The Morning Hark - 3 Oct 2022

Today’s focus ……Trussed up Kwarteng, The Week Ahead and Signs from the Treasury Market?

All prices are at 7.40 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December both up a healthy two and a half percent overnight in Asia currently trading at 87.30 and 80.80 respectively. The OPEC+ meeting speculation is the only show in town as traders are buying the rumour fast that a large output cut is on the agenda for Wednesday’s meeting. 

EQ - Equity markets a mixed bag overnight in Asia in holiday markets with the large parts of the region out the Nikkei is up one percent at 26,185 however the Hang Seng is down over half of one percent at 17,075. 

The Nasdaq and S&P both steady in Asian at 11,000 and 3603 respectively. Stocks closed the month on their lows boding ill for October. That makes it 3 quarters in a row we have witnessed declines in the market an occurrence last seen in the great recession. Stocks were not helped by Friday’s data showing a sharp decline in the Chicago PMI, its lowest print in 2 years, and an uptick in PCE inflation as we highlighted on Twitter. 

Gold - Gold Dec trades flat in Asia at 1671. Tight range in gold over the last few sessions with the wider range well defined with topside resistance at 1700 and downside support at 1650.

FI - US yields backing off a touch in Asia with the US2y and 10y currently trading at 4.20% and 3.78% respectively. 

European yields sold off on Friday closing the week lower at 2.111% and 4.514% for the German and Italian 10y yields respectively. UK gilts remain elevated closing the week at 4.149%.

FX - The USD trading flat with the USD Index now at 112.04. GBP has taken a tonic from the news regarding the u-turn on the scrapping of the top tier 45% tax band. This does not move the dial much as to the size of the tax cuts but it does show a willingness of the government to listen to criticism. On the flip side it shows how the government’s authority is starting to crumble a touch merely a month into its reign. GBP currently trading at 1.1176 and we still believe GBP remains a sell on a 1.12 handle with a stop above 1.13 with a view to retest the 1.05 zone again. EUR is flat at 0.9796 but the JPY has weakened a touch again at 145.12 and getting into the “intervention zone”. It was confirmed by the MoF that they intervened to the tune of around $20bn the other week. Some early jawboning today from finance minister Suzuki saying that they were ready to take “decisive” action. 

Others - Both Bitcoin and Ethereum continue on the sidelines with little to note currently trading at 19,195 and 1292 respectively.

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Fed Speakers/Market Stresses

Brainard had some interesting things to say amongst all the usual soundbites around remaining restrictive for sometime and her pushing back on the downward revisions to the UMich inflation expectations. However she did flag financial stability concerns especially surrounding poor liquidity coupled with deleveraging of risk positions especially in countries with higher debt burdens. In addition she alluded to the dual risks of raising rates too little and too much. 

I post at the bottom an article which references Bank of America’s rate strategist Cabana’s note to clients from the end of last week where he outlines his fears for the Treasury market. Indeed he specifically references the key concern being liquidity. With all the volatility and market dislocations we have seen of late especially in what are seen as “safe” fixed income assets there have to be institutions out their hiding losses in the hedge fund and asset management space who have been over-leveraged and in need of liquidity. The treasury market would seem the key player moving forward for signs of these stresses becoming extreme. Definitely something to remain vigilant on and would be an obvious catalyst for a Fed pivot. I also post at the end, the excellent FXMacro Guy’s weekly which has a comprehensive round up of all the FED speakers from last week as well as the other major central banks; 48 in total!

 

The Week Ahead

1. US ISM Manufacturing and Services.  The manufacturing regional surveys have been mixed with no clear indication for the overall reading. Forecasters have a wide range of expectations but in the main a slight slowing is expected although still well above the 50 boom/bust line. Services are expected to remain strongly above 50. In addition we get the final readings for the global PMIs which once again are expected to show the contrast between the stronger readings out of the US with the poor European prints which are expected to be confirmed in contraction.  

2. RBA Meeting. The RBA are expected to raise by a further 50bps on Tuesday bringing rates to 2.85% although the market is pricing in a strong case for a smaller hike of 25bps. Governor Lowe has signalled recently that at some point in the future they will not need to hike by 50bps as they get closer to normal but we think that moment has not arrived just yet despite some tentative signs of inflation starting to slow. 

