The Morning Hark - 7 Nov 2022
Today’s focus …China hokey cokey, US mid-terms looking red and The Week Ahead
All prices are at 7.40 GMT, with changes reflecting movement from midnight GMT
Oil - Brent and Crude January futures have given back a percent overnight in Asia with the pair currently trading at 97.30 and 90.10, respectively. The China reopening news gave oil wings on Friday giving it a good 5%+ rally. The subsequent denial by health officials has seen some of those gains trimmed.
EQ - All major indices in Asia in positive territory with the Hang Seng, Kospi and Nikkei futures currently trading at 16,627, 308 and 27,500, respectively. Mixed news overnight with hopes of a Fed slowing helping to underpin stocks in Asia despite the news that the Chinese will continue to adhere to their zero covid policy, in addition, covid cases have risen to a 6m high and Chinese trade data showed a further deterioration as both imports and exports shrank in October.
The Nasdaq and S&P off smalls overnight in Asia after Friday’s whipsaw trading now at 3767 and 10,842, respectively. The big downside levels for stocks remain for the Nasdaq 10,800 and the S&P at 3700.
Gold - Gold Dec off smalls at 1670 overnight in Asia. The past couple of sessions have seen us pretty much top and tail our range of 1675/1620. Gold rallied throughout much of Friday on the China positive news and USD weakness and indeed extended the rally beyond payrolls. Seems to be pausing for breath now with the obvious next topside target at 1700 with 1650 remaining the support and pivot.
FI - US yields bear flattened overnight in Asia with the US2y up over one percent at 4.72% whilst the 10y up close to half of one percent at 4.18%.
European yields continue to trade in a subdued manner with the German 10y yields trading up smalls currently at 2.332% and similarly Italian 10y yields at 4.478%.
UK gilts closed smalls higher on Friday with 10y yields closing at 3.535%.
FX - The USD holding steady in Asia with the USD Index currently up smalls at 111.17 after its sell off on Friday which saw the USD lose two percent from its Powell peak. All the majors a touch softer after their Friday gains with USDJPY, EUR and GBP currently trading at 147.50, 0.9930 and 1.13 respectively. Risk proxies giving back some of their China reopening gains with NOK, AUD and NZD off close to one percent at 10.3220, 0.6414 and 0.5878 respectively. CNH also off a similar amount at 7.2530.
Others - Bitcoin and Ethereum - well, we got a move as the pair rallied strongly on Friday with the China news and Bitcoin breaking some key technicals with a move through the 100dma around 20,700. The denial out of China has taken the shine off the risk rally and we are back trading not far from our opening levels from Friday at 20,720 and 1565, respectively.
One interesting piece of news that broke yesterday was Binance’s decision to sell its FTT tokens over the next several months. I post CZ’s twitter thread at the bottom on the announcement, and as always in the crypto space a lot of theories on the exact reason for the sale.
NFP Review
Somewhat overshadowed by all the Chinese euphoria. The headline number printed stronger than expected, at 261k, with also revisions to the previous month’s figure. More pertinently, the MoM for average earnings ticked up to 0.4% whilst the unemployment rate hit 3.7%. A mixed bag for the Fed, but you’d have thought in the current environment, the inflation number will stick out in a moderating labour report but one that is hardly showing any signs of slack. This despite what the headlines on layoffs may suggest. It’s the lag that gets you!
Central Bank Speakers
ECB speakers were all on the hawkish side with Lagarde leading the charge with we “must not and will not let high inflation become entrenched”.
de Guindos was focused on “dampening demand and capping inflation expectations” and saw inflation between 6/7% in H1 2023.
The Fed on the charge too, with Collins stating that rates may need to go higher than she had anticipated back in September. Although somewhat dovishly she noted that 50bps of a hike would have been considered large in the past, something which we have also pointed out of late.
Barkin was on the same hymn sheet when noting a higher end rate has potential even if it is reached at a slower pace.
