The Morning Hark - 22 Jan 2024

Today’s focus...China leaves alone. The Week Ahead and more “deny, deny, deny”.

Overnight Highlights

Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT

Oil - Oil quiet in Asia with Brent and Crude March futures off smalls at 78.20 and 72.90 respectively. Little new to start the week with the usual “push me/pull me” themes with tensions in the Middle East and Gulf continuing but offset by the general weak demand outlook for the sector.

EQ - Asian equity markets again having contrasting fortunes with the Nikkei continuing to power ahead up a further one percent and capturing another 34y high, its seventh time this year already. Currently sitting at 36,590. The Hang Seng’s woes continuing however as it loses close to four percent overnight. Although expectations were for the PBoC to hold rates steady the announcement seems to have not gone down well with the markets who crave some stimulation from the authorities. The index currently sitting at 14,900.

The US indices smalls up overnight with the S&P currently at 4880 whilst the Nasdaq is at 17,537 and holding onto their record highs from the close of last week. The Mag7 and the general tech sector powering ahead helping the S&P to confirm it has been in a bull market since October 2022.

Gold - Gold sees little new of note with Feb futures currently trading at 2024.

FI - Global yields backing off from their recent bid tone in Asia with the US2y and US10y currently at 4.40% and 4.12% respectively. 4.20% in the 10y seems to be the cap for now at least.

European yields closed the week little changed with the German 10y at 2.35% and the Italian 10y yield at 3.87%.

UK gilt 10y similarly so at 3.94%.

FX - The USD backing off a touch with the softer yields overnight in Asia with the USD Index currently at 103.18. The JPY, EUR and GBP all close to unchanged at 148.10, 1.09 and 1.2710 respectively.

Today’s FX option expiries sees in USDJPY $1.2bn at 148.

Others - For Bitcoin and Ethereum, the whole ETF process has been very much a repeat of the Coinbase IPO. Currently the pair consolidating close to their recent lows at 41,250 and 2435 respectively.

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Macro Themes At Play

Recap

Afternoon wise Canadian Retail Sales for November showed a drop of 0.2% MoM but there preliminary estimates for December are looking at a 0.8% rise which would be the sharpest rise in almost a year. YoY stood at 1.8% the fifth consecutive month of growth.

The January UMich survey was a nice upside surprise at 78.8 levels last seen in spring 2021. Inflation expectations warming the cockles too with 1y at 2.9% now the lowest in over three years and the 5y also dipping to 2.8%.

Existing Home Sales in December was a miss and confirmed the worst year on record for that measure.

Central Bank Speakers

Fed’s Goolsbee considered no imminent threat from the labour market. If inflation progress reverses then that could merit further hikes. However if we continue to make good progress on inflation we need to factor that into the policy rate.

Daly claimed it would be scarring to ease too quickly and not reach 2% goal. There is no denying there is still a lot of work to do but we are in a good place. Its premature to think rate cuts are just round the corner.

SNB’s Jordan claimed that, given the latest inflation forecasts, further rate hikes from the SNB are not needed.

The Week Ahead

1. BoJ Interest Rate Decision. All anticipation and potential volatility has been drained out of this policy meeting with the events of the first three weeks of the year. Official comments, weaker data and, of course, the earthquake have all taken the wind out of the hawks’ sails as a “nothing to see here” event looks the most likely outcome. Hence rates on hold at -0.1% and the YCC bands to remain at their current levels. The most interest will probably centre around the outlook report and in particular any changes to the growth and inflation forecasts. Both measures are expected to be trimmed but by how much? Seems likely that given the rally in US yields and no movement by the BoJ the JPY will continue to trade weakly into the all important spring wage negotiations, which the BoJ have previously flagged, as being crucial for the future path of rates in Japan.

2. January Flash PMIs. First look at the data for the new year and will probably be far from inspiring. Most measures are expected to tick up smalls but the majority of the major economies are expected to remain in contraction with the exception being the service sectors in the UK, US and Japan where mild growth is expected to continue. All in all benign to say the least.

