The Morning Hark - 4 Aug 2022
Today’s focus ……ISM relief, Fed clangers and the BoE’s rock and a hard place.
Daily roundup - all prices are at 7.50 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures flat on the day at 96.90 and 89.80 respectively. Oil markets jumped back into the spotlight yesterday with the OPEC+ meeting increasing production but in what is really only by a token amount. More importantly the EIA data showed a surge in stockpiles sending oil lower with Brent now below its 200dma. The EIA followed the previous day’s API build and if we look at the 4 week rolling average for gasoline demand we find it is below the 2020 level. With the token OPEC increase released we funnily enough got reports that US and Iranian officials would have indirect talks today regarding the potential revival of the nuclear treaty. It also seems that the US have approved the patriot missile sale to the Saudis.
EQ - Equity markets had a better risk tone in Asia with the Nikkei, Hang Seng and Kospi all up at 27,920, 20,080 and 326 respectively. With Pelosi moving off to safer climes Asian equities a lot calmer and happy to play catch up with their US cousins.
The Nasdaq and S&P trading a touch softer as they consolidate their gains from yesterday at 13,240 and 4150 respectively. Stocks rallied sharply yesterday with a set of “goldilocks” type data from the ISM which was seen as an encouragement that the market is on the right track. The ISM showed a much stronger than expected headline, the employment measure also beat expectations and rose from the previous month’s print in addition to the prices’ measure softening. Perhaps the Fed will get its soft landing after all? Couple that with some good Q2 earnings especially from PayPall and what’s not to like?
Gold - Gold futures up small on the session at 1787. Pretty much sidelined as it plays follow the USD. 1800/1750 remain the key levels we are looking at for further direction.
FI - Volatility continues in the rates space with US yields giving back some of their gains from yesterday with the US2y and 10y yields currently trading at 3.11% and 2.73% respectively. Despite the Fed chat the US2y10y continues to invert further to 38bps. Remember at the time of the Dotcom bubble this blew out to around 50bps. The Fed talk back continued yesterday with some more of the same. Bullard expressed that rates would be “higher for longer” and Kashkari seemed to think that rate cuts in 2023 were a “very unlikely scenario” its also worth noting that he is now scheduled on the speaking roster for next Wednesday, CPI day, to talk about that exact subject. Daly claimed that “we’re not even in neutral yet” contrary to last week’s thoughts from the Fed. Anyway she continued and stressed the Fed pain trade again by saying that a jobs slowdown is “completely worth it” to tame prices. Then not to be outdone went onto claim that “I don’t feel the pain of inflation anymore” although she may “balk at the price of things, but I don’t find myself in a space where I have to tradeoffs because I have enough” well that’s all good then. And we thought the ECB were bad!
Anyway with all the Fed talk and the better ISM we still have a large inversion in the 2/10 curve which they surely can’t be happy with? Do we get a Powell quote soon to get the 10y to play catch up?
European yields remain at wide levels with German and Italian 10y yields still over 200bps with them closing at 0.88 and 2.93 respectively. Still relatively sidelined for now but we do feel it’s only a matter of time before the market starts to refocus on the pressure points in Europe.
FX - Fairly muted session for FX in Asia with the USD Index consolidating its recent revival at 106.45. The continued “hawkish” Fed chat gave the USD a bid tone yesterday but the risk rally put a cap on the USD’s surge however the expected Fed hawkish chat will continue to give the USD support and keeps the JPY on the back foot at 134.20. GBP and EUR little of note at 1.2145 and 1.0166. AUD and NZD a touch firmer with risk being a touch better bid at 0.6961 and 0.6290 respectively.
Others - Bitcoin and Ethereum still sidelined with them currently trading at 22,900 and 1623 respectively.
The Pelosi legacy from her Taiwan visit continues today with the Chinese military carrying out drills close to Taiwanese territory. She, however, has headed off to safer climes in South Korea and Japan although, the daredevil that she is, is muted to be taking a visit to near the North Korean border. All in all though, headlines and hence markets should be a lot calmer.
As we discussed above the ISM gave the market and the Fed a shot in the arm with goldilocks and soft landing chat giving everyone a warm glow. Some confusion however continues with the contrasting of the earlier released S&P global services PMI which showed a sharp drop in the headline measure to below 50. Its components also showed drops in new orders, employment and in activity which contrasted with the ISM report. Also the household sector of the ISM survey had some troubling quotes with “cancellation rates” increasing but there is no denying it’s a strong report. Somewhat ignored in all the noise was a strong US factory orders print which beat expectations. Little of note in the US today so it’s all eyes on payrolls tomorrow and if we get a strong headline print and the household survey reverts to type and starts to track the headline number then perhaps the market may have to have a good look at itself? Let’s see.
25 or 50 is the call and the market is siding strongly with a 50bp hike albeit with a potentially dovish tone to the accompanying statement and subsequent press conference. The meeting comes on the day just as a leading think tank, The Resolution Foundation, (I’d never heard of them either) suggests that the BoE’s forecasts on inflation would have to be revised up, from their 11% peak, to a number closer to 15%. This comes as the NIESR just printed their quarterly report (which I post at the bottom) on the UK suggesting that the UK could well already be in a recession and the spectre of stagflation is upon us for the first time in 50 years. I also post Duncan Weldon from Value Added’s excellent recent piece which continues the theme from the NIESR report and as a package they don’t make for great reading for the UK.
For today’s meeting we think the rock and the hard place for the BoE will end up on the 50bp hike hard place as the Bank despite being the first of the G7 central banks to hike finds itself well behind the curve in terms of its inflation fight.
In addition, we should get further details on the Bank’s approach to quantitative tightening and the framework for gilt sales. We expect, given they have enough on their plate, that they will adopt a flexible approach rather than a targeted monthly target. Governor Bailey, in his Mansion House speech, had mentioned a £50/100bn figure with £35bn rolling off passively and a flexible amount of sales being the balance. The September MPC is the first live vote on QT. I post a couple of preview’s of the meeting below if you have the time/inclination.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
BoE Interest Rate Decision 50bp hike expected to 1.75% (12.00 BST)
BoE Monetary Policy Report (12.00 BST)
UK MPC Minutes (12.00 BST)
BoE Governor Bailey press conference (12.30 BST)
Elderson (15.30 BST)
Mester (17.00 BST)
RBA Statement on Monetary Policy (02.30 BST)
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
BNY Mellon - Short Thoughts
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📚⠀Further reading on the current key macro themes:
BoE and the UK Economy
National Institute of Economic and Social Research - A Risky Present
Duncan Weldon - The pain to come
BNY Mellon - Markets Reluctant To Expect Hawkish BoE
ING - Bank of England: Four scenarios for markets this Thursday
Pepperstone - GBP trader - Trading the GBP amid BoE hikes and political change
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Great read as always thank you