The Morning Hark - 13 Dec 2023
Today’s focus... The December FOMC - a festive game of “Where’s Waller’s Dot”.
Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil continues to slide after yesterday’s sell off with Brent and Crude February futures currently down close to one percent at 72.60 and 68.40 respectively. The old macro picture of over supply and weakening demand weighed on the sector yesterday resulting in a three percent loss. A small push back, post CPI, in the timing of the first Fed cut to May from April did little to help sentiment either. Whilst data on Russian exports, which showed they had jumped to their highest level in 6 months and the US EIA raising its forecast for supply in 2023 by 300,000 bpd put paid to any brittle optimism for the oil market.
EQ - Asian equity markets off overnight lead by weakness in the Chinese indices on the back of the Chinese leadership not delivering any specific measures out of their recent economic summit specifically aimed at stimulating the ailing real estate sector or boosting domestic demand. The Hang Seng is down over one percent at 16,170 whilst the Nikkei is off smalls at 32,830.
The US indices took a breather in Asia with the S&P currently up smalls at 4700 whilst the Nasdaq is at 16,600. The prospects of rate cuts next year, no matter when, seemed to fuel the Santa rally further yesterday as we are now at close to 2 year highs in the pair.
Gold - Gold “coulda been a contender” but not this time as it slips back below 2000. That zone now becomes our short term trading pivot but like a boozy office Christmas party; the rally offered so much but delivered so little apart from a sore head and a tinge of embarrassment. All eyes on JP for the next move. Currently the February futures sit at 1990.
FI - Global yields little changed in Asia with the US2y and US10y sitting at 4.73% and 4.21% respectively ahead of today’s FOMC. Yields took on a small bid tone post CPI with prospects for the first rate hike getting pushed a touch later into May of next year. Let’s see what tonight brings.
European yields softened a touch on the day with the German 10y closing at 2.23% and the Italian 10y yield at 4%.
UK gilt yields likewise with the 10y closing at 3.97%.
FX -Nothing of note overnight in FX land with the USD Index currently at 103.95. The JPY, EUR and GBP similarly quiet sitting at 145.90, 1.0780 and 1.2540 respectively.
FX option expiries wise today in EUR we see €1bn rolling off at both 1.0790 and 1.0850. Whilst in USDJPY $1.5bn at 146 and $1bn at 145.
Others - Bitcoin and Ethereum continue their slide with the pair currently at 40,800 and 2150 respectively. Encouraging for the bulls bids are starting to reappear again in Bitcoin so we may be finding a bottom. However the 40k level needs to hold or 30k comes back into play. Topside, as we said yesterday, 42.5k needs to be recaptured and held for 48k to come into play.
Macro Themes At Play
Recap
Germany ZEW Economic Sentiment Index for December had a decent upside beat to 12.8 for the month and its best print in 9 months despite the budgetary crisis in the country. The beat was spurred by double the number of respondents than previously except ECB rate cuts in the medium term.
The EU ZEW Economic Sentiment Index for the same month was an even more spectacular beat with a 23 print and a similar 9 month best. Similar optimism shining through on ECB rate cuts.
US CPI Review
All pretty much in line with the only disparity from consensus being on the headline MoM print which showed a slight uptick to 0.1%.The rise being attributed to a rise in rents which was tempered somewhat by the lower gasoline prices.
We have pretty much, as we spoke about in our preview yesterday, hit JPowell’s sweet spot, all in and around consensus with enough of an uptick to beat the market with, especially with core remaining sticky, but not too much to make them think about hiking again.
Guess Jay will come into the office tomorrow after all!
Central Bank Speakers
The ECB’s Villeroy was impressed by the recent drop in inflation from above 10% to under 3%. However the issue of rate cuts could be raised in 2024 but not right now. He did concede that, barring any shock, rate hikes were over.
The Chinese Politburo finished a two day meeting on the economy claiming support for the
faltering recovery but with little concrete measures specifically to help the real estate sector and measures to boost domestic demand. As we pointed to previously, when we highlighted Arthur Hayes’ piece “Panda Power”, potentially they are saving their bullets for after they have the Taiwan election results in early January which then may give them the ability to produce a stimulus package prior to the Chinese New Year?
FOMC Review
I post below my Week Ahead preview as a refresher for today’s main event.
In summary I think Powell will want to continue to stress that further tightening remains on the table and rate cuts are not being considered at this juncture. Perhaps he throws in a line suggesting that even if rate cuts were to take place, next year, it doesn’t mean the Fed cannot reverse such measures if the progress on inflation stalls or reverses.
The areas where he gets on shaky ground will be with the #DotPlot Mayhem. After his recent comments I can see a game of “Where’s Waller’s Dot” transpiring as we pour over the dot plot. In addition 12 out of 19 Fed members saw a further hike back in September so how radically will that change? Finally, of course, those pesky financial conditions and how he refers to the fact they have loosened close to a 100bps from September.
Then of course there is the small matter of whatever he says the market just does what it likes anyway!
FOMC Interest Rate Decision. #DotPlotMayhem here we go! The long awaited title fight with in the Blue corner the reigning champion and undefeated; JPowell and in the Red corner the challenger; Market Expectations. As one of my countrymen, Duncan McLeod, stated so dramatically………..“There can be only one”!
