The Morning Hark - 5 Dec 2022
Today’s focus …Oil no surprises, China relaxing, The Week Ahead and House hearing not for me thanks says SBF.
All prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude February futures up a touch in the Asian session, with them currently trading at 86 and 80.50, respectively. Firmer tone across the board with China “reopening” stories continuing to build. Remember, what is happening here is, yes, the additional strict measures are being lifted in the major cities and manufacturing hubs, but the country still remains in an overall zero-policy state for now at least. Anyway, the relaxation has given risk a boost and helped oil start the week on a firmer footing despite OPEC+, at their meeting yesterday, maintaining their production output and quashing any thoughts of a further production cut.
EQ - Asia futures mixed overnight, with Hang Seng obviously enjoying the China news with Shanghai and the Shenzhen, tech hub, regions in particular helping the story. Currently, the index is close to two percent higher at 19,541. Nikkei is a touch firmer at 27,772 but the Kospi giving back a little at 314.
The Nasdaq and S&P flat overnight and consolidating near their recent gains, with them trading currently at 11,971 and 4065, respectively.
Gold - Gold Dec firming a touch in Asia as it consolidates its recent gains, currently at 1813. Trading nicely above 1800 and even let some late comers scoop some in near our 1800 initial support on Friday after payrolls. Next target remains the 1840 level with 1800 downside support and further at 1780.
FI - US yields up close to one percent overnight in Asia with the US2y and US10y currently trading at 4.32% and 3.53%, respectively.
European yields following the US lead and firming a touch with the German 10y yields currently trading at 1.855% and Italian 10y yields at 3.785%.
UK gilts closed the week firmer, with the 10y yield closing at 3.153%.
FX - The USD off a touch in a quiet Asian session. The USD Index is currently trading at 104.37 and has had its biggest drop in 10 years. Optically it looks a little overdone and perhaps we get some pullback over what looks like being a very quiet week. The EUR and GBP currently flat at 1.0564 and 1.2313, respectively. USDJPY higher after an extended period of softness and sits currently at 134.87. The main mover has been USDCNH which is one percent lower at 6.95 and back through 7 for the first time since mid September.
Others - Bitcoin and Ethereum liking the risk tone, with the pair surviving another weekend and pushing higher at 17,310 and 1296 respectively.
At last, we got there as the G7 price cap on Russian oil was announced. The cap, $60, will allow non-EU countries to continue to import Russian oil via sea channels and indeed Russia has recently been building a fleet of oil tankers for this purpose. However, it will not allow shipping and insurance companies from handling Russian oil cargoes unless the oil is sold for a price below the cap.
OPEC+, as expected, did nothing and held their oil output targets.
Not what the doctor or the Fed ordered. Headline beat expectations (263k vs 260k) and indeed last month’s previous print too although it was revised up higher again (from 261k to 284k). Also, average hourly wages MoM and YoY, back above 5% again at 5.1%, beat expectations and the previous month’s prints. Indeed the average hourly earnings prints for the last 4 months have all printed higher. Not a good combo for the Fed and the market immediately looked to lean back into 75bps for next week’s FOMC taking the edge off the 50bps bets.
I have posted at the bottom a thread from Alf of The Macro Compass which goes deeper into the labour report and questions its strength.
SBF main headline over the weekend was his very polite refusal of an invitation to the hearing of the House Committee on Financial Services on the FTX collapse. Claiming he was working hard to compile all the information, so he knows the full facts of exactly what transpired at FTX before he attends a hearing. I guess he could have clawed back some time to do just that instead of his world tour of TV studios?
One other interesting point to note. Caroline Ellison, ex-CEO of Alameda, is supposedly in New York and speaking with a law firm which has some close ties to the Clinton justice department of old. Potentially “helping the authorities”? It is quite funny how the only person that has spoken/rambled since the whole affair blew up is SBF. All other protagonists seem to have lost their tongues or are choosing to hold their counsel. Cooperating?
The Week Ahead
RBA Rate Decision. Early Tuesday sees the RBA meet for their last rate meeting of the year. There is some degree of uncertainty on the outcome with most analysts, and indeed the market, leaning towards a further 25bp hike taking rates to 3.1%. There is an outside chance of a 50bp hike with calls for a more aggressive stance in the face of elevated inflation data out of Australia. The last meeting’s statement, which has been reiterated since by Governor Lowe, leaves the door open for all measures with a pause, more aggressive hike, or a slower paced one all available to the Bank depending on the incoming data. Lowe’s speech on Friday did little to tip the scales with something for both the hawks, domestic spending is “resilient” and the doves, policy lags are “very likely to be longer this cycle” and these are responsible for our recent “downshift in rates”. Deputy Governor Bullock was similarly “vague” when he noted that inflationary pressures were more broad based but we were getting closer to a point where we may be able to pause. All in all, we feel the chatter of late has had a slight tilt to the more cautious hike, and we agree with that sentiment.