Kashkari wasn’t shy either as he claimed that more work was needed to “try to cool down the economy” and to “bring demand and supply into balance”. He also felt rates would go above 5% but the pace of the would be dialled back.
Evans “it is possible to be thinking about pausing even if it is a year away”. He went further, suggesting that the Fed “can be done raising in 75bp increments” but could keep hiking in 50bps if inflation data disappoints.
All pretty much on script from the Fed so far, but lets see what they continue to say this week.
More on all the speakers at the bottom from the excellent FXMacro Guy’s daily tweet and of course his top notch weekly newsletter which gives a fantastic summary of what was some week in the markets!
US Mid-term Elections
The Democrats currently control both chambers of the US Congress (the Senate is evenly split, but Vice President Harris casts the deciding vote in a tie). Next week, all 435 seats in the House of Representatives will be at stake as well as 35 of the 100 Senate seats. President Biden’s position will obviously not be at stake until the elections in 2024, so the Democrats will continue to control the White House but control of the two chambers is up for grabs.
The House is strongly favoured to go back to the Republicans, but the Senate remains in the balance with Georgia, Nevada and Pennsylvania particularly close. The first two are Republican prime targets whilst Pennsylvania is Democrat target.
If the Democrats retain the Senate, but the Republicans take back the House then the passing of legislation would become all but impossible leaving Biden a lame duck President. Further implications would be for the funding of federal government and the debt ceiling. The Republicans would lean towards spending cuts for any agreement on funding and debt ceiling lifting. Fiscal stimulus will certainly be curtailed, which potentially has positive implications for inflation.
If the Republicans take both then expect some pretty ugly politics especially if it is a decisive victory which would raise the likelihood of Trump throwing his hat back in the ring for 2024 and all that that would entail. On the back of such an outcome political tensions will rise. With more power behind them, and especially the Trump loyalists, the Republicans could push to shut down the January 6 committee, take a run at Hunter Biden, bring immigration front and centre for the run up to the presidential elections and even try to flip the tables and impeach Biden for any number of reasons; his business links to Hunter, the botched withdrawal from Afghanistan, the immigration crisis amongst others. It’ll be a messy two years.
From a market’s prospective nothing in the near term to drastically change the landscape, but if it were to be a Republican big win then the fiscal stimulus pipes would be shut down, making it more likely we would see Fed rate cuts in the latter part of 2023 as it tries to stimulate a struggling economy. On the other hand, if the Democrats somehow held onto their majority, and even increased it, then speculation would grow that they would embark on more fiscal stimulus to bolster their “Build Back Better” agenda. That would suggest the markets pricing in higher yields and subsequently a higher USD with a higher peak in Fed Funds.
I post at the bottom a selection of articles on the US mid-term elections, from Harkster, which go into greater detail on the various potential outcomes and what bearing they might have on the political landscape and the markets beyond. Remember to log into the app for lots more great reads across all the important issues that are currently driving the markets.
The Week Ahead
US CPI. The second step on the road to the December FOMC. US CPI out on Thursday is once again expected to back up the Fed’s playbook that they will continue to hike in the face of persistently high inflation. Headline is expected to come in at 0.7% MoM vs 0.4 previously and YoY at 8% vs 8.2%. Core is expected to dip to 0.5% MoM vs 0.6 and 6.5% YoY vs 6.6%. Despite three out of the four measures expected to come in slightly lower than previously, they are still well above where the Fed would want to see them. Indeed if you look at the last six months of Core we have had one 0.7% read, four at 0.6% and one at 0.3%. The Fed would want to see these coming in below all these six prints to have any meaningful shift lower in the YoY measure. Chair Powell made it very plain on Wednesday that inflation was the primary target for the Fed and that they “will stay the course until the job is done’’. Basically, his “keep at it” from Jackson Hole. The uptick in average earnings in the labour report will also weigh heavy on their minds as they digest these prints. So any downside miss will obviously play into the slower path for rate hikes and 50bp for December will seem the most likely outcome. In-line or especially a topside miss will favour the 75bp camp. Remember, however, we still have the November CPI print prior to the December FOMC as well as a PCE.
