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The Morning Hark - 3 Nov 2022
Today’s focus …FOMC post mortem “pausers no more”, Norges and BoE up next, US services PMIs and ISM to follow.
Looking for the next trade post FOMC?
JPow maintained the Fed's optionality, keeping the door open to a 75 or 50bps hike in Dec dependent on the incoming data. As a result, Friday's NFP, next week's midterms and CPI will be key drivers of the USofA's fiscal and monetary policy direction into year-end. As the market narrative evolves, so does the Harkster Research Management Platform, where you will find dedicated channels for Mid-term Elections, NFP, Inflation, plus the Trade Idea Scanner.
The channels have aggregated financial research and commentary from sources including bank publications, independent research, governments/central banks, and financial press. It includes pieces from ING, Fortune, The Macro Compass, Brent Donnelly's AM/FX, Raoul Paul's GMI, Kevin Muir's The Macro Tourist, MrBlonde, Stenos Signals, Haver Analytics, Danielle DiMartino Booth and many more.
All prices are at 7.30 GMT, with changes reflecting movement from midnight GMT
Oil - Brent and Crude December down over one percent overnight in Asia with the pair currently trading at 94.80 and 89 respectively and smack back where we started yesterday. Go figure. Oil back in push me/pull me mode with the stronger USD, the China covid lifting seemingly dead in the water and continued interest rate hikes weighing on it. On the flip side, the geopolitical Saudi Arabia/Iran tensions are in the background with inventory data also supporting the sector.
EQ - Payback for the Hang Seng which, after its recent gains, has seen it give back over three percent today with the covid restrictions lifting story discounted and poor China PMIs. It currently trades at 15,355. Subdued elsewhere with the Kospi and Nikkei flat on the session at 304 and 27,323, respectively.
The Nasdaq and S&P stable overnight in Asia after their whipsaw day yesterday, currently trading at 3763 and 10,927, respectively. S&P rang the bell at 3900 on the Fed statement before plunging the depths on the presser. Those algos must have had so much fun.
Gold - Gold Dec continued its Powell presser sell off in Asia with it currently down a further one percent at 1631. After initially rallying close to our resistance at 1670 it crashed back down to earth and well through our trading pivot at 1650. We are currently on the lows and we would use the pivot at 1650 for short term trading with support now at 1620.
FI - US yields continuing their Powell presser rally overnight in Asia with the US2y and 10y trading currently at 4.69% and 4.16% respectively. The 10y took out the 4% level on the statement before spiking on the hawkish press conference. Terminal rates now above 5.10% for mid next year.
European yields unsurprisingly opening firmer with the German 10y yields trading currently at 2.263% and Italian 10y yields at 4.459%.
UK gilts off smalls yesterday with 10y yields closing at 3.399%.
FX - The USD king is back in the kingdom with the USD Index currently up a further percent at 112.46. USDJPY bizarrely flat at 147.94 but the EUR and GBP down a further half percent at 0.9775 and 1.1339, respectively. Risk proxies taking most of the beating, with AUD and NZD both lower by over half a percent at 0.6310 and 0.5785, respectively.
Others - Bitcoin and Ethereum surprisingly did little damage overnight and remain above 20,000 and 1500 despite all the turmoil. They currently sit at 20,292 and 1543 respectively.
Something for everyone with the bulls delighted initially before the bears returned to spoil the party and now have their feet firmly up on the table in front of the fire expecting a nice long winter.
“Fed pausers” seemed to have been put back firmly into the cupboard for now as Chair Powell did a Jackson Hole 2. Let’s take a look at some of the details.
From the statement:
75bps hike was delivered with a 12-0 vote
The statement was pretty much word for word from the previous one apart from this section:
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
This was the catalyst for the initial move up in stocks and for the USD and US yields to sell off.
The perception was that “cumulative tightening” was a nod to the fact that the Fed have done a lot already with previous hikes and hence there needed to be a time of slowing/pausing to let these tightenings filter into the wider economy. “Policy lags” again was perceived as a nod to a pause to allow a period of reflection and finally “financial developments” was noting the brittleness of markets and dare I say it some market participants may have perceived this as a return to the Fed put days.
