The Morning Hark - 9 Jan 2023

Today’s focus …poor ISM fuels the rally, China positive growth outlooks, DCG comes under the spotlight and The Week Ahead.

Jan 09, 2023

Prices are at 7.25 GMT/2.25 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude March futures enjoying the better risk tone with a less hawkish Fed seen post Friday’s numbers and the encouraging growth news out of China. They have posted a near two percent rally overnight as they currently trade at 80 and 75.40, respectively.

EQ - Asia equity futures all in positive territory overnight and consolidating their late gains from last week, with the Hang Seng, Nikkei and Kospi all up at 21,436, 26,208 and 311, respectively.

The Nasdaq and S&P equally up, with them currently at 11,162 and 3926, respectively. Bad is good is back with payrolls helping the mood, but the poor ISM really getting equities excited that a Fed pause/pivot is closer than they had hoped. Let’s see on that one.

Gold - Gold Feb futures consolidating near their highs at 1884, a seven month high, as we have taken out our first topside target at 1880. Gold enjoyed the “bad news is good news” rally post the ISM print and rode the wave managing to break above 1870 and then consolidating above in Asia trading. The belief is that a less hawkish Fed moving forward will help gold’s popularity as US rates and the USD start to retreat. An impressive start to the year for the precious metal. Can it sustain the rally?

FI - US yields little changed overnight, with the US2y and US10y trading currently at 4.27% and 3.58%, respectively, after their bull flattening in the week.

European yields followed the US sell-off on Friday, with the German 10y yields closing the week at 2.21% and Italian 10y at 4.21%.

UK gilt yields equally closed off with the 10y closing at 3.477%.

FX - The USD off smalls again after its steep decline on Friday. Currently the USD Index sits at 103.48. The majors all stronger with the JPY, EUR and GBP now at 132.12, 1.0673 and 1.2133, respectively.

The risk proxies all up close to one percent with the AUD, NZD and KRW currently at 0.6923, 0.6389 and 1244 respectively.

Others - That nail on the wall has started to loosen somewhat as Bitcoin and Ethereum jump on the risk wave and finally we have taken out the 17,000 level. Currently, they sit at 17,200 and 1311 respectively.

US labour report review

A delighted Fed, whilst headline beat expectations for the ninth month in a row if you also include the slight downward revision to the previous month, the NFP headline was pretty much a wash on expectations. Not only that but both the MoM and YoY average hourly earnings prints showed declines with the YoY now at 4.6%. The only fly in the ointment was a drop in the unemployment rate to 3.5%, its lowest level in 50 years, showing the tightness in the labour market remains. The Fed can also point to the fact that the JOLTS report showed job openings to job participants ratio still ticking to close to 2 for comfort. In addition, the headline number is still well above average reinforcing the Fed’s slower, higher, longer mantra for now. Overall a small positive for the Fed and the market.

The shine was taken off that report by the non-manufacturing ISM report, which saw the headline number unexpectedly fall into contraction at 49.6% against consensus forecasts of 55 and a previous print of 56.5. The real outlier in the underlying measures was the new orders component which saw a near 20% decline from the previous months print to move sharply into contraction at 45.2. In the other main measures, the employment one moved into contraction whilst prices increased again, but the pace started to slow a touch.

These sorts of levels in new orders have pointed to recessions in the past and more worryingly such severe drops generally happen because of a shock (covid) or as a precursor to something bigger (Bear Stearns collapse prior to the GFC). Let’s see.

Enough evidence here for 25bps hike from the Fed in February? Probably not quite, but Thursday’s CPI will be the key.

Japan

PM Kishida once again stressed the point that once a new central bank head is chosen, the BoJ and the Government must discuss relations going forward. A further nod to a more coordinated approach to the economy.

I attach a Twitter thread from the, as ever, excellent Robin Brooks that looks at the history of the BoJ’s YCC policy and where they find themselves now in trying to defend that peg.

Robin Brooks - The BoJ and YCC

China

On Friday, Evergrande, the Chinese property developer, called a meeting with its bondholders to discuss debt restructuring proposal as the property sector limps along.

