The Morning Hark - 3 Aug 2022

Today’s focus ……Pelosi bingo, the Fed hawkish talk day2 and beware the SNB.

Aug 3, 2022

Daily roundup - all prices are at 7.40 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude October futures close to flat on the day at 100.20 and 93.10 respectively. Oil markets a touch sidelined for now with all that’s going on elsewhere in markets. The bigger picture has certainly been clouded by House Speaker Pelosi’s Asian trip. It was further clouded yesterday by the G7 statement on energy security, which I post at the bottom, where they seemingly link the Russian oil price cap with other services that help to transport banned Russian oil into global markets. However any chance of China, and hence India, joining that ban seem less likely by the day given Pelosi’s Taiwan visit. Potentially the muted $3bn Saudi arms deal with the US may open up some alternative oil sources especially given the report’s timing with OPEC+ meeting today?

EQ - Equity markets stabilised after their sell off yesterday post hawkish Fed speakers and the Pelosi headline bingo trading session. The Nikkei, Hang Seng and Kospi all close to flat at 27,710 19,700 and 324 respectively.

The Nasdaq and S&P dull trading at 12,940 and 4100 respectively.

Gold - Gold futures down small on the session at 1783. Yesterday saw the raft of Fed officials ramping up the hawkish chat which helped cap the gold rally and take the shine off its recent revival. 1800 still seems the key to the topside with 1750 equally so on the downside.

FI - Volatility remains in play in the rates space with US yields giving back some of their gains from yesterday with the US2y and 10y yields currently trading at 3.04% and 2.72% respectively. The Fed talk back got into full swing yesterday with a number of “recently” scheduled Fed speakers. Evans talking in the WSJ regarding the September FOMC meeting said that “there’s enough time to play out that 50 is a reasonable assessment but 75 could be also okay”, SF Fed’s Daly claimed that the Fed was “nowhere near almost done”, Mester “wants to see compelling MoM inflation slowing” and there is “more work to do” and Bullard took a slightly different tack saying that “there is not going to be a recession in the US” whilst in the same breath saying that he wants to see “policy rates between 3.75/4% by the end of the year”. Funnily enough we have a fair few speakers today lined up so expect more of the same and I guess some more medicine for the market to take although no doubt a touch of diminishing returns about the whole process I guess unless Powell makes an appearance if he decides the retracement has not gone far enough?

Anyway it left the US10y with one of its biggest moves in 5 years and charts wise we had an outside day (higher high and lower low than the previous trading day) which can be a sign of exhaustion but let’s see.

European yields remain at wide levels with German and Italian 10y yields still well over 200bps with them closing at 0.82 and 2.914 respectively. Interesting data released out of the ECB yesterday revealed the Bank’s bond purchases for the last two months. It showed a near €15bn sale of German bonds whilst a near €10bn purchase of the Italian equivalent. It would have been interesting to see how much the spread would have widened without such defence and I’m guessing those numbers will only increase over the coming months. All the Fed and Pelosi talk has taken the heat off Europe and the ECB but once we get past this stage I feel the market’s attention will refocus on the poor state of the European economy and all the other problems it is facing and test the ECB’s nerves.

FX - FX space fairly muted with the USD Index consolidating at 106.25 after yesterday’s sharp reversal. With the “hawkish” Fed back in play USDJPY was once again flavour of the month rallying 3 big figures from the mid 130’s as we discussed yesterday and currently trading at 133.30. We remain keen to use the 130 as a good trading pivot and stop zone for continuing USD strength. Once we get through the period of Fed talk backs and global recessionary pressures start to resurface then USDJPY will, as ever, be a good vehicle to express that macro view and with the Fed’s help hopefully we shall get better levels to sell and enter that trade but not for now.

Others - Bitcoin and Ethereum little of note currently at 23,000 and 1640 respectively.

Pelosi’s trip

As you’d expect the headline bingo continues with Pelosi meeting Taiwan President Tsai this morning as she reiterated the US’s support for the country and China ratcheting up its displeasure at the whole proceedings. They have banned some 200 product lines of various goods normally imported to Taiwan as well as summoning the US ambassador to the foreign ministry and carried out military operations some of which have entered Taiwan’s air defence zone. More headlines no doubt throughout the day but perhaps we are past the worst of it?

