The Morning Hark - 30 Sep 2022
Today’s focus ……Bitter Pill for the government as Truss faces off to the OBR, US PCE and month/quarter end.
All prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December down a touch overnight in Asia currently trading at 87.40 and 80.40 respectively. USD weakness helping oil stabilise a touch over recent sessions with next week’s OPEC+ meeting looming large with much talk that they will cut crude production again. Oil is set to have its first up week since August with what would appear to be a floor building for now on the back of the OPEC+ meeting and the looming Russian oil import ban the supply side remains capped. The demand side, as we know, is all about interest rate hikes and whether they will tip us over into a global recession.
EQ - Equity markets a mixed bag overnight in Asia with the Nikkei and Kospi both lower at 25,967 and 283 respectively. The Hang Seng managed to stay in positive territory at 17,222.
The Nasdaq and S&P both stabilising in Asian at 11,244 and 3657 respectively after the hawkish Fed speakers and the mega cap tech stocks sell off dragged the indices lower again yesterday. BoA downgrading Apple with Meta and Instagram both announcing hiring freezes sending chill winds through the sector. Around the 3640 June low remains the key level for the S&P with a close below there having serious questions as to whether October is going to be any better a month than September!
Gold - Gold Dec futures up smalls in Asia at 1673. Gold happy to get a leg up from the weaker USD after its recent flirting with multi year lows. Sitting around resistance in this 1670/75 area a breach of which should see a retest of 1700. Downside support now at 1650.
FI - US yields stabilised in Asia with the US2y and 10y currently trading up at 4.20% and 3.78% respectively.
European yields continued to rally yesterday closing up at 2.178% and 4.669% for the German and Italian 10y yields respectively. UK gilts had a less volatile day yesterday remaining in a “fairly” constrained range compared to recent times and closing at 4.142%.
FX - The USD continues to weaken with the USD Index now at 111.91. All the majors having some relief with the JPY, EUR and GBP currently at 144.50, 0.9814 and 1.1122 respectively. GBP looks a decent risk reward sell into the 1.12 area with a stop above 1.13 with a view to revise back into the 1.05 zone again. Things have calmed down a touch but from the fundamental side it doesn’t look great.
USDCNH flat on the day at 7.09 after yesterday’s intervention by the PBOC and the softer PMIs released earlier.
Others - Both Bitcoin and Ethereum survived the turmoil of yesterday with surprisingly very few scars and indeed trade a touch firmer overnight at 19,420 and 1330 respectively.
Market Dysfunction
The Fed’s reverse repo facility, a mechanism the Fed uses to set intra day interest rates, hit a fresh record yesterday at $2.372tn not a good sign to say the least. I post an explainer below for those with an interest.
UK fiscal package fallout continues
BoE’s chief economist had quite a bit to say for himself.
“Gilt buying not attempt to cap rates”.
“Hard to avoid the conclusion that fiscal easing announced will prompt a significant and necessary monetary policy response in November”.
Most interestingly he seemed to contradict the government’s view on the world; “there has been a significant repricing of financial assets. Part of that repricing reflects broader global developments. Part of it reflects the ongoing normalisation of macroeconomic policy after the pandemic induced episode of exceptional ease. But there is undoubtedly a UK specific component”.
Much speculation about Blackrock’s part in triggering the BoE into action this week. The FT reported that they threatened to halt trading in some of their funds at the peak of the bond market turmoil this week in the UK which would have lead to pension schemes being unable to protect their members after the sharp move in gilts. Being such a significant player in the market it was felt that them pulling back from the market in such a manner would have brought even more turmoil and hence the BoE had to step in. I post at the bottom an excellent thread from The Macro Compass’s Alf explaining the exact mechanics of the pension funds trading and how this had the potential to have far greater issues for the wider market. It really is well worth a read and explains it in a succinct and simple manner.
Adding to the government’s woes a poll suggested the Labour Party has a 33% lead in the polls the biggest lead for any party in 20 years. PM Truss is having an emergency meeting with the Office for Budget Responsibility today to discuss last Friday’s fiscal package. The meeting was scheduled after it emerged that the OBR had prepared a draft set of forecasts for the chancellor prior to last Friday’s fiscal package but these were rejected as an accompaniment to the package. Although they have been asked by Kwarteng to draw up their next round of forecasts for October 7th.
