The Morning Hark - 7 Oct 2022

Today’s focus ……It was Kwasi “what dun it”, NFP Preview and the Fed’s Fab Five

Oct 7, 2022

All prices are at 7.45 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December down smalls overnight in Asia currently trading at 94.10 and 87.30 respectively as there was little reaction to the US’s sabre rattling in response to the OPEC+ production cut. The focus now on the US payroll report for direction.

EQ - Equity markets quiet in Asia with indicies relatively flat ahead of the number with the Nikkei, Hang Seng and Kospi currently trading at 27,050, 17,785 and 292 respectively.

The Nasdaq and S&P a tad offered in Asia at 11,470 and 3736 respectively. It feels like the 3735/50 level is a trading pivot which if we remain above we can look to take out the week’s highs up towards 3820 but any break leaves us vulnerable to revisit the week’s lows down towards 3570.

Gold - Gold Dec off a touch in Asia at 1717. Gold is back just below the “noisy zone” in quiet overnight trading. Payrolls will lead the way, or rather stocks, for gold. Looks fairly well defined with 1750/00 on the wide, range wise.

FI - US yields up close to a percent with early interest from the European open with the US2y and 10y currently trading at 4.30% and 3.86% respectively as they hold onto their gains from yesterday.

European yields were firmer yesterday also closing at 2.086% and 4.523% for the German and Italian 10y yields respectively. I post below an excellent thread from Robin Brooks looking at Italian bond spreads and as ever it is super insightful. UK gilts similar pattern with the 10y closing at 4.167%.

FX - USD took its cue from the higher US yield profile yesterday and it remains firm today in Asia with the USD Index trading at 112.40. All the majors suffering with the EUR, GBP And JPY trading lower at 0.9772, 1.11128 and 145.05 respectively. Little else of note with NZD and the CNH the other main losers overnight with them trading about half of a percent lower at 0.5633 and 7.1250 respectively.

Others - Both Bitcoin and Ethereum at last show a touch of weakness in line with stocks currently trading at 19,866 and 1350 respectively.

US Payrolls Preview

Expectations for the headline numberer for a 250k print with a range of expectations between 200-389k on the street. If expectations are correct the print would be the smallest rise in 2 years but putting it into a wider context that would still be an above average print for a monthly NFP headline number in the 5 years leading up to the pandemic.

The unemployment rate is expected to remain steady at 3.7% with average hourly earnings expected to match last month’s MoM print at 0.3% (range 0.2-0.5%).

Looking at the wider payroll data we have had some mixed messages with on the negative side this week’s JOLT report coming in much lower than expected albeit it is a volatile series. Equally the manufacturing PMI employment component remains in contraction territory. Yesterday’s Challenger report showed a market at its lowest since September 2011 for September hiring intentions with job cuts surging 46% in the month. However services ISM employment component came in higher than previously and the ADP report for September came in as a slight beat.

It feels like a much less hyped report than the last couple with market commentary uninspiring and no White House chatter but I guess they are too busy with oil at the moment. Potentially that signals an inline print? The Fed’s Waller made some comments on the report in yesterday’s remarks saying that the report was “unlikely to alter view on inflation fight”.

So we think on the downside a print below 200k will get the market excited to sell the USD (we’d favour USDNOK given the expected kicker from oil too) and take yields lower and get back on the stock’s rally train but only a number closer to the 100k will get the market aggressively pricing out the 75bps for November and reinforcing the early 2023 rate cuts. Over 300k would snuff out the much looked for exuberance for stocks and underpin the USD (we’d like to sell the EUR and GBP) and US yields. If Waller is to be believed we shouldn’t expect a big shift for the earnings component. As ever watch the revisions! Remember too its a US holiday on Monday so liquidity, for what it is, should tail off into the later afternoon.

Fed talk

The famous five hit the tapes yesterday and were to a man and woman hawkish through and through. Some quick soundbites.