A PBOC official has stated that China growth will be back on track soon. This comes as reports from the Securities Daily suggest that 6 of the major Chinese cities expect to see 5.5-7% growth on the back of the recent changes to Covid policy in the country.

I post an interesting article below, which plays into our thoughts on the move from globalisation back to more of a tribal one. The article suggests that President Xi, unsurprisingly, on his recent trip to Saudi Arabia encouraged the state to move business to the Shanghai exchange for oil transactions, which are based in Yuan, and away from the old petrodollar system. One to keep an eye on for sure.

Last week we flagged the authorities had approved a capital raise by Ant, the group company of Alibaba and felt that this was a sign of softening towards the conglomerate. However, reports over the weekend suggest that Jack Ma has relinquished control of the group and indeed appears to be in Bangkok. More below.

Market Business Insider - The rise of the petroyuan?

ZeroHedge - Jack Ma cedes control of Ant Group

Crypto

Reports over the weekend suggest that the Digital Currency Group have come under the spotlight of investigators from the SEC and DoJ regarding internal transfers. This comes after Cameron Winklevoss, of Gemini Trust, called out Barry Silbert, from Genesis and Digital Currency Group, accusing him of commingling of funds and refusing to return close to $1bn worth of Gemini’s customer funds which had been “invested” in high interest products at Genesis.

One to keep an eye on but doesn’t look good. The irony in all this is, of course, CoinDesk were the ones that started the dominoes falling with their “exclusive” article on the deficiencies of the Alameda balance sheet, which was the catalyst for the collapse of FTX. CoinDesk, of course, are owned by DCG. Well, we are all for freedom of speech and uncensored journalism.

CoinDesk - DCG being investigated by the DoJ/SEC

The Week Ahead

Japan Tokyo Core CPI. The release, late on Monday evening, is garnering a lot of attention, with the first consensus print suggesting a YoY print of 3.8% for December. If this was the case then it would be the highest print in 40 years and would fuel further the mounting expectations that post Governor Kuroda stepping down at the end of March, the BoJ would look to pivot from their ultra loose monetary policy. Remember, next week sees the first BoJ meeting of the year. No changes are expected, although we also said that for the December meeting! One thing does seem certain though that some more unscheduled bond buying from the BoJ is coming to a cinema near you soon.
US Inflation Report. Post NFPs the next focus for the markets and the Fed is Thursday’s CPI report. The market is anticipating a third consecutive month of softening for this series, with headline YoY ticking down to 6.6% from 7.1% and Core to 5.7% from 6% and both off peaks in June at 9.1% for Headline and 6.6% in September for Core. All well and good, but the Fed will reiterate that that is still over 3x the target rate and despite Headline being down close to 30% from its highs it’s not coming down quick enough for their liking. They have stressed ad infinitum that they are focused on the core “services ex shelter” component, which they claim is a bellwether for the tight labour market, which in turn is fuelling wage growth. Also worth noting that there are a couple of regional Fed surveys in the week (NY Monday and Michigan Friday) which have inflation components, so worth bearing in mind. I attach an article below from Joseph Politano which discusses a new inflation indicator, relating specifically to rents, which may help to identify the “lag effect” in a more quantitive manner. Technical piece but well worth a read.
Apricitas Economics - The Most Important New Inflation Indicator
UK Monthly GDP. More signs of weakening for the UK economy expected in the November GDP print, which consensus is pointing towards a 0.3% contraction for the month. The previous month’s bounce was primarily down to the Queen’s funeral, but November should see us back to the downward trend which if continued in December should see us print in negative territory and confine the UK Economy to the official ranks of a recession. Despite this, of course, the BoE will continue to hike with a 50/25bp hike priced in at 60/40 for the December MPC.
Powell speech. Chair Powell takes part in a panel discussion on Tuesday and obviously, all eyes will be on his utterings. The subject matter, however is on central bank independence so how much “market” guidance will be contained in it remains to be seen.

As ever, the FXMacro Guy gives an excellent overview of last week’s happenings in the market and a look ahead to this week in his piece below. Essential reading.

