The Morning Hark - 17 Apr 2024
Today’s focus...Powell (minor) pivot back to “higher for longer” mantra as central banks start to diverge.
Overnight Highlights
Prices are at 6.45 BST/1.45 EST, with changes reflecting movement from midnight GMT
Oil - Oil off smalls overnight with Brent and Crude June futures trading at 89.60 and 84.30. Global demand issues back in vogue with continued worries over Chinese economic growth and a rise in US stockpiles. The markets looked through the China GDP figure and focused more on the weaker retail sales and industrial production whilst EIA stats showed a build in inventories.
EQ - Asian equity markets off a touch overnight, following the weak US close, with the Hang Seng and Nikkei futures trading at 16,200 and 38,140 respectively.
The US indices flat with the S&P and Nasdaq futures currently at 5100 and 17,890 respectively.
Gold - Gold backing off overnight on some profit taking with currently June futures trading at 2393.
FI - US yields continuing their firm theme post Powell with the US2y futures trading at 4.99% whilst the US10y futures yield at 4.67%. Yesterday the 2y recaptured 5% for the first time since November.
European yields firmed again yesterday in line with the US move with the German 10y closing at 2.49% and the Italian 10y yield at 3.91%.
UK gilt 10y similarly at 4.30%.
FX - The USD holding onto its gains from yesterday with the USD Index currently at 106.40. The USD now on five days of gains as it hits a 6m high. The majors all a touch softer; JPY, EUR and GBP currently at 154.65, 1.0615 and 1.2420 respectively.
Today’s FX option expiries sees in the EUR €1.4bn at 1.0630 and in USDCAD $1.5bn at 1.38.
Others - Bitcoin and Ethereum continuing a mild recovery off its recent lows with the pair currently up a couple of percent at 64,000 and 3100 respectively.
Macro Themes At Play
Recap
UK Labour Report for February ugly as with its worst headline number in 6 months with employment down 156k, the unemployment rate edged up to 4.2% and the average earnings remained relatively stable but did not bring any cheer for the BoE as it remains at elevated levels; ave earnings excl. bonus at 6%. Volatile, out of date and not all that reliable but what you see is not great.
ZEW Surveys the only other morning highlights and what highlights they were with both the EU and German printing their best in over two years at 43.9 and 42.9 respectively.
Canada Inflation Report for March came in mixed with headline YoY ticking up a touch to 2.9% whilst core dropped to 2%. However both were a touch hotter than anticipated. However looking at the BoC more favoured measures CPI Median and Trimmed Mean we see a touch cooler at 2.8% and 3.1% YoY. Overall not a lot for the BoC to do just on this data.
Poor housing data in the US with the preliminary readings for March Building Permits and Housing Starts disappointing at 1.458m and 1.321m respectively and well below expectations. Housing starts at their lowest level for almost 4 years.
US Industrial and Manufacturing Production coming in pretty much in line with thew YoY measures now at 0% and 0.8% respectively.
Central Bank Speakers
The Fed speakers stole the show with what appeared to be a minor pivot back to the “higher for longer” mantra. At last Powell realised that “three is a disappointment” as he noted that the inflation prints from the first three months of the year had not given the Fed greater confidence. He even alluded to “whether” the Fed will be able to cut rates later this year. At best it seems its September for the Fed. Elsewhere in central bank land they all seem to be converging on June as being a bumper month for rate cuts with the ECB now appearing to be a shoe in, the BoC saying its a possibility and the BoE suggesting a move prior to the Fed. All the more reason to buy the USD I guess.
Fed’s Jefferson on the hawkish side of the debate as he claimed that stubborn inflation would warrant a longer period of rates at current levels. Unlike his February speech he did not reference rate cuts. He gave a heads up for next week’s PCE with headline and core for March expected to come in at 2.7% and 2.8% respectively. These are a touch higher than expectations.
Powell revisited the higher for longer theme of yesteryear in his speech at the IMF meeting. He referred to the inflation data this year as showing a “lack of progress” and has introduced new uncertainty over when and whether the Fed will be able to lower rates later this year. Furthermore he said that “recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence”.
Barkin pointed to the CPI data as not being supportive to a soft landing and its smart for theFed to take its time on the decision to cut rates.
ECB’s Rehn said the ECB will not pre-commit to any rate path. A 25bp cut is possible in June if the CPI trend persists.
Makhlouf says that he will not predict what will happen after the first cut in June but its possible that there will not be further cuts this year. We should be ready for all scenarios and be vigilant.
Villeroy anticipated further rate cuts this year and next falling kick off in June. However inflation may see ups and downs in the coming months.
Lagarde said that the ECB will cut rates soon barring any major surprises. However the path back to 2% target will be bumpy and doesn’t seee the ECB getting there sustainably until mid next year.
BoC’s Macklem felt that the March inflation data showed that the economy is moving in the right direction with the downtick in core inflation suggesting that the pressures are easing. Furthermore a June rate cut is possible.
BoE’s Bailey claimed to see “strong evidence” that the process of disinflation is working its way through. He saw divergence in the US and UK economies and as such the UK could potentially cut before the US.
Lombardelli claimed that the decline in UK inflation is likely to be bumpy and may prove to be more persistent than expected.
The PBOC stated that they had a meeting with the US financial working team which was professional, pragmatic, candid and constructive regarding monetary policy, financial stability and financial regulation cooperation. Potential end to the Yuan weakness approaching?
The Day Ahead
Overnight the NZ Inflation Report for q1 showed a QoQ 0.6% in line print but the YoY dropped to 4%, its lowest level since q2 2021. A decent result for the RBNZ but we don’t see this number changing their cautious stance on monetary policy.
The Japan April Tankan came in as expected at 9 for the month however the Balance of Trade for March jumped into surplus for the first time in a couple of months and indeed its biggest surplus since July 2021. The number was driven by a sharp drop in imports which had blipped into positive territory last month for the first time in a year but have returned to their negative territory again.
As we go to print the UK Inflation Report for March. Final EU Inflation Print for March is all the remind in terms of data for the day although again another plethora of central bank speakers. Overnight the Australian Labour Report for March.
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Main Highlights Ahead
All times in BST (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead ahead in terms of data and speakers:
Wednesday
UK Inflation Rate MoM Mar consensus % vs previous 0.6% (07.00 BST)
UK Inflation Rate YoY Mar consensus 3.1% vs previous 3.4% (07.00 BST)
UK Core Inflation Rate MoM Mar consensus % vs previous 0.6% (07.00 BST)
UK Core Inflation Rate YoY Mar consensus 4.1% vs previous 4.5% (07.00 BST)
EU Inflation Rate MoM Mar Final consensus 0.8% vs previous 0.6% (10.00 BST)
EU Inflation Rate YoY Mar Final consensus 2.4% vs previous 2.6% (10.00 BST)
EU Core Inflation Rate YoY Mar Final consensus 2.9% vs previous 3.1% (10.00 BST)
Fed Speakers
Mester (22.30 BST)
ECB Speakers
Cipollone (10.00 BST)
Cipollone (14.00 BST)
de Cos (16.00 BST)
Schnabel (16.45 BST)
BoE Speakers
Greene (13.05 BST)
Bailey (17.00 BST)
Haskel (19.00 BST)
Early Thursday
Australia Unemployment Rate Mar consensus 3.9% vs previous 3.7% (02.30 BST)
Australia Employment Change Mar consensus 7.2k vs previous 116.5k (02.30 BST)
Good luck.
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