The Morning Hark - 5 Jan 2023
Today’s focus …Fed minutes as hawkish as, Powell looking to “walk the line” ala Johnny Cash and SBF and the Crypto woes continue
Prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude March futures recovering some poise overnight after their steep sell off yesterday, currently trading up close to one percent at 78.50 and 73.80, respectively. Continued concerns on the global outlook, rising Covid cases in China and warnings of a more contagious variant in Europe have all put paid to any hopes of last year’s late rally in oil continuing a pace into the new year. The Fed’s hawkish minutes didn’t help the tone, and to compound matters, the API data showed an unexpected build. All in all the worst start to a year for oil in over 30 years.
EQ - Asia equity futures mixed again with the Hang Seng and Nikkei a touch softer at 21,128 and 25,758. The Kospi, in contrast, up a touch to 299.
The Nasdaq and S&P off smalls with them currently at 10,965 and 3867, respectively. The US indices holding in despite the hawkish tone to the Fed minutes and some more lay off stories hitting the tapes with Salesforce looking to shed 10% of their workforce and Amazon reported to lighten their payrolls by 17,000.
Gold - Gold Feb futures continue to consolidate their good start to the year with them currently trading at 1860 and 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. Also, Goldman’s pointed out the other scenario that would play into gold’s hands, with a Fed being too slow to pivot and subsequently pushing the US economy into a recession with gold providing a safe haven shelter for investors. Always a bit wary of early year moves, so proceed with caution, but admittedly it’s holding in well.
FI - US yields little changed despite the hawkish take of the Fed minutes. The US2y and US10y currently trading at 4.39% and 3.70%, respectively.
European yields continued their recent path lower with yet more lower than expected inflation prints out of Europe with the German 10y yields closing at 2.27% and Italian 10y at 4.29%.
UK gilt yields closed lower as well with the 10y closing at 3.49%.
FX - Really rather dull in FX land. Little movement of note, with the USD Index steady at 104.28 and the majors relatively unchanged; JPY, EUR and GBP currently at 132.44, 1.0610 and 1.2024, respectively.
Others - Speaking of little movement Bitcoin and Ethereum currently sitting at 16,792 and 1249 respectively.
Fed Minutes Review
As expected, the minutes were hawkish, which I guess came as no surprise given the Fed’s Kashkari’s earlier mutterings.
The minute highlights:
slowing rate hikes should not be seen as pivoting;
all officials agreed on a slowing of the aggressive interest rate increases;
no-one in the committee expected rate cuts in 2023;
any easing of financial conditions will complicate the Fed’s job moving forward;
the past two month CPI reports have been promising but need further evidence of a trend;
ongoing rate hikes needed;
history warns against a premature loosening of policy;
as a nod to market expectations the committee noted that the Fed’s dots were above market expectations but this dot plan was due to the committee’s strong commitment to return inflation to target;
the labour market remains tight and this is feeding into wage growth which in turn keeps the “core services ex shelter” component of CPI high;
inflation forecast risks skewed higher whilst growth forecast risks skewed lower;
many officials saw two sided risks; and
the committee will retain its flexibility and optionality.
Overall the main conclusion is they are staying the course albeit in a slower manner than previously. They frown on any premature easing of financial conditions, but, as we’ve seen in the past, that is a tough “line to walk”. In addition however, it would seem that there is a growing split in the committee as some members are seeing two sided risks going forward.
Probably for the market’s near term focus, the Fed’s attention on wages and the tight labour market makes tomorrow’s NFP all the more important.
No February guidance at all, probably because they haven’t a clue which, to be honest, is fair enough. The market is skewed to a 25bp hike, with that outcome sitting around 70% at present with 50bp at 30%.
Earlier in the day, Kashkari was out of the hawkish blocks sharpish with his first pronouncements of the year. He sees a further 100bps of hiking and a terminal rate of 5.4%. This is despite his acknowledgement that inflation may have peaked. He is keen not to cut rates prematurely and to cut only when the Fed is convinced that inflation is well on its way back to target.
The number two at the IMF in the FT this morning is giving the Fed some air cover as it sees US inflation not having “turned the corner yet” and encourages the Fed to “stay the course”.
They also have a similar theme for the ECB as they don’t see EU inflation returning to the 2% target until “well into 2024”.
