The Morning Hark - 31 Oct 2022
Today’s focus ….Fed Whisperer dialling back? ECB hawkish walk back continues and a big Week Ahead.
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All prices are at 7.40 GMT with changes reflecting movement from midnight GMT
Oil - Brent and Crude December dipping a half of one percent overnight in Asia with the pair currently trading at 94.80 and 87.50 respectively. Back to the demand concerns side of the debate as worries abound over covid curbs in China as outbreaks widened and the zero-covid policy continues in operation.
EQ - A mixed bag for equity futures markets in Asian. The Hang Seng is close to two percent lower as the poor China PMIs and further covid curbs on the mainland weigh on stocks. It is currently trading at 14,771. The Nikkei is flat on the day at 27,533 whilst the Kospi is up over a percent at 300.
The Nasdaq and S&P futures off smalls overnight in Asia but holding onto Friday’s gains with the S&P and Nasdaq currently trading at 3902 and 11,543 respectively. The “Fed pause” rally continued on Friday with the market happy to accept a slight tempering in the PCE inflation print as a sign that we are edging closer to a reduced pace of hiking by the Fed and that’s more than enough to fuel this rally. There is a strong smell of FOMO in the air.
Gold - Gold Dec flat overnight in Asia at 1645. Gold took out our support at 1650 on Friday as US yields pushed higher. However, there was little follow through as it seemed to lack the appetite to stretch the downside further ahead of the Fed. 1650 now looks a decent trading pivot with 1675/1620 the wider range.
FI - US yields firmed up in Asia with them consolidating their gains on Friday with the US2y and 10y currently trading at 4.45% and 4.03% respectively. The 10y recaptured 4% again with expectations of higher Fed rates for longer starting to play out in the rates space and continuing its dislocation from the equity sector’s view on the world.
European yields have continued to push higher post the ECB “sources” stories from Friday and the ECB Knot’s comments over the weekend. German 10y yields trading currently at 2.11%. Similar story for the Italian 10y yield with them currently trading higher at 4.207%.
UK gilts followed their US and European counterparts with yields pushing higher with the 10y closing at 3.471%.
FX - Not much to report out of the FX space with the USD relatively flat across the board with the USD Index currently trading at 110.95. The JPY, EUR and GBP currently trading at 147.89, 0.9941 and 1.1586 respectively.
Others - Bitcoin and Ethereum paring some of their recent gains with the pair currently trading at 20,552 and 1587 respectively.
Fed Whisperer Dial Back?
There appeared to be a conscious effort by the WSJ’s Timiraos to dial back his statement, from 10 days or so ago, when he introduced the “Fed pause”. This caught the attention of the market that the Fed could start to dial down their rate hike magnitude to 50bps as soon as December. A point that was backed up by the Fed’s Daly on the same day. The subsequent rally in stocks and sell off in bond yields has lead to a loosening of financial conditions.
However, over the weekend it would appear that he is stepping back from this view. In a series of tweets, which I post at the bottom, he points to comments from the Fed’s George who notes that households still have a large cushion of excessive savings which will continue to underpin demand and may need the Fed’s terminal rate to be higher for longer than currently thought.
He seemed to double down further on the US Sunday political shows when he said that
“even though the risk of doing too much is a recession, the risk of not doing enough is that inflation just stays high and you have to have a bigger downturn later.”
Well we don’t have long to wait until we get a steer from the real head of the Fed (or is he?) on Wednesday.
Fair hawkish chatter over the weekend from the ECB’s Knot who was forthright in his views claiming that the ECB is not even at half time in its fight versus inflation. He felt that a recession for the Eurozone was becoming more than likely however a 75bp hike was still feasible for December but as yet he is not decided, but it would be between a 50 and 75bp hike.
