The Morning Hark - 30 Nov 2023
Today’s focus... German inflation continues the yield sell off. More #DotPlot mayhem from the Fed. US PCE to continue the softening trend? ECB speakers can they hold the line in light of the data?
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Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil again consolidating its much needed gains in the Asian session with Brent and Crude January futures currently up smalls at 83.30 and 78.20 respectively. Another rollercoaster of a day yesterday with nervousness regarding today’s OPEC+ meeting. We were back to two OPEC+ sources who let it be known that behind the scenes talks were still on going but that no meeting delay is currently expected.
Judging by the price action oil seems to be leaning into deeper supply cuts being agreed as the market seemed happy to ignore the weaker Chinese PMIs overnight. In addition the EIA surprise inventory build was equally swept under the carpet. Although the API data did show a first decline in crude inventories in 6 weeks.
The picture is a tad muddy but hopefully we will get some clarity today.
EQ - Asian equity markets steady overnight with the Hang Seng and Nikkei currently up smalls at 17,120 and 33,470 respectively. After its recent travails the Hang Seng seems to have found some support around this 17,000 level, for now at least, even brushing off the weaker than expected Chinese PMIs.
The US indices equally up smalls in Asia with the S&P currently at 4570 whilst the Nasdaq is at 16,070. Stocks remain on course for one of their best months in the last 12 years.
Gold - Gold holding in there and sitting currently at 2043 just ahead of the short term trading pivot we spoke about yesterday at 2050. Upside target remains the year’s highs towards 2085 with support continuing around 2020. All eyes on US PCE today to see if we get a further leg up.
FI - Global yields firming up a bit in the Asian session after their recent steep declines. Currently the US2y and US10y sitting at 4.65% and 4.27% respectively.
The bull steepening continued yesterday with now 125bps of Fed rate cuts priced in for next year, starting from May. US yields are looking at their worst month in 15 years unless we get an upside surprise in US PCE today which, given the recent global trends in inflation, would certainly be a surprise.
European yields took another leg down on the back of the lower than expected German inflation report. European yields now back to levels last seen in the late summer with the German 10y closing at 2.43% and the Italian 10y yield similarly at 4.16%.
UK gilt yields similar pattern with the 10y closing at 4.10%.
FX -The USD has steadied the ship somewhat in a quieter Asian session with the USD Index little changed at 102.70. The JPY, EUR and GBP all equally quiet with them sitting currently at 146.90, 1.0980 and 1.2705 respectively.
FX option expiries wise today has nothing of note close.
Others - Bitcoin and Ethereum still remain well contained at the top end of their recent range. The pair currently at 37,900 and 2034 respectively.
Macro Themes At Play
Recap
OECD joined the soft landing brigade in its latest assessment of the global economy. They claim the chances of a hard landing have subsided although a recession is not totally off the table with concerns still over housing, high oil prices and sticky credit lending. They see this year’s global GDP at 2.9% before a dip to 2.7% next and 3% in 2025.
Other highlights were an upward revision for US and likewise for Europe albeit at a lower level.
The preliminary German Inflation report for November came in much softer than expected, although we got a good steer from the regional surveys which have been hitting the tapes all morning. YoY headline inflation now down to 3.2% from 3.8% a month earlier and almost halving over a four month period. The monthly showed a drop of 0.4%. At this rate we could see deflation by the first quarter!
Well over 100bps of cuts priced in now for next year. The ECB speakers will be interesting to listen to today especially as they all speak post the EU flash inflation report. It’s going to be hard to justify “higher for longer” mantra with such prints.
The US GDP Growth Rate QoQ second estimate for q3 may give Waller a wobble as it beat expectations with a huge upward revision to 5.2%. Albeit backward looking its an impressive reading and the Fed will hope that last quarter slowdown, they keep alluding to, is imminent. However the prices element of the report will cheer the Fed somewhat with them softening slightly more than had been expected.
Central Bank Speakers
The ECB’s de Guindos reiterated that it was the ECB’s objective to bring inflation down to target.
Stournaras saw the market’s ECB rate cut bets as a bit optimistic but felt it could come in the middle of next year. Growth in the Eurozone by his estimations for 2023 at 2.4% and 2.5% for§1 next.
The BoE’s Bailey kept the beat going insisting that we’ve got to get on and bring inflation down to target. Not sure if that was directed at his team or the government!
In addition he is seeing some weakening of economic activity. Aren’t we all Andy!
The Fed’s Mester stayed with the monetary policy is “in a good place” theme. She also added that monetary policy has tightened financial conditions. Not sure I agree with her on that unless she is giving us a history lesson from the time prior to the Fed starting to rant on about how FCs were doing the “heavy lifting for the Fed”!
Bostic meanwhile was increasingly convinced that inflation will continue to slow along with economic activity in the coming months. He continued that the Fed can feel more confident in its current outlook.
