The Morning Hark - 2 Feb 2024
Today’s focus... Bailey does his JayLite. NFP on the main stage and Powell takes Sunday’s prime time slot off Swift/Kelce
Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil recovering some poise in Asia with Brent and Crude April futures up smalls at 79.10 and 73.90 respectively. Yesterday two OPEC sources suggested that OPEC+ would review extending their voluntary cuts which are due to expire at the end of q1. In addition we saw unsubstantiated rumours that there was an imminent ceasefire between Hamas and the Israelis which weighed on the sector.
EQ - Asian equity markets quieter overnight with the Hang Seng futures flat at 15,630 and the Nikkei futures off smalls at 36,130.
The US indicies continuing to rally in Asia with the S&P currently at 4960 and the Nasdaq at 17,610. The market took a while to get the drift, but eventually worked out to ignore a strong ISM print and focus on the fact that a US regional banking crisis will feed into earlier rate cuts so lets rally like there’s no tomorrow. Let’s see.
Gold - Gold enjoyed an up day yesterday with a touch of the safe havens about it although flatlining in Asia with April futures currently trading at 2071.
FI - Global yields retracing a touch in Asia after yesterday’s sell off with the US2y and US10y currently at 4.22% and 3.88% respectively.
European yields closed yesterday softer in line with the US with the German 10y at 2.14% and the Italian 10y yield at 3.72%.
UK gilt 10y similarly closing yesterday softer at 3.75% despite what was seen initially as a hawkish BoE.
FX - The USD sold off yesterday on further weakness in the US regional bank sector and consequently softening US yields with the USD Index currently at 103. The JPY, EUR and GBP all enjoying a bit more spotlight with them sitting at 146.50, 1.0875 and 1.2745 respectively.
Today’s FX option expiries nothing of interest unusually for a payrolls day.
Others - Bitcoin and Ethereum liking the thought of another US regional bank crisis with the pair firming up to 43,160 and 2310 respectively.
Macro Themes At Play
Recap
Riksbank held rates steady as expected but were dovish to say the least. They did not rule out rate cuts in the first half of this year much sooner than had been anticipated back in November.
Swiss Manufacturing PMI for January came in almost unchanged on previous at 43.1 but well below estimated and continuing the year plus slowdown in the sector.
German Manufacturing PMI for January came in a. Touch better than the preliminary estimate at 45.5 but still languishing in contraction. One bright spot would be that it is the sixth month of “growth” albeit off a very low base.
Eurozone Manufacturing PMI for January saw a similar theme matching estimates at 46.6 but still well in the contraction zone.
January’s UK Manufacturing PMI was a small uptick on the preliminary at 47.
Eurozone Inflation Report for January came in as expected with the YoY flash estimate at 2.8%. The MoM back into disinflation at -0.4%. Core remaining stickier though with the YoY measure at 3.3% a touch higher than expected albeit a tick lower than the previous month.
December’s Eurozone Unemployment Rate came in steady at 6.4%.
US Challenger Job Report showed companies hiring plans at the lowest on record.
Canadian Manufacturing PMI for January had a decent beat to 48.3 on the month well up on last month’s print and a 6 month high but still in contraction.
January’s US Manufacturing PMI was revised higher a touch to 50.7 and its highest print since September 2022.
US ISM Manufacturing PMI Survey for January saw a decent uptick form both previous and consensus to 49.1, its best reading since October 2022. The component parts were mixed however with Employment dipping to 47.1 from last month’s print. However New Orders had a big jump to 52.5 its best since mid 2022. More worryingly for the Fed the Prices measure hit 52.9 its best in 9 months.
US Construction Spending for December hit the same level as last month and above estimates at 0.9%.
BoE Review
Rates remain on hold. Not exactly a revelation but needs to be said.
Statement. So couple of changes to the statement with the tightening bias, like the Fed, being struck through. They have also taken “sufficiently” out in reference to “restrictive” in this piece; the Bank “will ensure that bank rate is restrictive for sufficiently long to return inflation to the 2% target sustainably”. They also retained the extended period part when they stated that “we have judged since last autumn that monetary policy needs to be restrictive for an extended period of time”.
