yields opening up lower in line with US yields with German 10y yields trading currently at 1.947% and Italian 10y yields at 3.849%.

UK gilts did little of note yesterday with the 10y yield closing at 3.127%.

FX - The USD continues to give back its Fed chatter gains overnight with the USD Index currently trading at 106.33. The EUR and GBP trading a touch firmer at 1.0386 and 1.2030, respectively. USDJPY is lower at 138.17. Risk proxies are flying with KRW, AUD and NZD all up close to one percent at 1327, 0.6720 and 0.6231, respectively. USDCNH is close to a percent lower as the protests have started to become less prevalent with a stronger police presence on the streets. Currently trading at 7.17.

USD shorts are at levels last seen back in the summer of last year, according to the CFTC data published yesterday, which, given there’s a potential 75bp hike in the offing, seems a little overdone. Also, look out for the EUR 200 dma around the 1.0380 level, which maybe pivotal on the week.

Others - Bitcoin and Ethereum nothing of note and currently we sit at 16,460 and 1206 respectively.

Central Bank Speakers

Only one place to start here, and it’s the Fed speakers. I think we can be left in no doubt that Powell will be on the hawkish side of the debate in his speech tomorrow as his four lieutenants put the market firmly in its place with its platter of hawkish hors d’oeuvres.

Mester needed to see several more good inflation readings and doesn’t think the Fed is near a pause. She also said that the costs of stopping too early in the cycle are too high.

Brainard later in the day, in a rehash of a speech from June, stated that the Fed needed to avoid the risk of inflation expectations drifting above target.

Williams saw the need to maintain a restrictive policy for a while and how high rates needed to go depended on the economy. Inflation was far too high and would take time to fall. He stipulated that he saw inflation falling to 5% in 2023 and low 3s in 2024. The Fed still has more work to do. Although he did throw the market a bone by saying the Fed could lower in 2024!

Bullard however, had the real money lines when he alluded to the fact that markets are “underpricing risk FOMC may be more aggressive”. There is a ways to go to get restrictive on policy and rates need to be restrictive for longer to ensure inflation returns to target. He sees rate hikes in 2023 and then holding there through the next year. We need to get to the bottom end of the 5/7% range.

On the labour market, he felt that the feedback they had received suggested that inflation is not as strong as many people portray it whilst a tight labour market gives the Fed licence to pursue a disinflationary strategy.

Interestingly he admitted to having no control over supply shocks like the ones we have witnessed this year and this has the potential to lead to a more volatile backdrop for inflation in the future.

Finally, despite a lot of chatter lately in the press, he felt that changing the target level for inflation would be a “completely terrible idea”. Although I bet if you said to him now we’ll get inflation down to 3% in 2024 and it’ll remain there he’d bite your hand off, but that’s an argument for another day.

So boom! There we go. We thought the Fed speakers would be crucial for direction this week but we got there quicker than we had anticipated well before the main course of Powell’s speech tomorrow.

Where does that leave the markets then? Well, the “pauser/pivoters” have been dispatched to the boundary for now, and we have a reset of sorts. The terminal rate is back above 5% but still well off its recent highs. Stocks took a kneejerk beating as you’d expect although they have stabilised overnight and regained some ground. Similar picture with the USD. So is the market waiting for the big man to echo these words to get the message or is it calling the Fed’s bluff? We have seen in the last 2 pause/pivot rallies this year that it ends in tears. Do the markets feel its third time lucky? I’m sceptical, the message was pretty clear from what I could see, but we have a pause in scheduled communication today before Powell tomorrow. Let the market speak as they say but beware of Powell ramming the market’s words back down its throat if it gets too exuberant again.

One further point Fed’s Barkin also spoke yesterday and although under the radar compared to the other four, he did allude to a “continuation of solid job growth”. Perhaps a nod to Friday?

There was some ECB chatter too but way less interesting than what the Fed speakers provided.

Lagarde claimed that there was still a long way to go with rate hikes and policy remained restrictive. Growth would remain weak for the remainder of the year and into next. Rate hikes would take time to filter down into the real economy, but incoming data suggested that wage growth is still rising. How high and how quickly rates will go will depended on the updated outlook forecasts and will be influenced by the persistence of shocks, reaction of wages, inflation expectations and our assessment of the transmission process. The December meeting will also give details on the bond reduction program.