FXMacro Guy - Review of/Outlook for the week

Some points of note from Friday

The European flash inflation report did not fail to disappoint with a big downside miss on expectations with the December YoY headline coming in at 9.2% from a previous 10.1%. However, the core YoY measure ticked up to 5.2% from a previous 5% and no doubt the ECB will be firmly focused on this print as they ring the hawkish bell to start the new year.

Having said that, Centeno was swiftly out of the blocks on Friday, calling the report positive but sees more hikes, although he tempered the hawkish tone by saying that if there are no new shocks, rates are close to the peak.

Lane stuck his neck out and claimed that he expects to see a “fairly big drop”in inflation this year.

Fed speakers

Usual soundbites from the Fed speakers from late last week.

Cook felt inflation was still too high despite recent encouraging signs.

Bostic was comfortable with 25 or 50bps for the February FOMC and sees the terminal rate around the 5/5.25%. He remains of the belief that the Fed must stay the course.

Barkin alluded to a more gradual rate path which should in turn limit the harm to the economy.

Whilst George felt there remains a real risk to inflation from higher energy and crop prices. Also that the longer inflation remains high the more likely it will become embedded and more costly to combat.

Lastly Evans sees the path for slower pace of rate rises in the future.

The Day Ahead

Pretty quiet start to a week, which actually doesn’t hold out much hope outwith Powell’s speech on Tuesday (which may be a damp squib too, given the subject matter) and the US inflation report on Thursday.

Overnight the Tokyo CPI, where expectations point to a 40 year high in the Core CPI YoY measure at 3.8% which will fuel market expectations for a change in tack this year from the BoJ.

Fed’s Bostic speaks later too.

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

Monday

Japan Tokyo Core CPI YoY Dec consensus 3.8% vs previous 3.6% (23.30 GMT)

Japan Tokyo CPI YoY Dec consensus 4% vs previous 3.8% (23.30 GMT)

Japan Tokyo CPI Ex Food & Energy YoY Dec previous 1.2% (23.30 GMT)

Fed Speakers

Bostic (17.30 GMT)

Tuesday

Fed Speakers

Powell (13.00 GMT)

ECB Speakers

Schnabel (09.30 GMT)
de Cos (15.35 GMT)

Wednesday

Australia Monthly CPI Indicator Nov consensus 7.3% vs previous 6.9% (00.30 GMT)

ECB Speakers

Holzmann (08.35 GMT)
Vujcic (09.40 GMT)

Thursday

China Inflation Rate YoY Dec consensus 1.8% vs previous 1.6% (01.30 GMT)

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

US Inflation Rate YoY Dec consensus 6.5% vs previous 7.1% (13.30 GMT)

US Inflation Rate MoM Dec consensus 0% vs previous 0.1% (13.30 GMT)

US Core Inflation Rate YoY Dec consensus 5.7% vs previous 6% (13.30 GMT)

US Core Inflation Rate MoM Dec consensus 0.2% vs previous 0.3% (13.30 GMT)

Fed Speakers

Bullard (16.30 GMT)

Friday

UK GDP MoM Nov consensus -0.3% vs previous 0.5% (07.00 GMT)

UK GDP YoY Nov consensus 0.3% vs previous 1.5% (07.00 GMT)

UK Manufacturing Production YoY Nov consensus -5.1% vs previous -4.6% (07.00 GMT)

UK Industrial Production YoY Nov consensus -3.2% vs previous -2.4% (07.00 GMT)

UK Construction Output YoY Nov consensus % vs previous 7.4% (07.00 GMT)

EU Industrial Production YoY Nov consensus 0.5% vs previous 3.4% (10.00 GMT)

US Michigan Consumer Sentiment Prel Jan consensus 60 vs previous 59.7 (15.00 GMT)

US Michigan Inflation Expectations Prel Jan consensus vs previous 4.4% (15.00 GMT)

US Michigan 5y Inflation Expectations Prel Jan consensus vs previous 2.9% (15.00 GMT)

Good luck.

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