Fortune - 2 political problems for the Fed's inflation fight
MishTalk - FOMC minutes concerns on market expectations
Real Vision - The Fed stays strong
Japan
BoJ, as we spoke about recently, is going to raise its forecasts for inflation, keeping alive the market expectations that, once BoJ Governor Kuroda steps down, there will be a phasing out of the ultra-loose monetary policy in Japan.
China
Despite all the recent government intervention, it would appear it came too late as reports overnight have claimed that Times China Holdings, a Chinese property developer, has defaulted on two USD bond payments.
In brighter news, Sunday sees the reopening of the Hong Kong/China border with no requirement for a PCR test.
Crypto
Lot of news to digest, and not all of it particularly good, especially if you are SBF!
The US has taken a lead from the Bahamian authorities and made a land grab for anything it feels fit to seize. So far, they have managed to seize the Robinhood shareholdings that were linked to FTX, as well as some Silvergate Bank accounts.
In other reports, FTX’s former lawyer, Friedberg, has joined the ever growing ranks on the prosecutor benches. At this rate they may have to hire the FTX arena to fit them all in! He is said to have approached the authorities back in mid-November just after the collapse of the company. As we have said before, the silence of all the protagonists in this whole debacle, other than SBF, has been deafening and suggested they were “otherwise engaged”. More to follow?
Coinbase came to a settlement with the US regulators for a total of $100m. It will be split evenly as a fine for opening customer accounts without sufficient background checks and as a fund to improve their compliance procedures.
The SEC stepped into the Binance US/Voyager Digital deal objecting to the $1bn purchase of Voyager’s remaining assets, after its bankruptcy, claiming there was insufficient information.
Finally, a court ruling dashed any hopes for the account holders at the collapsed Celsius “Earn”. The judge ordered that any customers using the company’s interest-bearing services did not own their funds.
If it doesn’t rain, it pours in Cryptoloand!
Some points of note from yesterday
Swiss inflation followed its European neighbours with a softer-than-expected print, with the YoY figure closing the year at 2.8%.
German and European services PMIs mirrored their manufacturing measures from earlier in the week with better-than-expected prints, albeit both remain in contraction.
US manufacturing ISM had a small downside miss on expectations, but that is now nine straight month of decline, a losing stretch which hasn’t been seen since the mid 70s. In a somewhat alarming mixture for the Fed, the underlying measures offered little comfort. Prices paid and new orders declined to levels last seen at the height of the pandemic. The employment measure ticked up again, hinting at a tight labour market and to compound matters even more on that front, the JOLTS report suggested that job openings are still showing signs of resilience, with the ratio of openings to applicants still holding up close to 2/1. In a similar pattern to the NFP report that is now 11 out of the last 12 JOLT reports have come in stronger than expected. Mental note for Friday!
Overnight Australian services PMI beat consensus and previous at 47.3 but remains well in the contraction zone for the third straight month. China had a similar story with beats but remaining for the fourth straight month in contraction at 48.
The Day Ahead
Very little of note today before a busy end to the week tomorrow.
UK and US final readings for services PMIs for December are all we have in terms of data. However, hot on the heels of the hawkish Fed minutes, we get our first Fed speakers of the year.
Overnight we get the Japanese equivalent PMI print. Whilst just prior to publishing, we will see some stale data from Germany in the form of November factory orders and retail sales.
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All times in GMT (EST+5 / CEST-1 / JST-9)
Thursday
UK S&P Global/CIPS Services PMI Final Dec consensus 50 vs previous 48.8 (09.30 GMT)
US S&P Global Services PMI Final Dec consensus 44.4 vs previous 46.2 (14.45 GMT)
Fed Speakers
Bostic (14.20 GMT)
Bullard (18.20 GMT)
Early Friday
Japan Jibun Bank Services PMI Final Dec consensus vs previous 50.3 (00.30 GMT)
Germany Factory Orders MoM Nov consensus -0.5% vs previous 0.8% (07.00 GMT)
Germany Retail Sales Nov consensus 1% vs previous -2.8% (07.00 GMT)
Good luck.
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Early 2023 read.....US economy stronger, than expected...Recession, not until 2024 ??
Chinese economy weaker than expected....
$ 120 Crude Oil looking doubtful.....
Thank you for this daily lengthy and detailed report. You provide a wonderful service. Dare I say you are very accurate? (Hope that doesn’t jinx you…)