The Morning Hark - 2 May 2024
Today’s focus..Powell arrests the market’s fears on rate hikes as he prays for shelter disinflation. Larger than expected balance sheet run off does a lot of his talking. Japan intervene again
Overnight Highlights
Prices are at 7.10 BST/2.10 EST, with changes reflecting movement from midnight GMT
Oil - Oil trading up close to one percent overnight with Brent and Crude July futures currently at 84 and 79. As they recover after a rough session yesterday with the EIA stats showing a much higher build than expected in crude stocks in the US last week. This was it’s fifth week in six of a build and its largest since February. In addition the higher for longer mantra never helps the sector. The rebound overnight was a bit of position squaring and speculation that the US would start to replenish its strategic reserves as oil sells off.
EQ - Asian equity markets enjoyed the post Fed euphoria and took a bounce from the Fed dampening down thoughts of further rate hikes. The Hang Seng futures leading the way up over three percent at 18,130 whilst the Nikkei is up one percent to 38,210.
The US indicies continuing to firm in Asia, with the S&P and Nasdaq futures now at 5072 and 17,540 respectively.
Gold - Gold continuing to bask in the post Fed euphoria in Asia with the June futures trading currently up at 2325.
FI - US yields stabilising and a touch firmer overnight with currently the US2y futures trading at 4.95% whilst the US10y futures yield at 4.61%. Sell off in US yields post balance sheet and dovish Powell.
European yields little changed yesterday with the German 10y closing at 2.59% and the Italian 10y yield at 3.88%.
UK gilt 10y closed similarly at 4.37%.
FX - The USD flat overnight with the USD Index currently at 105.70 and stabilising after its Fed balance sheet sell off. The majors now trading at; JPY, EUR and GBP 155.60, 1.0710 and 1.2530 respectively. Today’s FX option expiries sees in the EUR; €1.8bn at 1.0775, €1.3bn at 1.0750 and €1.3bn at 1.0670.
Others - Bitcoin and Ethereum, well we took 60,000 out and haven’t look back since with some whipsaw around the Fed. Seems the HK ETF debut disappointed the market and the higher for longer Fed narrative tends to go down like a “bag of wet sick” in crypto land. Currently the pair at 57,530 and 2920.
Macro Themes At Play
Recap
UK Manufacturing PMI final print for April was revised slightly higher to 49.1 but slipping back from last month’s blip above the 50 level.
US ADP Employment Change for April showed a decent upside beat with 192k added as well as an upward revision of an additional 24k to last month’s print.
April’s Canada Manufacturing PMI showed a pullback into contraction after a couple of months of growth to 49.4.
US Manufacturing PMI final print for April was revised upwards a smidge to 50.
US ISM Manufacturing for April dipped back into contraction to 49.2 after a one month blip above 50 last month. The underlying measures were mixed with Employment remaining in contraction at 48.6, although that was the highest print since September. New Orders dipped back into contraction at 49.1 after last month’s growth number. Prices but the Fed on red alert as another inflation print misses to the upside. This month printed 60.9 its highest reading since June 2022.
April’s US JOLTs Report dipped to its lowest print in over 3 years with openings declining to 8.488m. Finance and construction were the main sources of the bleed lower.
US Construction Spending MoM for March was a disappointment showing a 0.2% decline.
Fed Review
As expected rates on hold.
Statement
The key change to the statement was the addition of; ”In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective.”
The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance"
The bold is replaced with: “have moved toward better balance over the past year”
All else remains pretty much in place.
Balance Sheet
So after much chatter the balance sheet runoff has arrived and its bigger than expectations.
Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.
The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities
This was seen as a dovish signal as it equates to less funding requirement in q3 which entails less issuance and in turn lower yields.
Press Conference
Some of the money lines:
“I think it’s unlikely that the next policy rate move will be a hike,”
“I do think it’s clear that policy is restrictive,”
“We believe, over time, it will be sufficiently restrictive.”
“I was around for stagflation. It was brutal. Ten percent unemployment. High single-digit inflation. And very slow growth. Right now, we have 3% growth. Which is pretty solid growth, I would say, by any measure. And we have inflation running under 3%. So, I don't really understand where concerns about stagflation are coming from.”
"inflation has shown a lack of further progress... and gaining confidence to cut will take longer than thought.”
"whether rates are at their peak will depend on data"
Also in a “comedic quip” he expressed a view that he didn’t see “the stag or the flation” when getting asked about stagflation.
The gist of it seemed to be its a high bar, at present, to cut rates but an even higher one to hike. He did however state that he didn’t have great confidence either way whether there will be rate cuts this year and it will likely take longer than previously thought to gain that confidence. He did give a nod to “three being a disappointment” when he noted that the Fed need to take a signal from the worse than expected inflation prints this year.
Data to watch is the obvious mix of a “meaningful” weakening in the labour market and inflation to ease and probably through “shelter disinflation”. On that point he did give a nod to the JOLTS data as a sign of a cooling labour market. On wage growth he said there had been progress on slowing this bit it had been “bumpy”.
He again stressed that politics is not a factor in their decision making and that the Fed are not satisfied with 3% inflation.
In conclusion the balance sheet tapering was the dovish tilt that tempered any major sell off in stocks. The language in the statement was acknowledging the bumps they are now hitting with inflation. It would take a lot for them to hike so that will be a turnaround when they do!! He is praying for shelter disinflation and any sign of weakness there will be the trigger for the market.
Next up NFP Friday and CPI on the 15 May.
Footnote to all this the BoJ intervened in USDJPY after the cash close in the US in a rather bizarre and unprecedented move. They nudged it lower but has since recovered some of its poise overnight. Lot of chatter that they would not have “wasted” this money if they didn’t have a nod that the NFP/CPI numbers would NOT push the USD higher…..let’s see.
Central Bank Speakers
ECB’s de Cos was increasingly convinced that the ECB was on the right track to reach 2% soon.
The Day Ahead
Overnight the BoJ Minutes from the March meeting were released all a touch stale given we had the April meeting last week and they’ve intervened in USDJPY twice since then. History lesson.
The morning we see the Swiss Inflation Report for April as well as their March Retail Sales.
We have the final German and EU Manufacturing PMIs for April then in the afternoon some secondary US data.
Overnight sees the Australian Services PMI final point for April.
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Main Highlights Ahead
All times in BST (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead ahead in terms of data and speakers:
Thursday
Switzerland Retail Sales MoM Mar consensus % vs previous -0.1% (07.30 BST)
Switzerland Retail Sales YoY Mar consensus 0.2% vs previous -0.2% (07.30 BST)
Switzerland Inflation Rate MoM Apr consensus 0.1% vs previous 0% (07.30 BST)
Switzerland Inflation Rate YoY Apr consensus 1.1% vs previous 1% (07.30 BST)
Switzerland procure.ch Manufacturing PMI Apr consensus 45.5 vs previous 45.2 (08.30 BST)
Germany HCOB Manufacturing PMI Final Apr consensus 42.2 vs previous 41.9 (08.55 BST)
EU HCOB Manufacturing PMI Final Apr consensus 45.6 vs previous 46.1 (09.00 BST)
US Nonfarm Productivity QoQ Prel q1 consensus 0.8% vs previous 3.2% (13.30 BST)
US Unit Labour Costs QoQ Prel q1 consensus 3.3% vs previous 0.4% (13.30 BST)
US Factory Orders MoM Mar consensus 1.6% vs previous 1.4% (15.00 BST)
ECB Speakers
Lane (21.15 BST)
Early Friday
Australia Judo Bank Services PMI Final Apr consensus 54.2 vs previous 54.4 (00.00 BST)
Good luck.
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