The Morning Hark - 8 Dec 2022

Today’s focus …BoC dovish hike, SBF’s troubles multiply….get used to it and an early World Cup preview.

Dec 8, 2022

All prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude February futures up over one percent in the Asian session as oil bounces after another sell off yesterday. The futures currently trading at 78.10 and 73.50, respectively. Oil was helped by data showing that US inventories shrank by more than expected, but the dark clouds of recession and lagging economic growth weigh heavy on the sector.

EQ - Asia futures continue their usual theme of late with the Hang Seng swaying in the winds of China reopening stories with today seeing the positive two percent rally to 19,537. Whilst the Nikkei and Kospi sidelined, with the pair currently at 27,532 and 306 respectively.

The Nasdaq and S&P flat overnight, currently at 11,519 and 3940, respectively. 3950 and 3900 are the big levels to keep an eye on.

Gold - Gold Dec flat once again in Asia, with it currently sitting at 1798. Gold has been flirting with the trading pivot, helped by a weaker USD but finding it hard to maintain any momentum above the 1800 level. First support at 1780 with some resistance towards 1810.

FI - US yields bouncing overnight in Asia with the US2y and US10y currently trading at 4.29% and 3.45%, respectively. The inversion now hovering near 40 year highs. 100bps anyone? If we do see 5% terminal, then the inversion should easily take that level out. We have now also broken our range bottom for the 10y and back at levels last seen back in mid September. We should see some further downside with the obvious stop back above 3.50%.

European yields opening a touch lower, with the German 10y yields currently trading at 1.784% and Italian 10y yields at 3.61%.

UK gilts a touch softer yesterday with the 10y yield closing at 3.046%.

FX - Quiet FX session with little new of note. The USD consolidating after selling off on recessionary fears and the sell off in US yields. The USD Index is currently trading at 105.16. The majors little of note with JPY, EUR and GBP currently trading at 136.81, 1.0522 and 1.2206, respectively.

Others - Bitcoin and Ethereum nothing to see here as we sit at 16,824 and 1234 respectively.

Bank of Canada

As we talked about yesterday, the BoC hiked 50bps to take this hiking cycle to a cumulative 400bps and accompanied the hike with a statement that has the market anticipating that the hiking cycle could be over.

The key quote from the statement was :

“looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target"

Previously in reference to rate rises, they had been more specific with the October statement saying that the BoC “expects that the policy interest rate will need to rise further”.

Some further reasons for the 50bp hike in the statement:

global inflation is high and broad based;
q3 GDP was stronger than expected;
there is excess demand in the economy; and
short term inflation expectations remain elevated.

But they did throw a bone to the doves:

3m rate of change in core inflation is declining and indicating that price pressures may be loosening.

All in all, a dovish hike and the Bank can assess the lag effect of their “front loading” policy over the next two months worth of data ahead of their next meeting in February.

SBF/CZ/Alameda

The gift that keeps on giving, and as if he didn’t have enough on his plate trying to find the $8bn hole in his company’s balance sheet, SBF is now being allegedly investigated for market manipulation. According to reports in the NYT prosecutors are investigating if the SBF empire were involved in precipitating the Terra/Luna collapse. This would be somewhat ironic, if true, as that event basically marked the beginning of the end for the FTX/SBF empire. Guess when you are in the middle of a major financial fraud, it’s difficult to see the wood for the trees! I post an article at the bottom with some more details.

The World Cup

Since there are no games today, I thought I would pad out the World Cup section with a look at the first quarter-final, which comes up tomorrow afternoon: Croatia v Brazil. According to the bookies, this is by far the most one-sided match in the quarter-finals, with some shops offering 10/1 for a Croatian win in 90 minutes.

Certainly, logic points in that direction, but is it ever that simple? As we noted earlier in the week, the joy which the Japanese got from attacking Croatia down the flanks should be an open invitation to Vinicius Jr and co! Neymar had a nice stroll out against South Korea to prove his fitness and needs one goal to match Pele’s record 77 for Brazil, so he won’t lack for incentive.

A lot has been made in this World Cup about player tiredness and the effect that could have on the teams as they enter the business end of the tournament. Brazil have been the team that have rotated the most, both within and between games, whilst Croatia have done the least of the 8 teams remaining. Similarly, Brazil became the first team to give their whole squad minutes in some of the games. In contrast, Croatia have used only 18 of their squad thus far in the tournament and come off a 120 minutes and penalties game versus the Japanese, who as we know, just never stop pressing! But then again, that’s what Croatia do and you just have to look at the last World Cup to see that they are very successful at finding a way.

Quite often, the Brazilians flatter to deceive in the early stages of tournaments and look world beaters only to come unstuck as the business starts to get serious. Remember, they have not won the World Cup since 2002. In the last several tournaments, when they have gone out of the competition, their achilles heel always seems to be a set piece which starts the rot before their eventual exit. Thus far in the tournament, Brazil have defended set pieces well marshalled by the silky Silva, but who better to exploit that weakness than Modric and a tall and physical Croatian team? Remember, it was a great header from Perisic that got them back in the game versus Japan.

Will Tite go with his Fab4 again and trust his two holding midfielders to “get in amongst” the Croatian midfield pass masters? From a footballing point of view, I do hope he picks the 4. Does Modric have one last big game in him on the international stage? Whatever happens, there is much quality to enjoy, so let’s kick back and enjoy and good luck to both teams.

The Day Ahead

Today the only thing to keep us warm is a couple of visits to the lectern from Lagarde.

One more sleep until more football.

Early hours of Friday, we get China’s November inflation data which is expected to soften somewhat from last month’s prints.

On a quiet day, some prep work for the Fed next week? If so, I post the FXMacro Guy’s crib sheet at the bottom with all the latest speech highlights for your perusal.

👍 If you found today’s piece useful, please consider giving it a ‘Like’ at the bottom of the page. It only takes a few seconds and helps our free commentary reach a wider audience.

In what is the peak of a quiet week, today really has little on the docket of any interest at all, and, in the absence of any football to distract us, I thought I would point you in the direction of the “Month in Macro” from Prometheus Research. It’s an excellent free monthly publication on the state of affairs of the US economy, and you can subscribe directly to it or read it via the Harkster app.

November’s piece has just been published and is a particularly fascinating read as we approach an inflexion point for the Fed where they look to step off the brake a touch and prepare to slow the pace of their rate hiking cycle. The publication does a deep dive into the various dynamics influencing both growth and inflation for the economy and why they feel that over the coming months, we are more likely to witness growth rather than inflation shocks.

Some excellent detailed analysis on:

initial claims data and where we are in terms of a historical level that would signal a recession for the series;
how inventory builds influence the economy; and
the underlying trend in regional manufacturing PMI surveys, which point to deteriorating corporate profits.

A really top and insightful read and well worth some of your time to digest fully.

Prometheus Research

Month In Macro

This report is part of our ongoing effort to provide economic and market guidance to our subscribers during a period of historic levels of uncertainty. This note aims to share our research team's internal checkpoint process in evaluating the current state of the economy as it pertains to markets. The pages that follow will have familiar content for thos…

6 months ago · 29 likes · 3 comments · Prometheus Research

All times in GMT (EST+5 / CEST-1 / JST-9)

Thursday

ECB Speakers

Lagarde (12.00 and 18.00 GMT)
De Cos (12.15 GMT)
Villeroy (16.00 GMT)

Early Friday

China Inflation Rate YoY Nov consensus 1.6% vs previous 2.1% (01.30 GMT)

China Inflation Rate MoM Nov consensus -0.2% vs previous 0.1% (01.30 GMT)

Good luck.

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