The Morning Hark - 30 Jan 2023
Today’s focus …Busy week ahead
Prices are at 7.20 GMT/2.20 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March futures slipping a touch in Asia with them currently trading at 85.80 and 79, respectively. Oil softer again after Friday’s sell off on the back of a Reuter’s report claiming that Russian oil supplies would rise dramatically this month on the back of Chinese demand as it continues to reopen. The sell off was tempered somewhat with the news of the Israeli drone strikes on Iranian facilities.
EQ - Asia equity futures a sea of red with the Nikkei, Kospi and Hang Seng all down at 27,343, 324 and 22,132, respectively.
The Nasdaq and S&P futures giving back a touch after their strong gains last week with them currently sitting at 12,144 and 4063, respectively.
Gold - Gold Feb futures are struggling to regain upside momentum after the rejection of the 1950 level last week. They sit currently at 1927 ahead of a very busy week with enough catalysts to shake it out off its recent tight range. Topside still at 1955/60. Support continues to be at 1900 then 1870.
FI - US yields flat in Asia with the US2y and US10y trading currently at 4.20% and 3.50%, respectively.
European yields closed the week a touch firmer with the German 10y yields closing at 2.244% and Italian 10y yields at 4.101%.
UK gilt yields similarly so with the 10y closing at 3.323%.
FX - Little of note in the FX space in Asia overnight with the USD Index currently flat at 101.94. The majors mixed with JPY, EUR and GBP currently at 129.50, 1.0857 and 1.2378, respectively.
Others - Bitcoin and Ethereum both up after some green Asian candles over the weekend with them currently at 23,616 and 1625 respectively.
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The Week Ahead
US Employment Costs. The tight labour market in the US has contributed to a rising wage cost backdrop which has helped to undermine the Fed’s fight with inflation. Tuesday sees the Employment Cost Index release for q4, which is expected to show a slight slowing to 1.1% QoQ but hardly enough to change the Fed’s stance on a potential pause. The Fed’s Brainard, in a speech earlier in the month, cited the ECI print as a potential signpost for a softening in the wages profile in the US. Let’s see.
EU Inflation. Wednesday sees the release of January’s flash inflation data for the EU. Expectations are for a slight moderation in both Headline and Core but both measures will remain elevated at 9.1% and 5.1%, respectively. The report should rubber-stamp the ECB’s decision to go for a more aggressive rate hike later in the week. As a heads up, we get the major regions printing prior to the EU wide print on Wednesday. Spain (Monday) is expected to show a moderation in the inflation profile for January. However, France and Germany (both on Tuesday) are expected to remain stubbornly high.
FOMC. Later on Wednesday we get the first rate announcement from the Fed for 2023. With inflation seemingly having peaked, for now at least, and recent economic activity showing signs of slowing, consensus is leaning towards a further slowing in pace from the Fed. Having produced four consecutive 75bp hikes they slowed to 50bps in December and we expect a further reduction to 25bps taking the upper band to 4.75%. The chatter from the Fed speakers has been mixed of late but there has certainly been a growing majority coming out in favour of 25bps. The main fly in the ointment is, of course, the tight labour market but, given its lag time, we’d expect the Fed to look through the labour market strength whilst cautioning against any complacency. In Powell’s press conference, we’d expect him to stress that, unlike the BoC, the Fed are not for pausing yet, nor indeed are they anticipating any rate cuts this year. How much the market believes this mantra is another thing. We’d also expect him to push back on any further market movements which contribute to additional loosening of financial conditions. He may wish to stress that any such loosening will merely make the Fed hike more and retain higher rates for longer.
Bank of England. First up on Thursday is the Bank of England who seem to have little choice but to hike by 50bps given the inflationary landscape in the UK. This despite the fact that economic activity is weakening further. Wage growth surprised to the upside this month and services CPI remains stubbornly high. Whilst the minutes of the December meeting alluded to a downshift by the Bank the inflationary data has trumped that view and we believe the Bank will opt for a tenth hike in the cycle with a further 50bps. However, to soften the blow, we’d expect them to again flag a downshift is likely in the coming meetings. The meeting will also offer an opportunity for the Bank to give its views on the economy with its monetary outlook report. Slightly rosier one this time around given the last one was published under the clouds of a lot of political upheaval and uncertainty. Outwith the various scandals that never seem to be far away, the political landscape is a lot calmer and rather boring and given that gas prices have softened a great deal, then there is the potential for the Bank to both upgrade their GDP forecasts a touch whilst tempering their inflationary ones. One last point the vote split will be a hoot as ever. December’s meeting had 1 vote for 75bps, 6 for 50 and 2 for no change. We’d expect the only change this time around to be the 75bp becomes a 25bp. The split could give us an indication on the members’ intentions moving forward.
