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The Morning Hark - 4 Nov 2022
Today’s focus …NFP step one on the road to the Dec FOMC and the BoE’s wing and a prayer
All prices are at 7.40 GMT, with changes reflecting movement from midnight GMT
Oil - Brent and Crude January futures have had a decent two percent rally in Asia with the pair currently trading at 96.50 and 89.40, respectively. The main reason for the rally is being pinned on the agreement by the G7 and Australia to place a price cap on Russian oil to take effect from 5 December, although no price as yet has been set. The expectation is that such a cap will tighten supplies on the back of Russia ceasing exports to any country that joins the pact.
EQ - The Hang Seng continues its volatile week with another swing this time a four percent gain to 16,180. Tech stocks seem to be leading the way for the index after hopes rose again for a lifting of covid restrictions. The rumoured news, this time, centred around lifting of flight suspensions. Subdued elsewhere with the Kospi and Nikkei flat on the session at 304 and 27,200 respectively.
The Nasdaq and S&P stabilised overnight in Asia after another rough day yesterday trading now at 3738 and 10,785 respectively. We are approaching some big levels for stocks going into the number today with the Nasdaq sitting on its 10,800 support with the S&P needing to remain above 3700.
Gold - Gold Dec rallied back to our trading pivot at 1650, off the back of some correction in the USD, and actually has behaved fairly well within our range. We saw the bounce off our range bottom towards 1620 and had a nice rally into the trading pivot. See no reason to change tack for now 1670/1620 with the pivot at 1650. Await the number!
FI - US yields continued their surge overnight in Asia with the US2y and 10y up close to one percent trading currently at 4.74% and 4.16%, respectively. The 2y hit a 15y high yesterday at 4.75%. The terminal rate going ever higher and is now around the 5.25% level.
European yields have been a lot more subdued with the German 10y yields trading currently at 2.248% and Italian 10y yields at 4.426%.
UK gilts closed higher yesterday with 10y yields closing at 3.515%.
FX - The USD king is catching some air, as it backs off a touch, with the USD Index currently down smalls at 112.57. USDJPY and EUR little changed from yesterday at 147.88 and 0.9766. GBP the big loser post BoE currently sitting at 1.1208. Risk proxies having a whale of time as things stabilise somewhat with AUD and NZD up close to one percent at 0.6336 and 0.5805 respectively. CNH took a lift from the covid flight suspension news in Asia now trading at 7.2863.
Others - Bitcoin and Ethereum, I’m going to need a new bag of nails as I nail these two to the wall. Currently at 20,558 and 1575 respectively.
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.
Been a very quiet lead into this print today given all the other major events of the week and hence it feels like it has a touch more surprise about it. Arguments for a stronger number would centre around this week’s JOLTS survey which showed an uptick in job openings as well as the tighter labour market going into the holiday season hiring. On the weaker print side, recent surveys have showed a general weakening in the employment measure (yesterday’s ISM) and of course the headline grabbing layoffs.
On that note with the ongoing Twitter storm, Morgan Stanley starting their cuts as well as other companies like Lyft and Stripe announcing double-figure cuts is there going to be a recency bias to these headlines that may influence the traders as they lean into an expected weaker print? We’ll soon find out but remember we are only a few days from the mid-terms so will that influence the numbers? As if…..
So on a “bad is good” basis we think a print below 150k will get the market excited to sell the USD, take yields lower and get back on the stock’s rally train with a potential 2% gain. This will also get the Fed pausers, back out of their cupboard and, aggressively pricing in 50bp hike for December.
Over 250k would snuff out the much looked for exuberance for stocks and see a further 1%+ selloff, underpin the USD (we’d like to sell the EUR and GBP) and US yields. With 75bps starting to look closer to the truth for December.
An inline number (175/225k) I think gets a small relief rally in stocks going into the weekend. As ever, watch the revisions!
Also, look out for the average earnings figure. Not the most exciting print, but any deviation either way from the expected 0.3% will have a big influence on the market direction.
One final point, remember, this is only step one of five on the road towards the December FOMC. We will still have one further NFP, 2 CPIs and a PCE.
I shall be tweeting over the release with our views on the labour market report.
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Dovish hike, if ever a 75bp hike in interest rates could be called thus.
Voting wise, it was a split 7-1-1 with Dhingra voting for 50bps and Tenreyro a real outlier at 25bps. I guess it was her round down the old Dog and Duck last night as they digested the market’s reaction to their decision over a few pints of Old Wallop. I hope they were all short sterling going into the day!
