The Morning Hark - 18 Dec 2023
Today’s focus...Fed civil war and The Week Ahead.
Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil up one percent overnight with Brent and Crude February futures at 77.30 and 72.50 respectively. Russian oil data showing lower exports due to bad weather has helped to underpin oil. Whilst the ongoing attacks off Yemen by the Houthis in the Red Sea have also contributed to the more hawkish backdrop.
EQ - Asian equity markets subdued overnight with the Hang Seng off smalls at 16,630 and the Nikkei flat at 32,700.
The US indices up smalls in Asia with the S&P currently at 4780 whilst the Nasdaq is at 16,850 both remain close to their all time highs. Indeed the Nasdaq had a record high close on Friday, the first time in over 2 years.
Gold - Gold remaining in no-man’s land having sold off a touch on the back of the Fed pushback. Gold Feb futures currently at 2038. 2000 remaining the base with the first target 2085 and beyond.
FI - Global yields under pressure again and back into their selling trend after the Fed pushback. The US2y and US10y currently at 4.42% and 3.91% respectively.
European yields sold off on Friday despite the ECB’s insistence it was higher for longer. The German 10y closing the week at 2.02% and the Italian 10y yield at 3.72%.
UK gilt yields similarly with the 10y closing at 3.69%.
FX - Quiet FX session with the USD flat with USD Index currently at 102.45. The JPY, EUR and GBP similarly quiet at 142.25, 1.0920 and 1.2690 respectively.
FX option expiries wise today in the EUR we have Eur1.4bn at 1.0910 whilst in the AUDUSD we have Aud1.4bn at 0.6740.
Others - Bitcoin and Ethereum back on the defensive with the pair off close to two percent at 41,200 and 2180 respectively. Bitcoin back through the 42,500 level with 38,000 being the downside target.
Macro Themes At Play
Recap
German PMIs didn’t start the day off particularly well with a small miss for manufacturing to 43.1 albeit the best print in six months which doesn’t say a lot. Services also missed to the downside a 48.4. They have now declined in the last three months on the back of weakening demand.
Similar pattern for Eurozone PMIs with both downside misses with manufacturing now at 44.2 and services 48.1.
The UK was a mixed bag with manufacturing mirroring the European numbers with a. Downside miss to 46.4. Services however power ahead at 52.7. Best print in 6 months and nose bleed territory!
NY Empire State Manufacturing Index was a shocker coming in well off target at -14.5 for December with new orders dropping for the third consecutive month. Industrial Production for November fared a touch better with it pretty much in line at 0.2% taking the YoY to -0.4%. Likewise Manufacturing Production with a 0.3% MoM reading taking the YoY to -0.8%.
The US Flash PMIs for December followed a similar line to the UK with the manufacturing measure having a downside miss to 48.3, its weakest print since August. However the services print showed an improvement to 51.3 its highest reading since July.
Central Bank Speakers
The ECB’s Centeno initiated that inflation had fallen faster than it rose.
Holzmann meanwhile stated that there was a higher probability that the ECB had reached the terminal rate. However there was no discussion on rate cuts.
Vasle felt that the current rate level would help the Bank return inflation to 2%.
Villeroy playfully said we should enjoy the plateau before the next move which should be a cut.
Nagel claimed that the German inflation outlook has significantly improved but its still too early to consider rate cuts.
ECB sources, well it wouldn’t be a post ECB without them, indicated that the ECB does not anticipating the steady rates message before the March meeting. Furthermore any rate cut prior to June would be difficult.
The Fed’s Williams as expected pushed back on the market’s expectations for rate cuts claiming that the Fed is still focused on whether monetary policy is on the right track to bring inflation back to target. The Fed will hike again if needed. Rate cuts are not being discussed right now, its “premature to be even thinking about that”…..touch out of line from 36 hours earlier from Powell; “are cuts are a topic of discussion right now”.
Bostic was in step with Williams saying that he was comfortable keeping rates higher for longer and called for the Fed to be resolute with inflation still having a ways to go. His belief was for 2 rate cuts next year from q3 onwards. He claimed that the Fed officials were “pretty much in the same place” right now that policy is at its peak.
Goolsbee went a tad off piste from his colleagues when he didn’t rule out cutting rates at the March meeting. He expected rates to be lower next year but not significantly.
The BoC’s Macklem was pleased to see long term inflation expectations remain anchored but short term expectations have risen with inflation. Inflation remains too high and we are not talking about rate cuts. He was non-committal on whether rates had reached their peak. Asked on market expectations for rate cuts in April he said that the Bank was looking for further and sustained downward momentum in core inflation with some wage growth moderation. However he was encouraged that the recent incoming data was pointing towards monetary policy working.
He also announced that next year the BoC rate announcement would be 15 mins earlier than previously (14.45 GMT) and that a press conference will accompany every rate announcement going forward.
In summary the general theme from the central bankers was; we’re not sure what your thinking market but we are thinking something very different to what you are. The new mantra from the Fed seems a touch softer “higher for longer” mantra with the “C” word being used in a more “positive” nature. The other central bank seem to be sticking to the harder version of the “higher for longer” mantra. 2024 is going to be a very interesting year!
