The Morning Hark - 18 Jan 2024
Today’s focus...Data driving yields higher in US, CPI doing the same in the UK and the ECB seem keen on June.
Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil firm again in Asia with Brent and Crude March futures up close to one percent at 78.50 and 73.10 respectively. Escalating tensions in the Middle East and Gulf, as well as lost production in the US due to the extreme weather, have helped oil regain its footing. The OPEC monthly report also gave some tailwinds with the prospects of decent demand for oil in 2025.
EQ - Asian equity markets a touch more rosey with the Nikkei consolidating near recent highs at 35,590. Even the Hang Seng has bounced off 5 year lows to the giddy heights of 15,400. Double whammy of those “weaker” China prints and the US yield move.
The US indices quiet overnight with the S&P currently at 4772 whilst the Nasdaq is at 16,890.
Gold - Gold on the back foot with the US yield rally with Feb futures trading at 2014.
FI - Global yields backing off a touch overnight after they continued to rally yesterday with the US2y and US10y currently at 4.33% and 4.09% respectively. Bear flattening as strong data reinforced Waller’s push back on early rate cuts.
European yields continuing to firm on the more hawkish central bank rhetoric with the German 10y at 2.32% and the Italian 10y yield at 3.91%.
UK gilt 10y a lot higher at 3.98% post CPI its biggest one day gain in almost a year.
FX - The USD softer despite the rally in yields and it continues to back off a touch in Asia with the USD Index currently at 103.15. The JPY, EUR and GBP all on their uppers with the softer USD at 147.75, 1.09 and 1.27 respectively. The main weakness in the USD seen through the stronger EUR with the ECB push back for early rate cuts and the GBP bid after yesterday’s surprise hotter inflation report.
FX option expiries in the EUR €1bn each at 1.0975 and 1.0990.
Others - Bitcoin and Ethereum the forgotten step children of the markets with little of note going on. Currently trading at 42,850 and 2535 respectively.
Macro Themes At Play
Recap
The final December Eurozone Inflation Report all in line with the preliminary print with YoY headline 2.9%.
US Retail Sales for December were a decent beat with the MoM at 0.6% taking the year to a very healthy 5.6%. As expected, from the earlier data, autos were the big kicker for the uptick.
Industrial and Manufacturing Production for December were small beats but nothing to write home about with the respective YoYs at 1% and 1.2%. December’s Capacity Utilisation in line at 78.6%.
Overall the US data we have seen thus far this year isn’t really pointing to a 6 rate cut environment. It seems more and more likely if we do see such magnitude of cuts it won’t be data driven but more in an effort to stave off some threat to financial stability.
Central Bank Speakers
Riksbank Breman felt that there was no need to raise interest rates further.
From the ECB comments there seems to be a entering of opinions that June is the meeting for the first rate cut. Deny, deny, deny has now become pre-summer cut. Lagarde speaks again today let’s see if she gives any further colour.
ECB’s Vasle noted that his rate expectations are substantially different to the market. Furthermore he said it was absolutely premature to expect rate cuts at the start of q2 as we need to see q1 inflation and wage data.
Lagarde the usual chatter with the battle is not yet won but the ECB is on track to get inflation back to 2% target. In the absence of any shocks its likely that the ECB cuts rates by the summer. She did point to the late spring wage data as a key indicator for the future rate path.
Knot flipped the argument back on the market by saying that the more easing the market does the less likely the ECB will cut. He continued that the market is getting ahead of itself and that if rate cuts did come they would be gradual. However he did concede that it is unlikely that the ECB will have to hike again.
Simkus was a little more explicit by stating that a rate cut probabilities will rise sharply after April with the first cut having a high probability before the summer holidays. No cut in March unless there is a huge surprise. Given there is no May meeting the early June meeting is being pencilled in.
The Day Ahead
Overnight we had the Japanese Machinery Orders, Industrial Production and Capacity Utilisation all for November and fairly unattractive at that. Machinery orders had their biggest drop in 6 months to -4.9% MoM. Industrial production was at its lowest in 3 months at -0.9% MoM and capacity utilisation at 0.3% MoM was well below the previous month’s gains.
In addition the December Aussie Labour Report, after a 7 month winning streak, saw its first fall in employment since April. The month saw a drop in employment of 65,100 erasing most of last month’s gains. More worrying there was a drop of 106,600 in full employment which was offset slightly by gains in part time workers. The unemployment rate remained steady at 3.9%.
Little before the ECB minutes from the December meeting. This is followed in the afternoon by some December US Housing data and the Philly Fed survey for January. Plus of course the usual smattering of central bank speakers.
Overnight the Japanese Inflation Report for December and just before we go to print tomorrow December UK Retail Sales.
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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:
Thursday
SNB Jordan Speaks (10.30 GMT)
ECB Monetary Policy Meeting Accounts (12.30 GMT)
US Building Permits Prel Dec consensus 1.48m vs previous 1.467m (13.30 GMT)
US Housing Starts Dec consensus 1.426m vs previous 1.56m (13.30 GMT)
US Philadelphia Fed Manufacturing Index Jan consensus -7 vs previous -10.5 (13.30 GMT)
US Philadelphia Fed Business Conditions Jan consensus vs previous 12.1 (13.30 GMT)
US Philadelphia Fed Employment Jan consensus vs previous -1.7 (13.30 GMT)
US Philadelphia Fed New Orders Jan consensus vs previous -25.6 (13.30 GMT)
US Philadelphia Fed Prices Paid Jan consensus vs previous 25.1 (13.30 GMT)
Riksbank Thedeen Speaks (15.30 GMT)
Japan Inflation Rate MoM Dec consensus % vs previous -0.1% (23.30 GMT)
Japan Inflation Rate YoY Dec consensus % vs previous 2.8% (23.30 GMT)
Japan Core Inflation Rate YoY Dec consensus 2.3% vs previous 2.5% (23.30 GMT)
Fed Speakers
Bostic (12.30 GMT)
Bostic (17.05 GMT)
ECB Speakers
Lagarde (15.15 GMT)
Early Friday
UK Retail Sales MoM Dec consensus -0.5% vs previous 1.3% (07.00 GMT)
UK Retail Sales YoY Dec consensus 1.1% vs previous 0.1% (07.00 GMT)
Good luck.
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