The Morning Hark - 6 Jan 2023

Today’s focus …NFP: its the hope that kills you, China’s “three red lines” moving to green and a good day for hamsters in Hong Kong.

Jan 06, 2023

Prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude March futures stabilised overnight as they currently trade at 79 and 74.40 respectively. The rally continued overnight after oil got a welcome boost from the US inventory data yesterday. The EIA showed inventories dropped by more than 1m barrels from expectations after the bitter snap of weather the US experienced in late December. Higher business confidence in China helped to underpin the bid tone for oil which also probably benefitted from some position squaring after its recent steep sell off.

EQ - Asia equity futures mixed again with the Hang Seng off over one percent at 21,074. However, the Nikkei and the Kospi seeing some gains at 25,888 and 303, respectively.

The Nasdaq and S&P up smalls, with them currently at 10,854 and 3842, respectively. As ever, a big day ahead for the US indices. In terms of levels downside on the Nasdaq remains at the 10,800 support, with the topside breakout level now 11,600. For the S&P 3880/3800.

Gold - Gold Feb futures consolidating after their sell off yesterday, with them trading flat overnight at 1842. The USD’s surge yesterday took the shine off the recent gold rally as it retreated from its highs. However, it still remains above 1835 and more importantly the “noisy” 1820/25 zone. 1880 is the topside target. Again early moves in the new year are often the wrong ones so proceed with caution. Let’s see what payrolls do to the landscape.

FI - US yields little changed overnight, with the US2y and US10y trading currently at 4.45% and 3.70% respectively.

European yields stabilised somewhat yesterday after their recent sell off with the German 10y yields closing at 2.32% and Italian 10y at 4.33%.

UK gilt yields closed up a touch as well, with the 10y closing at 3.55%.

FX - The USD holding onto its gains from yesterday, with the USD Index now at 105.20. The majors all off a touch, with the JPY, EUR and GBP now at 134.13, 1.0512 and 1.1896, respectively.

Others - Nailed to the wall Bitcoin and Ethereum currently sitting at 16,786 and 1246 respectively.

US Labour report preview

200k is today’s estimate for the headline NFP print, which from memory was the same “wished for” number from last month. The majority of street estimates are centred around there between 170/240k. The unemployment rate is expected to stay steady at 3.7% whilst average hourly earnings YoY are estimated to see a slight softening to 5%.

Anecdotally we have had strong employment hints this week with ADP and claims data coming in stronger than expected, in addition to the employment component of the manufacturing ISM, which printed above 50 and was the highest print in four months.

If we got a 200k print it would be the lowest print in two years but would still be a decent print in terms of historical data pre-pandemic. Remember the market tends to undercook their estimates. They are on an eight month losing streak and eleven out of the last twelve NFP prints have beaten estimates as the market hopes for the number to force the Fed to pivot. It’s the hope that kills you!

Feels like we are edging back to the “bad is good” style of trading where a “bad” number will see stocks rally and fuel the market’s belief that the Fed will sooner rather than later have to pivot in the face of a recession. Haven’t we been here before?

Anyway, I think a number of 250k and above will see stocks sell off 2%, yields and the USD rally and increase the likelihood of a 50bp hike in February.

In the 170-240k range a small sell off of perhaps 1%.

The Fed sweet spot I think would be in the 120-170k range where the Fed will feel comfortable slowing the hiking pace again to 25bps (as long as next week’s CPI allows), and the equity market probably rallies well over a percent.

Below 100k, however, will get people on alert that a recession is incoming, the jobs market is going to tip dramatically and the Fed will have to pivot this year. Stocks rally hard but at some point, someone has to tell them that a recession is not necessarily good for earnings!

Remember the average hourly earnings gauge as the Fed’s focus turns to its new pressure point in the CPI report of “core services ex shelter”, and of course, as we always say, remember the revisions!

Japan

Four things are certain in life; taxes, death, McCarthy losing a House speaker vote and the BoJ conducting another unscheduled bond-buying program.

China

Reports today suggest that the authorities in China are about to relax the “three red lines” policy they put in place two years ago to try to deleverage the sector and lower the risks for the financial sector whilst trying to make housing more affordable.

The three lines were introduced in August 2020 and were financial regulations related to the ratio of debt to cash, equity and assets that the property developers held on their balance sheets.

Other chatter suggests the authorities will ease borrowing caps for the developers and extend periods for meeting their debt targets.

