The Morning Hark - 4 Oct 2022

Today’s focus ……RBA dovish surprise, Kwarteng u-turns continue and back to the “bad is good” trading policy

Oct 04, 2022

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All prices are at 7.35 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December up a touch overnight in Asia currently trading at 89.40 and 83.10 respectively as they consolidate close to their recent highs. The OPEC+ meeting speculation continues to be the main focus as we await tomorrow’s announcement on production cuts.

EQ - Equity markets a sea of green in Asia at least for those markets that remain open in the Golden Week holiday period. The Nikkei and Kospi both up healthily at 26,920 and 290 respectively following the good rally we saw in the US yesterday.

The Nasdaq and S&P both up over one percent in Asian at 11,424 and 3728 respectively. The ill wind of the September low close actually turned out to have a balmy Indian summer feel to it as stocks rallied hard yesterday in the US on the “bad is good” ISM print. The print showed contraction in both the employment and new orders measures whilst prices paid were the lowest in over 2 years as well as more negative commentary but the market traded in a “Fed pivot” is closer mode. .

Gold - Gold Dec up smalls in Asia at 1712 as it consolidates near the highs after its bumper bull ride yesterday. Gold took out our 1700 topside resistance with ease yesterday recapturing the level last seen in the middle of September and it has never looked back. The miss in the ISM was the catalyst as US yields and the USD sold off giving gold at last the opportunity to rally. The noisy 1720/25 level is the next resistance to tick off.

FI - US yields continuing their sell off from yesterday in Asia with the US2y and 10y currently trading at 4.03% and 3.60% respectively.

European yields followed the US markets lower closing the day sharply lower at 1.913% and 4.20% for the German and Italian 10y yields respectively. UK gilts similar pattern with the 10y closing at 3.959%.

FX - Unsurprisingly after the US yield sell off the USD trading lower with the USD Index now at 111.34. Both the EUR and GBP up on the day at 0.9867 and 1.1370 respectively. USDJPY doesn’t want to join the party though as it trades higher to 144.70 and getting dangerously close to the “intervention zone”. USDCNH softer though to 7.0580 whilst unsurprisingly given the USD and oil’s recent performance USDNOK is lower to 10.5850.

Others - Both Bitcoin and Ethereum continue to be impressively dull currently trading at 19,843 and 1339 respectively.

The UK

The UK continues to be front and centre of a lot of the market’s attention as Kwarteng’s fiscal package and the landscape of future policy strategies start to slowly unravel. Obviously, yesterday started with the u-turn on the scrapping of the top tier of income tax which, given its cost was only £2bn, was small fry in the overall scheme of things but the u-turn was a significant climbdown. It beggars belief that anyone thought that this was a good idea but just shows how out of touch the government is. Anyway Kwarteng’s subsequent conference speech added nothing new in substance although his “little turbulence” comment re the markets is getting a lot of press time today.

One further danger point for the government, especially as the rebels know now that “the lady is for turning”, will be the lack of a top up for the inflation effect on public spending which could see up to £18bn worth of cuts to the NHS and schools. Watch this space.

One thing he did get right was when he signalled that he would bring forward his medium term fiscal plan with the OBR forecasts as he seeks to reassure the markets that his economic strategy is legitimate. As we discussed yesterday the 23 November seemed a long way away and the fact that he has committed to a date “later this month” is also encouraging especially with the next MPC on 3 November which will also include the Bank’s updated forecasts. A lot of work to do to get that all watertight by the end of the month but at least the credibility is ticking up a notch from a very low base. Again doing a fiscal package without the OBR forecasts was never going to go down well but that’s arrogance for you.

GBP in the main liked the announcements. Option volatilities remain elevated albeit they are down from the 20 handle. We liked the short GBP trade on a 1.12 handle with a stop above 1.13 but we subsequently succumbed to the Kwasi turn so will stand aside for now but still feel that GBP and the UK is far from out of the woods.

