The Morning Hark - 8 Feb 2023

Today’s focus …Powell over…..and breathe

Due to personal circumstances, this will be the last week, for the foreseeable future, that TMH will be published. The decision to stop publishing has been taken with a heavy heart, and I would like to thank all of the 15k+ subscribers that we have accumulated over the last 10 months or so.

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TMH

Prices are at 7.20 GMT/2.20 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude April futures flat in Asia as they hold onto yesterday’s gains with them currently trading at 83.60 and 77.50, respectively. Oil’s recovery continued yesterday with hopes for the “China promise” helped by Aramco’s decision to increase prices for Asia sales. In addition, the Powell risk event is out of the way with nothing new to fear from it, the earthquake in Turkey has also created supply disruptions and for the first time in 7 weeks we saw crude drawdowns from the API data. The only downside was the API data also showed continuing builds for gasoline.

EQ - Asia equity futures a mixed bag in Asia, with the Nikkei and Hang Seng currently trading flat and little changed from yesterday’s open at  27,578 and 21,304, respectively. The Kospi however up close to two percent at 326. 

The Nasdaq and S&P futures flat and holding onto their late gains post Powell sitting currently at 12,775 and 4172, respectively.

Gold - Gold April futures little changed again in Asia as we currently sit at 1890. Little new of note from the price action on the back of Powell to report. Topside resistance around 1930. Support comes in at 1860.

FI - US yields backing off a touch in Asia but yields still remain higher than where we saw them post FOMC and payrolls last week. The US2y and US10y trading currently at 4.43% and 3.65% respectively.

European yields continued to climb higher yesterday as they again got dragged up by the US curve as well the hawkish ECB chatter. The German 10y yields closed at 2.343% and Italian 10y yields at 4.186%. 

UK gilt yields similarly rallied helping the 10y close at 3.317%.

FX - Despite the round trip for markets the USD is pretty much back to where we were yesterday morning with the USD Index currently sitting at 103.30. The majors a touch lower, with JPY, EUR and GBP currently at 131.22, 1.0734 and 1.2056, respectively. Interesting price action in the EUR, which bounced from around the 1.0665 level we had flagged yesterday as a level where the CTAs may reassess their EUR long position. Worth keeping an eye on that zone.

Others - Bitcoin and Ethereum, with Powell out of the way and no harm done, sit higher at 23,235 and 1680, respectively.

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Powell at The Economic Club of Washington

Some of the money lines from Powell’s speech:

• if strong labor market data persists, the peak rate in the current hiking cycle may be higher than previously thought;

• the base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough;

• we’re going to react to the data so if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than has been priced in;

• just at the beginning of the disinflation process;

• must keep rates at a restrictive level for period of time;

• we’re seeing disinflation in the goods sector. We expect to see it in the housing services sector;

• but for the other 56% of the core inflation basket, we’re not seeing disinflation there yet and that’s going to take some time; and

• we’re going to need to be patient.

In summary, Powell believes that inflation has peaked and we are entering disinflation. There will be further hikes, and there is a long way to go to get inflation back to target. If data warrants it, then peak rates may be higher than previously thought.

As you can see the thread was hawkish but, as we alluded to yesterday with that much hype can he actually deliver and from the market’s reaction, he was not hawkish enough. There was no comment or nod to loosening financial conditions, and it seems Powell has flipped to a more “light touch” approach to guiding markets as opposed to his Jackson Hole blunt approach of last year.

Overall it feels like two more hikes of 25bps, unless the data insists on a 50bp somewhere, then a pause. 

Market-wise, quite the day with S&P up 1.5% then down close to 2% before rallying over 2%. Yields plunged then rallied and ended up at higher levels than the levels we saw post FOMC and payrolls whilst the USD having rallied most of the day pre-event, cratered then bounced and opens this morning not far off where we started the day yesterday.

So the big risk event of the week is over so markets can get back to what they normally do and try and put some risk back on until the next big risk event; next Tuesday's US CPI. Today we’d expect the Fed speakers to back Powell up with the slower, higher, longer mantra.

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Central Bank Speakers

ECB wise

Villeroy concentrated his focus on inflation insisting that it would be back to target 2% by the end of 2024/beginning of 2025 and that we are not far from its peak.

Nagel stated that rate cuts were not on the agenda in the foreseeable future as it would be dangerous to think that the inflation problem is solved. In addition as rates are not yet restrictive, more significant rate hikes are needed. 

Fed wise

Kashkari was out of the traps sharpish with his assessment of the world. He was surprised by the labour report and given the print he is not seeing much impact in the Fed’s actions on the labour market. He was also seeing virtually no progress in the core services ex housing measure. However, he did caution that by stating that no-one should overreact to one number. Finally, he was not lowering his projected rate path with around 5.40% seen as his terminal rate. In addition for rates it was higher for longer. 

BoC wise

Governor Macklem reiterated the BoC pause is in play as he stressed that the Bank “needs time to assess how people and businesses are reacting to higher interest rates before making future adjustments”.

However, he did temper that a touch by stressing that there was a long way to go before we return to target inflation and it was far too early to contemplate rate cuts.

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The Day Ahead

Not a lot on the slate apart from the small matter of six Fed speakers to follow up on Powell yesterday and a mere one ECB speaker. 

Just before we go to press tomorrow, we get the delayed German inflation print for January which is expected to show an uptick to 8.9% for the YoY number. 

 

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1. Lyn Alden - How the Fed “Went Broke”

2. Capital Notes
   - Chart of the Day: February 6, 2023

3. LPL Financial Research - A Short and Shallow Recession: How It Could Play Out

4. New York Fed - Inflation Persistence—An Update with December Data

5. BluSuit
   - The Hidden Financial Crisis Today

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

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

Wednesday

Fed Speakers

• Williams (14.15 GMT)

• Cook (14.30 GMT)

• Barr and Bostic (15.00 GMT)

• Kashkari (17.30 GMT)

• Waller (18.45 GMT)

ECB Speakers

• Knott (15.00 GMT)

 

Thursday 

German Inflation Rate MoM Prel Jan consensus 0.8% vs previous -0.8% (07.00 GMT)

German Inflation Rate YoY Prel Jan consensus 8.9% vs previous 8.6% (07.00 GMT)

 

Good luck.

 

 

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