The Morning Hark - 29 Nov 2023
Today’s focus...Waller wallops the markets but Bowman strikes back; #DotPlot mayhem! Aussie CPI tempers the Bullock. RBNZ’s hawkish hold and there’s a Christmas Tree down!
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Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil consolidating its much needed gains from yesterday in the Asian session with Brent and Crude January futures currently up smalls at 81.70 and 76.70
I love the way the OPEC+ sources stories ebb and flow numerically we’ve so far had three and two protagonists now we are up to four for the latest story. According to the four the talks on policy are “difficult”, as they are no closer to a resolution on African output, making a further delay as well as a rollover possibilities. There’ll be more no doubt.
Despite the uncertainty oil enjoyed a better day of it. Storm related supply disruption in Kazakh seemed to have helped the mood as well as the weaker USD.
EQ - Asian equity markets again weaker overnight with the Hang Seng and Nikkei currently at 17,020 and 33,300 respectively. The Hang Seng still being weighed down by poor Chinese corporate earnings. Currently sitting at a 5 week low having taken out all of the month’s gains. This time, the shopping platform, Meituan’s warning on outlook was seen weighing on the overall market.
The US indices not playing in Asia as they remain flat but holding onto their recent gains with the S&P currently at 4570 whilst the Nasdaq is at 16,070. Interestingly they didn’t want to have any extended run up after Waller’s comments. Rally starting to get tired?
Gold - Gold is back! Boom, all we needed all along was a bit of Waller. We’ve taken out our first two targets at 2020 and 2050 although we’ve drifted back below the latter in Asia. 2050 looks a short term trading pivot for now with the year’s highs up to 2085 in sight. Support now around 2020. At last its looking healthy until at least Powell on Friday I guess.
FI - Global yields again lower overnight in the Asian session after yesterday’s Waller led bull steepening which led to 4 month lows for the US curves. Currently the US2y and US10y over one percent lower at 4.67% and 4.27% respectively.
Our 4.33% downside focus in the US10y was taken out easily yesterday with now the 200dma around the 4% level the next target.
European yields another day and another follow the leader session with the US move becoming infectious. The German 10y closed lower at 2.50% with the Italian 10y yield similarly at 4.25%.
Italian bonds had underperformed after Nagel’s and Lagarde’s comments on the balance sheet and the potentials for a faster pace of selling of debt in the new year but Waller’s comments soon tempered that thought.
UK gilt yields closed at 4.17%.
FX -The USD took the brunt of Waller continuing its ride lower and increasingly looking like being its weakest monthly performance in a year. The USD Index leaking again to 102.60. The JPY, EUR and GBP all maintaining their recent bid tone with them sitting currently at 147.30, 1.10 and 1.2710 respectively. So much for the stodgy high 1.09s in EUR. Waller put paid to that and the hard work I thought was needed ended up being as simple as!
NZD loved Orr putting an oar in! Hawkish hold resulting in a close to one percent rally with the NZD currently sitting at 0.6180.
FX option expiries of note today sees in USDJPY $1bn rolling off at 148 and 148.15.
Others - Bitcoin and Ethereum loved a bit of Waller with the pair now up well over two percent at 38,170 and 2062 respectively.
Macro Themes At Play
Recap
Well that was a blast of a day! As we know central bankers don't like volatile markets but they sure do a good job of creating them! Fed speakers were out in force yesterday, in the last week of chatter prior to the December FOMC and we got a decidedly mixed message with Waller walloping the market but Bowman striking back. The next dot plot in a couple of weeks is gonna look like a 3 year old doing a join the dots puzzle!
Waller had previously been on the hawkish side of the debate (remember our chart from Farage’s favourite bank!) but seemed to do a good job of disguising it yesterday with his comments (see below). They seemed more like a man on a “pivot” rather than a “pause”.
The gist of his comments were that he was encouraged to see the latest softening of inflation data and the slowing of economic activity. He even went as far to stipulate a timeline of 3/5 months in which, if inflation continued to cool, the Fed could lower rates.
Bowman tried to pierce the party balloon with her comments however claiming that her baseline case saw the Fed having to raise rates further.
Looks like the Fed have some work to do at their December meeting communicating all this in a concise manner to the markets before they break open the Christmas sherry! At least they’ve got the dots to help us!
Market wise funnily enough preferred the champagne laced prospects of rate cuts rather than the Archers fuelled more hikes. The first Fed rate cut odds ramped up to over 80% for May having been around a 50/50 chance earlier in the day. In total the curve is pricing in well over 100bps of cuts for next year.
Do we get a Powell pushback on Friday?
Looking further afield and especially into the spring of next year. Waller’s comments, and again whether Powell is with him or not is key, and specifically his timeline of 3/5 months and then the BoJ’s Adachi, this morning, when he points to the new fiscal year being crucial re wage negotiations then there is a possibility we get the “golden cross” in USDJPY where the supertankers of Fed hiking and BoJ negative rates start to turn! Lot of planets and all that to align but 120 here we come!!!
Couple of other points to note. Japan is set to lift yields interest paid on bonds in the government’s annual budget proposal for the first time in 17 years as it tries to normalise policy.
Oh and the White House Christmas tree fell over! For any Scottish football supporters out there this resulted in a penalty for Rangers.
Central Bank Speakers
The ECB’s Nagel started the day as I’m sure his ECB colleagues will continue. He felt that the current hiking cycle was not necessarily over and it was premature to lower rates soon or even talk about that.
de Cos did not see interest rates returning to a neutral level in the short term.
