The Morning Hark - 17 Jan 2024
Today’s focus... Waller wallops the market again. Methodical and careful the new higher for longer? Hotter UK inflation….any comments Rishi?
Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil sold off a touch overnight in Asia with Brent and Crude March futures flat at 77.60 and 71.80 respectively. Still the same themes lurking in the background with the Middle East tensions and doubts still clouding the demand side of the equation. The sell off was due to some slight disappointment in the Chinese data dump which failed to meet expectations but only just! Seems a touch of a pin the tail on the donkey explanation that.
EQ - Asian equity markets a sea of red following the US stocks lower. The Nikkei holding in better with its new year underlying bid tone. It is off smalls at 35,490. The Hang Seng continues its shocker of a start suffering more, with an over four percent dip to 15,200. Double whammy of those “weaker” China prints and the US yield move.
The US indices off half of one percent overnight continuing their weakness from yesterday with the S&P currently at 4777 whilst the Nasdaq is at 16,850.
Gold - Gold on the back foot with the US yield rally with Feb futures trading at 2022.
FI - Global yields consolidating overnight after their post Waller rally yesterday with the US2y and US10y currently at 4.30% and 4.07% respectively. The 10y closing at its highest level since the Dec FOMC.
European yields continuing to firm on the more hawkish central bank rhetoric with the German 10y at 2.26% and the Italian 10y yield at 3.82%.
UK gilt 10y little changed at 3.80%.
FX - The USD riding the yield rally well with it almost erasing all of its Dec FOMC’s losses. The USD Index currently at 103.55. The JPY, EUR and GBP all suffering as a consequence with them currently at 147.85, 1.0865 and 1.2630 respectively.
FX option expiries in the EUR €1bn each at 1.09 and 1.0850 with USDJPY seeing $1.2bn at 147.35.
Others - Bitcoin and Ethereum all a bit dull as they stabilise around their post weekend sell off levels at 42,800 and 2560 respectively. .
Macro Themes At Play
Recap
Eurozone Consumer Inflation Expectations hit the lowest level in almost two years at 3.2%.
The ZEW Surveys for Germany and the wider Eurozone were both encouraging. Germany beat expectations to 15.2 its highest print in almost a year on the back of anticipated rate cuts. Likewise the Eurozone beat expectations to 22.7 but that’s a slight downtick on last month’s print.
Canadian Inflation Report showed the headline coming in as expected at -0.3% MoM taking the YoY higher to 3.4% on the back of higher gasoline prices. Similar upticks were seen for the YoY CPI median and trimmed-mean. In brighter news the core measure dipped to an eighteen month low at 2.6%.
BoC rate cut bets got trimmed with March’s chances now in the 30% region post data.
US NY Empire State Manufacturing Index for January hits its lowest reading since the depths of the pandemic at -43.7! The drop was lead by new orders and shipments which posted steep declines. One bright spot would be to point out that the last few January prints have been on the weak side.
Oops I did it again! Waller loves to wallop the market!
He was at it again yesterday pushing back on not only early rate cuts but also the frequency of them. In what could be seen as the new “higher for longer” he claimed cuts should be considered “methodically and carefully”. There was no reason to copy previous rate cutting cycles which were more about combatting recessions.
Remember we have spoken about this in the past that rate cutting cycles tend to be a lot sharper and quicker than the equivalent hiking cycles.
This is all well and good but what if there are not recessionary concerns but financial stability ones? What happens to the rate path then? More on this below.
He also flagged the Feb 9 BLS release of seasonally adjusted CPI revisions as one of the key factors when the Fed would look to cut rates.
Market reaction was fairly swift with yields rallying, USD strengthening and rate cut expectations getting trimmed with now around 60% chance in March.
ZeroHedge - Why market is gunning for early rate cuts
Central Bank Speakers
ECB’s Villeroy too early to declare victory on inflation. Rates shouldn’t be higher than today and our next move should be a cut.
Centeno was keen to stress that the ECB needs to be prepared for all topics, including rate cuts. December projections have been confirmed by recent data but inflation slightly below.
Valimaki felt that inflation was on the right track but again the job is not done yet and therefore restrictive monetary policy is still called for. The ECB must not jump the gun on rate cuts better to wait longer than exit prematurely.
