The Morning Hark - 8 Sep 2022
Today’s focus ……MoF/BoJ meeting, ECB front and central until tomorrow’s energy meeting, Brainard’s two way markets and of course Powell.
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures stabilising somewhat in Asia currently trading up smalls at 88.20 and 82 respectively. The sell off in oil continued yesterday with oil going back below levels last seen before the conflict in Ukraine as worries on China and the general state of the global economy compounded by a strong USD weighed on the sector. Some relief was found however from the US energy watchdog which forecast for slightly higher demand in a tightening supply environment as we move towards 2023. The USD retreat also helped the rally this despite the API data showing a surprise build in inventories. Remember too OPEC+ flagged the spectre of an emergency meeting “to address market developments”. It would seem a sliding oil price would fall into that category. Perhaps a few OPEC headlines tomorrow over the European emergency energy meeting?
EQ - Equity markets showing a mixed picture with the Nikkei and the Kospi currently trading up smalls at 27,787 and 309 respectively. However the Hang Seng struggling down just under one percent at 18,859 on the back of a miss for the Chinese trade data and continuing China Covid lockdown worries.
The Nasdaq and S&P steady in the Asian session currently at 12,303 and 3987 respectively as they consolidate their gains from yesterday. The gains were lead by the back off in US yields as well as a good deal of short covering in, as what we always say these days, pretty shocking liquidity conditions. The Fed’s Brainard comments were taken on the less hawkish side helping the risk on mood.
Near term levels for the S&P at 3965 and 4020 up above.
Gold - Gold Dec futures holding steady overnight in Asia at 1730 as it consolidates its gains on the back of the pull back in the USD and US yields. We failed to capture 1700 and support still lies with the year’s low around that level. Topside remains that noisy zone of 1750/55.
FI - US yields continue their sell off overnight with the US2y and 10y yields currently trading at 3.42% and 3.23% respectively. Earlier in the day US rates had captured three month highs before the turn on the perceived slightly less hawkish tone from Brainard.
European yields followed the US markets closing at 1.575 and 3.858 for the German and Italian 10y yields respectively. The UK 10 gilt also closed lower at 3.033.
FX - The USD like yields backing off again in Asia with the USD Index now well over a big figure off its recent highs at 109.63. Seemed a bit of a bell ringing day yesterday with USDJPY hitting a 24 year high at 145, GBP plunging to a 37 year low but holding 1.14 and USDCNH inches away from taking out 7. Whether this move is a natural pullback from an over extended rally before a fresh attempt at more USD highs or a turn in the USD time will tell or will Powell tell? Still feels like there’s more to come but it was interesting that Brainard mentioned the USD yesterday and its a safe bet Lagarde will mention the EUR today. Also on that note Japan’s finance ministry has just announced the MoF, FSA and BOJ officials will meet today reportedly at 08.45 BST.
Anyway relief all round for now at least. JPY, EUR and GBP all enjoying the break currently at 143.78, 0.9996 and 1.1507 respectively. Another big miss on the Yuan fix today and the CNH still under pressure currently trading at 6.9620.
Others - Bitcoin and Ethereum recovered and backed away form the danger zones for now that we spoke of yesterday as the overall risk tone brightened. The pair currently trading at 19,250 and 1627 respectively.
So is it 50 or 75 or something else entirely?
Well the market is siding with a 75bp hike (around 65% chance) and has around 175bps of hikes priced in by the year end which entails a further 3 meetings including todays. That to us looks a little overcooked; yes the ECB is well behind the curve but can the Eurozone handle such a hike in rates, both politically and economically, as the area heads further towards a recession with, what seems, every passing data print.
The arguments for 75bps, which would be the first such magnitude of hike since 1999, are plentiful. Around Jackson Hole ECB committee members were tripping over each other to sound hawkish, Eurozone CPI printed 9.1% this month, the ECB is behind the curve with the last hike merely taking it out of negative rates territory, given the data the window appears to be narrowing for the ECB to act decisively and the weakness in the EUR is not helping matters and such a rate hike is perceived to help in its support (good luck with that). Remember I still post Jens Nordvig’s eloquent reasoning for an aggressive ECB at the bottom for your reference.
On the 50bp side we have the ever deteriorating data prints out of Europe best, the doves on the committee have been quiet in comparison to the hawks so in effect we have not had their side of the debate, sources leaking that Lagarde is all in on 50bps, politically they have the Italian elections at the end of the month and the energy crisis seems for now front and centre for all Europeans so why pour more misery on them with a 75bp hike.
Ultimately I feel that 75bps will prove too high a hurdle for the doves to handle and a compromise of a hawkish 50bp hike with promises that “further normalisation will be appropriate in upcoming meetings” if the incoming data warrants such hikes. We believe that the hawks have been the vocal ones and as such part of the market’s hawkish pricing is based on what they are hearing rather than what they are not hearing.
As with all decisions there is the dilemma of what actually should be done and ultimately what actually is done. 75bps definitely falls into the first camp but 50bps, I believe, is in the second camp.