They both can’t be right can they? Anyway there would seem to be 4 areas of combat:
The Statement. The obvious first battleground. To temper the “challenger’s” enthusiasm we would expect JPowell & co to give a nod to the following three points; the continuing strong labour market and wage growth, both evidenced in Friday’s payroll report and the persistence of inflation, and in particular core, which they may have had some evidence of from the previous day’s inflation report. The area where the “champion” may feel most vulnerable will be in any reference to “financial conditions”. The previous statement had referred to these as “tighter” but since then US10y yields have come off some 70bps or so. To retain “tighter” would seem amiss so to soften somewhat or get rid totally? This will probably be the crucial tweak in the statement.
DotPlot. This is where it will get more interesting, although remember JPowell did previously diss these as “out of date” the minute they are released. What’s the point one may ask? Anyway in the last set they had looked for an additional 25bp hike and 50bp of cuts by the end of 2024. What looks likely is keeping that hike in would be a stretch at best so likely they get rid. So now it comes down to do they, retain the 50bps of cuts or, raise them further? In the moods the “champion” and “challenger” are in its tough to see the former letting the latter get even more ahead of itself and add to the number of cuts in 2024. Therefore 25 out and keep the 50 seems the most conservative approach. The problem may come with the Waller’s of the world who’s dots, given his recent rumblings, you would think will change dramatically.
Macroeconomic Projections. May offer an opportunity for the “champion” to “justify” the Fed’s DotPlot. Higher revisions to GDP in the earlier months with maybe a slowing in the later projections may help them justify their higher for longer dots. Equally a mild slowing in employment and inflation would do similar.
The Presser. Finally the “champion’s” last chance to land a knockout blow. Little deviation from Dec 1 speech with a little more clarity in terms of “restrictive enough” would seem the playbook. So the Fed are still on a “higher for longer” course, they will hike again if needed, growth and the labour market remain resilient and we will not contemplate cuts until we see core inflation on a consistently downward trend and start to see sub trend growth. I guess where he gets into potentially stick territory is any reference to financial conditions.
The Day Ahead
Overnight the Japanese Tankan survey for q4 which showed the Large Manufacturers Index beating expectations coming at 12 and printing its best q1 2022. The Non-Manufacturers Index equally as good coming in at 30 and continuing the upward trend in the series. Indeed we haven’t been at these levels since the early 1990s.
Main factors for the upside surprise are improved supply chains, falling import costs and a bottoming out of the chip market. For more quotes and a deeper dive I refer you to the link below for those with an inclination.
Just printed UK GDP data for October and it was a stinker showing a slowing in growth of -0.3% which takes the YoY to a rather anaemic 0.3%. Both sharp downside misses.
The 3m average meanwhile is flat. Is there a pulse out there? A Merry Christmas to you all!
In addition Industrial Production for October did little to cheer showing a contraction of 0.8% taking the YoY to 0.4%.
Manufacturing Production for October even worse at -1.1% for the month leaving the YoY at 0.8%.
All in all a pretty depressing data dump as the BoE sits down tomorrow for its pre Christmas knees up!
The morning is taken up by October’s Eurozone Industrial Production print.
The afternoon is all about the US PPI report for November after yesterday’s slightly hotter CPI. Expectations are, despite an uptick in the MoM, for the YoY’s to continue to soften and core potentially printing its lowest level since early 2021.
Quite a cacophony of data overnight too. First up q3 NZ GDP followed by Japanese Machine Orders for October.
Australian Labour Report for November is closely followed by the RBA Bulletin and then the Bank’s Jones speaks. Finally Japanese Industrial Production for October.
Just as we go to print the Swedish Inflation Report for November.
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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 Industrial Production MoM Oct consensus -0.3% vs previous -1.1% (10.00 GMT)
EU Industrial Production YoY Oct consensus -4.6% vs previous -6.9% (10.00 GMT)
US PPI MoM Nov consensus 0.1% vs previous -0.5% (13.30 GMT)
US PPI YoY Nov consensus 1% vs previous 1.3% (13.30 GMT)
US Core PPI MoM Nov consensus 0.2% vs previous 0% (13.30 GMT)
US Core PPI YoY Nov consensus 2.2% vs previous 2.4% (13.30 GMT)
FOMC Interest Rate Decision expectations for rates on hold at 5.5% (19.00 GMT)
FOMC Economic Projections (19.00 GMT)
Powell Press Conference (19.30 GMT)
NZ GDP Growth Rate QoQ q3 consensus 0.2% vs previous 0.9% (21.45 GMT)
NZ GDP Growth Rate YoY q3 consensus 0.5% vs previous 1.8% (21.45 GMT)
Japan Machinery Orders MoM Oct consensus -0.5% vs previous 1.4% (23.50 GMT)
Japan Machinery Orders YoY Oct consensus -5.1% vs previous -2.2% (23.50 GMT)
Early Thursday
Australia Employment Change Nov consensus 11k vs previous 55k (00.30 GMT)
Australia Unemployment Rate Nov consensus 3.8% vs previous 3.7% (00.30 GMT)
RBA Jones Speaks (00.30 GMT)
RBA Bulletin (00.30 GMT)
Japan Industrial Production MoM Final Oct consensus 1% vs previous 0.5% (04.30 GMT)
Japan Industrial Production YoY Final Oct consensus % vs previous -4.4% (04.30 GMT)
Japan Capacity Utilisation MoM Oct consensus % vs previous 0.4% (04.30 GMT)
Sweden Inflation Rate MoM Nov consensus 0.6% vs previous 0.2% (07.00 GMT)
Sweden Inflation Rate YoY Nov consensus 6% vs previous 6.5% (07.00 GMT)
Sweden CPIF MoM Nov consensus 0.5% vs previous 0.1% (07.00 GMT)
Sweden CPIF YoY Nov consensus 3.9% vs previous 4.2% (07.00 GMT)
Good luck.
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