The Morning Hark - 3 Aug 2023
Today’s focus... USD wrecking ball warming up, BoE 25 or 50?, BoJ back again..
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BoJ returned to the bond mkt again last night, which has aided USDJPY ascent (143.50 on the Ldn open)
China Caixin Services saw a surprising beat 54.1 (est 52.4, prev 53.9)
Brazil cut 50 rather 25 (BBG). The read across from Latam to CEE is apparent.. first to hike = first to cut?
A sea of red for global equities as the USD wrecking ball picks up some steam, carry trades like USDMXN squeezing off their summer lows as VIX pops, MSFT fails to breakout of its previous high (double top forming?), and the risk of asset sales by the private sector to take down the increased issuance feeds through the system. Simply put by the FT: Higher yields threaten the equity rally
The impact of the Fitch downgrade as well as the increased longer duration supply can be seen in the long end with TLT (20+ year etf) and/or 30yrs breaking ranges. In particular, 30yr clearing 4.05/4.10% range highs that have defined 2023 multiple times (Ackman’s short recommendation based on “supply” all over FinTwit via Bloomberg). As the Fed also nears the end of its cycle, steepness is coming in 5s30s.
Reading Harkster.com yesterday, the response was very much indifferent to the downgrade, with limited forced selling expected...
Investors are prepared ... this is not their first rodeo having lived through 2011 and not had any long run pnl impact.
Deficit spending, rising caps ... there is nothing new or surprising in the report, it is/was completely forecastable by the street. This is not a sudden shift in direction and if one was buying some of this years enlarged auctions, well they weren't waiting for Fitch to tell them its credit worthiness or the direction of travel of the government deficit.
If US isn't AAA... what is? Their paper is still needed, they issue the worlds reserve currency and it sits at the core of the financial markets
Crucially, it will still be accepted for margins. Contracts have been rewritten to no longer need AAA, but simply "be backed by US govt"
The mkt spoke during the debt ceiling debacle .... Mr Price doesn't need Fitch to confirm what it knew months ago
Outlook stable - no forced selling expected - this is not the great reckoning.
This downgrade can reprice term premium going forward.
Now Harkster HQ are not FI experts and finds it hard to disagree with the conclusions. However, a sanguine consensus response can also be of worry. Asking some adversary questions, how did assets perform in 2011? The equity impact the month after the 2011 downgrade was aggressive... 10% sell offs ensued the month after the summer downgrade of 2011 whilst SX5E also dropped over 10%. Very easy to be bearish, especially after the SLOOS (tighter credit lending into the economy), heaving positioning/speculation in AI stocks, negative Aug seasonals and increased issuance from the Treasury (private sector forced to sell assets to make room to take down paper with a higher risk-free rate?)
The downgrade was a volatile/provocative headline within thin, understaffed summer markets, but ultimately we're trading JPow's list of economic data ahead of the Sept meeting ... ECI, 2 NFP's and 2 CPI's ... tight labour mkt shown through yesterday with next week's CPI building up v.serious gap risk momentum. US exceptionalism got another boost, fuelled by ADP adding 324k jobs, 278k of which were service sector jobs. Both ADP and JOLTS showed decline in layoffs.
The market has been very comfortable with a disinflation trend which has been mostly led by base effects ... next week we start to see potential upside risks as fuel, gas, oil have risen again. Crucially, 10yr's are testing range highs heading into nfp/cpi double header (
: BoJ's changed Triggers)For further reading on the sell sides (DB, UBS, Barc, GS and more) reaction to SLOOS, Fitch, ADP, ISM, JOLTS and some NFP Previews, one can find it all in yesterday's compressive piece written by
(Link)
BoE Preview: 25 or 50?
Who would be a central banker? Market participants always like to complain about Gov's doing the wrong policy, which is probably more a reflection of their pnl than better economic knowledge or future forecasting of the economy. Harkster HQ has great sympathy for Gov Baily heading into today's decision. One can't compare the economic cycle that Gov Carney had to quietly sail through relative to Gov Bailey's tenureship.
25bps or 50bps? Kill anaemic growth or fight inflation? Kill demand but also hurt low-income households... effectively Gov Baily has to risk a hard landing to stop poeple paying > £7 for a pint! Why can't we do that for ourselves?
Five Previews from Harkster.com Bank of England Channel.
WSJ: Indication of BoE Pause Could Lead to Downside Risk for GBP/USD
Macro Hive: 25bp hike with Upside Risk, but Terminal is Close
LiveSquawk: BoE MPR Preview
ING: Better inflation news allows for a smaller 25bp rate hike
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Morgan Stanley Podcast: How Will the U.S. Credit Downgrade Affect Markets?
RIA Advice: Stocks Versus Bonds: Allocating For The Next Ten Years
Westpac: New Zealand change of OCR forecast
The Gryning times: Fitch downgrades US Credit Rating ... and why thats Bullish
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All times in British Summer Time (BST)
UK (12:00): BoE
US (1:30): Initial Jobless Claims
US (1:30): Unit Labour Costs
US (15:00): ISM Services Index
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I like the Top Pieces section.
Excellent !!!!!
But Bonds are down and Stocks are down.....
Question for Bond Mkt: Can a Snake swallow an Elephant ??
When the US Debt becomes 40T or 50T and they need to fund 5-10T/ year,
what Higher Interest Rate will the Bond Mkt demand ???
This path is UNSUSTAINABLE..........