The BoE’s Ramsden followed the well worn path with his latest musings. Path for rates will be data dependent, no commitments are being made on where rates will be, upside risks remain for inflation and the old classic rates are to stay restrictive for an extended period.
Haskel, here we go again, rates will have to be held higher and longer than many seem to be expecting. Labour market tightness will need higher rates for longer to get inflation sustainably to target.
The Fed’s Goolsbee noted that inflation is coming down but not yet back to target.
Waller was “increasingly confident” policy is in the right place. He felt that the labour market is cooling off but still “fairly tight”. We need to see some improvement in services inflation ex-housing for overall inflation to reach target. He will monitor closely the goods, services prices in the coming weeks to see if inflation is still on a downward path.
He cannot tell for sure if the Fed have done enough but the data over the next couple of months will hopefully tell.
Financial conditions got a nod when he referred to the recent loosening as a reminder to be careful about relying on market tightening to do the Fed’s job.
Waller overall seemed to have turned a corner with regard to the economy and thus his thoughts on the rates profile. Previously he had looked to a slowing in growth as a primer for lower inflation. Today he stated that he was stunned by the third quarter GDP data (wait until you see the revision then!) but he was “encouraged” by signs of moderating economic growth. He estimates the last quarter at between 1-2% growth.
He went even further by claiming that if inflation continues falling for several more months (3/5 months), there is a good economic argument to lower policy rate.
Bowman still favours hikes if inflation progress stalls. She sees potential upside risks for inflation from energy prices and higher services consumption. Her baseline outlook is that the Fed will have to increase rates further to keep policy sufficiently restrictive.
Williams felt that it was encouraging to see the decline in inflationary pressures whilst long run inflation expectations have been very stable.
The Day Ahead
Overnight Australia Monthly CPI for October came in much lower than expected at 4.9% for the month matching the July print, and the lowest since the first quarter of 2022. Encouraging news for Bullock and co round at the RBA.
The BoJ’s Adachi said that it was premature to debate the BoJ’s exit from ultra easy policy. Inflation risks remain to the upside. He claimed that a rise in real rates into positive territory would have a negative impact on the economy. He personally feels that it’s difficult to end negative rates until a positive wage inflation cycle kicks off. More clarity on this will come at the start of the next fiscal year. Next year’s wage talks outcome is crucial in making a big policy decision.
The steps that the BoJ took to make the YCC flexible have mostly removed market distortions.
The RBNZ as expected held rates steady at 5.5% and as expected we got the hawkish commentary to accompany it.
Governor Orr was concerned that longer term inflation expectations are creeping up and is nervous about inflation being outside the band for so long. In addition rates need to remain high for some time to come. He even pointed out, given the gap between meetings, that they could act, in case of a shock, between meeting dates but is comfortable waiting until the February meeting (next RBNZ is 28 February).
The minutes also hawkish:
Growth in parts of the economy is slowing but there has been less of a decline in aggregate demand growth than expected;
Ongoing excess demand and inflationary pressures were of a concern, given high core inflation;
Members remain confident that monetary policy is restricting demand; and
If inflationary pressures were to be stronger, the OCR would likely need to increase further.
Forecasts placed the first rate cut in mid 2025
Later in the day German Inflation Report preliminary reading for November is expected to continue the global trend of softening inflation. That is followed by the second reading of q3 US GDP which is touted to be aggressively revised up.
Overnight we get a raft of Japanese data with Industrial Production and Retail Sales for October being the highlights. In addition we get the Chinese PMIs for November.
Just as we go to print tomorrow German Retail Sales for October I’m sure will start the day with a bang!
For those that missed it yesterday I have reposted Arthur Hayes’ latest piece. Cracking read as ever, very insightful with his usual sprinkling of some dark humour. He muses firstly on the Binance ruling and then the recent meeting between Xi/Biden and its implications for the wider markets and in particular crypto.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead in terms of data and speakers:
Wednesday
German Inflation Rate MoM Prel Nov consensus -0.2% vs previous 0% (13.00 GMT)
German Inflation Rate YoY Prel Nov consensus 3.5% vs previous 3.8% (13.00 GMT)
US GDP Growth Rate QoQ 2nd est q3 consensus 5% vs previous 2.1% (13.30 GMT)
US PCE Prices QoQ 2nd est q3 consensus 2.9% vs previous 2.5% (13.30 GMT)
US Core PCE Prices QoQ 2nd est q3 consensus 2.4% vs previous 3.7% (13.30 GMT)
Japan Industrial Production MoM Prel Oct consensus 0.8% vs previous 0.5% (23.50 GMT)
Japan Industrial Production YoY Prel Oct consensus % vs previous -4.4% (23.50 GMT)
Japan Retail Sales MoM Oct consensus % vs previous -0.1% (23.50 GMT)
Japan Retail Sales YoY Oct consensus 5.9% vs previous 5.8% (23.50 GMT)
Fed Speakers
Mester (18.45 GMT)
Early Thursday
China NBS Manufacturing PMI Nov consensus 49.7 vs previous 49.5 (01.30 GMT)
China NBS Non Manufacturing PMI Nov consensus vs previous 50.6 (01.30 GMT)
BoJ Nakamura Speaks (01.30 GMT)
Japan Consumer Confidence Nov consensus 35.6 vs previous 35.7 (05.00 GMT)
Japan Construction Orders YoY Oct consensus % vs previous -3% (05.00 GMT)
Germany Retail Sales MoM Oct consensus 0.4% vs previous -0.8% (07.00 GMT)
Germany Retail Sales YoY Oct consensus -2% vs previous -4.3% (07.00 GMT)
Good luck.
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