The Saturday Hark Back - 14 Oct 2023

Capturing the themes of the week when there’s more time to digest them.

Oct 14, 2023

The Hark Back

The key narratives that drove markets last week:

Global assets were hit last week by two Fed narratives fighting for dominance ... it's still not clear if the squeeze in USD and rates was just a correction in the broader trend or if we're starting to form a more meaningful top in rates, high in USD and low in equities... the market tried and failed to start the Santa rally, but there is still time, if indeed the Fed cycle has ended.

#1. Positive Asset Performance - Santa Rally or just a Correction?

The Santa seasonals looked like they were falling nicely into place as the USD squeezed post NFP. USD longs, paid rates, short equities ... all the main themes from September had taken a meaingful step back, a sufficient squeeze to empower confidence in a trend reversal.
The reversal was endorsed by the Fed indicating they were close to being done. The meassage from Daly/Logan/Jefferson was that rates would remain "higher for longer" but they were approaching "sufficiently restrictive". In particular the market is doing their work for them, term premium has done enough of the work to aid the fight against inflation (The MacroTourist - The Fed Just Paused)
Expectations of disinflation were also apparent with the inflation swaps market looking for a CPI print below the economist survey. This had aided a 3-4 day equity rally ahead of the data.
We've also had a strong start to earning season from US banks with JPM hitting another record NII but clearly concerns remain on the economic outlook / consumer health (FT - US banks: bigger is still better for now)
China stimulus chatter re-appears post-holiday (FT, Bloomberg)

#2. Then came sticky super core... and a negative risk spiral into the weekend

Powell has told us forward guidance is dead and that they're data dependent. That still didn’t stop HarksterHQ falling for the new message from key committee participants and that there was a high probability that they were done as they showed unease with the trend in the long end. {Repeat after me .. it's the data that counts, it's the data that counts, it's the data that counts...}
Core CPI had a different idea.... It was not hot enough to force a Nov hike to come back onto the table but sticky core / rising rent / strong labour market was enough to keep another one on the table by year end (Dec @ 40%).
We can all see the leading activity indicators turning lower (looking at you housing) but the fiscally fuelled US economy is just too strong and the labour market too resilient for the Fed not to worry about re-igniting inflation and wages pressures. This week's PPI/CPI data set does not give a high degree of confidence or project with comfort a return to 2% inflation target.
The pop in rents was clearly a key driver of today's core inflation data, again we all know it is a lagging indicator but SEB make an excellent point that must worry the Fed ... "declining affordability for own homes (because of sky-rocketing mortgage rates) will spill over into demand for rentals and higher rents"
Following on from CPI, we then had an ugly 30-year tail - Bloomberg reports the worst scenes since 2020 Turmoil (Bloomberg)
Finally, as the prospect of an Israel land invasion increases, safe haven bids induced a short positioning squeeze in Fixed Income duration but it also led yesterday to a $50 rally in gold, sell off of ~1% in EURCHF and oil to rallied back to $90. “Gold saw its largest daily gain since March and the second-largest since March 2020” (h/t Daily Chartbook #301).
Energy security is a renewed global concern (Gordian Knot - "The Next Energy Domino: Natural Gas")... Australia LNG strike, Sabotage in Finland, potential Israel ground movement with the Saudi's also pausing diplomacy to normalise ties with Israel.

The US curve and Fed pricing was clearly to the forefront of trading last week, but elsewhere plenty of themes were trying to get some of the markets attention

US consumer confidence dipped (63.0 vs exp 67.1 and prior 68.1), along with heightened 1yr inflation expectations (3.8%)
Bankruptcies in the US are steadily rising under the brunt of higher funding cosys (Apollo Academy - Bankruptcies Rising Because of Fed Hikes)
UAW have upped the ante (Axios) and extended their strikes to some of Ford’s most profitable plants but Ford say they’ve no more room in negotiations (Fortune)
China risks deflation and trade data was very mixed (SCMP)
Italian bonds spread to Germany continues to concern participants, governments but not the ECB (Econostream)
UK real estate market is under considerable pressure (FT)
SBF trial dominated by Caroline Ellison (Fortune)
House is still struggling to find a new leader after Scalise couldn't secure the necessary votes (ZeroHedge)

Top 5 Podcasts of the Week:

Cognitive Dissidents - What You Missed During the War
Unchained - Day 8: former Blockfi CEO adds credibility to fraud charges
JPM Commodity Focus - Global Natural Gas: Prices rise everywhere
Morgan Stanley - Treasury Yields Move Higher
JPM Global FX - Not calling an end to the USD ride yet

The Week Ahead

Looking forward to next week...

ING - Key events in developed markets and EMEA next week
SEB - Tricky balance for Powell
Scotiabank - What Powell Might Say
UBS - The week in review and preview
Newsquawk - Highlights include US retail sales, china activity data, PBoC, inflation from NZ, Japan, UK and Canada

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