The Week Ahead
FOMC Meeting. The Fed are expected to announce a fourth consecutive 75bp hike on Wednesday with markets pricing in an over 80% likelihood of such a hike. On that basis all the “excitement” will be generated from the accompanying statement and Chair Powell’s press conference. Will he take the Jackson Hole approach and scold the naughty teenagers for getting ahead of themselves once again and delivery a short, sharp rebuke and make it very clear that the Fed is not for turning and will “keep at it” until it sees a consistent and sustainable downtrend in inflation. Or will he lose his nerve? Friday’s data did little to encourage either side to be honest, with ECI and Core PCE delivering a very indecisive outcome for either although you would have to think that it does nothing for the “fed pausers” with core still above 5%. In addition, the UMich survey showed both near term and 5y inflation expectations had risen something which we know the Fed will frown upon. Obviously, the market was whipped up, a couple of Fridays back, by the WSJ Timiraos article and Fed Daly’s comments regarding a slower pace of rate hikes and, in particular, the fact this could be a hot topic in this week’s FOMC meeting. Surely such a discussion is going to happen, and probably has before, given the pace of the hiking in this cycle. At some point in the future a reduction in magnitude of hike would be sensible to consider but is the time now? And indeed, would they want to signal that? Given that between this week’s FOMC and the December meeting we have; 2 NFP reports, 2 CPI prints and a PCE print surely data dependency would seem to be the sensible thing to stress? The landscape is far from conducive to a pause when you look at the data. Since July, we have seen a moderation in the labour report but it is still trending higher than pre-pandemic. There has been signs of stress in the housing market but Core CPI has consistently risen over the summer as indeed has the Core PCE so if the Fed is being true to its word the hikes will keep coming. For the markets to think that a slowing/pause/cut transition over the next few months will allow us to happily revert back to a bull market with no collateral damage seems deluded at best to us. Anyway, we believe that the pace of the market’s reaction to the WSJ article and Daly’s comments which has seen financial conditions loosen with the market price action will give Powell enough fuel to dampen expectations of a slowing in magnitude of rate hikes just yet. One possible way out would be to signal some form of slowing at the December meeting but to use the economic projections to show that the Fed will keep rates higher for longer and the slowing by no means is an indication that the Fed will stopped hiking. The obvious route would be nay moving the median dots higher from their 4.6% current level. The fact that the RBA, BoC and ECB have either slowed their hiking pace or been dovish with their hikes has clouded the waters for the Fed albeit all three of those economic regions has their own specific frailties which has contributed to their policy action. 75bps, data dependency and kick the can to December would seem plausible to us.
RBA Rate Announcement. The RBA meet Tuesday with markets expecting a further 25bp from the Bank. Expectations, however, have shifted a touch higher after last week’s hotter than expected q3 CPI data which pretty much beat expectations across all measures. There is a definite market to play here as the market seems caught between two 25bp hikes over the next two meetings or do a 50bp hike now and sit on their hands until the new year and assess the economy over the following couple of months. Close call for the early hours tomorrow.
BoE MPC Announcement. Yet again, a close call for the BoE on Thursday, with a slight majority in favour of a 75bp hike taking rates to 3%. 50bps is the other main choice with a small 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; inflation is 10.1% and core at 6.5%, the Gilt sale operation will have just started on Tuesday, 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. With all this uncertainty it seems more sensible to go 75bps and assess the upcoming fiscal package and catch up/adjust in the December meeting. 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”.
Norges Bank Announcement. The other central bank to announce on Thursday is the Norges Bank. 50bps has been the Bank’s main play throughout the summer but they have hinted that a slowing of that pace is probably on the cards. It’s whether this is the meeting that the slowing starts or whether the recent upside miss on inflation will tip them towards the higher magnitude of hike. Once again, it’s another close call.
US Labour Report. A moderation is expected in the headline number from 263k down to 200k. That would be quite a slowdown in comparison to the average print we have seen this year, which currently stands at 420k, and well below last year’s 562k. Remember these numbers are distorted by the pandemic and even a 200k print still remains higher than the Fed would wish especially with job vacancies so high and of course the inflation backdrop. The unemployment rate is expected to tick up to 3.6% and average hourly earnings are expected to remain steady at 0.3% MoM. Once again remember to look out for any revision to the previous headline number.
