The Morning Hark - 20 Mar 2024
Today’s focus...Fed Day….2 dots or 3? JPY crushed on the crosses. Oh and the lowest we hit was 9k……
Overnight Highlights
Prices are at 6.40 GMT/2.40 EST, with changes reflecting movement from midnight GMT
Oil - Oil off a touch in Asia after yesterday’s further climb higher which saw us back to levels last seen in October. Currently Brent and Crude May futures trading at 87.20 and 82.5 0 respectively. Same themes helping the sector; China growth hopes and Russian refinery drone strikes.
EQ - Asian equity markets quiet session with the Hang Seng up smalls at 16,590 and the Nikkei likewise to 40,000.
The US indices flatlining in Asia with the S&P and Nasdaq futures currently at 5236 and 18,250 respectively holding onto their gains from yesterday’s US session.
Gold - Gold unchanged in Asia with April futures currently trading at 2160.
FI - US seeing the front end yields rallying with the US2y futures trading at 4.79% whilst the US10y futures yields currently flat at 4.29%. Nervous market ahead of the Fed with the 2/3 dots seemingly a close call. We haven’t seen these levels in the 2y since November.
European yields static with the German 10y at 2.46% and the Italian 10y yield at 3.69%.
UK gilt 10y similarly at 4.17%.
FX - FX in Asia waking up a little bit but really its all about the JPY. The USD Index currently firm at 103.90. The majors; JPY, EUR and GBP currently at 151.55, 1.0870 and 1.2720 respectively. The JPY having a shocker in the crosses. Whilst $JPY is at a 4 month high, EURJPY has seen a 16y high at 164.73 and GBPJPY a 9y high to 192.81 all down to the “disappointment” of the BoJ decision and retention of its accommodative stance.
Today’s FX option expiries today sees in the EUR €1.2bn at 1.08 and 1.0875. In the AUD we have Aud1.2bn at 0.6500. Finally in USD/CNY we see $3.8bn at 7.20 right where we are.
Others - Bitcoin and Ethereum off close to a further five percent overnight and looking ever more vulnerable. We have seen over $500m of outflows from the ETFs lead by large outflows from Grayscale’s GBTC who now have under half of their pre ETF holdings left on their books. Lots of reasons for the move being banded about with the US tax season and the fact that the new “institutional” investors have paper hands compared to the crypto bro’s diamond ones. Currently the pair trading at 61,850 and 3140. Starting to see some build up of bids on the exchanges around 60k.
Another thing that didn’t look good for the sector yesterday was the Bitmex flash crash which saw BTC hit 9k! Looks like some rather naive order execution of 400 BTC in total in a 2 hour fairly illiquid time period saw a vacuum of volume. I guess the thought of using a TWAP or VWAP over a number of exchanges hadn’t occurred to them. Not sure I would have wanted to be the sales guy reporting that average fill…….well we got the first few away around 66k and the lowest we hit was 9k!
Macro Themes At Play
Recap
EU ZEW Economic Sentiment for March big upside beat to 33.5 and its highest in over 2 years.
In addition the q4 Labour Cost Index YoY and the Wage Growth YoY both dipped considerably from the previous period to 3.4% and 3.1% respectively.
Germany ZEW Economic Sentiment for March also showed a good upside beat to 31.7 again an over 2 year high.
Both ZEWs buoyed by the anticipation of an ECB rate cut in the coming months in addition to increased expectations for China’s economy as well as an anticipation of a weaker dollar.
February’s Canada Inflation Report saw a decent downside surprise with the monthly measures for headline and core at 0.3% and 0.1% respectively. YoY saw a drop to 2.8% and 2.1% respectively and their lowest levels since June 2023 and March 2021. The market started to reprice the curve aggressively post print with a BoC rate cut now close to 80% priced in from around 50% pre. The BoC favoured measures saw a smaller decline with both Median and Trimmed Mean above 3%.
US Building Permits and Housing Starts for February defied expectations with both strong upside beats to 1.518m and 1.521 respectively.
FOMC Preview
The latest major data prints, inflation and NFP, have left the Fed in a “not angry, just disappointed” zone and surely in a “too hot to cut” predicament.
Backdrop has seen decent “major prints” for inflation, growth and the labour market whilst the secondary data; regional surveys, claims and housing have shown signs of weakness. At the turn of the year the market was anticipating well over 6 rate cuts for 2024 whilst the Fed insisted 3 was their base case. Since then, with the major data prints and some tempering words from Fed officials, the market has repriced to under 3 cuts for the year.
Meeting outcomes
Holding rates steady is baked in the cake.
Statement expected to be a cut and paste.
Dots and economic projections is where the juice will be and the direction in which Powell will be dragged in his presser.
Dots wise, back in December, we were furnished with the dovish tilt of 75bps worth of cuts for 2024 and a further 100bps for 2025. The market seems to be leaning into the chance of those 3 moving to just 2 cuts for this year and 2025 remaining at 4. The call is close to 50/50 with the eventual outcome most likely creating the most market volatility from this meeting.
2024 projections, back in December, saw GDP at 1.4%, CPI at 2.4% and Unemployment Rate at 4.2%. Currently those measures are all missing with growth continuing to grow above trend, inflation remaining stable around 3% whilst unemployment is below 4%. That would appear to allow the Fed to be able to lift their growth and inflation profiles.