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US Economy

So as we thought we got the talk back chat from the Fed with more to come this week no doubt. Interestingly CS’s rates guru Zoltan Pozsar believes that the Fed will have to go much much further than the market is anticipating with him believing that Fed Funds at 5/6% is more appropriate if the Fed is going to have any chance of taming inflation. His theory is based on the economic war between the East and West with the old regime of the exporting of cheap goods to the West by the East well and truly over with the reduction of this supply chain creating a structural shift for higher inflation. He believes that, given this rates profile, the US is in for a deeper and longer recession if it has any chance of getting inflation under control. More below but whatever happens it does seem it is only a matter of time before “target levels” for inflation are raised.

Talking of recession the US Jolts report yesterday was pretty ugly with the headline number dropping dramatically, albeit from a high base, again a further canary in the coalmine for the employment market rolling over. One glimmer of hope from the report was the expectations for wage growth slowing in H2.

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Swiss CPI/SNB

Not something we flag often but it may be worth keeping an eye on. Swiss CPI has just been released at 3.4% YoY for July the same print as last month and 0.1% lower than the market had expected. Whether this is enough for the SNB to act on is debatable but it is worth noting that in their recent quarterly assessment the SNB stated that they “may take monetary policy measures at any time between regular assessment dates if circumstances so require”. Hence suggesting that there is potential for inter meeting hikes. Remember the SNB is not immune to giving the market a shock if we remember back to the de-pegging of the CHF back in 2015! They also surprised the markets back in June by hiking 50bps. Given they do not meet again until late September it may be worth keeping an eye on the goings on in the Cantons.

Today brings the global services PMIs which are all expected to show downturns although at higher levels than their manufacturing counterparts. The US ISM services also expected lower but to remain well above the 50 level. We also get the OPEC+ meeting decision.

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📅⠀The main highlights for the day ahead in terms of data and speakers:

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Wednesday

German S&P Global Services PMI Final Jul consensus 49.2 vs previous 52.4 (08.55 BST)

EU S&P Global Services PMI Final Jul consensus 50.6 vs previous 53 (09.00 BST)

UK S&P Global Services PMI Final Jul consensus 53.3 vs previous 54.3 (09.30 BST)

EU Retail Sales MoM Jun consensus 0% vs previous 0.2% (10.00 BST)

US S&P Global Services PMI Final Jul consensus 47 vs previous 52.7 (14.45 BST)

US ISM Non-Manufacturing PMI Jul consensus 53.5 vs previous 55.3 (15.00 BST)

US ISM Non-Manufacturing Prices Jul previous 80.1 (15.00 BST)

US Factory Orders MoM June consensus 1.1% vs previous 1.6% (15.00 BST)

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Fed Speakers

Bullard (12.30 BST)
Harker (15.30 BST)
Daly (16.15 BST)
Barkin (16.45 BST)
Kashkari (19.30 BST)

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Good luck.

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🔥⠀Top 5 trending posts on Harkster.com yesterday:

The Macro Strategist - The Macro Brief: Fed Pause Is A Psychological Bear Trap
Brent Donnelly - Week 23: Bear markets are hard to trade, even when you're bearish
Market Champions - 215|When Will the Fed Pivot? And an Energy Update ft. Lyn Alden with Srivatsan Prakash 🎧
Going John Galt - $12 FIGHTING OCKHAM
Macrodesiac - 🔔 Peak Inflation (Again). Now The Hard Part...

Discover more market commentary & research from 450+ curated sources on Harkster.com.

📚⠀Further reading on the current key macro themes:

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US Economy

Bloomberg - Pozsar Says L-Shaped Recession Is Needed to Conquer Inflation
ZeroHedge - Robinhood Fires A Quarter Of Employees Via Slack; Reports Dismal Earnings One Day Early

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ECB

Bloomberg - ECB Spent Billions to Shield Italy Using First Line of Defense

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G7 Oil

UK Govt. - Energy security amid Russia’s increased weaponization of energy: G7 foreign ministers’ statement
OilPrice.com - Saudi Arabia May Push For Higher OPEC Production

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