Suffice to say the market read into this what it wanted to read into it and decided a pause was coming, and some strategists even suggested that Powell would double down on this in his press conference. That couldn’t have been further from the truth.
We believe that these are the key quotes from his press conference:
“The incoming data since our last meeting suggest the terminal rate of Fed Funds will be higher than previously expected (4.63%), and we will stay the course until the job is done’’. JH keep at it
“It is very premature to be thinking about pausing.... Very premature.”
“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive”
In effect, he was saying that the terminal rate is going to be higher than we previously thought and, indeed will stay there for longer. There is no pause coming soon and although we may slow as soon as December, this will not signal a pause anytime soon. We believe that he is trying to get the market into focusing on not the pace and magnitude of hikes but rather the higher terminal rate for Fed Funds.
Other interesting soundbites included:
Short term inflation expectations have risen of late and that may feed into wages
Want to reach real positive rates
If we hike too much we can cut rates however, if we do not do enough then we are in real trouble
A nod to Timiraos with his comment that household balance sheets were strong
The strong USD is a problem for some countries but no push back on it. Good luck JPY!
No sense that inflation is coming down
A troubling but not surprising opinion that he felt that, with rates higher for longer, the path for a soft landing had narrowed
On the inflation fight/rate hikes there was a ways to go and some ground to cover
One final point on his press conference was that he misinterpreted a journalist’s question whereby he thought he said that stock markets were rallying in response to his comments. He proceeded to wheel out a bingo card of hawkish comments to emphasise that he was not in favour of such a reaction. Worth a watch, and I post the clip at the bottom along with the Fed statement in full for those who haven’t read it yet. I also post the FXMacro Guy’s tweet from last night, which gives a great rundown of the FOMC as well as some other central bank chatter from around the world.
So, where does this leave us? Well, as we said yesterday, let’s see the upcoming data prints. We have enough of them between now and the December meeting starting on Friday with NFP. As regular readers will know, we always doubted the Fed pausers rally, and it would seem that Powell has put that idea to bed for now. His Jackson Hole “keep at it” was emphasised even more by his Jackson Hole 2 “until the job is done”.
A close call for the BoE today, with a slight majority in favour of a 75bp hike taking rates to 3%. 50bps is the other main choice, with a tiny smattering in favour of 100bps. The ripping up of the first fiscal package has reduced the urgency for the BoE to act decisively on the rates front as a counterbalance to the fiscal expansion that the original package was proposing. The chatter out of the “take 2” is much more of a sober and austerity focused package which lends itself to a lower magnitude of hike. Remember too, Deputy Governor Broadbent was fairly explicit in his views on the market’s pricing, which he felt was more aggressive than the Bank felt necessary. However, there is a lot for the Bank to consider; headline inflation is at 10.1% with core at 6.5%, the Gilt sale operation has just been restarted this week, successfully thus far, GBP is on a much firmer footing than of late and of course they will have to wait until the 17 November for the Government’s fiscal package.
A lot of uncertainty and hence the close call.
Calls for 75bps centre around:
The Bank reasserting its credibility post the Truss regime;
Inflation in double digits and projected to rise further;
Keeping up with The Joneses from across the Pond;
Remember that expectations were for a 100bp hike not that long ago; and
Get away with such a hike as a “one off”
Calls for 50bp centre around:
With all the uncertainty why not err on the side of caution;
The fiscal package u-turns have blunted the loosening to such an extent that the “take 2” attempt in two weeks is now in keeping with the Bank’s estimates for the fiscal landscape;
The Bank have stressed on several occasions that the market is overestimating the pricing in the UK rates curve and a small hike is the best way of illustrating this; and
GBP stronger and in a better place, than previously, to withstand a disappointment
There is a huge amount of uncertainty, but with inflation rampant, we feel the BoE will go 75bps. Then we expect them to assess the upcoming fiscal package and then play catch up/adjust in the December meeting based on the outcome of the package and the incoming data. Indeed the Bank could make a case for “grouping” the two meetings together to in effect combine the two hikes in response to the fiscal package outcome. Either way, there will be a divided committee, so the voting split will also be interesting to dissect.
