The Morning Hark - 29 Sep 2022
Today’s focus ……. Yet more CB speakers with ECB spread over the whole day. US PCE is the important data point at 13.30 BST. Regional German CPI out during the morning.
All prices are at 6.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures are flat in Asia trading currently at 88.75 and 81.65 respectively.
Energy products rose yesterday as the world digested the Nordstream pipeline news and the move lower in US yields.
World bank’s Malpass has stated this morning that it will take years to wean the world off Russian energy and that the risk of a global recession is rising. Both statements will apply headwinds to further price rises.
As I type Sweden announces they have found a fourth leak in Nordstream pipeline.
EQ - Equity markets in Asia have had a good day catching up some of the Western world’s moves from yesterday following the selloff in US yields. The Nikkei and Hang Seng are at 26,455 and 17,425 respectively. The Kospi is the winner on the day at 286.60, up 1.35%
Yesterday saw US yields hit hard down from the 4% the previous day. This saw equity markets rally in early NY and the whole thing was undoubtedly helped by the BoE buying gilts as NY sat down.
Gold - Gold Dec futures are lower on the day following a 2% rally Wednesday. They sit at 1657.5 currently with some support seen 1650-55 although once again this will be determined by US yields and USD strength.
FI – US treasuries yields came off hard yesterday as another major central bank tipped into YCC. The US10yr yield is sitting at 3.7675 and US 2yr is at 4.1450%
An impossible task to follow all the central bank speakers yesterday but highlights were Rehn stating ECB would reach neutral rate by Christmas, Lagarde stating they will hike at next several meetings, (and also saying they won’t forward guide!) and of course the Old Lady fighting inflation by buying gilts.
The Bank of England’s actions were by far the most important piece of news yesterday and we write up more details below.
FX – What a day in GBP! Let’s start with honesty I got carried out yesterday in GBP, not my finest hour although with a 212 pip 5-minute candle, (up and then down) I can at least feel slightly vindicated that you didn’t have to be totally wrong just wrong once or twice in the wrong amount.
The BoE decided to act which the market took as risk on and GBP went up only to realise that they were lowering interest rates and GBP went down, Fast!
GBPUSD ended up +170 pips on the day on risk reduction and US yields coming lower. We will wait and see how the market treats the BoE actions over the next few days. For now, GBP holds in although slightly down 77 pips since the open.
USDCNH hit a new high yesterday of 7.2675 before the PBOC came on the wires to warn speculators and advise banks to respect the daily fix. It sold off hard but has reversed that journey today. We think a top could form at 7.2000 and will sell against that with a new high stop.
EURUSD printed a 20 year low yesterday at 0.9528 but while that would have been a good story on any normal day, no one cared yesterday.
Others - Bitcoin and Ethereum benefitted from the rally in risk yesterday. Today they are quiet, sitting at currently 19,580 and 1343.
Galaxy digital’s Novogratz spoke yesterday and said Galaxy will have a hiring slowdown and that he doesn’t see many forced sellers left in the market. Will he come to regret that comment like he probably does that infamous LUNA tattoo.
Market dysfunction continues
Just when you thought it couldn’t get any worse and just as Yellen says that there’s nothing to see here….
Moody’s ramped up their view on the UK expressing concern that large unfunded UK tax cuts would threaten the country’s credit rating and hence increase the government’s borrowing costs. The IMF chimed in and urged a change of course by the government and for them to re-evaluate their tax cuts. Both the 20y and 30y gilts surged over 5% as rumours emerged that Kwarteng was going to ask financiers not to bet against GBP although I think that ship has sailed to be honest. Ultimately if the underlying fundamentals point to shorting GBP then a cup of tea, a chocolate biscuit and a friendly word is not going to change people’s views. The rumours were subsequently denied but given the track record of the government over the last few days it would not seem that farfetched to think that he was going to ask for this favour.