BoC Rate Decision. Similar to the RBA the BoC meeting on Wednesday remains a close call. Once again, it’s 25 vs 50bps hike that is in question. Analysts are split and the markets are in slight favour of 25bps. There is no press conference scheduled so any guidance will come only with the Bank’s accompanying statement. Having raised 350bps this cycle the market will be looking for a steer as to how much further the Bank has to go if any. Our view is for a 50bp hike given the tight labour market, elevated inflation backdrop and a q3 GDP which remains robust. The big player on the dovish 25bp side is the Canadian housing market which remains brittle to say the least given that market’s higher borrowing levels than its G7 peers.
US Data. In a light week for both data and central bank speakers, second-tier US data will have a little more focus and indeed more scrutiny as to whether the US economy is going to tip into a recession and if so how deep will that recession be. As we spoke about on Friday, there seems to be a slight shift in the market’s thinking away from the “bad is good” in terms of economic data towards bad could actually mean a recession, and yes, whilst that may mean Fed cuts, those cuts are not to supply the market with free money but rather as a lifeboat for ailing companies. On the slate for the week, we have a final services PMI number for November, which is seen as remaining in contraction, the ISM equivalent, which is seen as remaining above the 50 boom/bust line, but if it breaches it, then that may reinforce the markets thinking that a recision is imminent. In addition, we have PPI for November, which should see a further easing in pricing pressures and finally, the preliminary UMich survey for December with its inflation expectation components. All fairly second-tier but may give us some further colour as to the exact state of the US economy. One final point if the markets get a touch giddy, do not be surprised to see a WSJ Timiraos article appearing to temper the enthusiasm.
China. The week ahead holds some headline risk out of China, with the continuing lifting of restrictions and lockdowns seemingly gathering apace across the country. Any official comments from the authorities on the “relaxation” will be taken with interest by the market. Tuesday sees a Politburo meeting, so there may be some noise out of there with potentially some guidance on economic policy for the year ahead. Finally, Friday sees the inflation report for November, which is expected to see an easing of the YoY measure back below 2% and potentially opens up the opportunity of a rate cut from the PBOC later in the month.
The Day Ahead
Overnight we got the Australian final services PMI for November, which showed a continued contraction, with the series now sitting at 47.6.
China and Japan printed their equivalent PMIs where both showed similar declines. China’s dipped to 46.7 as Covid restrictions and lockdowns led to a weakening of demand. Should we expect some rebound in December with all the loosening measures? Japan, whilst showing a steep decline, did remain above 50 at 50.3.
The morning will focus on the final PMI prints for November in Europe, which are expected to continue to show the EU and UK in contraction.
The afternoon sees the US equivalent which is expected to show a similar theme to the European prints. We also get the non-manufacturing ISM for the US, which is expected to buck the trend and remain in expansionary territory.
Some ECB chatter throughout the day and indeed the week as we head into the last ECB meeting of the year next week.
The World Cup ⚽️🏆
So the round of last 16 got underway over the weekend with some excellent football. USA wasted their chances, but the Netherlands took theirs, including a great 20 pass team goal from Depay to set the ball rolling literally! Their victory sets up a quarter-final clash with a Messi-inspired Argentina, who beat the Australians in a game that had some nerves late on, which it probably shouldn’t have had. Messi seems to be warming to the task, and the quarter-final clash will bring back a lot of memories for both sets of supporters; that Bergkamp goal from 1998 and, of course, the home win for Argentina back in 1978 and all the controversy that surrounded that. More later in the week.
Yesterday’s games saw the World Champions France progress relatively comfortably with a Mbappe inspired (2 goals and assist) performance against the Poles. Whilst in the other game, after a rather stodgy first 35 minutes where a Mane-less Senegal had several chances, it all became rather Bella Bella Bellingham as the youngster dragged the English team forward and killed the game off with two team goals before half time. So England, having dispensed with the African champions, move onto the World Champions. Is it as simple as Mbappe v Maguire?
Today sees the round of last 16 continuing with a couple of fascinating clashes. The early game sees the never stop running Japanese play the never stop passing Croats. A good old-fashioned clash of styles. Will the Japanese be able to keep up the press in the face of the impressive passing machine of the Croats?
The late game sees a similar style of clash with the neutrals’ favourite Brazil taking on South Korea. Again will the all-action Koreans be able to put the Brazilians under enough pressure to stop their passing game? Also, how will the Brazilians react after having made significant changes for their dead rubber game on Friday? It’s often not easy to rev up the engines and get going again after taking a games break. Let’s see.