Press conference will be all about the dots. We’d expect Powell to not stray too far from his previous deliberations no matter if its 2 or 3 dots. We need more confidence that the data is leading us back to target inflation, maybe a higher for longer thrown in or indeed that, even if they cut earlier, they are not going to embark on a rate cutting cycle which looks similar to their most recent hiking profile.
The other big point of note will be any discussion on QT and specifically the balance sheet reduction. Can this be done as the Fed enter a period of rate cuts? Equally can this be achieved without disturbing the level of ample reserves? Maybe we get some more colour on Waller’s suggestion surrounding duration. Will the Fed start to invest more in the short end at the expense of the long end?
Hawkish would see 3 dots become 2 for 2024 with a higher growth and inflation profile. Market wise USD should see some strength as the curve bear flattens with 2y pushing back towards 5% and the 10y setting its eyes on 4.5% again.
Base case would be for 3 dots to remain but the projections show a higher growth profile but inflation unchanged. We’d expect a bear stepping with 2y unchanged to smalls down and the 10y yields rallying. The USD would back off its recent strength.
Dovish would be 3 dots with growth lore and inflation unchanged. The curve would steepen with the 2y back to 4.5% and the USD trashed.
Stocks wise…..will probably eventually rally whatever happens!
One last point of note, given this meeting is a hold from the Fed, we only have 6 meetings for the rest of this year; May, June, July, September, November and December.
Logic suggests that cutting in July and November are potentially too politically hot for a rate cut. July is right in the middle of the two parties’ conventions whilst the election is on the day before the November meeting starts and who knows we could be in another court battle! That only leaves 4 meetings to squeeze 2 or 3 rate cuts in. If they don’t go in June there’s a long stretch until September. June still looks the starting gun month but there’s a lot of moving parts.
Central Bank Speakers
ECB’s de Cos risks to growth projections are clearly to the downside whilst inflation risks are more balanced. In June we could start cutting rates but it is conditional on data.
Kazaks was “comfortable” with market bets on three rate cuts this year.
ECB Sources story suggested that data would be the key determinant to the frequency of ECB rate cuts post June first cut. Expect 25bp steps with no discussions on 50bps thus far.
Riksbank’s Floden stated that it was clear that inflation is falling back towards target.
The Day Ahead
Overnight it was all about the Chinese Loan Prime Rate announcements and nothing changed.
First up this morning we have the February UK Inflation Report.
Late afternoon sees the BoC Summary of Deliberations from their March meeting followed of course by the FOMC.
Busy overnight session with NZ GDP for q4, the Japanese Reuters Tankan Survey as well as their Trade Balance for February. In addition we start to get the Flash PMIs for March. Finally the Aussie Labour Report for February.
👏 If you found this briefing helpful, please show the desk some appreciation by giving it a ‘Like’ or a ‘Comment’ at the bottom of the page.
Stay on top of the latest market narratives throughout the day using our curated research & commentary channels on Harkster.com
Main Highlights Ahead
All times in GMT (EST+4 / CET-1 / JST-9)
The main highlights for the day ahead ahead in terms of data and speakers:
Wednesday
UK Inflation Rate MoM Feb consensus 0.7% vs previous -0.6% (07.00 GMT)
UK Inflation Rate YoY Feb consensus 3.5% vs previous 4% (07.00 GMT)
UK Core Inflation Rate MoM Feb consensus 0.7% vs previous -0.9% (07.00 GMT)
UK Core Inflation Rate YoY Feb consensus 4.6% vs previous 5.1% (07.00 GMT)
BoC Summary of Deliberations (17.30 GMT)
FOMC Interest Rate Decision expectations for rates to remain on hold at 5.5% (18.00 GMT)
FOMC Economic Projections (18.00 GMT)
FOMC Press Conference (18.30 GMT)
NZ GDP Growth Rate QoQ q4 consensus 0.1% vs previous -0.3% (21.45 GMT)
NZ GDP Growth Rate YoY q4 consensus 0.1% vs previous -0.6% (21.45 GMT)
Australia Judo Bank Manufacturing PMI Mar Flash consensus vs previous 47.8 (22.00 GMT)
Australia Judo Bank Services PMI Mar Flash consensus vs previous 53.1 (22.00 GMT)
Japan Reuters Tankan Index Mar consensus vs previous -1 (23.00 GMT)
Japan Balance of Trade Feb consensus JPY-810.2bn vs previous JPY-1758.3bn (23.50 GMT)
Japan Exports YoY Feb consensus 5.3% vs previous 11.9% (23.50 GMT)
Japan Imports YoY Feb consensus 2.2% vs previous -9.6% (23.50 GMT)
ECB Speakers
Lagarde (08.45 GMT)
Lane (09.30 GMT)
Schnabel (13.45 GMT)
Early Thursday
Australia Employment Change Feb consensus 40k vs previous 0.5k (00.30 GMT)
Australia Unemployment Rate Feb consensus 4% vs previous 4.1% (00.30 GMT)
Japan Jibun Bank Manufacturing PMI Mar Flash consensus vs previous 47.2 (00.30 GMT)
Japan Jibun Bank Services PMI Mar Flash consensus vs previous 52.9 (00.30 GMT)
Good luck.
The information provided in this post is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision.