The Morning Hark - 3 May 2022
Today’s focus ……..Calm before the Fed storm and the RBA discombobulate the market
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Both Brent and WTI futures down small on the session at 107.10 and 104.70 respectively. Oil is consolidating near recent highs after its near 5% gains yesterday. The rally was fuelled by the European Union firming up plans for a ban on Russian oil imports after Germany stepped back from its objections to the plan last week. Further details are set to be released today with talk that the plan could be immediate or be implemented “in a few months”. There is also talk that Hungary and Slovakia, who are both heavily dependent upon the Russian supply, would be exempt from the plan. Today sees the API inventory data for the US with the EIA reporting on Wednesday.
EQ - Asian indicies being lead by a 1.5% gain for the Hang Seng at 21,040 which was playing catch up after being closed yesterday for the holidays. Other Asian indicies flat on the day. On the US side both main indicies are up small with the S&P at 4,160 and the Nasdaq at 13,100. This doesn’t tell the full story however as we saw the pair dump dramatically in the US session on a poor US ISM print which printed at 55.4 vs 57.6 expected. However, the bounce back was even more dramatic with all losses wiped out in just an hour as the S&P bounced a full 2+% from oversold territory in illiquid conditions. Elsewhere in equities land, Citibank have owned up to causing the 8% crash in Swedish stocks blaming the move on an erroneous trader input.
Gold - Gold flat on the day at 1860. Trading softly going into the Fed meeting with US yields continuing to edge higher and the break of 1875 last week’s low adding to the metal’s weak tone.
FI - US yields smalls down on the day at 3.00 having previously captured the target level yesterday. There’s a sense that having captured this target the market will hold off and wait for guidance from the Fed tomorrow as to its next move. Has the market reached the terminal rate?
FX - At the risk of sounding boring the USD remains on the front foot although in a somewhat muted session. USD Index remains at elevated levels at 103.60. USDJPY remains above 130 at 130.10. The EUR is hovering around the 1.05 level and likewise GBP at 1.25. USDCNH again a touch firmer close to 6.69. The outlier was the AUD which saw a sharp rally to the mid 0.71s before settling back towards 0.7120. As we highlighted yesterday the market had priced in a full 15bp hike to take rates to a nice even 0.25% with an outside chance of 40bp to take rates to 0.50%. However, the RBA decided to do 25bp taking the end cash rate to 0.35% and confusing all of us 25bp incremental types! This is the first hike in rates by the RBA since 2010. The statement was on the hawkish side stating that inflation would peak towards 6% at some point this year before halving by the middle of 2024. On the rate front they signal more hikes to come although how quickly remains to be seen with question marks on China’s future growth profile. Also, the curve already was aggressively priced in so it looks tough for the AUD to aggressively outperform in these circumstances. One final point the RBA also noted they will not reinvest the proceeds of its maturing bonds program a signal that they are entering a phase of quantitative tightening.
Others - Bitcoin and Ethereum little of note to mention with the pair still lounging within their recent ranges at 38,500 and 2,850 respectively.
The MOVE and the VIX continue to trade higher. The MOVE showed good gains yesterday to close above 135 and within striking distance of its recent high at 140. The VIX showed even more momentum yesterday printing above 36, unsurprisingly given the volatility we saw in the US session, before settling back to the mid 32s.
Today seems to be the calm before the storm with markets fairly subdued outwith the RBA curve ball. There is little to focus on data wise but with liquidity across markets still poor, as we saw yesterday, moves driven by flow can be outsized in nature.
📅⠀The main highlights for the week in terms of data and speakers:
For those who missed yesterday’s edition of The Hark here are the remainder of the week’s highlights:
UK Manufacturing PMI April final - consensus sees 55.3 versus 55.2 previously (09.30 BST)
Euro Area Unemployment Rate - seen for no change at 6.8% (10.00 BST)
Euro Area Services PMI April final - consensus sees 57.7 versus 55.6 previously (09.00 BST)
Euro Area Retail Sales Mar YoY - consensus sees 1% versus 5% previously (10.00 BST)
US ISM Non-Manufacturing PMI April - consensus sees 58.5 versus 58.3 previously (15.00 BST)
Also note the prices component which came in previously at 83.8 for any sign of levelling off of inflation data
FOMC rate decision - expectations for a 50bp hike to take rates to1%. (19.00 BST). Followed by Chair Powell press conference where forward guidance on rates will be closely scrutinised with a further two 50bp hikes for the next two meetings and also any comments on last week’s miss for US GDP. The other point of note will be any more details on the balance sheet reduction piece of the puzzle and in particular when this will start, potentially at this meeting, and the amount of monthly run off which the previous meeting minutes suggested building upto $60bn of treasuries and $35bn of MBS.