I post at the bottom the FXMacro Guy’s excellent weekly review, which, after the week we had with all the central bank chatter, is a great summary to revise the memory.
I also post a thread from Michael Gayed, from the leadlagreport, who uses his various signals to suggest that a period of “risk off” could be imminent. A fascinating read!
For another excellent take on the inflation profile and whether we are seeing a peak emerging, I refer you to the link at the bottom from Stephen Kirchner of Institutional Economics. He comes at the inflation issue by taking a look at the shipping industry, and specifically the spot freight rates from the major routes around the world. Fascinating piece and made all the better with its nostalgic reference to the “shipping news” in its title.
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All times in GMT (EST+5 / CEST-1 / JST-9)
Germany S&P Global Services PMI Final Nov consensus 46.4 vs previous 46.5 (08.55 GMT)
EU S&P Global Services PMI Final Nov consensus 48.6 vs previous 48.6 (09.00 GMT)
UK S&P Global Manufacturing PMI Final Nov consensus 48.8 vs previous 48.8 (09.30 GMT)
EU Retail Sales MoM Oct consensus -1.7% vs previous 0.4% (10.00 GMT)
US S&P Global Services PMI Final Nov consensus 46.1 vs previous 47.8 (14.45 GMT)
US ISM Non-Manufacturing PMI Nov consensus 53.1 vs previous 54.4 (15.00 GMT)
US ISM Non-Manufacturing Prices Nov previous 70.7 (15.00 GMT)
US ISM Non-Manufacturing New Orders Nov previous 56.5 (15.00 GMT)
US ISM Non-Manufacturing Employment Nov previous 49.1 (15.00 GMT)
Villeroy (08.00 GMT)
Makhlouf (09.00 GMT)
Wunsch (16.00 GMT)
World Cup - Round of Last 16
Japan v Croatia (15.00 GMT)
Brazil v South Korea (19.00 GMT)
RBA Meeting 25bp hike expected taking rates to 3.10% (03.30 GMT)
German Factory Orders MoM Oct consensus -0.2% vs previous -4% (07.00 GMT)
Canada Ivey PMI s.a. Nov consensus vs previous 50.1 (15.00 GMT)
Japan Reuters Tankan Index Dec consensus vs previous 2 (23.00 GMT)
af Jochnick (10.10 GMT)
World Cup - Round of Last 16
Morocco v Spain (15.00 GMT)
Portugal v Switzerland (19.00 GMT)
Australia GDP Growth Rate QoQ q3 consensus 0.7% vs previous 0.9% (00.30 GMT)
Australia GDP Growth Rate YoY q3 consensus 6.3% vs previous 3.6% (00.30 GMT)
German Industrial Production MoM Oct consensus -0.5% vs previous 0.6% (07.00 GMT)
EU GDP Growth Rate QoQ 3rd Est q3 consensus 0.2% vs previous 0.8% (10.00 GMT)
EU GDP Growth Rate YoY 3rd Est q3 consensus 2.1% vs previous 4.3% (10.00 GMT)
BoC Rate Decision 50bp hike expected taking rates to 4.25% (15.00 GMT)
Japan GDP Growth Rate QoQ Final q3 consensus -0.3% vs previous 1.1% (23.50 GMT)
Japan GDP Growth Rate Annualised Final q3 consensus -1.1% vs previous 4.6% (23.50 GMT)
Lane (07.10 GMT)
McCaul (12.00 GMT)
Panetta (14.30 GMT)
RBA Bulletin (00.30 GMT)
Lagarde (12.00 and 18.00 GMT)
de Cos (12.15 GMT)
Villeroy (16.00 GMT)
China Inflation Rate YoY Nov consensus vs previous 2.1% (01.30 GMT)
China Inflation Rate MoM Nov consensus vs previous 0.1% (01.30 GMT)
US PPI MoM Nov consensus 0.2% vs previous 0.2% (13.30 GMT)
US PPI YoY Nov consensus 7.2% vs previous 8% (13.30 GMT)
US Core PPI MoM Nov consensus 0.2% vs previous 0% (13.30 GMT)
US Core PPI YoY Nov consensus 5.9% vs previous 6.7% (13.30 GMT)
US Michigan Consumer Sentiment Prel Dec consensus 57 vs previous 56.8 (15.00 GMT)
US Michigan Inflation Expectations 1y Prel Dec consensus % vs previous 4.9% (15.00 GMT)
US Michigan Inflation Expectations 5y Prel Dec consensus % vs previous 3% (15.00 GMT)
Enria (07.45 GMT)
McCaul (20.10 GMT)
World Cup - Quarter Finals
Netherlands v Argentina
France v England
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Great piece folks! Nice to be in third spot over the weekend!