The PBOC also announced that in cities where the selling prices of new homes have been consistently falling, they will allow the floor for mortgages to be lowered or abolished for first time buyers. Analysts suggest that this could potentially amount to close to 40 cities on the mainland.

In brighter news, Hong Kong has lifted the year-long Covid related import ban on hamsters.

Reuters - China may ease three red line policy

BBC - HK lifts import ban on hamsters

Crypto

The FTX fallout continues with Silvergate, the crypto bank, reporting that the company had to sell assets at a loss to cover over $8bn worth of withdrawals after the collapse of FTX. In addition, they cut some 40% of staff.

I guess the positive is they didn’t launch a “token” to cover this liability! Although by all accounts, they were considering it before shelving the plans!

They also reported that crypto-related deposits dropped by close to 70% in q4 post-FTX.

The crypto exchange Huobi has just announced a 20% reduction in staff.

Not a great start to the year for crypto, given all the headlines this week. Onwards and upwards.

The Block - Silvergate's shares plunge

Blockworks - Who would be interested in Silvergate now?

Some points of note from yesterday

UK services PMI had a small miss on expected but posted higher than the previous month at 49.9.

The US equivalent had the flip of the UK with a small beat on expectations but lower than the previous month at 44.7. Main reason was a further fall in new orders as demand starts to fade on the back of the higher interest rate profile in the US.

Japan services PMI bucked the trend and posted another month of growth, a fourth in total. The print was an uptick from the previous month, although lower than the flash estimate at 51.1.

The Fed’s George was reiterating the Fed’s hawkish stance yesterday. She has raised her forecasts for the terminal rate for Fed Funds and claimed that once hikes ended the key would be holding rates at that level for sometime. Alluded, once agin, to no cuts this year and favours rates above 5%. Much of a muchness; slower, higher, longer.

The Day Ahead

Somewhat stale, given its November, but nonetheless noteworthy given the shocker of a print to is German factory orders declined 5.3% in November, with estimates being for a small decline on the month.

The morning will be all eyes on the flash EU inflation report for December with expectations being fuelled further for a downside surprise given all of this week’s softer headline numbers from the major EU economies. Expectations are for the headline to dip back below 10% to 9.7%.

We covered NFP above, with the other major US print this afternoon being the services ISM, which, although expected to dip on the previous month’s print it will still remain well above the 50 boom/bust line. All a touch of “after the Lord Mayor’s Show” about it, to be honest.

First ECB speakers of the year, as well as more from the Fed.

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All times in GMT (EST+5 / CEST-1 / JST-9)

Friday

EU Inflation Rate MoM Flash Dec previous -0.1% (10.00 GMT)

EU Inflation Rate YoY Flash Dec consensus 9.7% vs previous 10.1% (10.00 GMT)

EU Core Inflation Rate YoY Flash Dec consensus 5% vs previous 5% (10.00 GMT)

EU Retail Sales MoM Nov consensus 0.5% vs previous -1.8% (10.00 GMT)

EU Retail Sales YoY Nov consensus -3.3% vs previous -2.7% (10.00 GMT)

EU Economic Sentiment Dec consensus 94.7 vs previous 93.7 (10.00 GMT)

Canada Employment Change Dec consensus 8k vs previous 10.1k (13.30 GMT)

Canada Unemployment Rate Dec consensus 5.2% vs previous 5.1% (13.30 GMT)

Canada Average Hourly Wages YoY Dec previous 5.4% (13.30 GMT)

US NFP Dec consensus 200k vs previous 263k (13.30 GMT)

US Unemployment Rate Dec consensus 3.7% vs previous 3.7% (13.30 GMT)

US Average Hourly Earnings YoY Dec consensus 5% vs previous 5.1% (13.30 GMT)

US ISM Non-Manufacturing PMI Dec consensus 55 vs previous 56.5 (15.00 GMT)

US ISM Non-Manufacturing Employment Dec previous 51.5 (15.00 GMT)

US ISM Non-Manufacturing New Orders Dec previous 56 (15.00 GMT)

US ISM Non-Manufacturing Prices Dec previous 70 (15.00 GMT)

US Factory Orders Dec consensus -0.8% vs previous 1% (15.00 GMT)

Fed Speakers

Cook and Bostic (16.15 GMT)
Barkin (17.15 GMT)
George (18.00 GMT)
Bostic (20.30 GMT)

ECB Speakers

Centeno (10.35 GMT)
Lane (16.15 GMT)

Good luck and a good weekend to one and all.

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