The Morning Hark - 1 Feb 2024
Today’s focus...Jay stays strong and proclaims its not the Ides of March but the Darling Buds of May but watch those Regionals!
Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil little changed in Asia with Brent and Crude April futures sitting at 80.60 and 75.80 respectively. Oil had a triple whammy of bad news yesterday; weak economic data, EIA stats showing a crude build and the hawkish Fed.
EQ - Asian equity markets quieter overnight with the Hang Seng futures starting the month smalls in the green at 15,600. The Nikkei futures little changed at 35,900.
The US indicies stabilising in Asia after yesterday’s sell off. The S&P currently at 4880 and the Nasdaq at 17,300. All eyes on the regional banking sector after yesterday’s sharp decline taking it back to levels last seen during the SVB crisis. The main driver was the NY Community Bancorp down draft of close to 40% on the back of real estate worries.
Gold - Gold still seeing nothing of note with the April futures currently trading unchanged at 2060.
FI - Global yields again selling off in Asia with the US2y and US10y currently at 4.24% and 3.94% respectively after yesterday’s round trip.
European yields closed yesterday softer with the German 10y closing at 2.17% and the Italian 10y yield at 3.73%.
UK gilt 10y similarly closing yesterday at 3.80%.
FX - The USD had a round trip and some yesterday sold off on NYCB and weak ADP and rallied on no March cut and we are right back where we started yesterday at 103.65, which pretty much sums up this year! The JPY, EUR and GBP similarly so at 146.80, 1.08 and 1.2660 respectively.
Today’s FX option expiries nothing of interest.
Others - Bitcoin and Ethereum didn’t like the Jay chat but still hanging in there with the pair currently sitting at 42,160 and 2275 respectively.
Macro Themes At Play
Recap
Swiss Retail Sales for December showed a similar disappointment to the earlier German reading. The MoM dipping to -0.6%, its first negative print in 5 months.
Germany Unemployment Change ticked down in January, in a rare bright spot for the beleaguered country. Unemployment rate ticks down a notch to 5.8%.
Germany Inflation Report for January in line with the MoM at 0.2% but the YoY dipped below 3% to 2.9% for the first time since mid 2021.
US ADP Employment Change for January missed expectations at 107k and also saw a downward revision to the previous month’s print.
US Treasury Refunding Announcement saw the treasury increase auction sizes again and goes against the grain of what they had said on Monday. Although they did claim that they see no more boosts coming (like they said on Monday?).
Canada GDP nice upside surprise for November at 0.2% and also for December preliminary print at 0.3%.
US Employment Cost Index QoQ q4 touch softer at 0.9%and the softest since q3 2021.
US Chicago PMI for January followed the pattern of recent regional surveys with a downside miss at 46 with a further downside revision to the previous month.
FOMC Review
Rates remained on hold. Not exactly a revelation but needs to be said and was voted for unanimously.
Statement. They took out the tightening bias as was expected but tempered it with the need to see more “confidence” that inflation is slowing before cutting rates. The statement also omitted, somewhat worryingly, the reference to the US banking system being sound and resilient. It also dropped the reference to tighter financial conditions.
New voting members. Hard to tell their influence but certainly a more hawkish tone to proceedings.
Press Conference. Jay walked the line and managed to get the tightening bias out of the statement but still left the building with a seemingly hawkish stance. Some of his money lines:
“We need to see more evidence that confirms what we think we are seeing, gives us confidence we are on sustainable path to 2% inflation”
“I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to [cut], but that's to be seen”
“We have confidence but more confidence is needed”
“If we saw an unexpected weakening in the labor market, that would certainly call for cutting sooner. If inflation was stickier or higher than anticipated, that would argue for moving later”
“A lot of the growth is from labour market and supply chain healing. When that peters out, our restrictive rate will show up more sharply
QT tapering. Another placeholder with regard top QT. Powell indicated that the reverse repo does not have to go to zero before tapering and that the March meeting will see a “in-depth discussion” on the balance sheet.
That seems a little slower than a lot of participants were looking for with a March announcement and May start being consensus. Let’s see.
In conclusion certainly more hawkish than the market had expected and more explicit. March off the table but May is in play and probably the starting gun for the rate cutting cycle, if all things go as planned. We don’t often praise him much but looks like, for now at least, Powell has started 2024 off pretty well. 25% chance for March now. Fully priced for May with 110bps for the year in total.
However taking out “the US banking system is sound and resilient” from the FOMC statement when NY Community Bancorp hit a down draft does that tell us something?
Regional bank sell off tantrum feeds a Fed talkback on March anyone???
