The Morning Hark - 4 May 2022
Today’s focus ……..Chair Powell
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Both Brent and WTI futures up over a percent on the session at 106.30 and 103.90 respectively. Oil has bounced a tad after renewed optimism for a European ban on Russian oil imports. Yesterday’s silence and somewhat negative statements from European officials had dampened the optimism and hence oil’s price however measures are now expected to be announced today as to the path of sanctions with a ban on Russian imports seen by the year end. Also contributing to the more positive tone was the API data which showed a draw of oil in the previous week raising concerns for the supply side of the debate. Today sees the EIA reporting their figures (15.30 BST).
EQ - Asian indices a mixed bag with the main move seeing the Hang Seng down just under a percent at 20,800. The drop is being attributed to 3+% sell off in both Tencent and Alibaba, as well as yesterday’s Fitch’s GDP downgrade for Chinese growth in 2022 (4.3% versus 4.8% previously) and again less than optimistic news on Covid with Beijing shutting down some public transportation to try to contain the spread of the virus. On the US side both main indices are little changed with the S&P at 4,180 and the Nasdaq at 13,120. Indeed they have both been trading in a tight range for the last day ahead of the Fed announcement this evening.
Gold - Gold flat on the day at 1864. Trading softly, albeit in a tight range, going into the Fed meeting.
FI - US yields steady with the 10y at 2.99.
FX - Like the other asset classes FX is also quiet with the market at similar levels to yesterday. The USD Index at 103.50, JPY at 130.20 and the EUR 1.0520. GBP is a little softer below 1.25 at 1.2480 and USDCNH at 6.65.
Others - Bitcoin and Ethereum again little of note to mention with the pair still lounging within their recent ranges at 38,300 and 2,810 respectively. Both pairs had moves lower towards their recent range lows but recovered somewhat although the rallies do seem to be having less legs as time goes by.
Unsurprisingly given the backdrop the MOVE and the VIX have had an offered tone about them with both closing lower yesterday at 126.46 and 29.25.
Very much the calm before the storm in Asia. The big event for the week looms large with all asset classes sitting at big levels so it does feel that we are going to have some fireworks later in the day whatever happens….famous last words! Expectations are for a nailed on 50bp hike by the Fed but it will be Chair Powell’s statement and press conference (19.30 BST) which will garner most attention. The current market expectations are for a hawkish tone to Powell’s commentary. The GDP data miss of last week is expected to be batted away as an anomaly and the Fed having come so far in guiding the market higher in terms of yields and seen the subsequent sell off in equities it feels too soon for them to turn back. This time it feels different; the market is the one to blink first. With the current outlook for two further 50bp hikes in the coming meetings the hawkish tone could take the shape for a potential 75bp hike at one of these meetings. Equally the announcement of the immediate start of balance sheet reduction and/or a more aggressive pace of reduction getting us to the anticipated end game of $60bn of treasuries and $35bn of MBS per month would also be seen as hawkish. A dovish surprise would entail a nod to the Fed being happy with the current market pricing of the curve and/or a thought that supply chain issues are starting to ease.
Market reaction given where we are with assets will be interesting. As we say we are at or near critical levels; US stocks close to 4,000 and 13,000, US10y at 3%, USD Index near its recent highs and even if you want to go there Bitcoin towards 37,000. Perhaps the market has priced in the 50bp and the hawkish Powell and we’ll see a relief rally alternatively the market has a tantrum and tests the Fed’s resolve to stick to its inflation fighting plan and be damned with the consequences. Either way, it does feel like we are at a big inflection point for the year. I post some Fed previews which go into things in more detail below. Good luck this evening and we’ll see you on the other side.
📅⠀The main highlights for the week in terms of data and speakers:
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Today
Euro Area Services PMI April final - consensus sees 57.7 versus 55.6 previously (09.00 BST)
Euro Area Retail Sales Mar YoY - consensus sees 1.4% versus 5% previously (10.00 BST)
US ISM Non-Manufacturing PMI April - consensus sees 58.5 versus 58.3 previously (15.00 BST)
Also note the prices component which came in previously at 83.8 for any sign of levelling off of inflation data
FOMC rate decision - expectations for a 50bp hike to take rates to1%. (19.00 BST). Followed by Chair Powell press conference where forward guidance on rates will be closely scrutinised with a further two 50bp hikes for the next two meetings and also any comments on last week’s miss for US GDP. The other point of note will be any more details on the balance sheet reduction piece of the puzzle and in particular when this will start, potentially at this meeting, and the amount of monthly run off which the previous meeting minutes suggested building upto $60bn of treasuries and $35bn of MBS.