ECB. Up next on Thursday is the ECB. Once again a pretty well telegraphed 50bp hike is on the cards with probably the March meeting containing more of the fireworks. A majority of ECB speakers of late have been canvassing for a 50bp hike and Lagarde has been very explicit that the market’s pricing has been undercooked in terms of rate hikes and with core inflation remaining strong they are keen to “stay the course”. The statement and press conference will be picked over for clues as to how far and how fast the ECB intends to be with their rate hiking profile.
US Labour Report. January labour report will be much anticipated given the backdrop of the first FOMC of the year and what seems a never ending stream of lay offs from high profile companies that we have encountered over the last few months. December’s print once again beat consensus expectations and completed a year of prints all above 200k. However the last 5 months of the year the pace of the report has slowly dwindled into the low 200k range. If we were to get the 188k anticipated number it would be the lowest print in over two years but still a historically decent trending number. Remember consensus forecasts are now on a nine month losing streak as they continue to under estimate the labour market’s strength so don’t bet the house! Remember also the average hourly earnings gauge as the Fed’s focus turns to its new pressure point in the CPI report of “core services ex shelter”. Expectations are for an unchanged 0.3% print which would still be a touch too high for the likes of Jerome and his chums on the committee.
Other Points of Note. Final global January PMIs for both manufacturing and services are printed throughout the week. China is expected to show a rosier backdrop as it emerges from the zero covid policy with the western world fairing better in the services sector as opposed to the contractions seen in manufacturing. We also get the US ISMs and Friday’s services measure will have most focus given the sharp decline we saw in December into recessionary territory. A rebound is expected. Tuesday is of course month end and its a big week in the US for earnings with Thursday looking like the highlight with Apple, Alphabet and Amazon all reporting. We also get an OPEC+ meeting which is expected to keep production steady.
The Day Ahead
Little of note to start a very busy week. German flash q4 GDP will do little to relieve the boredom. Overnight we get a Japanese data dump with retail sales, unemployment rate and industrial production for December.
In addition, we have Chinese PMIs for January with expectations for an uptick given the reopening of the country post Covid.
On an otherwise quiet day and what better way to prep for the busy week ahead but with the excellent FxMacro Guy’s central bank crib sheets and his outlook for the week. I’ll leave you in his capable hands.
FxMacro Guy - Central bank speakers summary
FxMacro Guy - Outlook for the week
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All times in GMT (EST+5 / CEST-1 / JST-9)
German GDP Growth Rate QoQ Flash q4 consensus 0% vs previous 0.4% (09.00 GMT)
German GDP Growth Rate YoY Flash q4 consensus 1.3% vs previous 1.3% (09.00 GMT)
Japan Unemployment Rate Dec consensus 2.5% vs previous 2.5% (23.30 GMT)
Japan Retail Sales MoM Dec consensus % vs previous -1.1% (23.30 GMT)
Japan Retail Sales YoY Dec consensus 3% vs previous 2.6% (23.30 GMT)
Japan Industrial Production Prel MoM Dec consensus -1.2% vs previous 0.2% (23.30 GMT)
Japan Industrial Production Prel YoY Dec consensus % vs previous -0.9% (23.30 GMT)
China NBS Manufacturing PMI Jan consensus 49.7 vs previous 47 (01.30 GMT)
China NBS Non Manufacturing PMI Jan consensus vs previous 41.6 (01.30 GMT)
German Retail Sales MoM Dec consensus 0.4% vs previous 1.1% (07.00 GMT)
German Retail Sales YoY Dec consensus % vs previous -5.9% (07.00 GMT)
German Unemployment Rate Jan consensus 5.5% vs previous 5.5% (08.55 GMT)
German Unemployment Change Jan consensus 5k vs previous -13k (08.55 GMT)
EU GDP Growth Rate QoQ Flash q4 consensus 0% vs previous 0.3% (10.00 GMT)