BoE Preview ….tightening bias goes, vote changes and upbeat forecasts?
Rates remain on hold. Not exactly a revelation but needs to be said.
Statement. Key point of note here, and similar to the Fed, is that the BoE’s statement still alludes to potential further hikes. Policy is referred to as being “sufficiently restrictive for sufficiently long” and to stay restrictive for “an extended period”. In addition “further tightening” is required if evidence emerges of “more persistent inflation pressures”. It seems likely, given the inflation profile, that the “further tightening” message will be struck through but to retain a semblance of “control” they will keep the higher for longer piece
The Vote. 6/3 balance between hold/hike has been in place for some time now but is likely to be threatened more than ever at this meeting. Given the backdrop of the sharp drop in inflation and the stagnant growth profile of the UK, are hikes really still needed? If the tightening bias goes in the statement surely some of the hawks will crumble and join the holds? Do we have any advance on a cutter? That would set the tongues wagging in Middle England!
Forecasts. So the BoE have a winning trifecta ticket with their year end forecasts, based on their November projections, for inflation, unemployment and wage growth all coming in lower than expected; 4% (versus 4.6% forecast), 4.2% (4.3%) and 6.5% (7.25%). They also saw inflation returning to 2% target by the end of 2025. Surely we see a whole host of positive revisions on the inflation front and potentially seeing them move target inflation reached by the end of this year.
In conclusion, the Bank could find itself with a runaway train on the rates front if the statement, vote and forecasts all line up on the dovish front. There is currently around 110bps worth of cuts in the curve but we could be off to the bull steeper races if they adjust things as radically as expected. Bailey the Laggard may struggle to keep a lid on things at this rate! Follow the Jay, Andy!
Central Bank Speakers
ECB’s Lane needed more confidence that inflation is headed to 2% target.
The Day Ahead
Overnight we got the final Manufacturing PMIs from Australia, Japan and China. Australia started things off on a positive note with a first growth print in 11 months at 50.1 although a slight downward revision on the preliminary reading.
Japan came in as estimated at 48 whilst the Chinese equivalent had a slight uptick on estimated to match last month at 50.8.
Busy day ahead with central bank meetings from the Riksbank and the BoE. The remaining major economies’ final January Manufacturing PMIs. The Eurozone’s Flash Inflation Report for January and its Unemployment Rate for December.
Finally the afternoon sees the US ISM Manufacturing Survey.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead ahead in terms of data and speakers:
Thursday
Riksbank Interest Rate Decision rates to remain on hold at 4% (08.30 GMT)
Switzerland procure.ch Manufacturing PMI Jan consensus 44.5 vs previous 43 (08.30 GMT)
Germany HCOB Manufacturing PMI Final Jan consensus 45.4 vs previous 43.3 (08.55 GMT)
EU HCOB Manufacturing PMI Final Jan consensus 46.6 vs previous 44.4 (09.00 GMT)
UK S&P Global Manufacturing PMI Final Jan consensus 46.9 vs previous 46.2 (09.30 GMT)
EU Inflation Rate MoM Flash Jan consensus % vs previous 0.2% (10.00 GMT)
EU Inflation Rate YoY Flash Jan consensus 2.8% vs previous 2.9% (10.00 GMT)
EU Core Inflation Rate YoY Flash Jan consensus 3.2% vs previous 3.4% (10.00 GMT)
EU Unemployment Rate Dec consensus 6.4% vs previous 6.4% (10.00 GMT)
BoE Interest Rate Decision rates to remain on hold at 5.25% (12.00 GMT)
BoE Monetary Policy Report (12.00 GMT)
BoE MPC Meeting Minutes (12.00 GMT)
Canada S&P Global Manufacturing PMI Jan consensus vs previous 45.4 (14.30 GMT)
US S&P Global Manufacturing PMI Final Jan consensus vs previous 47.9 (14.45 GMT)
US ISM Manufacturing PMI Jan consensus 47 vs previous 47.4 (15.00 GMT)
US ISM Manufacturing Employment Jan consensus vs previous 48.1 (15.00 GMT)
US ISM Manufacturing New Orders Jan consensus vs previous 47.1 (15.00 GMT)
US ISM Manufacturing Prices Jan consensus 46.9 vs previous 45.2 (15.00 GMT)
US Construction Spending MoM Dec consensus 0.5% vs previous 0.4% (15.00 GMT)
ECB Speakers
Centeno (09.15 GMT)
Lane (11.30 GMT)
Lagarde (13.45 GMT)
Good luck.
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