US ISM Manufacturing and Non-Manufacturing PMIs. Released on Tuesday and Thursday respectively. Both measures are expected to moderate somewhat with the manufacturing measure expected to dip below the 50 boom/bust line after the drop in new orders in the previous month’s report.
Eurozone Data. Monday sees the Eurozone GDP q3 flash print, which is unsurprisingly, given the slowing of the data throughout the quarter, expected to print lower at 0.2% although still not contracting. At he same time, we shall get the region’s flash inflation print for October, which is expected to hit double digits for the headline with Core knocking on 5%. The print will be key in assessing the forward path of the ECB after last week’s meeting and in particular whether the more dovish tone from the Bank is justified. Later in the week, we get the final October PMIs as well as unemployment for September. Worth noting a raft of ECB speakers in the week with Lagarde speaking on Thursday and Friday.
The Day Ahead
Some secondary Japanese data out overnight and a mixed bag at that. Retail sales surprised to the upside with a 4.5% YoY print for September. However, industrial production printed a downside miss at -1.6%.
Australian retail sales for September came in as expected at 0.6%.
China October PMIs both lower than expected and both now in contraction with manufacturing coming in at 49.2 with non-manufacturing now at 48.7.
Just printed the German retail sales data for September and after last week’s upside surprise in the GDP data we get another one with today’s print. An expectation for a contraction of 0.3% was met with a print of +0.9% for September. The sick man of Europe maybe isn’t as sick as was originally thought?
Later in the day, we get the EU GDP and inflation data which we mention above. Later still, the Chicago PMI is expected to show an uptick but still remain in contraction.
Finally, some overnight data to look out for in the early hours tomorrow. We get Australia, Japan and China final measures for manufacturing PMIs as well as the RBA who, as we state above, have a close call to make on whether it’s a 25 or 50bps hike.
Remember, the clocks in Europe have changed their clocks but the US has not so the US data will be an hour earlier than usual throughout this week.
For those who missed it last week, I post at the bottom the great roundtable from Imran Lakha’s Options Insight discussing the prospects for Macro through q4. It’s really well worth an hour or so of your time. Great insight as ever.
Finally, I post down below FXMacro Guy’s excellent weekly recap tweet, which is a great summary of a very busy week. I also post his valuable weekly, which is full of great insight and information. Please take time to read and subscribe to the newsletter, which contains really useful crib sheets on the central bank speakers as we embark on another heavy week of rate decisions.
Oh and Happy Halloween by the way.
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EU GDP Growth Rate QoQ Flash Q3 consensus 0.2% vs previous 0.8% (10.00 GMT)
EU GDP Growth Rate YoY Flash Q3 consensus 2.1% vs previous 4.1% (10.00 GMT)
EU Inflation Rate MoM Flash Oct consensus vs previous 1.2% (10.00 GMT)
EU Inflation Rate YoY Flash Oct consensus 10.2% vs previous 9.9% (10.00 GMT)
EU Core Inflation Rate YoY Flash Oct consensus 4.9% vs previous 4.8% (10.00 GMT)
US Chicago PMI Oct consensus 47 vs previous 45.7 (13.45 GMT)
Australia S&P Global Manufacturing PMI Final Oct consensus vs previous 53.5 (22.00 GMT)
Visco (09.30 GMT)
Lane (15.00 GMT)
Japan Jibun Bank Manufacturing PMI Final Oct consensus vs previous 50.8 (00.30 GMT)