The Vote. The vote was a mixed bag with only one hawk flying the nest to its new home in the “hold” camp leaving Haskell and Mann still looking for further hikes. However we did see one holder flying the coup to the cutting nest with Dhingra confirming, what we already knew, that she is the doviest of them all!
The market didn’t really know what to do with that difference in opinions, the first such divergence since the GFC days!
Forecasts. All a touch rosier in Bailey’s garden with wage growth seen moderating a touch more over the coming few years than previously thought as well as a good upward revision to growth. Inflation is seen moderating and cooling sufficiently for the Bank to see it reaching the target 2% in q2 however it is expected to rise again and not to return to target for a full 2 years. Interest rates, based on these assumptions, are expected to be lower than the previous estimate.
Wage Growth seen at:
q4 2024 4% YoY (November 4.25%), q4 2025 2.75% (2.75%); q4 2026 1.75% (2%).
GDP seen at
2024 +0.25% (November 0%), 2025 0.75% (0.25%), 2026 1% (0.75%).
CPI is expected to return to 2% target in q2 2024 but above target in q3 2024 and not at target again until q4 2026.
Bank Rate, based on assumptions, seen at
q4 2024 4.2% (November 5.1%), q4 2025 3.4% (4.5%), q4 2026 3.2% (4.2%)
Bailey saw “good news” on inflation in recent months but the Bank needs “more evidence” that inflation will fall all the way to 2% and stay there before cutting rates.
In conclusion, hawkish with May now being the most likely month for the starting gun on rate cuts. A touch of the Fed lites about it all with the tough guys in town, who won’t get bullied by the markets until they are!
NFP Preview
That time of the month again when the algos go nuts over a headline number then everyone looks at the revisions and we retrace the move and some. Yep its NFP day and all the fun of the fair.
The range for the headline estimates is as wide as the consensus forecast go figure! The range is 120-300k with a 180k estimate. In addition a small uptick in the unemployment rate to 3.8% is expected and a small downtick for average hourly earnings to 0.3%.
We come into the day with a backdrop of poor ADP data, a rise in lay offs in the Challenger survey but JOLTs beating expectations so pick the bones out of that one! One thing to note would be from Powell’s comments on Wednesday where he flagged that an “unexpected weakening” in the labour market numbers would potentially lead to the Fed cutting rates sooner. So a poor number would froth up the markets big time as everyone would start congregating around that punchbowl again in anticipation of those intoxicating rate cuts! I guess the question is what constitutes an “unexpected weakening”? Anything south of 100k to me feels of that ilk although the current mood of the market makes me believe they will raise that low bar a touch.
Remember too that between now and that March FOMC we still have a couple of CPI reports, a PCE and another NFP so lets not get too carried away. And as ever remember those revisions!
One last thing the BLS will publish its annual benchmark revisions and update its formulas in order to smooth the data for seasonality just to add to the noise!
Good luck
Central Bank Speakers
ECB’s Centeno saw inflation converging to 2%. If it continues on the same trajectory over the coming months then it is expected the ECB will cut rates and start a normalisation cycle.
Herodotou expects rates to begin declining this year but it will be data lead.
The Day Ahead
Very kindly the day is laid aside for the US Labour Report for January. On the second stage we have UMich and Factory Orders as well as some central bank speakers.
Late Sunday and into the early hours of Monday we get the final Services PMIs for January out of Australia, Japan and China.
Also Powell will be interviewed on 60 Minutes on Sunday 7pm ET. May be worth a listen?
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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:
Friday
US NFP Jan consensus 180k vs previous 216k (13.30 GMT)
US Unemployment Rate Jan consensus 3.8% vs previous 3.7% (13.30 GMT)
US Average Hourly Earnings MoM Jan consensus 0.3% vs previous 0.4% (13.30 GMT)
US Factory Orders MoM Dec consensus 0.2% vs previous 2.6% (15.00 GMT)
US Michigan Consumer Sentiment Final Jan consensus 78.9 vs previous 69.7 (15.00 GMT)
US Michigan Inflation Expectations Final Jan consensus vs previous 3.1% (15.00 GMT)
US Michigan 5y Inflation Expectations Final Jan consensus vs previous 2.9% (15.00 GMT)
ECB Speakers
Centeno (08.30 GMT)
BoE Speakers
Pill (12.15 GMT)
Good luck and a good weekend to one and all.
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