Fed speakers. Post FOMC we have a number of Fed speakers on the slate for the week. The vote for 75bp was unanimous and Powell was hawkish to say the least in his press conference but as we know, the accompanying statement was read as dovish and was obviously agreed on by the committee so it will be interesting to hear the individual voices as they opine on the decision and the wider economy. Powell, of course, is the loudest and strongest voice, but he also only has one vote. Any dovish chatter will gather a lot of attention from the “Fed pausers” keen to get these stocks rallying again.
China reopening. Will they, won’t they? Conflicting messages out of China with the recent Congress endorsing the zero tolerance Covid policy, which was subsequently reaffirmed as staying in place by senior health officials. However, rumours started to circulate last week that the authorities had set up a committee to assess how to extract the country from the zero policy. This was subsequently denied but on Friday further stories arose with chatter that some flight restrictions would be lifted as a step in re-opening the economy. Xi himself claimed that China “will continue to open up” whether this related specifically to covid or the wider economy was not clear. The markets loved it! Any excuse for a rally and I’m in, was their policy. CNH had its best day in 10 years and Chinese stocks rallied hard whilst general risk proxies followed in step (AUD, S&P, copper, Bitcoin). Once again, over the weekend, health officials denied that the zero-covid approach would be lifted and it would be “unswervingly” be adhered to. The story will continue to develop this week, but as we spoke about last week, even if it is true which we doubt, is an emerging and open China post Ukraine the same as an emerging and open China pre Ukraine? My view is that it is not, and it will interesting to see if China embraces globalisation again for its own benefit or it goes to the more tribal approach that has emerged over this year.
UK GDP. The preliminary UK GDP q3 prints on Friday and with the QoQ measure expected to show a rather anaemic 0.6% contraction in growth for the quarter and backing up the comments of the BoE last week. The numbers are expected to have had a further drag from the Queen’s funeral, which, whilst it was a bank holiday, saw many shops and services remain closed as a mark of respect. The number pretty much will tells us what we already know; it’s going to be a long hard winter and spring ahead. Pass the gruel if there’s any left!
Other News
Some news highlights from the “real world” with Meta reported to head into large scale lay offs this week, joining the queue of high profile companies in the tech space.
Apple has admitted that China covid restrictions have significantly reduced capacity in its assembly of the iPhone 14 model, which will lead to lower shipments going into peak holiday season.
Wells Fargo reported a 90% decline in mortgage originations from the previous year. One caveat is that a year ago the post Covid house market boom was in full swing so it is off a high base but still its an eye-catching number.
In the UK, further press reports on next week’s fiscal package have raised the bar with £60bn now being touted as the number Hunt will try to raise. The split seems to be in favour of spending cuts taking the majority of the strain at £35bn with the balance in tax raises.
FXMacro Guy keeps on giving, and I include his weekend tweet with some reading recommendations for the markets. I can speak first-hand that there are some great reads in there so well worth a look.