Central Bank Speakers
ECB speakers ramping up the hawkishness going into next month’s ECB meeting. Kazakh said that they should start discussing QT soon in addition to seeing them hit the upper side of neutral rates by the year end. Centeno reckoned that they are “still far” from the neutral rate. Whilst Simkus reckoned that “my choice would be 75bps hike”.
All with the backdrop of another hot inflation print this time from Germany which hit double figures for August at 10% vs 7.9% previously.
An ECB source also felt that there was no need to activate TPI for Italy. Can’t be long though.
The Fed on a similar tack. Mester reckoned that “we’re still not even in restrictive territory on the funds rate” and “the recession won’t stop Fed raising rates”.
Bullard equally so claiming that rates would be “higher for longer” and whilst there was a “higher risk of recession” this was not his base case. He was firm in noting that markets have “understood the message” from the Fed’s latest dots plan and it was a “bad plan” to change the Fed’s inflation target.
Daly later in the day claimed that the Fed had achieved “neutrality” and that she was “comfortable” with the median Fed Funds rate path showing 4/4.5% for year end and 4.5/5% for 2023.
For more details on the various speakers, I post the FXMacro Guy’s comprehensive thread below. Well worth a read for a great round-up.
Today’s focus
Some welcome cheer early doors for the UK with final q2 GDP figures beating consensus and dragging themselves into positive territory for the quarter at 0.2%.
Once again a raft of central bank speakers. We would focus on Schnabel’s comments as the pick of the bunch from the ECB whilst on the Fed side Brainard and Williams are the two Fed speakers up today who have not spoken this week and hence should garner most attention.
Data wise there are two main themes for the day with flash EU inflation for September which is expected to push higher again to 9.7% with obvious risks to the upside. More importantly the US PCE measure for August should give the markets its lead as we go into next week’s PMIs and US payrolls report. Expectations are for a slight uptick to 4.7% which from memory was what the market was expecting from the main CPI print earlier in the month and we all know what happened then. The delicate nature of the markets makes me feel that a big miss either way will have the potential for an outsized move especially given its both months and quarter end. See you on the other side.
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Friday
German Unemployment Rate Sept consensus 5.5% vs previous 5.5% (08.55 BST)
EU Inflation Rate YoY Flash Sept consensus 9.7% vs previous 9.1% (10.00 BST)
EU Core Inflation Rate YoY Flash Sept consensus 4.7% vs previous 4.3% (10.00 BST)
EU Unemployment Rate Aug consensus 6.6% vs previous 6.6% (10.00 BST)
US Personal Income MoM Aug consensus 0.3% vs previous 0.2% (13.30 BST)
US Personal Spending MoM Aug consensus 0.2% vs previous 0.1% (13.30 BST)
US PCE Price Index MoM Aug previous -0.1% (13.30 BST)
US PCE Price Index YoY Aug previous 6.3% (13.30 BST)
US Core PCE Price Index MoM Aug consensus 0.5% vs previous 0.1% (13.30 BST)
US Core PCE Price Index YoY Aug consensus 4.7% vs previous 4.6% (13.30 BST)
US Chicago PMI Sept consensus 51.8 vs previous 52.2 (14.55 BST)
US Michigan Consumer Sentiment Final Sept consensus 59.5 vs previous 58.2 (15.00 BST)
US Michigan Inflation Expectations Final Sept previous 4.8% (15.00 BST)
US Michigan 5y Inflation Expectations Final Sept previous 2.9% (15.00 BST)
ECB Speakers
Elderson (12.00 BST)
Visco (16.15 BST)
Schnabel (16.30 BST)
Fed Speakers
Barkin (13.30 BST)
Brainard (14.00 BST)
Mester (14.00 BST)
Williams (14.00 BST)
Bowman (16.00 BST)
Williams (21.15 BST)
Good luck and a good weekend to one and all.
Blain's Morning Porridge - Thank the Lord for the Bank of England!
Zero Hedge - Bond Portfolios In Var Shock Get BOE Help, But There's Plenty More Action To Come
Notayesmanseconomics - The pressure now turns to the Euro area and the ECB
The Gryning Times - Markets Uncle Point
Mr. Blonde - Testing Times
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Italy and what’s next
Macro Alf - A short thread
UK
Reuters - Explainer: Why are Britain's pension schemes dumping gilts?
Bond Vigilantes - Collateral Calls: the dynamic about to drive UK asset prices?
Macro Alf - A thread on the pension fund industry
Fed Reverse Repo
Liberty Street Economics - How the Fed’s Overnight Reverse Repo Facility Works
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