The Morning Hark - 14 Feb 2024
Today’s focus...US CPI puts another nail in the early rate cut coffin. USDJPY on intervention watch.
Overnight Highlights
Prices are at 5.00 GMT/0.00 EST, with changes reflecting movement from midnight GMT
Early print today due to travel commitments
Oil - Oil quiet in Asia with Brent and Crude April futures trading flat at 82.70 and 77.50 respectively. Oil had remained firm into the number yesterday before having the inevitable sell off with the renewed inflationary backdrop. In addition the API data showed an unexpected surge in inventories adding to oil’s woes. However the sell off was tempered by continued Middle East tensions.
The OPEC report had little of note with it sticking to its oil demand growth view although lifting its economic forecasts
EQ - Asian equity markets quiet despite the Hang Seng futures back open. They currently trade up smalls at 15,830. The Nikkei futures flat at 37,695.
The US indicies flat in Asia and licking their wounds after yesterday’s post CPI sell off with the S&P futures currently at 1970 and the Nasdaq at 17,675.
Gold - Gold at last had some movement yesterday but not good news for the gold bugs. Inflation never a good catalyst for gold and so it proved after the print with gold dipping a couple of percent. The April futures currently trading flat at 2005.
FI - Global yields coming off a touch in Asia after yesterday’s strong rally in yields with the US2y and US10y yields currently at 4.63% and 4.31% respectively. Yesterday’s print put paid to the US10y 4.20% level we had been flagging for some time. That level should now provide good support on the downside.
European yields naturally followed the US move yesterday and closed firmer with the German 10y at 2.40% and the Italian 10y yield at 3.94%.
UK gilt 10y similarly at 4.15%.
Japan’s 10y JGB up also to 0.76% its highest levels of the year.
FX - FX in Asia again quiet with the USD Index marking time at 104.80 and holding onto its post CPI gains from yesterday, on the back of the US yield rally. The JPY, EUR and GBP all suffering, although the JPY taking the majority off the strain, they currently sit at 150.45, 1.0710 and 1.26 respectively.
Today’s FX option expiries sees in the Eur €1.9bn at 1.07 and in USDJPY we have $2.3bn at 150.
Others - Bitcoin and Ethereum both held up relatively well given the carnage we have seen elsewhere. The pair currently down one percent at 49,400 and 2625 respectively.
Macro Themes At Play
Recap
The UK Labour Report for December was a mixed bag with the Employment Change registering a near expectations 72k build. The Unemployment Rate dipped to 3.8%, a year low, and a tick lower than expectations and the 5th consecutive month of declines for the series. Average Weekly Earnings (inc bonus) dipped to a 17 month low at 5.8% although slightly above expectations. On the flip side redundancies were at their highest level in nearly 3 years.
Post print the UK curve moved to price out cuts with only 69bps of cuts priced in for the rest of the year as opposed to 78bps prior to the report.
Swiss Inflation Report for January was a lot softer than anticipated and the SNB’s Jordan seems to have thrown a curveball to the markets when he anticipated inflation reaccelerating in the coming months. MoM did rise 0.2% but a lot lower than had been anticipated and the YoY printed its lowest level since October 2021 at 1.3%. Big contributors to the decline were housing, utilities and food.
The ZEW Surveys both coming in better than expected and the best prints in well over a year. The EU rose to 25 beating both previous and expectations as did the German gauge at 19.9. Sentiment was fuelled by the imminent expectations of rate cuts from the ECB. However one fly in the ointment is the current conditions gauge in Germany which sank to its lowest level since mid 2020.
US Inflation Report Review
Not what the market ordered but I guess the Fed speakers now have some “told you so” bragging rights. Hot report with upside misses for both headline and core MoM at 0.3% and 0.4% respectively. Indeed core had its sharpest MoM rise in 9 months. The YoY measures did little for near term rate cut expectations with headline and core at 3.1% and 3.9% respectively both above market expectations.
The shelter component seems to have been the major factor in the re-acceleration (0.6% MoM from 0.4% previously).
Immediate reaction May and June rate cut odds starting to shrink, now less than 100bp of cuts in the curve for the year, US10y above our 4.20% key upside level and USDJPY trades above 150 again.
As we said in our Week Ahead “in effect the easy miles are done on the inflation fight and its now the bumpy sticky prints that the Fed hopes will see them eventually get back to target”. I guess that’s where we are right now.
It looks like any chance of early rate cuts now rest on bank failures or a financial crisis!
Central Bank Speakers
ECB same rhetoric whilst the Japanese officials start to ramp up the intervention watch
ECB’s Lane suggested that the number of ECB rate cuts will depend on the inflation data and the number of cuts will depend on the ECB’s progress to its price goal. He also acknowledged the risks of cutting rates too soon and too late.
Japan’s Finance Minister Suzuki unsurprisingly, given the weak JPY, was back on the tapes. Expressing the usual stable currency mov events reflecting fundamentals and they are closely monitoring movements with a sense of urgency.
Also their Chief Currency Diplomat Kanda expressed concern at the recent rapid FX movements and they will take appropriate steps as needed. Again watching FX with high sense of urgency.
As we are back above 150 in USDJPY. I thought it would be useful to repost the escalation path of FX intervention from the jawboning to the actual physical intervention. A lot of these are old news but often good just to have a refresher.