It would seem however there is a fair amount of conflict at the Fed which should not surprise anyone given the #DotPlot Mayhem. That should make each meeting moving forward from March onwards “live” and somewhat harder to predict.
Speaker wise Bostic the only Fed speaker thus far scheduled but if markets start to get spicy I’d expect to see some more wheeled in. Remember given its the last real week of the year liquidity will start to get less and less as the week rolls on potentially exaggerating some of the market movements.
The Week Ahead
RBA Minutes. Minutes from the early December meeting where they held rates steady at 4.35% and pointed to forward guidance, with regard to evolving risks and incoming data, on whether interest rates needed to rise further. Governor Bullock had been more hawkish in her comments leading up to the meeting which were somewhat watered down in the meeting’s accompanying statement. Any signs of a split in the Board will be of interest to market participants.
BoJ Interest Rate Decision. Despite the Ueda comments from the 7 December, when the market got frothed up about a change in the ultra loose BoJ monetary policy, we expect no change from this meeting. For one, as we said at the time, the comments didn’t look that different to what he had already said, and two they have been subsequently walked back by sources stories. Yes USDJPY has had quite a move and that was set off by those initial Ueda comments but the Fed’s outlook has taken over as the main protagonist in that argument, for now at least. What has been flagged repeatedly by the BoJ has been the importance of the Shinto wage negotiations that take place in the spring and it is these that are seen as the key component for the BoJ to change tack on policy. The next BoJ meeting is on 23 January by which time they will have had two CPI reports and will also get their new forecasts. Never say never with the BoJ, especially with the Fed pivot giving them some air cover, but I do think this one will be a non-event.
Canada Inflation Report. The trend of softening off the summer highs is expected for the series with the headline even pushing into deflationary territory with base effects giving some tailwinds to the move and expected to bring YoY back below 3%. As ever core is where things remain a tad sticky. The BoC have consistently stressed that they are looking for a multi month softening and sustainable trend for inflation until they consider cutting rates and this month will be seen as merely part of that process. Macklem has referred to “bumps” along the road over the coming months so taking one month in isolation looks like a money losing operation. From their signalling late spring/early summer looks more likely when the BoC come into play in terms of rate cuts.
UK Inflation Report. Continued softening expected albeit at a slower pace than we have seen recently which have been fuelled by base effects and in particular energy bills. This time round the softening is expected to filter through from food and energy prices. Given we are in a higher for longer stage its hard to see the print being that market moving.
Bank of Canada Summary of Deliberations. Unchanged rates at 5% with a shift in both directions for the statement. On the hawkish side they emphasised the risks to the upside for inflation and stated that they would hike again if necessary. On the dovish side they gave a nod to the effects of higher rates on the consumer. In addition they referred to GDP contracting with excess demand waning as well as the labour market tightness easing. Something for everyone but the market is fairly at one that the BoC have hit peak rates. Recent Macklem deliberations have been cautiously optimistic but pushing back on rate cut chatter. Any weakness on this front may be seized on.
Japan Inflation Report. A drop to 2.5% is expected for the headline YoY given the drop we saw in the recent Tokyo CPI print. The drop is expected, in part, from energy bills thanks to the government’s energy subsidy programs. Tough one to get too excited about given we will have had the BoJ earlier in the week and we get a further inflation report next month ahead of the January BoJ.
UK Retail Sales. Expectations are for a rebound in the series after last month’s fall with expectations around 0.4% driven by early Black Friday sales. Despite the general pessimism of the UK consumer the talking heads have suggested a more upbeat Black Friday period with a “spend and be damned” attitude. That always ends well! However this will not be enough to drag the YoY back into positive territory with it expected to languish at -1.8%.
US Core PCE. Given November’s PPI and CPI prints PCE is expected to drop further this month. Core is expected to print at 0.1% or even flat for the month which could see the YoY knocking on the door of 3%! Music to the rate cut expectation mob on the Friday before Christmas with liquidity shot. Could make for an interesting way to sign off the year!
The Day Ahead
All about German Ifo survey and not a lot else to be honest. Online shopping anyone?