China Caixin Manufacturing PMI Oct consensus 49 vs previous 48.1 (01.45 GMT)
RBA Interest Rate Decision 25bp hike expected taking rates to 2.85% (03.30 GMT)
RBA Lowe speaks (08.20 GMT)
UK S&P Global/CIPS Manufacturing PMI Final Oct consensus 45.8 vs previous 48.4 (09.30 GMT)
Canada S&P Global Manufacturing PMI Oct consensus vs previous 49.8 (13.30 GMT)
US S&P Global Manufacturing PMI Final Oct consensus 49.9 vs previous 52 (13.45 GMT)
US ISM Manufacturing PMI Oct consensus 49.9 vs previous 50.9 (14.00 GMT)
US ISM Manufacturing New Orders Oct consensus vs previous 47.1 (14.00 GMT)
US ISM Manufacturing Prices Oct consensus 53 vs previous 51.7 (14.00 GMT)
US ISM Manufacturing Employment Oct consensus vs previous 48.7 (14.00 GMT)
US Construction Spending MoM Sept consensus -0.5% vs previous -0.7% (14.00 GMT)
BoC Rogers speaks (22.30 GMT)
BoC Macklem speaks (22.30 GMT)
BoJ Monetary Policy Meeting Minutes (23.50 GMT)
Germany S&P Global Manufacturing PMI Final Oct consensus 45.7 vs previous 47.8 (08.55 GMT)
German Unemployment Rate Oct consensus 5.5% vs previous 5.5% (08.55 GMT)
Fed Interest Rate Decision 75bp hike expected taking rates to 4% (18.00 GMT)
Chair Powell Press Conference (18.30 GMT)
Australia S&P Global Services PMI Final Oct consensus vs previous 50.6 (22.00 GMT)
Makhlouf (09.00 GMT)
Villeroy (14.00 GMT)
Nagel (18.00 GMT)
China Caixin Services PMI Oct consensus vs previous 49.3 (01.45 GMT)
RBA Kearns speaks (05.00 GMT)
Switzerland Inflation Rate YoY Oct consensus 3.2% previous 3.3% (07.30 GMT)
Switzerland Inflation Rate MoM Oct consensus 0.2% previous -0.2% (07.30 GMT)
EU S&P Global/CIPS Services PMI Final Oct consensus 46.6 vs previous 48.4 (09.00 GMT)
UK S&P Global/CIPS Services PMI Final Oct consensus 47.5 vs previous 50 (09.30 GMT)
Norges Bank Interest Rate Decision 50bp hike expected taking rates to 2.75% (09.00 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 55.4 vs previous 56.7 (14.00 GMT)
US ISM Non-Manufacturing New Orders Oct consensus vs previous 60.6 (14.00 GMT)
US ISM Non-Manufacturing Prices Oct consensus vs previous 68.7 (14.00 GMT)
US ISM Non-Manufacturing Employment Oct consensus vs previous 53 (14.00 GMT)
BoC Beaudry speaks (17.30 GMT)
Lagarde (07.50 GMT)
Panetta and Nagel (08.00 GMT)
Elderson (09.50 GMT)
Visco (11.00 GMT)
Makhlouf (13.15 GMT)
Mann (20.30 GMT)
Australia Statement on Monetary Policy (00.30 GMT)
Australia Retail Sales MoM Final Sept consensus vs previous 0.6% (00.30 GMT)
Japan Jibun Bank Services PMI Final Oct consensus vs previous 52.2 (00.30 GMT)
German Factory Orders MoM Sept consensus -0.6% vs previous -2.4% (07.00 GMT)
German S&P Global Services PMI Final Oct consensus 44.9 vs previous 45 (08.55 GMT)
EU S&P Global Services PMI Final Oct consensus 48.2 vs previous 48.8 (09.00 GMT)
Canada Unemployment Rate Oct consensus 5.3% vs previous 5.2% (12.30 GMT)
Canada Employment Change Oct consensus 5k vs previous 21.1k (12.30 GMT)
Canada Average Hourly Earnings Oct consensus vs previous 5.2% (12.30 GMT)
US NFP Oct consensus 200k vs previous 263k (12.30 GMT)
US Unemployment Rate Oct consensus 3.6% vs previous 3.5% (12.30 GMT)
US Average Hourly Earnings MoM Oct consensus 0.3% vs previous 0.3% (12.30 GMT)
Canada Ivey PMI s.a. Oct consensus vs previous 59.5 (14.00 GMT)
de Guindos (08.45 GMT)
Lagarde (09.30 GMT)
Pill (12.15 GMT)
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"...the real head of the Fed (or is he?)" I had to think about that especially on Halloween! Who's really hiding behind the JP mask?
Happy Halloween. Trick or treating in a Kwasi Kwarteng costume.