Knot chimed in with inflation expectations are on the upside and the underlying trend is worrying.

Kazimir stated that interest rates would continue to rise despite the unfavourable economic developments.

SBF/CZ/Alameda

So the worst kept secret broke cover yesterday with BlockFi filing for bankruptcy. Nothing new there, but what is new is that BlockFi is suing SBF to seize “pledged collateral” back in the form of his Robinhood $600m stake. This goes back 3 years to an agreement that claims that SBF had guaranteed Alameda’s loans with a pledge of those shares. I post a more detailed article at the bottom, but this one will run especially given that those shares are pretty much the “crown jewels” of what remains of the crumbling empire. There will be a lot of eyes on that salvage value from a number of players.

One last point the House Financial Services Committee will have their hearing on the FTX collapse on the 13 December.

The Day Ahead

Overnight the Japanese October data disappointed, with the unemployment remaining stable at 2.6% but above expectations whilst retail sales was a miss with YoY coming in at 4.3% well below both previous and expectations.

Some secondary EU indicators to start the day before German preliminary inflation for November, which may give us a steer for tomorrow’s crucial EU inflation print. Later in the day Canadian q3 GDP and of course the usual smattering of central bank speakers.

Late evening we get Japan industrial production for October and early doors the RBA Kearns speaks before the Australian monthly CPI indicator for October and, finally, China November PMIs.

World Cup wise, we move onto the final group games with all the jeopardy that entails. Sadly for the hosts Qatar, that ship has sailed, but the remaining three teams in Group A all have a chance of qualifying. The Netherlands take on Qatar and are expected to win that game and hence top the group. On that basis, the Ecuador v Senegal game becomes a playoff, with Ecuador safely through with a draw or a win, but Senegal having to win to progress.

Group B offers up hope for all 4 teams, although Wales’ hopes are slim at best. They take on England and need a hefty win and hope for a draw in the Iran v USA game. A draw will do for England. The Iran v USA game is a winner takes all game, although a draw will be enough for Iran to progress.

Couple of articles (posted at the bottom) to point out. As ever, the FXMacro Guy’s excellent weekly review and central bank speaker summary is a must read.

Equally, I enjoyed another weekly summary with a slight tweak towards the credit sector from Credit from Macro to Micro. Some great macro analysis but also some interesting takes on the credit world, both indices and single name, which is something well worth exploring. Finally, part II of the ZeroHedge FTX long read.

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All times in GMT (EST+5 / CEST-1 / JST-9)

Tuesday

EU Economic Sentiment Nov consensus 93.5 vs previous 92.5 (10.00 GMT)

EU Industrial Sentiment Nov consensus -0.5 vs previous -1.2 (10.00 GMT)

EU Consumer Confidence Final Nov consensus -23.9 vs previous -27.5 (10.00 GMT)

German Inflation Rate YoY Prel Nov consensus 10.3% vs previous 10.4% (13.00 GMT)

German Inflation Rate MoM Prel Nov consensus -0.2% vs previous 0.9% (13.00 GMT)

Canada GDP Growth Rate QoQ q3 previous 0.8% (13.30 GMT)

Canada GDP Growth Rate Annualised q3 consensus 1.5% vs previous 3.3% (13.30 GMT)

Japan Industrial Production MoM Prel Oct consensus -1.5% vs previous -1.7% (23.50 GMT)

Japan Industrial Production YoY Prel Oct previous 9.6% (23.50 GMT)

ECB Speakers

de Guindos (08.10 GMT)
Schnabel (13.30 GMT)

BoE Speakers

Mann (12.35 GMT)

World Cup

Ecuador v Senegal (15.00 GMT)

Netherlands v Qatar (15.00 GMT)

Iran v USA (19.00 GMT)

Wales v England (19.00 GMT)

Early Wednesday

RBA Kearns Speech (00.00 GMT)

Australia Building Permits MoM Prel Oct consensus -1.8% vs previous -5.8% (00.30 GMT)

Australia Monthly CPI Indicator Oct consensus 7.4% vs previous 7.3% (00.30 GMT)

China NBS Manufacturing PMI Nov consensus 49 vs previous 49.2 (01.30 GMT)

China NBS Non-Manufacturing PMI Nov previous 48.7 (01.30 GMT)

Good luck.

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