The Morning Hark - 4 Jan 2023
Today’s focus …More Japanese bond buying, China dips into its pockets again for the property sector and Fed minutes on the horizon.
All prices are at 7.15 GMT/2.15 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March futures consolidating overnight after their steep sell off yesterday, currently trading at 81.80 and 76.80 respectively. Guess the IMF warnings of weaker growth caught up eventually with the oil market as recessionary fears once again weighed on the market. The uncertainty over the rising Covid cases in China also didn’t help sentiment as the market mulled China’s growth prospects.
EQ - Asia equity futures mixed again with the Hang Seng leading the way up a further two percent at 20,778. Reports of further support for the property sector have helped in addition to Alibaba helping to lead the tech sector higher. This comes as regulators approved a plan for the parent group to raise $1.5bn for its consumer unit, which points to progress in the government’s overhaul of the firm. The Kospi up a similar amount to 298 however, the Nikkei is lagging off smalls at 25,613.
The Nasdaq and S&P trading flat again in a quiet session, with them currently at 10,983 and 3853 respectively. The Nasdaq recovered into the close yesterday after a steep sell off in Apple stocks as reports suggested that the company had received order cuts out of Asia.
Gold - Gold Feb futures consolidating their good start to the year with them currently trading at 1857 with 1880 the first upside target of note. Still feels like an early “year ahead” move with many analysts predicting a slowing pace of Fed hikes which will follow through into a lower USD and hence higher gold. Always a bit wary of early year moves, so proceed with caution. Fed minutes should give us near term direction.
FI - US yields continue to soften ahead of the Fed minutes with poor China data and weaker German inflation, all pointing to a lower rate profile for markets. The US2y and US10y trading currently at 4.35% and 3.72% respectively.
European yields closed lower too, with the German 10y yields at 2.39% and Italian 10y at 4.49%.
UK gilt yields closed their first day of trading for the year lower, with the 10y closing at 3.65%.
FX - The outlier in what has been a very mundane session has been the AUD which has rallied one percent in Asia to 0.6822 as a better risk tone in Asia has filtered through into the risk proxy. Interestingly the NZD has not joined the party to the same extent. Elsewhere all flatish with the USD Index at 104.40 and the majors; JPY, EUR and GBP, currently sitting at 130.42, 1.0578 and 1.2009, respectively.
Others - Bitcoin and Ethereum are trying hard to rally, but 17,000 is looking like a hard nut to crack for now. The pair currently sitting at 16,862 and 1249 respectively.
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Fed Minutes Preview
Today sees the release of the minutes from the December FOMC meeting. The meeting, as expected, saw the Fed slow their rate hiking pace with rates moving higher by 50bps rather than the 75bps which we had seen at the previous four meetings. The hike was accompanied by a hawkish statement and a higher dot plan. The key takeaways from the statement and presser were that the labour market remains tight which feeds into the Fed’s new pressure point; “core inflation ex. goods and shelter”. Furthermore, rate hikes will continue into the new year and no rate cuts are anticipated in 2023. Over-tightening is seen, by the Fed, as the lesser of two evils and they wish to avoid inflation becoming entrenched. Finally, the inflation target of 2% will not be altered.
Any clues as to the commitment of the committee to these key points, as a whole or otherwise, will give the markets an indication of what lies ahead in q1 from a Fed point of view. Overall, however, we’d expect the Fed to keep up the pressure/bravado and deliver hawkish minutes to try to reinforce their slower, higher, longer mantra and in turn hopefully encourage a reprice of the market’s more dovish stance. Remember 17 out of the 19 members of the FOMC committee are looking for 5% or higher for the Fed Funds terminal rate.
Fortune - 2 political problems for the Fed's inflation fight
The BoJ had to step into the bond market for the fourth consecutive day to conduct unscheduled bond buying in the face of a huge sell off in bonds again on the back of their surprise lifting of the yield cap in the 10y.