Language such as “monitoring developments in currency markets”.
“Sudden/abrupt/rapid” movements in currency markets are “undesirable”. In addition markets are “not reflecting fundamentals”.
“Excessive” is introduced next to describe the price movements alongside “clearly” in addition to referring to FX moves as “speculative”.
Readying for action is normally reflected with the phrase “we are ready to take decisive action” which would suggest some action is imminent.
Price checking is the step prior to actual intervention whereby the BoJ will call round selected Japanese banks and ask for a level of USDJPY. Even though they do not deal the act of them asking normally makes the banks, who have been contacted, sell USDJPY in anticipation of intervention and they will also spread the news around the market to encourage more selling.
Same as 5 but this time the BoJ actually do sell USDJPY. This may happen in waves.
Finally co-ordinated intervention with other major central banks involved. This would generally happen early NY hours to include the US. This obviously has the most effect on the markets.
As we have said many times in the past, intervention has the best chance of turning the tide when it is coordinated and we see no incentive for the US to get involved at present especially as fundamentals actually do not support such a move. Given there is an over 5% difference between US and Japanese rates it would be hard to justify any help from the US as supporting economic fundamentals.
The Day Ahead
First up q4 Norwegian GDP and the UK Inflation Report for January.
Q4 data for the EU in terms of Employment Change and GDP is the main focus for the rest of the morning and throughout the day a deluge of central bank speakers will be on the tapes.
Busy overnight session where we get the Japanese q4 GDP print as well as Industrial Production and Capacity Utilisation for December. We also get the Australian Labour Report for January.
Prior to going to print tomorrow we get the q4 UK GDP Report as well as Industrial and Manufacturing Production for December.👏 If you found this briefing helpful, please show the desk some appreciation by giving it a ‘Like’ or a ‘Comment’ at the bottom of the page.
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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:
Wednesday
Norway GDP Growth Rate QoQ q4 consensus % vs previous -0.5% (07.00 GMT)
Norway GDP Growth Rate YoY q4 consensus % vs previous -1.9% (07.00 GMT)
UK Inflation Rate MoM Jan consensus -0.3% vs previous 0.4% (07.00 GMT)
UK Inflation Rate YoY Jan consensus 4.2% vs previous 4% (07.00 GMT)
UK Core Inflation Rate MoM Jan consensus -0.8% vs previous 0.6% (07.00 GMT)
UK Core Inflation Rate YoY Jan consensus 5.2% vs previous 5.1% (07.00 GMT)
EU Employment Change QoQ prel q4 consensus 0.2% vs previous 0.2% (10.00 GMT)
EU Employment Change YoY prel q4 consensus 1.1% vs previous 1.3% (10.00 GMT)
EU GDP Growth Rate QoQ q4 2nd est consensus 0% vs previous -0.1% (10.00 GMT)
EU GDP Growth Rate YoY q4 2nd est consensus 0.1% vs previous 0% (10.00 GMT)
EU Industrial Production MoM Dec consensus -0.2% vs previous -0.3% (10.00 GMT)
EU Industrial Production YoY Dec consensus -4.1% vs previous -6.8% (10.00 GMT)
BoC Mendes Speaks (19.30 GMT)
Japan GDP Growth Rate QoQ prel q4 consensus 0.3% vs previous -0.7% (23.50 GMT)
Japan GDP Growth Annualised prel q4 consensus 1.4% vs previous -2.1% (23.50 GMT)
Fed Speakers
Goolsbee (14.30 GMT)
Barr (21.00 GMT)
ECB Speakers
Vujcic (08.00 GMT)
Guindos (08.30 GMT)
Cipollone (14.00 GMT)
Nagel (17.00 GMT)
BoE Speakers
Bailey (15.00 GMT)
Early Thursday
Australia Employment Change Jan consensus 30k vs previous -65.1k (00.30 GMT)
Australia Unemployment Rate Jan consensus 4% vs previous 3.9% (00.30 GMT)
Japan Capacity Utilisation MoM Dec consensus % vs previous 0.3% (04.30 GMT)
Japan Industrial Production MoM Final Dec consensus 1.8% vs previous -0.9% (04.30 GMT)
Japan Industrial Production YoY Final Dec consensus % vs previous -1.4% (04.30 GMT)
UK GDP Growth Rate QoQ prel q4 consensus -0.1% vs previous -0.1% (07.00 GMT)
UK GDP Growth Rate YoY prel q4 consensus 0.1% vs previous 0.3% (07.00 GMT)
UK GDP MoM Dec consensus -0.2% vs previous 0.3% (07.00 GMT)
UK GDP 3m Avg Dec consensus -0.1% vs previous -0.2% (07.00 GMT)
UK Industrial Production MoM Dec consensus -0.1% vs previous 0.3% (07.00 GMT)
UK Industrial Production YoY Dec consensus -0.4% vs previous -0.1% (07.00 GMT)
UK Manufacturing Production MoM Dec consensus 0% vs previous 0.4% (07.00 GMT)
UK Manufacturing Production YoY Dec consensus 0.6% vs previous 1.3% (07.00 GMT)
Good Luck and Happy Valentine’s Day.
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actually, when it comes to the yen, I would argue the tide will only be turned when policies change, and that doesn't look like it is happening soon. not to say they won't intervene above 152, but it will only slow things down unless the Fed actually does start to cut