Anyway, all attention flipped quickly onto the BoE who took fright and stepped in aggressively to prop up the gilt market. Not only have they postponed their gilt sales program until the end of the month, something which we had suggested they do on Monday, but they’ve gone full circle with a financial stability package which entails them making unlimited purchases of bonds between now and Oct 14. Details are that they will do daily auctions in maturities of 20y and above and purchase up to £5bn per auction. One wonders where the markets will be by mid-October and if this policy needs extending but for now at least some respite.
It would appear that the straw that broke the camel’s back was a funding crisis for the UK pension funds who were having large margin calls on their hedging of gilt positions and the BoE stepped in to prevent a further fall out in the gilt market. So, with a backdrop of 10% inflation and a falling GBP we are to all intents and purposes back in QE in the UK.
6% rates for November next year looks a far off dream now. Somewhat appropriately, given I am in Amsterdam, the analogy of the boy putting his finger in the dam springs to mind as the BoE may have stemmed the tide in the gilts market but the obvious release valve now is going to be GBP. We wouldn’t be surprised to see it testing the lows again. I think the BoE will need a lot of fingers at this rate.
So we have the BoJ and BoE in YCC land. ECB next? Will the markets go after Italy with more vigour now? Without coordinated policies of some sort then it seems the most logical step. Markets seem to want to test the governments and central banks. As an aside the EU approved a EUR 700mio cheque for Italy to help businesses affected by the Ukraine/Russia war, which sounds a little like a bribe to the new government.
The Fed after the high CPI print and latest FOMC have seemed to have tamed their demons for now at least but the UK is the new battleground with Europe coming next.
On a lighter note, the BoE cancelled his speech scheduled for tomorrow on “reducing the size of the central bank’s balance sheet”.
On the political side with the Conservative party conference next week a number of “big hitters” in the party have decided to sit it out; Sunak, Javid, Davis and Stride all set to find better things to do with their time.
Central Bank Speakers
ECB’s Holzmann forthright with “prepared to raise rates past neutral if needed” and that “75bp was a good fit for October”. Also mentioned that they would discuss QT next week but after the BoE today that may now be off the agenda!
Lagarde was fairly self-explanatory noting that we are “not at neutral” and the “situation too uncertain for forward guidance”. Kazimir at least was open “we do not have a consensus what neutral rate is”.
For a link to see exactly what everyone said from the CB world check out the FX Macro Guy tweet at the bottom.
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German Inflation Rate YoY Prel Sept consensus 9.4% vs previous 7.9% (13.00 BST)
Canada GDP MoM Jul consensus -0.1% vs previous 0.1% (13.30 BST)
US GDP Growth Rate QoQ Final q2 consensus -0.6% vs previous -1.6% (13.30 BST)
US PCE Prices QoQ Final q2 previous 7.1% (13.30 BST)
US Core PCE Prices QoQ Final q2 consensus 4.4% vs previous 5.2% (13.30 BST)
Simkus (08.00 BST)
Panetta (08.00 BST)
Centeno (08.45 BST)
Guindos (09.00 BST)
Rehn (09.00 BST)
Villeroy, Knot, Elderson (09.15 BST)
Kazaks (09.15 BST)
De Cos (09.50 BST)
De Guindos (10.30 BST)
McCaul (11.45 BST)
Simkus, Muller (14.00 BST)
Lane (18.00 BST)
Ramsden (12.30 BST)
Hauser (13.00 BST)
Bullard (14.30 BST)
Mester (18.00 BST)
Daly (21.45 BST)
Japan Unemployment Rate Aug consensus 2.5% vs previous 2.6% (00.30 BST)
Japan Retail Sales YoY Aug consensus 2.8% vs previous 2.4% (00.50 BST)
Japan Industrial Production MoM Prel Aug consensus 0.2% vs previous 0.8% (00.50 BST)
China NBS Manufacturing PMI Sept concensus 49.6 vs previous 49.4 (02.30 BST)
China NBS Non-Manufacturing PMI Sept previous 52.6 (02.30 BST)
China Caixin Manufacturing PMI Sept consensus 49.5 vs previous 49.5 (02.30 BST)
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