The Morning Hark - 5 Sep 2022
Today’s focus ……Labour Day markets, USD presses higher, OPEC+ and The Week Ahead
All prices are at 7.25 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures both up over two percent in Asia currently trading at 95.30 and 88.40 respectively. The oil rally was fuelled by the potential for a OPEC production cut as the OPEC+ meeting starts later today. This despite reports over the weekend that Russia had opposed such a move. An unchanged output with some hawkish rhetoric on potential cuts in the future may help to sustain the move although on a US holiday moves will become extended. We’d expect an announcement sometime in the early afternoon.
EQ - Equity markets a mixed bag again overnight in Asia with the Nikkei up close to a percent at 27,647. However both the Hang Seng and the Kospi are down around half of one percent at 19,138 and 313 respectively.
The Nasdaq and S&P on the US holiday are both flat in the Asian session at 12,110 and 3932 respectively.
As an aside European equities are suffering down 3% on the continuing energy crisis saga.
Gold - Gold Dec futures steady overnight in Asia at 1723 continuing their tight range from the end of last week. Gold still caught in the headwinds of higher US yields and the resurgent USD. Support lies with the year’s low around the 1700 level. Topside remains that noisy zone of 1750/55.
FI - US yields flat overnight with the US2y and 10y yields currently trading at 3.40% and 3.20% respectively both holding their lows after the sell off post payrolls. The inversion in the curve continues to narrow.
European yields sold off a touch to finish the week closing at 1.523 and 3.839 for the German and Italian 10y yields respectively. The spread between the two remains extended as we enter ECB week.
FX - The USD ticked off another fresh high in Asia as it powers ahead after its sharp reversal on Friday from the 109 level with us now trading up over half of one percent at 110.14. All the majors suffering in particular the EUR and GBP both down close to half of one percent at 0.99 and 1.1467 respectively. The EUR making a fresh near 20 year low. As you’d expect AUD and NZD are nor far behind at 0.6790 and 0.6092 respectively. USDJPY seems quite happy above 140 for now trading at 140.40.
USDCNH equally ticking off the big figures on its way to 7 with it currently trading at 6.9470 despite another stronger than expected fix.
Others - Bitcoin and Ethereum nothing to see here 19,755 and 1565 respectively.
So an almost perfect report for the Fed with the headline number coming in a touch stronger than expectations but with a lower revision to the headline number. We had flagged the potential for a revision on Friday which ultimately left the overall payroll headline number slightly lower but still well within positive growth territory. The unemployment rate ticked up as more people entered the labour market and average hourly earnings again ticked lower.
Overall nothing for the Fed to do here with the CPI data on the 13th being the key to their final decision of a 50 or 75bp hike. As the WSJ summarised over the weekend the decision will obviously rest not only on the CPI print but also on how quickly Chair Powell wants to get rates higher. The market is leaning slightly for a 75bp hike but it’s a close call. I post at the bottom a follow up tweet from Eric Basmajian from EFB Research who we posted in Friday’s TMH ahead of the payrolls. Interesting take on the numbers from his own model on the US labour market.
Not all good news however as later in the day the factory orders print disappointed with a -1% MoM print for July vs the 0.2% expectation.
The Week Ahead
ECB rate decision. Is it 50 or 75bp? If it’s 75bp it would be the largest hike in rates by the ECB for 30 years. The hawks have been very prominent in the last two weeks or so with the doves nowhere to be seen and maybe the market, with the lack of a dovish side to the debate, is getting ahead of itself. For now we would expect a “hawkish 50bp hike” with the door left open for further hikes in October. Several of the Wall Street banks have upped their forecasts to 75bp but we believe this will be too much of a stretch for the ECB. Also the ECB will update their staff projections for this year and next for their growth and inflation profiles where we anticipate downward and upward revisions respectively. I post at the bottom the excellent FX Macro Guy’s ECB crib sheet of all the recent comments from the committee members as they assess the rate hike’s magnitude.
Further central bank meetings. RBA on Tuesday morning are expected to hike 50bps whilst the BoC look to hike 75bps the following day. Inflation, as with all central banks, is front and centre for the RBA and they are expecting to hike by 50 for the fourth meeting in a row. The country has similarities to the US with a tight labour market, capacity constraints and strong demand placing upward pressure on prices. With inflation well above target in Canada a continued aggressive stance is required from the BoC even after their 100bp hike back in July. 75bps is expected as the bank front loads its policy tightening.
Fed speakers. Several speakers in the week ahead of the quiet period before the FOMC meeting just over two weeks. However Powell on Thursday will garner most attention with the 50/75bp dilemma for the markets still very much in play and especially given this will be his last chance to address the markets prior to the quiet period unless of course they signal through the WSJ at a later date! It’s hard to see him delivering anything new to the debate. We’d expect the usual forcefulness in the face of inflation, a nod to the upcoming CPI Data print and potentially some feel for his view on the pace of hikes to the ultimate terminal rate.