3. RBNZ Meeting. The RBNZ are expected to hike by 50bps on Wednesday taking rates to 3.50%. This would be their fifth straight hike of such a magnitude. Unlike in Australia the inflation profile  is still worrying with the Bank’s recent set of projections suggesting that inflation will not peak until next year. The expectation is for the terminal rate to be around the 4% mark and hence we see further tightening going into year end. Indeed there is an outside chance that they will go 75bps but that is not our base case. 

4. OPEC+ Meeting. The much talked about meeting is upon us on Wednesday with expectations of a cut in production of between 0.5-1m barrels per day. Indeed there is much speculation of a bigger cut given the weakening of global demand and with the news that the meeting will be conducted “in person” rather than by zoom. 

5. ECB Minutes. Minutes from the September meeting are published on Thursday when the ECB hiked by 75bps and was accompanied by a hawkish statement and press conference. In addition the forecasts were updated with increases to the inflation profile and cuts to growth although both were on the optimistic side to say the least. The decision was seen as unanimous but the minutes may offer clues as to if there were any dissenting views and also the profile of rate hikes for the future. 

6. US NFP. The usual first Friday of the month brings the US payroll report with expectations for a slowing but still healthy 250k reading with the unemployment rate remaining at 3.7% with earnings steady at 0.3%. Thus far the range in forecasts is between 175k-350k. If we hit 250k it would be the smallest rise in payrolls in almost 2 years although to put that in context that magnitude of print would be higher than the average monthly rise in payrolls in the 5 years prior to the pandemic and certainly would not be sufficient a drop to warrant any change in Fed policy.

7. UK. The UK remains central to the global markets for all the wrong reasons and it will once again be the focus this week with the continued fallout from Kwarteng’s fiscal package. It is the Conservative party conference this week and he will be defending his fiscal package with all his might today with much press speculation that he is fighting for his job (16.00 BST). PM Truss seemed to throw him under the bus yesterday when asked about the scrapping of the top rate in tax claiming that it had not been discussed in cabinet and it was the chancellor’s decision. This comes as there is renewed speculation that the vote on the scrapping will be delayed for several months as there is little chance of it passing the vote. Indeed some papers are suggesting that it will be scrapped all together in an embarrassing u-turn. This has now been confirmed officially. PM Truss will speak on Wednesday (10.00 BST). Optically the top tier of tax scrapping hardly sits well when in the same breath they are talking about benefit cuts and spending cuts to both the NHS and schools. Nor does it look good when it is rumoured that Kwarteng attended a “cocktail party” with hedge fund types (and indeed party donors) the evening of the fiscal package announcement for a nice Cosy Up Cash Out session. He has promised a full medium term fiscal plan alongside the OBR forecasts for late November. The question is will the UK be able to limp along for the next 6 weeks or so? Watch this space but either way the UK will sadly not be dull for some time yet. 

 

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Monday

German S&P Global Manufacturing PMI Final Sept consensus 48.3 vs previous 49.1 (08.55 BST)

EU S&P Global Manufacturing PMI Final Sept consensus 48.5 vs previous 49.6 (09.00 BST)

UK S&P Global Manufacturing PMI Final Sept consensus 48.5 vs previous 47.3 (09.30 BST)

Canada S&P Global Manufacturing PMI Sept previous 48.7 (14.30 BST)

US S&P Global Manufacturing PMI Final Sept consensus 51.8 vs previous 51.5 (14.45 BST)

US ISM Manufacturing PMI Sept consensus 52.2 vs previous 52.8 (15.00 BST)

US ISM Manufacturing New Orders Sept  previous 51.3 (15.00 BST)

US ISM Manufacturing Prices Sept consensus 51.9 vs previous 52.5 (15.00 BST)

US ISM Manufacturing Employment Sept consensus vs previous 54.2 (15.00 BST)

Fed Speakers

• Bostic (14.05 BST)

• Barkin (16.45 BST) 

• George (19.15 BST)

• Bostic (23.45 BST)