Couple of other UK related points of note. The BoE in their emergency gilt buying operation bought only £22.1m in yesterday’s auction out of a total of £1.9bn submitted. They later put out a statement reaffirming their willingness to buy unto £5bn of long dated gilts each day “subject to a reserve price”.

The BoE’s Mann explained her hawkishness in voting for a 75bp hike at the last MPC pointing to the government’s energy plan as well as the weakness of GBP as two of the main reasons for her decision. Again points to the strains in policy between the BoE and government as well as an unusual mention of GBP by a central banker.

As ever I post at the bottom, the FXMacro Guy’s daily tweet which gives a great run down of the yesterday’s central bank speakers as well as the other highlights of the day. Always a great quick fire summary of what’s going on. I also post the weekly which has a more comprehensive run down of the latest central bank speakers and their key quotes. Essentially reading for those trying to plot a course through these troubled waters!

RBA

The RBA surprised us and the markets and raised only 25bps overnight sending the AUD initially 80bps lower (we’d predicted 1% yesterday on Twitter). The rates market bull steepened. They signalled that further hikes were not ruled out but claimed that the “policy rate had been increased substantially in a short period of time so it had decided to slow the pace of moves”.

Fed Speakers/Market Stresses

Williams was the highlight yesterday and had some interesting viewpoints. Certainly hawkish when saying that “lower commodity prices and receding supply chain issues will not be enough by themselves to bring inflation back to our 2% objective”. He sees inflation at 3% by the end of next year with unemployment at 4.5% in the same timeline. He did however give a nod to the Fed pain trade when he said that tighter financial conditions via higher borrowing and mortgage rates as well as lower equity prices are starting to constrain people’s ability to spend.

Obviously a lot of chatter regarding Credit Suisse and their CDS price performance. Yes the CDS has moved significantly but it’s still pricing in a very low chance of a default in the next year. Equally the bank’s capital tier ratios are well above what the Swiss regulator and the Basel accord call for so the bank is well capitalised. However we have also seen a shift up in CDS for most banks and when that starts to gain momentum then there is a systemic risk as it can then precipitate a freezing on interbank lending and that’s when the Fed’s swap lines will get rolled out. Something to keep an eye on.

The Day Ahead

Data wise very little to get excited about so it’s all about the central bank speakers with the usual stream of Fed speakers Jefferson has not spoken of late so worth noting. Probably more interestingly we have Lagarde and the focus will be on if we get any repricing of a 75bp hike by the ECB later in the month.

The RBNZ are expected to hike by 50bps on Wednesday (02.00 BST) taking rates to 3.50%. This would be their fifth straight hike of such a magnitude. Unlike in Australia the inflation profile is still worrying with the Bank’s recent set of projections suggesting that inflation will not peak until next year. The expectation is for the terminal rate to be around the 4% mark and hence we see further tightening going into year end. Indeed there is an outside chance that they will go 75bps. In light of the RBA decision today the market has tempered expectations a touch but 50bp remains the base case.

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Tuesday

US Factory Orders MoM Aug consensus 0% vs previous -1% (15.00 BST)

Australia S&P Global Services PMI Final Sept previous 50.2 (23.00 BST)

Fed Speakers

Williams (14.00 BST)
Logan (14.00 BST)
Mester (14.15 BST)
Jefferson (16.45 BST)
Daly (18.00 BST)

ECB Speakers

Enria (13.00 BST)
Centeno (13.30 BST)
Lagarde (16.00 BST)

Early Wednesday

Japan Jibun Bank Services PMI Final Sept previous 49.5 (01.30 BST)

RBNZ Interest Rate Decision expected 50bp hike (02.00 BST)

Good luck.

Andreas Steno Larsen - Steno Signal #17- A historic FX crisis in Europe
Mish Talk - What Are the Odds Putin is Bluffing About Using Nuclear Weapons?
Notayesmanseconomics - Why are banks in trouble again?
Prometheus Research - The Week Ahead
Concoda - The European Paradox

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