Nagel was, unsurprisingly, on the deny deny deny mantra with talk about rate cuts comes too soon. We still have a ways to go on inflation and we remain data dependent.
Muller noted that market expectations for rate cuts in 2024 are aggressive.
Fed’s Waller likes to give the market a slap! The Fed can cut “this year” if inflation doesn’t rebound. No reason to move “as quickly, cut as rapidly as in the past”. When cuts begin they should be “methodical and careful”. I will need more information in the coming months to be sure. We are on the right track to reach 2% target. We will be watching the scheduled CPI revisions carefully. Risks to inflation and employment mandates are more closely balanced.
On the balance sheet he claimed that it “could slow this year” adding “I don’t think we need to taper the pace on MBS” as “we are not even hitting the cap”.
The Day Ahead
Overnight saw the January Japanese Reuters Tankan Index which dipped on expectations and previous to 6.
The Chinese Data Dump was lead by GDP which came in pretty much in line with q4 growth seen at 1% which takes YoY to 5.2% and above what is seen as trend 5% growth.
Industrial Production YoY Dec was a smidge better than previous and expectations at 6.8% and its best print in almost 2 years.
Retail Sales YoY Dec slight payback for the bumper numbers of November but still a strong showing at 7.4%.
Unemployment Rate Dec saw a small uptick to 5.1%.
Industrial Capacity Utilisation q4 came in at 75.9% a small upside beat and its best reading in 2 years.
Just as we go to print the December UK Inflation Report and it was not in the playbook with it coming in hotter than expected. Headline MoM at a 3 month high to 0.4% taking the YoY back to 4%. Core stickier still with a MoM print at 0.6%, its highest monthly print since May. The YoY now at 5.1%. Not what the Bailey ordered!
The rest of the day is pretty packed with a plethora of central bank speakers.
The morning only sees the final December Eurozone Inflation Report. The afternoon sees US Retail Sales, Industrial and Manufacturing Production as well as Capacity Utilisation for December.
Overnight we have Japanese Machinery Orders, Industrial Production and Capacity Utilisation all for November as well as the December Aussie Labour Report.
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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
Riksbank Breman Speaks (08.10 GMT)
EU Inflation Rate MoM Final Dec consensus 0.2% vs previous -0.6% (10.00 GMT)
EU Inflation Rate YoY Final Dec consensus 2.9% vs previous 2.4% (10.00 GMT)
EU Core Inflation Rate YoY Final Dec consensus 3.4% vs previous 3.6% (10.00 GMT)
US Retail Sales MoM Dec consensus 0.4% vs previous 0.3% (13.30 GMT)
US Retail Sales YoY Dec consensus % vs previous 4.1% (13.30 GMT)
US Industrial Production MoM Dec consensus 0% vs previous 0.2% (14.15 GMT)
US Industrial Production YoY Dec consensus % vs previous -0.4% (14.15 GMT)
US Manufacturing Production MoM Dec consensus 0% vs previous 0.3% (14.15 GMT)
US Manufacturing Production YoY Dec consensus % vs previous -0.8% (14.15 GMT)
US Capacity Utilisation Dec consensus 78.7% vs previous 78.8% (14.15 GMT)
Japan Machinery Orders MoM Nov consensus -0.8% vs previous 0.7% (23.50 GMT)
Japan Machinery Orders YoY Nov consensus 0.2% vs previous -2.2% (23.50 GMT)
Fed Speakers
Barr (14.00 GMT)
Bowman (14.00 GMT)
Williams (20.00 GMT)
ECB Speakers
Cipollone (08.30 GMT)
Vasle (08.35 GMT)
Simkus (09.15 GMT)
Vujcic (11.30 GMT)
Knot (12.15 GMT)
Lagarde (15.15 GMT)
Nagel (18.30 GMT)
Early Thursday
Australia Unemployment Rate Dec consensus 3.9% vs previous 3.9% (00.30 GMT)
Australia Employment Change Dec consensus 17.6k vs previous 61.5k (00.30 GMT)
Japan Industrial Production MoM Final Nov consensus -0.9% vs previous 1.3% (04.30 GMT)
Japan Industrial Production YoY Final Nov consensus % vs previous 1.1% (04.30 GMT)
Japan Capacity Utilisation MoM Nov consensus % vs previous 1.5% (04.30 GMT)
Good luck.
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