BoE Speakers

• Mann (19.00 BST)

 

Tuesday

Japan Tokyo Core CPI YoY Sept consensus 2.8% vs previous 2.6% (00.30 BST)

Japan Tokyo CPI YoY Sept consensus % vs previous 2.9% (00.30 BST)

Australia Interest Rate Decision 50bp hike expected (04.30 BST)

US Factory Orders MoM Aug consensus 0.3% vs previous -1% (15.00 BST)

Australia S&P Global Services PMI Final Sept consensus  vs previous 50.2 (23.00 BST)

Fed Speakers

• Williams (14.00 BST)

• Logan (14.00 BST) 

• Mester (14.15 BST)

• Jefferson (16.45 BST)

• Daly (18.00 BST)

ECB Speakers

• Enria (13.00 BST)

• Lagarde (16.00 BST)

 

Wednesday

Japan Jibun Bank Services PMI Final Sept consensus  vs previous 49.5 (01.30 BST) 

German S&P Global Services PMI Final Sept consensus 45.4 vs previous 47.7 (08.55 BST) 

EU S&P Global Services PMI Final Sept consensus 48.9 vs previous 49.8 (09.00 BST) 

UK S&P Global Services PMI Final Sept consensus 49.2 vs previous 50.9 (09.30 BST) 

US S&P Global Services PMI Final Sept consensus 49.2 vs previous 43.7 (14.45 BST) 

US ISM Non-Manufacturing PMI Sept consensus 56 vs previous 56.9 (15.00 BST) 

US ISM Non-Manufacturing Prices Sept previous 71.5 (15.00 BST)

US ISM Non-Manufacturing New Orders Sept  previous 61.8 (15.00 BST)

US ISM Non-Manufacturing Employment Sept consensus vs previous 50.2 (15.00 BST)

Fed Speakers

• Bostic (21.00 BST)

 

Thursday

German Factory Orders MoM Aug consensus -0.7% vs previous -1.1% (07.00 BST)

EU Retail Sales MoM Aug consensus -0.4% vs previous 0.3% (09.00 BST) 

Canada Ivey PMI sa Sept  consensus vs previous 60.9 (15.00 BST)

Fed Speakers

• Evans (18.00 BST)

• Cook (18.00 BST)

• Waller (22.00 BST)

 

Friday

German Industrial Production MoM Aug consensus -0.5% vs previous -0.3% (07.00 BST)

German Retail sales MoM Aug consensus -1% vs previous 1.9% (07.00 BST)

Canada Unemployment Rate Sept consensus 5.4% vs previous 5.4% (13.30 BST)

Canada Employment Change Sept consensus 20k vs previous -39.7k (13.30 BST)

Canada Average Hourly Wages YoY Sept consensus  vs previous 5.6% (13.30 BST)

US Unemployment Rate Sept  consensus 3.7% vs previous 3.7% (13.30 BST)

US NFP Sept  consensus 250k vs previous 315k (13.30 BST)

US Average Hourly Earnings MoM Sept consensus 0.3% vs previous 0.3% (13.30 BST)

Fed Speakers

• Williams (15.00 BST)

 

Good luck. 

 

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1. FX Macro Guy - Outlook for Week 40/2022

2. Mr. Blonde - Bear Bounce?

3. Quoth the Raven - Pivot Point? New Cracks Emerge In Fed's Rate Hike Narrative

4. Topdown Charts - Weekly S&P500 ChartStorm - 2 October 2022

5. Apricitas - an Econ Blog - Gilt Trip

Discover more market commentary & research from 500+ curated sources on Harkster →

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Market Liquidity 

• Zero Hedge - "Treasury Market Breakdown Is At Risk": Fed Markets Guru Has A Scary Warning For Powell

FX Macro Guy - Central Bank Review

• Substack - Outlook for Week 40/2022

• Twitter - Friday and weekly recap thread

UK

• Zero Hedge - UK's Truss Pressured To Abandon Tax-Cut For The Rich, Throws Kwarteng Under The Bus After Revolt

• Politico - London Playbook: Good morning from Birmingham — Screeching 45p U-turn — Kwasi speaks

 

 

 

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