The Morning Hark - 7 Feb 2023
Today’s focus …RBA more hawkish than expected, ECB speakers continue to talk the talk, Fed’s Bostic references Friday’s “blowout” number in looking for two further hikes but its all about the boy JPow
Prices are at 7.15 GMT/2.15 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude April futures up well over one percent in Asia with them currently trading at 82.20 and 75.70 respectively. Oil’s mini recovery is unsurprisingly all about the “China promise” of growing demand as the OPEC secretary general yesterday had a more upbeat outlook on the back of the China reopening story.
EQ - Asia equity futures flat in Asia with the Nikkei, Kospi and Hang Seng currently trading at 27,603, 321 and 21,322 respectively.
The Nasdaq and S&P futures similarly quiet sitting currently at 12,537 and 4128 respectively.
Gold - Gold April futures little changed in Asia as we currently sit at 1885. Little new of note as we await the big event. Topside resistance around 1930. Support comes in at 1860.
FI - US yields in Asia selling off a touch in Asia after yesterday’s continuing strength. The US2y and US10y trading currently at 4.42% and 3.62% respectively.
European yields closed significantly higher again yesterday dragged up again by the US curve as well as a plethora of hawkish ECB chatter. The German 10y yields closed at 2.298% and Italian 10y yields at 4.15%.
UK gilt yields similarly rallied with the BoE Mann’s more forthright views on the UK rate path helping the 10y close at 3.0243%.
FX - The USD is happy to hold onto its recent gains with the USD Index currently sitting at 103.44. The majors lower again with JPY, EUR and GBP currently at 132.16, 1.0734 and 1.2030 respectively. Remember 1.07 looks a key level for the EUR. In addition the CTA community is long EURs with reports that 1.0665 is their key level to reassess the trade.
The AUD off a touch from its post RBA highs but still a good gain on the day to 0.6930.
Others - Bitcoin and Ethereum unchanged at 22,944 and 1635 respectively.
RBA Rate Decision
As expected the RBA duly delivered a 25bp hike taking rates to 3.35% in addition to delivering a more hawkish statement compared to December.
The money line was:
“the Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary”.
They seemed particularly concerned with wage growth which they saw continuing to accelerate, fuelled by both the tight labour market and increases in inflation.
However, they did give a nod to the weakening housing market and admitted that the road to a soft landing remains narrow.
The AUD had a 1% rise on the surprisingly hawkish statement.
Forecast-wise, they saw growth for this year and next coming in around 1.5%, whilst inflation was seen at 4.75% this year but getting to below 3% by mid 2025.
Powell at The Economic Club of Washington
So post FOMC and post payrolls Chair Powell will have an opportunity to express exactly what he wants to get over to the market in Tuesday’s interview. The market’s focus for the FOMC meeting was very much on the fact that he didn’t take the opportunity to push back on loosening financial conditions, and as such, the animal spirits took over and continued apace only to be derailed by the blowout NFP number. Given the platform and timing post FOMC, many believe that this will become an “extension” of his press conference, and he will be able to “correct” the market as to their reading of the event. Probably easier said than done though as we have seen of late the market tends to hear and do what it wants to do! Alternatively, he could pass the opportunity and let the market rip, but that seems a stretch. Let’s see.
From a market point of view, it would seem that the market has come round to the Fed’s way of thinking in terms of peak rates, as it now prices in 5.12% for the terminal rate. Furthermore, the close to 50bps of rate cuts for the next year, which had been priced in post Powell have been taken out of the market.
In addition lot of S&P put buying going through yesterday in anticipation of a scolding, with most volume centring around the 4100 and 4050 strikes. With this much hype, can he actually deliver?
Central Bank Speakers
The ECB were out in force once again to try and reinforce their hawkish rhetoric yesterday.
Vasle stated that hikes were far from over despite the lower inflation profile.
Kazak felt that a significant data shock was needed to stop a further 50bp hike in March from the ECB.
Holzmann stressed that the risks of doing too little dwarfed the threat of over tightening.
Visco was a little more two sided saying that tightening can continue cautiously but unwarranted over tightening would have serious consequences.
BoE Pill was once again sent out to get the BoE’s point over and was by far the most dovish of the central bank speakers yesterday.
Monetary policy has had an impact but much more is to come. We are not quite at a turning point in the rates cycle. The Bank will do whatever it takes to get inflation back to target. The chance of inflation becoming embedded is higher in the UK than the EU or the US. Any further rate rises will be less aggressive than in the past and we also must guard against doing too much.
Mann was a little more aggressive insisting the BoE needed to stay the course and her base case was a further hike rather than a pause or cut. She still saw material upside risks to inflation and wanted to see significant and sustained decreases in CPI.
Bostic was the first Fed speaker to face the press post NFP and he referenced the “blowout” number when saying that a higher rate hike is on the table after Friday. Although he did caution that the number will need to be “investigated”. His base case is still two more hikes but the Fed could go back to 50bps if needed. In addition, the peak may need to be higher. On inflation, he saw it in the “low 3s” this year.
The data-dependent Fed will now bring a lot more volatility to the market as they try to steer the economy and markets into their pause/pivot. If February NFP disappoints with revisions to January, then it’ll be everyone over the other side of the ship again as peak US rates will get revised back down from 5.12 to below 4.90 again.
BoJ
Reports yesterday suggested that the government would deliver its nominees for the BoJ next week to parliament.
In the meantime, wage growth in the country hit a 26 year high with a 4.8% YoY rise in December.
After yesterday’s noise it’s always good to get Weston Nakamura’s take on the landscape.
Crypto
Genesis and DCG have reached an initial agreement with their main creditors as they start to take the baby steps towards coming out of bankruptcy. The agreement would include the Gemini customers. Let’s see. On a side note, the FT reports today that DCG have sold part of their stake in Grayscale as they try to raise funds.
Coindesk - Genesis and DCG reach initial agreement with main creditors
The Day Ahead
All eyes on Powell, with secondary interest in the BoC’s Macklem and a raft of ECB and BoE speakers.
Also, this evening, or rather the early hours, we have President Biden’s State of the Union speech. Preview below.
Finally, in the UK, look out for a reported mini-reshuffle from Sunak and also some potential changes to Whitehall departments.
Zerohedge - State of the Union Preview
FxMacro Guy - Outlook for the Week
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- - sellside observations from the week that was AND for the one just ahead (Feb 6)
- - 3 Feb 2023 - Global Credit Wrap
- - Earnings' Story
- - Macro Brief
UniCredit - Sunday Wrap
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All times in GMT (EST+5 / CEST-1 / JST-9)
Tuesday
Powell at The Economic Club of Washington (17.00 GMT)
Bank of Canada Governor Macklem Speaks (17.45 GMT)
BoE Speakers
Ramsden (09.00 GMT)
Pill (10.15 GMT)
Cuncliffe (15.30 GMT)
ECB Speakers
Knot (08.00 GMT)
Kazimir (08.00 GMT)
Villeroy (10.00 GMT)
Schnabel (17.00 GMT)
Fed Speakers
Barr (19.00 GMT)
Good luck.
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