The Morning Hark - 8 Nov 2023
Today’s focus...Long term yields confuse the Fed. Boss can you help us out? Meanwhile the IMF gives us a laugh.
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Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude January futures taking a much needed breather in Asia currently sitting flat at 81.70 and 77.20 respectively. Oil took a further backward step yesterday with the Middle East war premium long gone and the focus now on demand and the seeming lack of it. Yesterday the API data showed a rise in oil stocks in the US and this, coupled with the Chinese trade data suggesting a lack of global demand, was enough to tip oil to a 3 month low. The market has awful short memories.
EQ - Asian equity markets showing a touch of rouge overnight after, what has been, a decent run for them of late. Overall little damage done with the Nikkei and Hang Seng both off close to one percent at 32,150 and 17,615 respectively but little changed from where we were yesterday morning.
The US indicies off smalls in Asia but still holding onto the majority of their recent gains with the Nasdaq and S&P futures at 15,345 and 4390 respectively.
Gold - Gold Dec also flat in Asia and the 2000 level seems a distant memory. Currently at 1974.
FI - Global yields firming up in Asia ahead of Powell but remain well off their recent highs. The US2y and US10y currently trading at 4.94% and 4.61% respectively and little changed from yesterday’s open.
European yields seemed to play catch up with the US rates space yesterday with the German 10y yield closing lower at 2.66% and the Italian 10y yield similarly at 4.49%.
UK gilt yields likewise with it closing at 4.28%.
FX - USD once again having the resilience to ride out the recent sell off and slowly grind back higher. The USD Index currently at 105.65. The JPY, EUR and GBP all a touch softer versus the USD currently at 150.70, 1.0680 and 1.2275 respectively.
FX option expiries of note for today. USDJPY sees $1.9bn rolling off at 151 and $1.3bn at 150.
Others - Bitcoin and Ethereum mixed overnight. Bitcoin a touch better bid at 35,300 with the underlying anticipation of an ETF approval keeping it bid. However Ethereum somewhat decoupled at 1880 down smalls.
Macro Themes At Play
Recap
Little to recap on the data front but I guess on the Fed speakers its been interesting that pretty much to a man/woman they have all alluded to long term yields and the affect they may or may not have on the economy. Its fairly clear from what they are saying that a) they are watching them closely, b) they have no idea the cause of them, c) they don’t know how they will affect the economy or inflation and d) depending who you believe they will ignore them or act on them. All in all doesn’t feel like a safe space for our FOMC chums. Over to you boss today to pick the bones out of that and, oh by the way, if you don’t like the reaction today Jay you’ll get another chance tomorrow. What could possibly go wrong.
Since his presser of last week we have seen the payroll moderation that the Fed have been looking for and, what would seem, a small push back from the Fed speakers on the market reaction, stressing that the battle is not yet won. Financial conditions have loosened quite considerably since he last spoke and market expectations of cuts are edging nearer. Will he be happy with that landscape? I suspect he will not be unhappy with the overall landscape but he will be loathed to tell the market that. Caution, act if we need, the battle continues but it is progressing in a manner that is encouraging. Something along those lines?
Central Bank Speakers
The ECB’s de Guindos told us nothing new with the Eurozone q4 growth expected to stagnate. However the ECB will continue to be data dependent regarding future monetary policy.
The Fed’s Kashkari out of the traps early with the usual rhetoric; have to let the data guide us and get inflation back to 2%. He did express surprise at the US’s GDP growth and hence whether the Fed have done enough on rates. As for rate cuts there has been no discussion by the Fed on said topic.
Goolsbee, like Cook, alluded to long term rates and was somewhat dismissive of them. He asserted that if long rates are sustained at high levels then yes that is like tightening but you have to look beyond two week movements in the sector. He emphasised that the Fed are paying attention to them and if indeed they are coming from term premier then that has to be taken into account.
On the economy he felt that it was slowing and the labour market was becoming more better balanced but inflation is the most important part of the mandate at present and it is has fallen a lot.