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the week ahead in terms of data and speakers:
Monday
German Ifo Business Climate Dec consensus 87.8 vs previous 87.3 (09.00 GMT)
German Ifo Current Conditions Dec consensus 89.7 vs previous 89.4 (09.00 GMT)
German Expectations Dec consensus 85.9 vs previous 85.2 (09.00 GMT)
ECB Speakers
Wunsch (12.00 GMT)
Schnabel (13.30 GMT)
Lane (15.00 GMT)
BoE Speakers
Broadbent (10.30 GMT)
Tuesday
RBA Minutes (00.30 GMT)
BoJ Interest Rate Decision expectations for rates to remain on hold at -0.1% (03.00 GMT)
EU Inflation Rate MoM Final Nov consensus -0.5% vs previous 0.1% (10.00 GMT)
EU Inflation Rate YoY Final Nov consensus 2.4% vs previous 2.9% (10.00 GMT)
EU Core Inflation Rate YoY Final Nov consensus 3.6% vs previous 4.2% (10.00 GMT)
Canada Inflation Rate MoM Nov consensus -0.2% vs previous 0.1% (13.30 GMT)
Canada Inflation Rate YoY Nov consensus 2.9% vs previous 3.1% (13.30 GMT)
Canada Core Inflation Rate MoM Nov consensus % vs previous 0.3% (13.30 GMT)
Canada Core Inflation Rate YoY Nov consensus % vs previous 2.7% (13.30 GMT)
US Building Permits Prel Nov consensus 1.47m vs previous 1.498m(13.30 GMT)
US Housing Starts Nov consensus 1.36m vs previous 1.372m (13.30 GMT)
Fed Speakers
Bostic (17.30 GMT)
ECB Speakers
Simkus (08.00 GMT)
Enria (09.00 GMT)
Elderson (09.00 GMT)
BoE Speakers
Breeden (13.00 GMT)
Wednesday
China Loan Prime Rate 1y rates expected to be on hold at 3.45% (01.15 GMT)
China Loan Prime Rate 5y rates expected to be on hold at 4.20% (01.15 GMT)
UK Inflation Rate MoM Nov consensus 0.2% vs previous 0% (07.00 GMT)
UK Inflation Rate YoY Nov consensus 4.4% vs previous 4.6% (07.00 GMT)
UK Core Inflation Rate MoM Nov consensus 0.2% vs previous 0.3% (07.00 GMT)
UK Core Inflation Rate YoY Nov consensus 5.5% vs previous 5.7% (07.00 GMT)
Riksbank Governor Thedeen Speaks (14.00 GMT)
US Existing Home Sales Nov consensus 3.77m vs previous 3.79m (15.00 GMT)
BoC Summary of Deliberations (18.30 GMT)
ECB Speakers
Lane (14.00 GMT)
Thursday
Canada Retail Sales MoM Oct consensus 0.8% vs previous 0.6% (13.30 GMT)
Canada Retail Sales YoY Oct consensus % vs previous 2.7% (13.30 GMT)
US GDP Growth Rate QoQ q3 Final consensus 5.2% vs previous 2.1% (13.30 GMT)
US GDP Growth Rate YoY q3 Final consensus % vs previous 2.5% (13.30 GMT)
US PCE Prices QoQ q3 Final consensus 2.5% vs previous 2.8% (13.30 GMT)
US Core PCE Prices QoQ q3 Final consensus 2.3% vs previous 3.7% (13.30 GMT)
US Philly Fed Manufacturing Index Dec consensus -3 vs previous -5.9 (13.30 GMT)
US Philly Fed Employment Dec consensus vs previous 0.8 (13.30 GMT)
US Philly Fed New Orders Dec consensus vs previous 1.3 (13.30 GMT)
US Philly Fed Prices Paid Dec consensus vs previous 14.8 (13.30 GMT)
Japan Inflation Rate MoM Nov consensus % vs previous 0.7% (23.30 GMT)
Japan Inflation Rate YoY Nov consensus % vs previous 3.3% (23.30 GMT)
Japan Core Inflation Rate YoY Nov consensus 2.5% vs previous 2.9% (23.30 GMT)
BoJ Monetary Policy Meeting Minutes October meeting minutes (23.50 GMT)
ECB Speakers
Lane (16.00 GMT)
Friday
UK Retail Sales MoM Nov consensus 0.4% vs previous -0.3% (07.00 GMT)
UK Retail Sales YoY Nov consensus -1.8% vs previous -2.7% (07.00 GMT)
UK GDP Growth Rate QoQ q3 Final consensus 0% vs previous 0.2% (07.00 GMT)
UK GDP Growth Rate YoY q3 Final consensus 0.6% vs previous 0.6% (07.00 GMT)
Canada GDP MoM Oct consensus 0.2% vs previous 0.1% (13.30 GMT)
Canada GDP MoM Prel Nov consensus % vs previous 0.2% (13.30 GMT)
US PCE Price Index MoM Nov consensus 0% vs previous 0% (13.30 GMT)
US PCE Price Index YoY Nov consensus 2.8% vs previous 3% (13.30 GMT)
US Core PCE Price Index MoM Nov consensus 0.2% vs previous 0.2% (13.30 GMT)
US Core PCE Price Index YoY Nov consensus 3.4% vs previous 3.5% (13.30 GMT)
US Durable Goods MoM Nov consensus 2% vs previous -5.4% (13.30 GMT)
US Personal Income MoM Nov consensus 0.4% vs previous 0.2% (13.30 GMT)
US Personal Spending MoM Nov consensus 0.3% vs previous 0.2% (13.30 GMT)
US New Home Sales Nov consensus 0.685m vs previous 0.679m (15.00 GMT)
US Michigan Consumer Sentiment Final Dec consensus 69.4 vs previous 61.3 (15.00 GMT)
US Michigan Inflation Expectations Final Dec consensus 3.1% vs previous 4.5% (15.00 GMT)
US Michigan 5y Inflation Expectations Final Dec consensus 2.8% vs previous 3.2% (15.00 GMT)
Good luck.
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