The Morning Hark - 19 Dec 2023
Today’s focus...The Fed civil war gets walked back but the market is firmly behind Powell (unsurprisingly). BoJ do nothing but still produce volatility.
Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil taking a breather overnight with Brent and Crude February futures steady at 78.10 and 72.80 respectively. Oil has held onto its gains from yesterday with a decent spike higher seen after escalations of the Red Sea attacks on oil tankers off Yemen. Several companies have now started to reroute tankers with the obvious knock on effects for the supply chain.
EQ - Asian equity markets diverging overnight with the Hang Seng off one percent at 16,490 but the Nikkei up one percent on a relief rally post BoJ at 33,120.
The US indices flat in Asia with the S&P currently at 4790 whilst the Nasdaq is at 16,920 both remain close to their all time highs. Indeed the Nasdaq had a second successive record high close yesterday.
Gold - Gold pretty much back to the “nailed to the wall” mode. Gold Feb futures currently at 2039. 2000 remaining the base with the first target 2085 and beyond.
FI - Global yields fairly steady despite the continued walk back from the Fed. The US2y and US10y currently at 4.45% and 3.94% respectively.
European yields taking more notice of the ECB’s insistence it was higher for longer. The German 10y up on the day at 2.08% and the Italian 10y yield at 3.76%.
UK gilt not getting involved and remain steady with the 10y closing at 3.69%.
FX - Outwith the JPY, it was a quiet FX session with the USD flat with USD Index currently at 102.50. The JPY, EUR and GBP sitting at 143.60, 1.0930 and 1.2660 respectively.
Despite remaining on hold, as expected, the JPY weakened a big figure on the BoJ announcement which I guess tells you more about liquidity rather than the actual outcome of the meeting. It will interesting to see what Governor Ueda does to the rate with his comments.
FX option expiries wise nothing of note.
Others - Bitcoin and Ethereum reversing its move yesterday and some with the pair up a decent clip at 42,900 and 2240 respectively. Bitcoin back through the 42,500 trading pivot.
Macro Themes At Play
Recap
German Ifo didn’t meet expectations with misses across the board with expectations at 84.3 versus 85.8 expected. Current conditions printed the low for the year at 88.5. Faltering recovery at best in Germany.
Central Bank Speakers
Almost to a man and woman the central bankers on tap were pushing back on the market's rate cut expectations. Seem to remember we had this narrative on the way up too?
The ECB’s Vasle claimed that market pricing for both the start of rate cuts and the totality for 2024 are “excessive”. He pointed to wage formation in q1 as “crucial” for monetary policy outlook. Once again banged the drum for an uptick in inflation data in the first half of next year.
Kazimir continued the theme by saying that premature easing is worse than holding too long. Whilst the decision to hold off from discussing reductions is a strategic choice. Prudence is the key and I’m watching the data.
Stournaras flagged that the ECB needed to see inflation sustainably below 3% by mid year before cutting rates.
Wunsch insisted that interest rates will not be lowered as fast as the markets are pricing.
The BoE’s Broadbent said that it will probably require a protracted and clearer decline in wage growth data before the MPC can safely say that things are on a firmly downward trend.
The Fed’s Mester stated that the markets are a bit ahead of central banks on rate cuts. She continued that the next phase is about how long do we need monetary policy to remain restrictive.
Goolsbee was “confused by the market’s reaction towards Fed rate cuts. He rather fancifully suggested that Powell had been consistent in his comments despite his change of tack over the first two weeks of December. In addition there is no contradiction between what the Williams and Powell said over the last week. Hmmmmmm
He added that the Fed would be prepared to adjust policy in case of external shocks.
Daly felt that rate cuts may be needed next year to prevent over-tightening and suggested 3 rate cuts could be needed. A mere three weeks ago she was saying that she was not thinking about rate cuts. I guess a lady is allowed to change her mind. As indeed are men and other genders, of course, are available.
Decent article below looking back at history, and in particular the 70’s, in terms of where the Fed find themselves now.
The BoC’s Macklem admitted that the BoC will cut rates in 2024. However in order for them to do that they need to see several months of downward momentum in core inflation first.
The Day Ahead
RBA Minutes were on the hawkish side with the RBA considering a hike at their December meeting but deciding to pause and watch the incoming data amid signs of encouraging progress on inflation. They emphasised the need for softer data to exit the tightening bias and further tightening depended on incoming data and the assessment of risks. . CPI was seen as hitting the top end of the target range by the end of 2025, not the midpoint.
BoJ Meeting despite holding pat managed, as they always seem to do, to produce some decent market volatility. Rates remained on hold at -0.1% with no change to YCC in an unanimous vote.
The statement highlights:
Underlying CPI likely to increase gradually toward achieving price stability target;
BoJ to closely monitor FX and market movements, assessing their impact on the economy and prices;
Uncertainty remains for Japan’s economy;
They will add to easing if necessary;
Prices remain very high; and
Reports moderate rise in inflation expectations.
Governor Ueda is speaking as we go to print. So far some highlights:
Won’t hesitate to take additional easing measures if necessary;
Economy is gradually picking up;
Likelihood is that the underlying inflation rate will gradually increase towards target through financial year 2025;
We will continue easing until we hit the price target; and
We are still not in a place to see sustainable and stable inflation with sufficient confidence.
However sources suggest that Japan’s MoF are to cut their 20y bonds by Jpy200bn in January due to declining investor demand.
Eurozone final inflation report for November unlikely to trouble the scorers unlike the Canadian Inflation Report in the afternoon which should; with expectations for deflation on the month and a breach of 3% for the headline YoY print.
In addition some US Housing Data and some central bankers to warm the cockles of our hearts with the Fed's Bostic the main focus given the perceived “Fed civil war”.
Early doors tomorrow the Chinese Prime Rate announcement with no change expected. Also as we go to print the ever softening UK Inflation Report for November.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead in terms of data and speakers:
Tuesday
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 -0.1% 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)
Early 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 5.6% vs previous 5.7% (07.00 GMT)
Good luck.
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