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Monday
BoE Speakers
Breeden (09.00 GMT)
ECB Speakers
Lagarde (08.40 GMT)
Panetta (09.30 GMT)
Fed Speakers
Mester and Collins (20.40 GMT)
Barkin (23.00 GMT)
Tuesday
EU Retail Sales MoM Sept consensus 0.3% vs previous -0.3% (10.00 GMT)
Japan Reuters Tankan Index Nov consensus vs previous 5 (23.00 GMT)
US Midterm Elections
ECB Speakers
Enria, Nagel (07.15 GMT)
Enria (08.40 GMT)
Wunsch (17.30 GMT)
BoE Speakers
Pill (09.00 GMT)
Wednesday
China Inflation Rate MoM Oct consensus 0.3% vs previous 0.3% (01.30 GMT)
China Inflation Rate YoY Oct consensus 2.4% vs previous 2.8% (01.30 GMT)
RBA Bullock speaks (09.05 GMT)
ECB Speakers
Elderson (10.00 GMT)
Fed Speakers
Williams (08.00 GMT)
Barkin (16.00 GMT)
Thursday
US Inflation Rate MoM Oct consensus 0.7% vs previous 0.4% (13.30 GMT)
US Inflation Rate YoY Oct consensus 8% vs previous 8.2% (13.30 GMT)
US Core Inflation Rate MoM Oct consensus 0.5% vs previous 0.6% (13.30 GMT)
US Core Inflation Rate YoY Oct consensus 6.5% vs previous 6.6% (13.30 GMT)
BoC Macklem speaks (16.05 GMT)
ECB Speakers
De Cos (11.30 GMT)
Schnabel, Kazimir, Vasle (13.00 GMT)
BoE Speakers
Tenreyro (13.10 GMT)
Fed Speakers
Harker (14.00 GMT)
Logan (14.35 GMT)
Mester (17.30 GMT)
George (18.30 GMT)
Friday
Germany Inflation Rate MoM Final Oct consensus 0.9% vs previous 1.9% (07.00 GMT)
Germany Inflation Rate YoY Final Oct consensus 10.4% vs previous 10% (07.00 GMT)
UK GDP Growth Rate QoQ Prel q3 consensus -0.6% vs previous 0.2% (07.00 GMT)
UK GDP Growth Rate YoY Prel q3 consensus 2.1% vs previous 4.4% (07.00 GMT)
UK Industrial Production MoM Sept consensus -0.8% vs previous -1.6% (07.00 GMT)
US Michigan Consumer Sentiment Prel Nov consensus 59 vs previous 59.9 (15.00 GMT)
US Michigan Inflation Expectations Prel Nov consensus vs previous 5% (15.00 GMT)
US Michigan 5y Inflation Expectations Prel Nov consensus vs previous 2.9% (15.00 GMT)
ECB Speakers
Holzmann (09.00 GMT)
de Guindos, Panetta (12.00 GMT)
Lane, De Cos, Centeno (16.00 GMT)
Nagel (17.30 GMT)
Good luck.
FX Macro Guy - Outlook for Week 45/2022
Marc to Market - Can the Dollar Sell Off Much More Before the CPI?
Topdown Charts - Weekly S&P500 ChartStorm - 6 November 2022
🎧 Arbor Research & Trading - Jim Bianco: Powell views the best way to get inflation down is a reverse wealth effect
Nordea - Bonds & bold: Historical performance is a reverse indicator of future performance
Discover more market commentary & research from 500+ curated sources on Harkster →
FXMacro Guy Weekly Review and Daily Tweet
Substack - Outlook for Week 45/2022
Twitter - Friday and weekly market recap thread
Twitter - Top 10 trading books
US Markets and the Mid-terms
Zero Hedge - Powell, Payrolls, & Positioning Spark Chaotic Week Across Markets
Zero Hedge - Morgan Stanley's 3 Keys Takeaways For Investors From Election Week In America
Zero Hedge - Republicans Will Sweep Both House And Senate: Stifel
Axios - Democrats risk losing 100% winning record in Texas' 28th District
S&P Global - US MIDTERMS 2022: Makeup of next US Congress weighs on permitting reform push
The New Yorker - Why Republican Insiders Think the G.O.P. Is Poised for a Blowout
Crypto
Options Insight - Does this recent crypto rally have legs, or will Uncle Jerome and the FOMC tomorrow send us back down?
CZ_Binance - Binance’s decision to sell its FTT tokens
UK
Politico - London Playbook: Net zero sum game — How to discipline Conservative children — Sausage fest MPs
Discover more market commentary & research from 500+ curated sources on Harkster.
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Great stuff as always. A messy 2 years indeed, I just hope that PFauci goes to jail but I know it's a long shot.