EU GDP Growth Rate YoY Flash q4 consensus 1.8% vs previous 2.3% (10.00 GMT)
German Inflation Rate MoM Prel Jan consensus 1% vs previous -0.8% (13.00 GMT)
German Inflation Rate YoY Prel Jan consensus 9.2% vs previous 8.6% (13.00 GMT)
Canada GDP MoM Nov consensus 0.1% vs previous 0.1% (13.30 GMT)
Canada GDP MoM Prel Dec consensus% vs previous% (13.30 GMT)
US Employment Cost Index QoQ q4 consensus 1.1% vs previous 1.2% (13.30 GMT)
US Chicago PMI Jan consensus 44.9 vs previous 44.9 (14.45 GMT)
Australia Judo Bank Manufacturing PMI Final Jan consensus vs previous 50.2 (22.00 GMT)
Japan Jibun Bank Manufacturing PMI Final Jan consensus vs previous 48.9 (00.30 GMT)
China Caixin Manufacturing PMI Final Jan consensus 49.5 vs previous 49 (01.45 GMT)
German S&P Global Manufacturing PMI Final Jan consensus 47 vs previous 47.1 (08.30 GMT)
EU S&P Global Manufacturing PMI Final Jan consensus 48.8 vs previous 47.8 (09.00 GMT)
UK S&P Global/CIPS Manufacturing PMI Final Jan consensus 46.7 vs previous 45.3 (09.30 GMT)
EU Unemployment Rate Dec consensus 6.5% vs previous 6.5% (10.00 GMT)
EU Inflation Rate MoM Flash Jan consensus % vs previous -0.4% (10.00 GMT)
EU Inflation Rate YoY Flash Jan consensus 9.1% vs previous 9.2% (10.00 GMT)
EU Core Inflation Rate YoY Flash Jan consensus 5.1% vs previous 5.2% (10.00 GMT)
US ADP Employment Change Jan consensus 170k vs previous 235k (13.15 GMT)
Canada S&P Global Manufacturing PMI Jan consensus vs previous 49.2 (14.30 GMT)
US S&P Global Manufacturing PMI Final Jan consensus vs previous 46.2 (14.45 GMT)
US JOLTS Job Openings Dec consensus 10.2M vs previous 10.458M (15.00 GMT)
US ISM Manufacturing PMI Jan consensus 48 vs previous 48.4 (15.00 GMT)
US ISM Manufacturing Employment Jan consensus 50 vs previous 51.4 (15.00 GMT)
US ISM Manufacturing New Orders Jan consensus vs previous 45.2 (15.00 GMT)
US ISM Manufacturing Prices Jan consensus 40 vs previous 39.4 (15.00 GMT)
US Construction Spending MoM Dec consensus -0.1% vs previous 0.2% (15.00 GMT)
FOMC Interest Rate Decision expected to raise 25bps to 4.75% (19.00 GMT)
BoE Interest Rate Decision expected to raise 50bps to 4% (12.00 GMT)
BoE MPC Meeting Minutes (12.00 GMT)
BoE Monetary Policy Report (12.00 GMT)
ECB Interest Rate Decision expected to raise 50bps to 2.5% (13.15 GMT)
ECB Press Conference (13.45 GMT)
US Factory Orders MoM Dec consensus 2.3% vs previous -1.8% (15.00 GMT)
Australia Judo Bank Services PMI Final Jan consensus vs previous 47.3 (22.00 GMT)
Lagarde (15.15 and 18.30 GMT)
Japan Jibun Bank Services PMI Final Jan consensus vs previous 51.1 (00.30 GMT)
China Caixin Services PMI Final Jan consensus vs previous 48 (01.45 GMT)
German S&P Global Services PMI Final Jan consensus 50.4 vs previous 49.2 (08.30 GMT)
EU S&P Global Services PMI Final Jan consensus 50.7 vs previous 49.8 (09.00 GMT)
UK S&P Global/CIPS Services PMI Final Jan consensus 48 vs previous 49.9 (09.30 GMT)
US NFP Jan consensus 185k vs previous 223k (13.30 GMT)
US Unemployment Rate Jan consensus 3.6% vs previous 3.5% (13.30 GMT)
US Average Hourly Earnings MoM Jan consensus 0.3% vs previous 0.3% (13.30 GMT)
US S&P Global Services PMI Final Jan consensus 46.6 vs previous 44.7 (14.45 GMT)
US ISM Non Manufacturing PMI Jan consensus 50.3 vs previous 49.6 (15.00 GMT)
US ISM Non Manufacturing Employment Jan consensus vs previous 49.8 (15.00 GMT)
US ISM Non Manufacturing New Orders Jan consensus vs previous 45.2 (15.00 GMT)
US ISM Non Manufacturing Prices Jan consensus vs previous 67.6 (15.00 GMT)
Pill (12.15 GMT)
Elderson (13.00 GMT)
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Greatest probability of 0.5% hike from the Fed. The NFP/labour market reports are a fallacy if you look at the revisions. The Fed wants a strong dollar otherwise they risk importing all the inflation they've exported and they want a strong dollar leading into a weakening economy.They have a mandate to hike until something breaks. 2% chance of a soft landing. .
Nice H&S on gold. A 50% retracement takes it back to the 1875 level.
Powell : 25 and Hawkish....