Some other points to note from the meeting:
Staff projections: the new projections where we’d expect unsurprisingly growth downgrades and inflation upgrades. The real question will be when, if at all, do the ECB see the Eurozone entering a recession and if so how deep do they expect the recession to be. On the inflation side where and when do the ECB see it peaking?
Asset purchases: at present we have the situation where all maturing proceeds from QE are reinvested. Given the the backdrop of the energy crisis and the political tensions and fallout from the Italian elections it would be a surprise if they tinker in anyway in this corner. Seems like a 2023 gig and depending how things pan out they may signal their plans in their December meeting.
Euro weakness: after Brainard mentioned the USD overnight it wouldn’t be a surprise if Lagarde doesn’t reference the EUR in her press conference. The “joint” communication may have more force to it but ultimately what the ECB do and probably more pertinently what emerges from the emergency energy meeting tomorrow may have more effect.
Anti-fragmentation tools: all the rage back in July but its all about energy now.
Remember at the bottom I post for your reference all the ECB speakers over the last month or so all laid out excellently by the ever resourceful FX Macro Guy. It’s a good illustration to my point above about how the hawks have been a lot louder over the last month.
In addition I post some previews of the event for those that have the time and inclination.
Finally an attempted playbook. Based on the EUR at 1.00 and the 10y Bund at 1.58%
50bp hike but no nod to further hikes would be a major surprise and see the EUR and the 10y bund yield knee jerk lower with the EUR through the lows and struggling to regain parity anytime soon and the 10y easily taking out 1.50% again.
50bp hike with a hawkish commitment to further hikes on a data dependent basis will probably see the EUR sell off a percent and the 10y sell off towards 1.50% but hold the level.
75bp hike with no nod to further hikes, which again would be a surprise, would get a knee jerk spike in both rates and the EUR but in turn see a swift return to their starting point.
75bp with a hawkish commitment to further hikes would see a two percent rally in EUR and a 10bps rally in bund yields.
Yes the ECB is a crucial piece of the puzzle but the European energy meeting will have just as much influence on market direction going forward.
Fed Speakers and Powell
The majority of Fed speakers yesterday said little new of note however Brainard’s speech was the one the markets paid most attention to. She went somewhat off script with claims that Average Hourly Earnings in last week’s NFP report had fallen “quite a bit”. In addition she said that “lags create risks associated with over tightening” although she did temper that with its “important to avoid the risks of pulling back too soon”. Also the USD reference was new with the “potential for stronger USD to cool inflation”. The somewhat ambiguity in the speech gave the market a crack which it was more than happy to squeeze through and get on the risk rally again. Not sure she’ll have been too pleased with the outcome of her speech and will Powell use today to reinforce the Fed pain trade?
Speaking of which Chair Powell speaks on “The State of Monetary Policy After 40 Years” and I’m sure we could all make a few comments on that subject. Anyway what will be rolled out. Well probably a repeat of his Jackson Hole rhetoric; strong labour market, CPI appearing to be in a better place but its not over yet, terminal rate in the 3.5/4% region and higher for longer all getting rolled out in one way or another. Our old friend the WSJ Fed whisper Timiraos was keen to stress thin his latest piece that the Fed were leaning towards a 75bp hike and the main point of focus was now on the terminal rate and on that basis how do the Fed achieve that rate in the upcoming meetings. Front loading with a 75bp hike in September in effect gives them flexibility going into the last two meetings of the year especially as one is politically challenged due to its proximity to the mid term elections in November. Remember too CPI next week so he still has that card to play. Hard to see him deviating from script and based on the market’s reaction to Brainard yesterday the danger would be that he is on the margins more hawkish to remind the markets whose boss.
BoC as expected hiked 75bps. The policy statement also as expected signalled further hikes ahead with the money line “given the outlook for inflation, the Governing Council still judges the policy interest rate will need to rise further”.
Truss has been busy with her initial proposals on the funding for the energy crisis well in hand, and indeed we await an announcement from her today, she has now moved onto addressing the supply side of the crisis. Plans include building more nuclear power plants, the announcement of more North Sea oil and gas exploration licenses and the latest one being speculated is that the fracking ban will be lifted. All in all if this is indeed true it should support GBP and maybe 1.14 will once again be the low. Certainly more positive news for the UK. Let’s see.
Also on that note the initial soundbites from the government have been more reconciliatory towards the BoE than Truss had been during the leadership battle. One to watch.
Earlier today RBA Lowe signalled a slowing rate of hikes in Australia and became the first major central bank to explicitly signal such a move.
Also Japan GDP was an upside surprise with q2 YoY rising 3.5% versus 2.9% expected.
One final point China inflation data is out early tomorrow morning.
One final last point to lighten the mood on our earlier Soy$ story. Argentinian farmers have sold 3x, in the last two days, the level of soyabeans sold the whole of last week taking advantage of the country’s new “currency regime”.
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ECB Interest Rate Decision 50bp hike expected (13.15 BST)
ECB Press Conference (13.45 BST)
Powell (14.10 BST)
China Inflation Rate YoY Aug consensus 2.8% vs previous 2.7% (02.30 BST)
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