A lot of chat on the Fed of late especially as last week saw the anniversary of the “transitory” word by Powell in describing inflation. Criticism has been running high that the Fed has been too slow to react in the face of rising prices and it’s only now that it is acting on the two fronts of hiking rates and running off the balance sheet purchases. Hindsight is a wonderful thing but it’s hard to argue against the critics especially when the Fed have these two taps to control the world of easy money. The real danger is that by taking so long to pivot they now have to pivot harder and therein lies the danger that they kill off economic growth. They have made it clear that although this is consequence is obviously unwanted their focus is purely on getting inflation down. The bond market has certainly got onboard with that message early and the equity sector is now catching up. Time will tell and this week’s actions and words will be just another piece in the puzzle of where we are headed. The poor GDP print last week is not enough to make them blink and its expected that Powell will address this as due to specific one off circumstances but if the NFP prints start to falter then their resolve may be tested in the coming two meetings as they go for the 50bp hike trifecta.
China Services PMI April - previous print 42. (02.45 BST). This will be the first look for markets to assess how China’s service sector has held up in April with all the various lockdowns across the country due to the continuing Covid pandemic
Norway’s Norges Bank Rate Decision - no change expected but the surprisingly Riksbank tone of late has put analysts on alert for a spillover into its near neighbour. (09.00 BST)
BoE Rate Decision and Monetary Policy Report - 25bp hike priced in by markets to get rates to 1% and on a par with the US (12.00 BST). The vote split will be of much interest given the recent poor growth, sentiment and economic prints which all seem to be trending down in contrast to the higher inflation points of late. Will there be some forward guidance that the BoE having been proactive in shifting rates up will pause and let the data settle as the recent rate rises filter into the economy. Remember the forward guidance has already been dialled down from “likely to be” in terms of further hikes to last time’s “modest tightening in monetary policy may be appropriate in the coming months” and further dilution would cause some market disruption given where GBP is currently trading and the aggressive nature of what’s priced into the curve.
OPEC Meeting - despite the supply constraints caused by the conflict in Ukraine and the potential banning of Russian exports of oil into Europe there is no change expected from the OPEC countries in terms of tweaking output
UK Local Elections - Boris judgement day?
RBA Statement on Monetary Policy - post rate hike commentary? (02.30 BST)
Canadian Employment Report April - Unemployment rate previously at 5.3% expectations at 5.2% (13.30 BST)
US NFP April - headline expected at 380k versus 431k previously
Canadian Ivey PMI April - previous print 74.2
Fed speakers - post Wednesday’s meeting and Powell press conference we have the first Fed speakers to raise their heads. Williams (14.15 BST) and Bostic (20.20 BST) both speak and their comments on the rate decision, balance sheet run off and of course and further forward guidance will be keenly anticipated by the markets. Note too in the early hours of Saturday Waller and Daly also have speeches lined up.
📚⠀Articles discovered on Harkster exploring some of the current key macro themes in more depth:
Hedgopia - After Vicious Rally Last Several Months, 10-Year T-Yield Could Begin To Attract Bond Bulls
Real Vision - The Next Big Trade - Raoul Pal & Why The Bond Market is the Ultimate Truth Teller
🔥⠀Top 5 trending links on Harkster yesterday:
42 Macro - The Macro Minute | May 2, 2022
The BondBeat - while we slept; 'speculators rushed to cover...'; a few observations from global Wall St
Prometheus Research - Week Ahead
Macro Ops - The Storm Before The Calm… [DIRTY DOZEN]
Lyn Alden - Investing During Stagflation
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