Waller said that CPI is “high and very persistent” and expects further hikes in early 2023 noting that the Fed hasn’t “made meaningful progress on inflation”.

Interestingly he referred to global markets when saying that its not the Fed’s “responsibility to tackle the issues of other countries”, although they will be responsible to pick up the pieces.

Evans saw a full 125bps of hikes over the next two meetings and rates between 4.5-4.75% by spring 2023.

Kashkari “seeing almost no evidence that inflation has peaked” and the Fed “are quite away from a pause in rate hikes”. Again on the global front he notes that “as interest rates rise, I fully expect there to be losses and failures in the global economy”.

Cook in her first utterings as a FOMC member said high inflation has required “front loading” of rate hikes. I guess she wasn’t about this time last year? Inflation was “too high and must come down and we will keep at it until the job is done”.

Mester “there will be no rate cuts next year” and it’s going to take “a while to get inflation down”.

All up there on the bullish front but I’m guessing that this time last year they were all of the opinion that there was nothing to see here in terms of inflation? As things stand 75bps is approximately 80% priced in but let’s see where we are post payrolls.

Once again, I post at the bottom the excellent FXMacro Guy’s daily tweet for a more comprehensive round up of the central bank speakers and yesterday’s data highlights. Also, look out tomorrow when he publishes his weekly, which is a great weekend read for a round up of the week gone by. Huge amount of essential market intel packed into a super readable format.

The UK

Little thankfully from the government’s side but a lot of attention this morning from reports that the National Grid has warned that the UK faces periods of rolling blackouts this winter if it cannot get enough energy from Europe. As if things couldn’t get worse in this country. Pictures of supermarket shelves empty of batteries, torches and candles I assume will be next up!

In other news, the BoE have published their report to the Treasury Committee regarding the fallout from the fiscal package and subsequent volatility in the gilt market and the eventual intervention by the Bank. I post the report at the bottom and its well worth a read, although it’s hardly an Agatha Christie in its conclusion that “Kwasi dun it”.

OPEC+

As expected the US responded with a whole list of ways to reduce OPEC’s control over the oil price. Measures to explore would include banning of US oil exports and the NOPEC anti-trust regulation. Some rumblings from politicians that direct action could be taken on the Saudis with the withdrawal of US troops and military equipment from the state one of the measures proposed. I guess the next headlines will involve a reopening of talks with Iran.

Other Central Bank News

The ECB minutes were pretty much as expected with some committee members arguing for a 50bp hike but the majority siding with 75bps. The main reasoning obviously was that inflation remains too high and likely to “stay above the governing council’s target for an extended period”. The EUR’s depreciation was also noted as adding to the inflationary pressures. Little to change the view that they will repeat 75bps later this month.

Elsewhere the BoC's Governor Macklem was hawkish to say the least explicitly saying more hikes were needed after the latest CPI miss and the backdrop of a strong labour market.

The Day Ahead

The day starts as ever with some weak German data with both industrial production and retail sales both lower than previous months and expectations. Only morning highlight is the BoE’s Ramsden talking then we move onto Canadian payrolls data but of course the main show in town is the US payrolls report. Day closes off with a further three Fed speakers.

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Friday

Canada Unemployment Rate Sept consensus 5.4% vs previous 5.4% (13.30 BST)

Canada Employment Change Sept consensus 20k vs previous -39.7k (13.30 BST)

Canada Average Hourly Wages YoY Sept previous 5.6% (13.30 BST)

US Unemployment Rate Sept consensus 3.7% vs previous 3.7% (13.30 BST)

US NFP Sept consensus 250k vs previous 315k (13.30 BST)

US Average Hourly Earnings MoM Sept consensus 0.3% vs previous 0.3% (13.30 BST)

Fed Speakers

Williams (15.00 BST)
Kashkari (16.00 BST)
Bostic (17.00 BST)

BoE Speakers

Ramsden (11.25 BST)

Good luck and a good weekend to one and all.

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