A lot of chat on the Fed of late especially as last week saw the anniversary of the “transitory” word by Powell in describing inflation. Criticism has been running high that the Fed has been too slow to react in the face of rising prices and it’s only now that it is acting on the two fronts of hiking rates and running off the balance sheet purchases. Hindsight is a wonderful thing but it’s hard to argue against the critics especially when the Fed have these two taps to control the world of easy money. The real danger is that by taking so long to pivot they now have to pivot harder and therein lies the danger that they kill off economic growth. They have made it clear that although this is consequence is obviously unwanted their focus is purely on getting inflation down. The bond market has certainly got onboard with that message early and the equity sector is now catching up. Time will tell and this week’s actions and words will be just another piece in the puzzle of where we are headed. The poor GDP print last week is not enough to make them blink and its expected that Powell will address this as due to specific one off circumstances but if the NFP prints start to falter then their resolve may be tested in the coming two meetings as they go for the 50bp hike trifecta.
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Thursday
China Services PMI April - previous print 42. (02.45 BST). This will be the first look for markets to assess how China’s service sector has held up in April with all the various lockdowns across the country due to the continuing Covid pandemic
Norway’s Norges Bank Rate Decision - no change expected but the surprisingly Riksbank tone of late has put analysts on alert for a spillover into its near neighbour. (09.00 BST)
BoE Rate Decision and Monetary Policy Report - 25bp hike priced in by markets to get rates to 1% and on a par with the US (12.00 BST). The vote split will be of much interest given the recent poor growth, sentiment and economic prints which all seem to be trending down in contrast to the higher inflation points of late. Will there be some forward guidance that the BoE having been proactive in shifting rates up will pause and let the data settle as the recent rate rises filter into the economy. Remember the forward guidance has already been dialled down from “likely to be” in terms of further hikes to last time’s “modest tightening in monetary policy may be appropriate in the coming months” and further dilution would cause some market disruption given where GBP is currently trading and the aggressive nature of what’s priced into the curve.
OPEC Meeting - despite the supply constraints caused by the conflict in Ukraine and the potential banning of Russian exports of oil into Europe there is no change expected from the OPEC countries in terms of tweaking output
UK Local Elections - Boris judgement day?
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Friday
RBA Statement on Monetary Policy - post rate hike commentary? (02.30 BST)
Canadian Employment Report April - Unemployment rate previously at 5.3% expectations at 5.2% (13.30 BST)
US NFP April - headline expected at 380k versus 431k previously
Canadian Ivey PMI April - previous print 74.2
Fed speakers - post Wednesday’s meeting and Powell press conference we have the first Fed speakers to raise their heads. Williams (14.15 BST) and Bostic (20.20 BST) both speak and their comments on the rate decision, balance sheet run off and of course and further forward guidance will be keenly anticipated by the markets. Note too in the early hours of Saturday Waller and Daly also have speeches lined up.
Good luck.
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📚⠀Articles discovered on Harkster exploring some of the current key macro themes in more depth:
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The Fed
Fortune - Powell’s fed set to go big and keep going until inflation tamed
Mish Talk - The Fed's Quantitative Tightening (QT) Problem in Three Pictures
ZeroHedge - FOMC: More Room For Hawkish Than Dovish Surprises
Pepperstone - FOMC meeting preview – Hawkish, but will it be hawkish enough?
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🔥⠀Top 5 trending links on Harkster yesterday:
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Alhambra Partners - What Really ‘Raises’ The Rising ‘Dollar’
Cheap Convexity - Its Volcker Until Neutral
Prometheus Research - The Observatory
Quoth the Raven - Russia Is Returning To The Gold Standard And China Is Going To Be Next
The BondBeat - while we slept; draft ≠ FINAL; zero point zero; hiking into weakness; look out below; tightening already working
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