The Morning Hark - 8 Aug 2023

Today’s focus...China trade struggles confirmed, the first of the key US auctions and build up to Thursday's CPI print.

• China's trade slumped in July, the steepest fall since Feb 2020 (FT, BBG, WSJ). The RoW vs USofA trade ailing from the softness in Chinese imports (AUDUSD down 80bps on ldn open 0.6535 with HSI down ~1.5%). The overnight data was worse than forecast by economists, but Chinese struggles have been apparent throughout Q2, leaving the mkt in limbo, waiting for the fiscal push from Beijing that the bleak data is calling for. It's hard to be limit short the Chinese complex when you're starring down the barrel of a fiscal bazooka. Tomorrow's Chinese CPI/PPI prints will be of particular importance as China gets closer to exporting deflation to the RoW. 

• Fed speak has opened the door to a Sept hold (Williams close to "peak") as well as kept a hike on the table (Bowman, Bostic). A balanced message that provides little comfort to a mkt uncertain with its data forecasts (Reuters) ... 

• With all eyes on Thursday's CPI and a clear narrative growing on Harkster.com of the potential ingredients for a higher print, some good news for deflationists with Manheim Used Car Index showing prices fell again in July whilst WSJ's Nick Timiraos highlighted a San Francisco Fed model that showed "YoY shelter inflation continuing to slow through late 2024 and may turn negative by mid-2024"

• USDJPY back above 143.00, still trying to find its new clearing rate in the aftermath of the BoJ tweak. The JPY underperforming overnight the other G10 funders. (ING FX Daily: Currencies starting to detach from bond dynamics) 

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Excellent piece from the FT (Inflation, still scary) that is based upon a post by the Research Affiliates as well as other sources (BofA, Inflation Insights, The Overshoot to name a few). Looking back on the base effects that have aided the deflation we've seen in the first half of 2023, the lower denominator could now become a positive influx and allow inflation to drift higher, increasing (pun very much intended) the risks to a base effect driven inflation resurgence to end 2023. As TMH has mentioned before, the easy work has been done, now (data dependent) global central banks need slower wage growth to reduce consumer demand (something even the BoJ warned about this week). The hardest part for CB's lies ahead as they need to induce (or pray for) softer core MoM readings to return inflation to their 2% target(s). The uncertainty around Fed Terminal, will induce further volatility for asset prices upon major US data points as the mkt gyrates from soft to hard landing narratives. 

The positive inflation story that we've seen in H1, will be tested by the ~15% acceleration in WTI crude prices over the past 1-2months and the rise in gasoline prices in the US will impact the Fed's inflation fight. The week doesn't end with CPI, PPI and Univ of Mich Inflation Expectations follow on Friday. Data dependent Fed has a tricky Q3 ahead. Greater volatility in US data, also corresponds with the seasonal lows in Vix. Buckle up!

With supply concerns ($103bn of 3s/10s/30s) top of mind this week following the quarterly announcement, GS and JPM have issued recommendations to buy bonds, with BBG reporting interest in 30yr inflation linked bonds. The real rates are too hard to ignore? As the mkt beings to fear a hotter print, an inline CPI, auctions that go well ... we may see a positive turn for mkt's into the wkd, like last Friday's post NFP reaction. As Brent Donnelly likes to say ... stay nimble!

 

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1. Daily Chartbook
   : #253

2. The Overshoot
   : Settling Into 4% Inflation 

3. ING Rates Spark: Action at both ends of the curve 

4. The Gryning Times
   : Shallow Dips 

5. The Insight: Conversations by Oaktree Capital - Fighting the fed with Armen Panossian, Danielle Poli and Megan Messina 🎧

Follow the latest market narratives through our curated research & commentary channels on Harkster.

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All times in British Summer Time (BST)

US (11:00): NFIB

US (13:15): Fed’s Harker (Voter)

US (13:30): Trade Balance

US (18:00): 3yr Auction ($42bln) 

 

 

 

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