Rather provocatively he agreed that financial conditions matter but the market doesn’t tell the Fed what to do…….hmmmm.
Waller emphasised that prices would not go back to pre-pandemic levels. Running that theory on would suggest then that rates would not return to their pre-pandemic levels too? The labour market is cooling and getting close to the average pre-pandemic levels.
The move in US10y is the equivalent to an “earthquake” in that sector and policy makers are mulling what drove long term yields higher. More buyers than sellers Christopher?
Bowman was keen to stress that she would support further rate hikes and expects to see further hikes. On the flip side she called current policy restrictive and admitted that since September
financial conditions have tightened some of which can be attributed to higher long term yields. However, it is not clear how this tightening will affect the economy and inflation.
Logan was watching to see if financial conditions were sufficiently tight to bring down inflation and we are watching to see how far longer term rates retrace. Interestingly she did say that if long term rates were rising on the back of strong economic growth then the FOMC would have to deliver. The key question she asked again was what is driving long term rates.
Given all the Fed speakers this week I thought it would be useful to revive this chart to try and help us navigate all the chatter.
BoJ Ueda claimed that the Bank does not need to wait for inflation adjusted wage growth to turn positive before it ends its ultra easy monetary policy. He went on to say that he expects cost push inflation to wane soon.
The IMF had a couple of crackers that were hard to ignore. They suggested that the Eurozone economies were headed for a soft landing but they then “taketh away” with their view that rates need to remain at 4% in 2024 to get inflation down. They’re a barrel of laughs round at the IMF!
Harkster
Thought I’d repost these articles from yesterday for those that did not get a chance to read them.
The FX Poet, aka Andy Fately, has a great summary of recent moves in markets in his latest piece and argues strongly that the Quarterly Refunding Announcement had a big part to play in the moves we saw last week in financial markets. Well worth a read.
I found Sam Ro’s piece an excellent revision of what to do/not to do when trying to interpret news/economic data in a trading environment. It is also a good follow on from Andy’s previous article above.
TKer - Guide to Processing News
Also one which isn’t on HHQ but I couldn’t resist given my withdrawal symptoms from the SBF trial (or is it the adderall!) Anyway a great deep dive into the part played by Genesis/DCG in the 2022 crypto market crash. Well worth a read and may well be coming to a criminal court near you soon. Of course Laura Shin has started to investigate the story too and I also post her recent podcast (which can be found on HHQ) with two of Genesis’s creditors below.
Vijay Boyapati - X thread on Genesis
The Day Ahead
Overnight the Reuters Tankan survey for November showed an upside surprise coming in at 6 versus 4 previously.
German final inflation report for October just printed and bang in line. Move along please.
Later in the morning Eurozone retail sales for September. NBP rate decision and the BoC minutes take up the latter part of the day.
Yet again a plethora of central bank speakers with Powell the obvious standout.
Early doors tomorrow China potentially hits deflation with the October inflation report.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead in terms of data and speakers:
Wednesday
EU Retail Sales MoM Sept consensus -0.2% vs previous -1.2% (10.00 GMT)
EU Retail Sales YoY Sept consensus -3.1% vs previous -2.1% (10.00 GMT)
National Bank of Poland Interest Rate Decision (15.00 GMT)
Bank of Canada Summary of Deliberations (18.30 GMT)
Fed Speakers
Cook (10.15 GMT)
Powell (14.15 GMT)
Williams (18.40 GMT)
Barr (19.00 GMT)
Jefferson (21.45 GMT)
ECB Speakers
Lane (08.45 GMT)
de Cos (12.30 GMT)
Enria (15.00 GMT)
BoE Speakers
Bailey (09.30 GMT)
Early Thursday
China Inflation Rate MoM Oct consensus 0% vs previous 0.2% (01.30 GMT)
China Inflation Rate YoY Oct consensus -0.1% vs previous 0% (01.30 GMT)
Good luck.
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2 days running!!