The Morning Hark - 6 May 2022
Today’s focus ……..The inks barely dry, stocks carnage but stand still, GBP woes and US NFP quick preview
Daily roundup - all prices are at 7.50 BST with changes reflecting movement from midnight BST
Oil - Both Brent and WTI futures up a percent on the day at 112 and 109.50 respectively. That doesn’t tell the full story of yesterday however having seen Brent initially rally to 114 before selling off to 109 before the consolidation. Lots of two way news stories to play with. The Biden administration are set to start to replenish their SPR reserves already as they look to buy 60m barrels of crude (a third of their emergency release from back in late March). In addition, the shadow of EU sanctions also gives an underlying bid tone to oil. On the flip side, we saw demand worries stemming from a global economic slowdown affecting oil consumption and also cracks starting to already appear with the EU oil sanction measures with Hungary’s Orban accusing the EU of undermining the regions unity and Austria claiming that it would take years for it to cut its supply of Russian gas.
EQ - Not been pretty but more on that below. For now, Asian stocks have come out in solidarity with their US cousins and sold off albeit in a less dramatic fashion with the Hang Seng and Kopsi both currently down 1.5% at 19,880 and 348 respectively. The Nikkei is the outlier as it comes back from the Golden Week holidays which seems to have taken a weighted average of all the moves in the space since it was out and has ended up smalls at 27,000. The US indices have taken a breather after yesterday’s bloodbath with S&P and Nasdaq down smalls at 4,145 and 12,860 respectively. Interestingly both have basically done nothing all week in terms of price apart from the Bart Simpson hairline move we’ve seen in the post-Fed timeline.
Gold - Gold flat on the day at 1875. Gold turned around yesterday afternoon after its recent resurgence driven by the rise in yields again and sharp reversal for all other asset classes.
FI - US yields down smalls on the session with the 10y at 3.05 and 30y at 3.14. This is in sharp contrast to stocks in the week with both tenors up over 4% from their opening levels on the week and pointing to the real pressure point in markets.
FX - The USDs back to being top dog again after a brief interlude with the USD index back towards its highs at 103.80. In the Asian session the JPY and CNH have taken much of the strain with USDJPY now firmly back above 130 to 130.50 and USDCNH firmly through the 6.70 level trading now at 6.7150. EUR is back close to 1.05 and GBP continues to look soft as it tests the lows at 1.2315 continuing its post BoE sell off. The big news out of the BoE was the shocking headline grabbing new set of forecasts which sees inflation rising into double digits at 10.2%, its highest level in 40 years, unemployment expected to rise from 3.8% to 5.5% by 2025 and a lower growth profile all pointing to the spectre of stagflation. In addition, the political landscape is offering no help to the beleaguered pound with the Tories losing key and historically significant councils like Wandsworth and Westminster in London and the expected Sinn Fein gains in Northern Ireland complicating the Brexit picture. Overall as we have argued many times the UK curve was too aggressively priced for our liking and its hard to find a reason currently to hold GBPs, especially versus the USD.
Others - Bitcoin and Ethereum had nowhere to hide and took the strain lead by the tech stock carnage at one point they hit lows of 35,500 and 2,685 respectively before recovering somewhat to current levels of 36,500 and 2,750 respectively. The market is very much in the hands of stocks and is very much a very small tail on a very big dog. The weekly close will be interesting!
Well the ink was barely dry on this quote from yesterday’s piece “it remains to be seen if the euphoria we experienced last night and into today is sustainable” when it all went south. Some interesting statistics always come out of such moves; USD at 20 year highs, US yields their highest in almost 4 years and the Nasdaq’s biggest daily loss in 2 years. The one that really grabbed my attention though was that there have been two previous days in the last 25 years where we have seen the move we saw yesterday whereby the S&P was down 3% and US futures were down 1%. The previous ones were at the start of the pandemic and during the financial crisis back in 2008. It feels very much like there was some forced liquidation happening yesterday in, what we have stressed many times before, very poor liquidity conditions. The market is now pricing in more of a likely hood of a 75bp hike in June and testing Powell’s resolve although this surely is more to do with an extended move that a real belief that the Fed will flip that quickly. As we say above stocks despite all the volatility are at their opening levels from the start of the week albeit not all that attractive levels. The various Fed speakers later in the day will be interesting to monitor.
The US NFP report will be key for the mood of the market as it closes a momentous week of volatility. The headline of course will garner much attention but given that inflation is the only game in town the average hourly earnings will be picked over finely. The market expects 5.5% YoY growth anything higher towards the 6% level will see a continuation of the price action we saw in yesterday’s afternoon session and with liquidity as poor as it is things could get very ugly. Let’s hope we get a calming print.
Couple of overnight points to note. Japan’s Tokyo CPI rose to 1.9% the fastest pace of growth in seven years. The RBA also released their statement on monetary policy where they raised their inflation profile with core up 2% for the year to 4.6% and taking two years to return to its target band. Both readings did little in their respective markets with the FX space continuing to be dominated by yield differentials.
📅⠀The main highlights for the day in terms of data and speakers:
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Friday
Canadian Employment Report April - Unemployment rate previously at 5.3% expectations at 5.2% (13.30 BST)
US NFP April - headline expected at 391k versus 431k previously (13.30 BST)
Canadian Ivey PMI April - previous print 74.2 (15.00 BST)
Fed speakers - post Wednesday’s meeting and Powell press conference we have the first Fed speakers to raise their heads. Williams (14.15 BST), Kashkari (16.00 BST), and Bostic (20.00 BST) all speak and their comments on the rate decision, balance sheet run off and of course and further forward guidance will be keenly anticipated by the markets. Note too in the early hours of Saturday Bullard and Daly also have speeches lined up.
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Early Monday
BOJ Monetary Policy Meeting Minutes - given this was the catalyst for the push through 130 in USDJPY it will be interesting to see the discussions on the currency and the yield curve controls. (00.50 BST)
Good luck and a good weekend to one and all.⠀
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📚⠀Articles discovered on Harkster exploring some of the current key macro themes in more depth:
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Post Fed
ZeroHedge - Bond Market Is Breaking: The Last Three Times 30Y Yields Jumped More, The Fed Intervened
US NFP Preview
ZeroHedge - April Payrolls Preview: Get Ready For A Big Miss
The BoE aftermath
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🔥⠀Top 5 trending links on Harkster yesterday:
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Alhambra Partners - Who’s Playing Puppetmaster, And Who Is Master of Puppets
Prometheus Research - The Observatory
Palisades Gold Radio - Alfonso Peccatiello: The Fed Wants to Create Demand Destruction
The BondBeat - while we slept; BEARISH hike; worst start for 10y USTs since ... 1788
Pepperstone - FOMC reaction - when 50bp is considered dovish
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