As a playbook, we would consider a dovish 50bp hike as a cue for GBP to sell off 2% and see 10y gilt yields sell off some 15bps. A hawkish 50bp hike, we would expect to see GBP come off by about 1% and yields to dip 5bps. A 75bp dovish hike seen as a one-off would see GBP knee-jerk a touch higher but remain relatively unchanged and rates would see a small uptake. A hawkish 75bp hike would see GBP 1% higher and yields rally 10bps.
In addition, there will be the MPR projections which, given all the uncertainty, will be more like a game of “pin the tail on the donkey”.
I shall be tweeting out live the details of the MPC decision, the vote split and anything else of interest. In addition, I shall also be attempting to make some sense of the “pin the tail on the donkey” game with the MPR projections.
For updates, follow us on Twitter at @HarksterHQ
Also, remember to sign onto the Harkster app for all the latest financial analysis and insight into the BoE’s decision.
As an aside, press reports today suggest that Sunak and Hunt are dipping their hands back into the honey pot by extending the windfall tax on oil and gas companies in order to raise around £40bn over the next 5 years to help plug the fiscal hole.
Central Bank Speakers
Some speakers to catch up on.
ECB usual jargon from the members with de Cos suggesting more hikes were needed to fight inflation. Nagel, as ever, said that there was a long way to go for rate hikes and just in Kazaks claiming that EU inflation is very high and we need to raise rates.
Dull as, but at least the Swiss can spice things up a little when he said that more interest rate hikes cannot be ruled out to ensure price stability. However, the spiciest piece from the SNB was that they are exploring cross-border trading and settlement of wholesale CBDCs using DeFi protocols in conjunction with France and Singapore.
Chinese health officials seemed to douse the speculation on the lifting of the zero policy with regard to Covid by praising it and reaffirming their commitment to it.
Apple is to pause hiring throughout next year on the back of recessionary fears, whilst Chinese Covid lockdowns are set to slow the production in some of their factories.
US refunding offered nothing new and ADP employment was stronger than anticipated. Unlike the German and EU services PMIs which plunged to new depths with depressing comments in the survey that there was “no turnaround in sight”.
Not to miss out North Korea continued their war games firing missiles which reportedly flew over the Japanese mainland before landing in the Pacific beyond.
The Day Ahead
Overnight we got Australian services PMI, which came in lower than the previous month’s print and places the measure into contraction at 49.3. Elsewhere not much better news out of China within their services PMI for October also coming in lower at 48.4 for the month.
Swiss inflation has just hit the tapes and is lower than expected, sitting at 3% YoY. A lot of countries I know would dream of such a print!
Coming up today a fair amount of interest with the Norges Bank leading us off with their interest rate decision where consensus looks for a 50bp hike but once again it’s a close call.
The morning then is focused on UK services PMI which is again expected to be a shocker and pushing well into contraction territory.
EU unemployment rate meanwhile is expected to remain stable.
BoE rate decision at noon.
The afternoon is dominated by the US services PMI and ISM.
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Norges Bank Interest Rate Decision 50bp hike expected taking rates to 2.75% (09.00 GMT)
UK S&P Global/CIPS Services PMI Final Oct consensus 47.5 vs previous 50 (09.30 GMT)
EU Unemployment Rate Sept consensus 6.6% vs previous 6.6% (10.00 GMT)
BoE Interest Rate Decision 75bp hike expected taking rates to 3% (12.00 GMT)
BoE Monetary Policy Report (12.00 GMT)
US S&P Global Services PMI Final Oct consensus 46.6 vs previous 49.3 (13.45 GMT)
US ISM Non-Manufacturing PMI Oct consensus 55.5 vs previous 56.7 (14.00 GMT)
US ISM Non-Manufacturing New Orders Oct previous 60.6 (14.00 GMT)
US ISM Non-Manufacturing Prices Oct previous 68.7 (14.00 GMT)
US ISM Non-Manufacturing Employment Oct previous 53 (14.00 GMT)
BoC Beaudry speaks (17.30 GMT)
Mann (20.30 GMT)
Australia Statement on Monetary Policy (00.30 GMT)
Australia Retail Sales MoM Final Sept previous 0.6% (00.30 GMT)
Japan Jibun Bank Services PMI Final Oct previous 52.2 (00.30 GMT)
German Factory Orders MoM Sept consensus -0.5% vs previous -2.4% (07.00 GMT)
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