Barkin however took a more hawkish stance insisting that if inflation flares back up again you want to have the option of doing more on rates. His view is that inflation will come down but “stubbornly”. Rate cut talk is “premature” and the markets have a different forecast to him on that front. He still needs to be convinced on inflation and on that basis he is not willing to take a rate hike off the table.
The Day Ahead
Overnight Japanese Industrial Production for October showed an upside beat for the MoM preliminary to 1%.
Whilst Retail Sales for October had its worst monthly read in over 2 years decreasing by 1.6% on the month.
We also had Consumer Confidence for November and Construction Orders for October both small upside surprises at 36.1 and 4.2% respectively.
The BoJ’s Nakamura claimed that the BoJ would need more time before being able to modify easy monetary policy but they are seeing signs that wage growth will exceed the rate of inflation. Expectations are for the economy to recover moderately accompanied by wage increases
China PMIs small misses on forecast and previous month’s reading. Maunufacturing now at 49.4, Non manufacturing fared a touch better coming in at 50.2 which was the 11th straight month of “expansion” but the lowest reading of the year. Overall not a lot to cheer.
Just out German Retail Sales for October were an upside surprise with the MoM reading coming in at 1.1% which brings the YoY now close to flat for the year.
In what is a busy day data wise we start the morning off with Swiss Retail Sales for October. Then we get the German and Eurozone labour reports for November and October respectively. The highlight of the morning however is the flash Eurozone Inflation Report for November where a further softening, in line with the global trend, is expected.
The afternoon sees Canadian GDP for q3 which is unlikely to get the pulses racing. However the US PCE Price Index for October has the potential to get us off to the races again. Already expectations are for both YoY headline and core to drop significantly. Any softer print than that could set us off on a further leg lower in the USD and US yields.
Later on Chicago PMI for November still expected to be languishing well below the 50 line and some US housing data.
Throughout the day we get a smattering of central bank speakers with Lagarde and Williams probably the highlights.
Overnight we get the Japanese Unemployment Rate for October and the final November readings for the Australian, Chinese and Chinese PMIs.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead in terms of data and speakers:
Thursday
Swiss Retail Sales MoM Oct consensus % vs previous 0.8% (07.30 GMT)
Swiss Retail Sales YoY Oct consensus 0.2% vs previous -0.6% (07.30 GMT)
German Unemployment Rate Nov consensus 5.8% vs previous 5.8% (08.55 GMT)
German Unemployment Change Nov consensus 22k vs previous 30k (08.55 GMT)
EU Inflation Rate MoM Flash Nov consensus % vs previous 0.1% (10.00 GMT)
EU Inflation Rate YoY Flash Nov consensus 2.7% vs previous 2.9% (10.00 GMT)
EU Core Inflation Rate YoY Flash Nov consensus 3.9% vs previous 4.2% (10.00 GMT)
EU Unemployment Rate Oct consensus 6.5% vs previous 6.5% (10.00 GMT)
Canada GDP Growth Rate QoQ q3 consensus % vs previous 0% (13.30 GMT)
Canada GDP Growth Rate Annualised q3 consensus 0.2% vs previous -0.2% (13.30 GMT)
Canada GDP MoM Sept consensus 0% vs previous 0% (13.30 GMT)
Canada GDP MoM Prel Oct consensus % vs previous 0% (13.30 GMT)
US PCE Price Index MoM Oct consensus 0.1% vs previous 0.4% (13.30 GMT)
US PCE Price Index YoY Oct consensus 3% vs previous 3.4% (13.30 GMT)
US Core PCE Price Index MoM Oct consensus 0.2% vs previous 0.3% (13.30 GMT)
US Core PCE Price Index YoY Oct consensus 3.5% vs previous 3.7% (13.30 GMT)
US Personal Income MoM Oct consensus 0.2% vs previous 0.3% (13.30 GMT)
US Personal Spending MoM Oct consensus 0.2% vs previous 0.7% (13.30 GMT)
US Chicago PMI Nov consensus 45.4 vs previous 44 (14.45 GMT)
US Pending Home Sales MoM Oct consensus -2% vs previous 1.1% (15.00 GMT)
US Pending Home Sales YoY Oct consensus % vs previous -11% (15.00 GMT)
Australia Judo Bank Manufacturing PMI Final Nov consensus vs previous 48.2 (22.00 GMT)
Japan Unemployment Rate Oct consensus 2.6% vs previous 2.6% (23.30 GMT)
Japan Capital Spending YoY q3 consensus % vs previous 4.5% (23.50 GMT)
Fed Speakers
Williams (14.05 GMT)
ECB Speakers
Lagarde (13.30 GMT)
Enria (13.45 GMT)
McCaul (14.15 GMT)
Jochnick (15.45 GMT)
BoE Speakers
Greene (16.00 GMT)
Early Friday
Japan Jibun Bank Manufacturing PMI Final Nov consensus 48.1 vs previous 48.7 (00.30 GMT)
China Caixin Manufacturing PMI Nov consensus 49.8 vs previous 49.5 (01.45 GMT)
Good luck.
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