New UK Prime Minister. The announcement will be made on Monday at 12.30 BST but will it be Truss or Sunak? It would be a major surprise if it were not Truss and the focus then will turn to what fiscal stimulus she intends to unleash and how the markets will react. The two key areas of focus for her in the initial days of her term will be the cost of living crisis and exactly what she intends to do to soften the blow to UK households. She has signalled tax cuts but will that be sufficient? We wouldn’t be surprised if she also has a more targeted approach for support payments to the more vulnerable households. Whatever help is dished out it will surely be offset by further BoE hikes as they try to tame inflation especially with the latest Goldman forecasts talking about a 20% inflation peak. The second point of focus will be Brexit and specifically the Northern Ireland Protocol Bill which she is a big proponent of. This could potentially allow the UK to override sections of the deal agreed with the EU back in 2019. This in turn could lead to a suspension by the EU of the UK/EU trade deal with the obvious implications for the UK economy. Judging by the recent moves in UK assets where we have seen the aggressive selling of Gilts, the weakness in GBP and the ever rising borrowing costs for the UK as the BoE hikes rates ever higher it looks like a bumpy ride ahead for her. Speaking of the BoE Truss has been keen to point the finger of blame for inflation and subsequent cost of living crisis firmly at the BoE. Whilst their independence is not up for debate their mandate could be questioned and a review of their powers could lead to some trimming. I post at the bottom some further analysis of what lies ahead for the new PM.
OPEC+ meeting and oil. Monday’s meeting, according to leaks over the weekend, will bring a freeze on output as the proposed output cuts look to have been ditched due to opposition from Russia. Their objection centre around their concerns that such a move would signal to buyers that the market is oversupplied and hence reduces the leverage that Russia can impose on the markets. The development comes as further negative news broke on the Iran nuclear deal with the Iranians refusing any inspection, from outside, of their nuclear program a clause which had previously seemed to have been agreed. Elsewhere G7 have backed a plan for the capping of Russian oil prices and the NordStream on/off saga continues with it currently closed due to an unspecified “leak” although Gazprom claims that it is still supplying Europe with oil via Ukraine.
European Emergency Energy Meeting. Friday’s meeting has taken on even more significance to the markets after Bloomberg leaked some of the proposals which potentially will be discussed to solve the crisis. On the pricing side; caps on both gas prices and on Russian imported gas are being proposed. From a market’s liquidity stand point proposals include; the suspension of energy derivatives, capping limits on margin and a credit line backed by the Eurozone to cap spiralling borrowing costs. All well and good saying it but implementing it all will be a lot harder. I post below an article outline in more detail some of the measures being proposed.
The Day Ahead
Labour Day in the US with NYSE closed and reduced hours for the CME. Volumes will be lighter than usual and liquidity will be subsequently reduced.
Quiet day of data with only the final services PMI prints for Europe and the UK as well as Eurozone retail sales for July. The major countries printing in Asia all saw declines on the previous month’s prints with Japan sliding below the 50 boom/bust line.
Early tomorrow we get the RBA rate decision where a further 50bp hike is expected.
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German S&P Global Services PMI Final Aug consensus 48.2 vs previous 49.7 (08.55 BST)
EU S&P Global Services PMI Final Aug consensus 50.2 vs previous 51.2 (09.00 BST)
UK S&P Global Services PMI Final Aug consensus 52.5 vs previous 52.6 (09.30 BST)
EU Retail Sales MoM Jul consensus 0.4% vs previous -1.2% (10.00 BST)
Mann (16.30 BST)
RBA Interest Rate Decision 50bp hike expected (05.30 BST)
German Factory Orders MoM Jul consensus -0.2% vs previous -0.4% (07.00 BST)
US S&P Global Services PMI Final Aug consensus 44.8 vs previous 47.3 (14.45 BST)
US ISM Non-Manufacturing PMI Aug consensus 55.5 vs previous 56.7 (15.00 BST)
US ISM Non-Manufacturing Prices Aug consensus vs previous 72.3 (15.00 BST)
Australia GDP Growth Rate QoQ q2 consensus 1% vs previous 0.8% (02.30 BST)
German Industrial Production MoM Jul consensus -0.2%vs previous 0.4% (07.00 BST)
Eurozone GDP Growth Rate QoQ 3rd Est q2 consensus 0.6% vs previous 0.5% (10.00 BST) Canada Ivey PMI s.a. Aug consensus vs previous 49.6 (15.00 BST)
Bank of Canada Interest Rate Decision 75bp hike expected (15.00 BST)
Barkin (14.00 BST)
Mester (15.00 BST)
Brainard (17.35 BST)
Barr (19.00 BST)
Japan GDP Growth Rate QoQ Final q2 consensus 0.7% vs previous 0% (00.50 BST)
ECB Interest Rate Decision 50bp hike expected (13.15 BST)
ECB Press Conference (13.45 BST)
Lowe (04.05 BST)
Powell (14.10 BST)
China Inflation Rate YoY Aug consensus 2.8% vs previous 2.7% (02.30 BST)
Canada Unemployment Rate Aug consensus 4.9% vs previous 5% (13.30 BST)
Canada Employment Change Aug consensus 15k vs previous -30.6k (13.30 BST)
Canada Average Hourly Wages YoY Aug consensus vs previous 5.4% (13.30 BST)
Canada Capacity Utilisation q2 consensus vs previous 82% (13.30 BST)
Eurozone Emergency Energy Meeting
Evans (15.00 BST)
Waller and George (17.00 BST)
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Very helpful. It would be great to highlight in bold or in different color, the ones that the market is most anticipating or the ones that if it missed estimate might have an impact on the market :) Thanks Again for the amazing work.
Very helpful, as usual!