Some highlights of the Monetary Policy Report and Statement:
Based on a 3% rate and holding there, the Bank sees inflation is seen to hit 2.2% by the end of 2024 and 0.8% at the end of 2025;
If the Bank were to follow the market path of rates ie. with a terminal rate north of 5% then the Bank would predict a 2y recession;
However, they believe that the UK is currently in recession which will last into next year;
Market pricing is too high and believe there needs to be a repricing;
Peak inflation now seen at 10.9% this quarter with it falling to 5.2% by the end of next year;
GDP for next year will be -1.9% and -0.1% in 2024;
They will act forcefully on persistent inflation if that is needed; and
All forecasts were based on the assumption of no effect from the upcoming fiscal package.
Some highlights from the press conference:
Inflation, inflation, inflation was Governor Bailey’s early rhetoric for the reason for the 75bp hike;
Keen to stress the divergence in the terminal rate peaks over the last few months with pre fiscal package being closer to 3% the immediate post package stresses pushing it to more than double that rate to now around the 4.5%;
Couldn’t resist a pop at the old Truss regime by stressing that the repricing had a significant UK element to them;
Rates may have to rise further but not as far as market is pricing;
Labour market remains tight but there are some signs of softening; and
Inflation risks are skewed to the upside.
Overall much as we had anticipated a dovish hike, a lot of uncertainty, the Broadbent warning adhered to and let’s see what 17 November brings and we shall reassess in December. Whilst Powell felt in control of the car there was an element of my approach to golf in the BoE’s performance; hit and hope.
Overnight BoE’s Mann was stressing the point further “rates do not have to be as high as the market suggests”.
In a TV interview, Governor Bailey suggested that the UK was hours away from a financial Armageddon during the pension crisis. Another dig at the Truss regime.
I take the Bank’s point that they are walking a tightrope with regard to rates and don’t want to tighten too much for fear of a multi year recession but equally, that theory is based on inflation coming down aggressively. They have undercooked their inflation forecasts on the way up quite a bit, so who’s to say they will be any better on the way down?
One last point of note the papers today are again full of further stories on Chancellor Hunt’s hunt for cash to fill his black hole. The latest sofa they are trying to extract a few extra coins from is the capital gains tax pot. With talk of changes to the rates, reliefs and allowances as well as a cut to dividend allowances. The honeymoon is going to be short to say the least. There’s only so much they can pin on The Truss and Kwasi show. Some more at the bottom from Politico.
Central Bank Speakers
ECB speakers were 10 a penny yesterday.
Lagarde was claiming that the ECB can’t just mirror the Fed which seems fairly obvious although her comment that inflation expectations are broadly anchored at the moment left a lot to be desired! She also feels that a recession won’t be enough to tame inflation which beggars the question what will?
Centeno was very optimistic in his claim that inflation would peak this year. Furthermore, a good part of their rate increases should already have been done. Didn’t they just get positive a few months back?
Panetta wanted to avoid raising rates too fast because this could excessively hurt economic growth.
Visco notes that the Italian/German spread is still too wide. Also that market expectations of 3% terminal rate for the ECB is a possibility.
Kazaks let the cat out of the bag when he said that EU recession is the baseline scenario. That’s a first for the ECB.
More on all the speakers below from the excellent FXMacro Guy’s daily tweet. He also has included a tweet on his Trading View hacks which are really useful. Finally remember his excellent weekly newsletter which will hit the tapes tomorrow and there’s certainly a lot to digest from this week!
RBA Monetary Policy Report
The RBA was again keen to stress that they can resume large rate hikes but equally pause as necessary. In terms of their outlook for the next couple of years they base their assumptions on the cash rate being at 3.5% or the end of next year and at 3% for 2024.
They see growth for this year at 3% with the next two years at 1.5% with CPI at 4.75% at the end of 2023 and 3.25% for the year after.
Norges took the low road with a 25bp hike but signalled a further hike next month was likely on inflation fears.
UK services PMI for October remained in contraction at 48.8 although did beat expectations and prior.
US services beat previous and expectations by a good margin but again still remain in contraction at 47.8. ISM non-manufacturing, however was weaker than expected and previous at 54.4. New orders plummeted, prices paid spiked back above 70 but the employment measure was much weaker and now in contraction.
The Day Ahead
Overnight we had the statement of monetary policy out of Australia, which we talk about above, as well as the retail sales data from September, which came in as expected.
Japan services PMI for October saw an uptick from the previous month at 53.2.
We have also just had the German factory orders for September, which were a big downside miss at -4%.
Later in the day, we get EU final services PMI for October
Canada sees the labour report and their Ivey PMI for October.
Of course, the main highlight of the day is the US NFP report. The first data print on our long and winding road to the December FOMC.
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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 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 previous 59.5 (14.00 GMT)
Lagarde (09.30 GMT)
Pill (12.15 GMT)
Good luck and a good weekend to one and all.
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