This comes as BoJ Governor Kuroda continued his easy monetary policy mantra as he said the Bank would continue with monetary easing to meet inflation target with wage growth. He also claimed that the economy would grow firmly and stably in 2023 backed by the accommodative monetary conditions.
PM Kishida meanwhile was urging corporations to increase wages faster than inflation to make up for years of wage declines. Glad everyone is on the same page then.
As herd immunity seems the only game in town as China continues to fight Covid, with some estimates suggesting that 70% of Shanghai have contracted the disease, attention has turned to the other wobbling tower in the Chinese economy; the property sector. Reports suggest that the authorities are weighing further measures to boost the prospects of the “too big to fail” developers. One suggestion appears to be a relaxing of buying restrictions which have limited land supply in some cities in the country. In addition, banks are being encouraged to offer loans and equity finance to the “bigger and higher quality” developers in the sector.
Interestingly the Australian Treasurer Chalmers was at pains to stress that Australia expects a “substantial impact” on global supply chains due to the surging cases of Covid in China.
SCMP - Top 100 Chinese developers saw sales plunge 40% in 2022
Some points of note from yesterday
German data once again comes in stronger than expected with the monthly unemployment change seeing a decrease in the German unemployment bucking a 6 month trend.
UK manufacturing PMI came in better than expected albeit well in the contraction zone at 45.3.
The main focus of course was the German inflation preliminary print for December. It didn’t disappoint with the YoY headline printing well below both consensus and previous at 8.6%. The MoM measure was a whopping -0.8%. The print is the lowest since August and it was down, in the main, to the German government’s initiative to lower gas bills for the country’s households which came into effect last month.
Canadian manufacturing PMI for December came in lower than previous at 49.2. Meanwhile, in the US nothing of note as the manufacturing print came in at 46.2 as expected. As did Japan’s at 48.9 overnight.
The Day Ahead
December Swiss inflation continues the inflation theme out of Europe this week. Going along with the trend the Swiss December reading is expected to show a softening of the series.
Later we get the European final services PMIs for December.
The main focus will be on the US ISM manufacturing PMIs and of course the Fed minutes.
Overnight we start to get the final December prints for the services PMI with Australia and China up first.
As a start to the year it’s always good to have a perspective on the previous year’s performances. ChartStorm does that to a T in their weekly, and this week’s takes a look back at 2022. Well worth a look.
ChartStorm - Weekly S&P charts to start the year
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Blain's Morning Porridge - Watch the Bond Market – that’s where the line will break!
Daniel Lacalle - Central Bank Losses Make Them Buy Record Amounts of Gold
The Irrelevant Investor - 10 Predictions For 2023
Saxo Markets - COT: Funds loaded up on commodities ahead of yearend
Follow the latest market narratives through our curated research & commentary channels on Harkster.
All times in GMT (EST+5 / CEST-1 / JST-9)
Swiss Inflation Rate MoM Dec consensus -0.2% vs previous 0% (07.30 GMT)
Swiss Inflation Rate YoY Dec consensus 2.9% vs previous 3% (07.30 GMT)
Germany S&P Global Services PMI Final Dec consensus 49 vs previous 46.1 (08.55 GMT)
EU S&P Global Services PMI Final Dec consensus 49.1 vs previous 48.5 (09.00 GMT)
US ISM Manufacturing PMI Dec consensus 48.5 vs previous 49 (15.00 GMT)
US ISM Manufacturing Employment Dec previous 48.4 (15.00 GMT)
US ISM Manufacturing New Orders Dec previous 47.2 (15.00 GMT)
US ISM Manufacturing Manufacturing Prices Dec consensus 42.6 vs previous 43 (15.00 GMT)
US FOMC Minutes (19.00 GMT)
Australia Judo Bank Services PMI Final Dec previous 47.6 (22.00 GMT)
China Caixin Services PMI Dec previous 46.7 (01.45 GMT)
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Thanks Erican. Likewise and all the best for 2023
great clarity....there seems to be growing affection for Japan financials....you're point that the PM/BOJ are not in sync is notable...thanks very much.....have a great week and new year