3. BoC Interest Rate Decision. Tug of war in Canada with strong price pressures and wage growth pointing to higher for longer whilst a contracting economy looking for some relief. Its likely that the BoC will side with the former and potentially take a page out of the ECB book and “deny deny deny” that rate cuts are coming anytime soon. Indeed, the market has jumped the gun a bit on that already with March seeing only a 25% chance of a cut and only 4 full cuts being priced in for the year from 6 a few weeks back. The main catalyst for this repricing has been the December CPI report which came in hotter than anticipated. Indeed it would be no surprise to see Macklem walking back some of his optimism from the last BoC when he stated that “underlying pressures are easing in much of the economy”.  Remember we get the full gambit on Wednesday with the rate decision, policy statement, MPR, governor’s opening remarks and finally the press conference. Something for everyone!

4. Norges Bank Interest Rate Decision. Surprise hike from the Norges last meeting but nothing so exciting from this one it would seem. The last CPI print dipped below the Bank’s estimate but inflation remains too high. In addition NOK weakness continues to be a concern. The Bank had previously said that there would possibly be more hikes if inflationary pressures remained or if the NOK turns out to be weaker than projected so they will not be scared to go again. Looks highly unlikely any change this month but expect some push back, as seems to be the central bankers way, on market optimism for rate cuts in the press conference. A full cut is currently priced in by June.

5. ECB Interest Rate Decision. Davos was the ECB meeting it seemed! We got the full court press that June it is (until it isn’t!). Seems the ECB are happy to leave rates as is until the early summer unless the data turns and the current state of stagnation for growth turns into a steep recession. In addition, expect a further scolding from Lagarde that the aggressive market pricing makes it less likely the ECB will move sooner given the easing in financial conditions we have seen since December. A March rate cut has dropped to around a 15% chance from 65% not that long ago but the magnitude of rate cuts expected by the market remains too high as far as the ECB is concerned hence expect more pushback. As things stand if they cut in June, for the first time, there remain a further 4 meetings for the rest of the year. Two of those, September and December, will be accompanied by forecast revisions and these tend to be the ECB favourite meetings to alter policy given they have the tools to illustrate further their thinking. So 75bps tops this year?

6. US GDP q4. Consensus has slowly ticked up over the last few weeks and now stands at 2%. Remember however, the last 6 quarterly prints have beaten consensus expectations and, given the Atlanta Fed reading is sitting currently at 2.4%, we could be hitting Lucky 7! Such a print would surely expel any notion the market has that March is a live meeting especially after the recent Fed commentary as well as the strong hard data prints that we have seen over the first few weeks of the year. Indeed that thought has slowly percolated to such an extent that March is now a 50/50 chance at best for the first time since mid December and the total cuts priced for the year are now down closer to 130bps rather than the 170bps we saw at the peak of the hysteria. That is still over 5 cuts and seems more like a market betting on a crisis.

7. Japan Tokyo Inflation Report. Chatter is that Core CPI YoY dips below 2%, for the first time since mid 2022, with government subsidies on energy bills and high base effects from last year contributing. A further death knell in the expectations for imminent rate hikes from the BoJ. We may get a good steer for this print from the BoJ’s Outlook Report and in particular their revisions to their inflation profile.

8. US PCE. A soft 0.2% MoM print is anticipated, one the back of lower energy prices, which could have the potential to take the YoY measure below 3% for the first time in almost 3 years.

The Day Ahead

The China Loan Prime Rate announcements for the 1y and 5y were as expected with rates remaining at 3.45% and 4.2% respectively. This despite continued waining investor sentiment and the well documented property sector woes.

Nothing else in play for the rest of the day.

Early doors tomorrow the BoJ “non-event”.

Remember little on the speaker front with the ECB meeting this week and the Fed quiet period ahead of the FOMC next week. Hence central banker talk will generally be confined to the set piece press conferences post rate decisions. We expect a general push back on market rate cut expectations as the bankers continue to stress that rate cuts are not coming any time soon.

As we have mentioned several times before generally rate cutting cycles are shorter and more decisive, in terms of magnitude of cuts, in comparison to the hiking cycles. This time it appears that whilst the market is still on that page the central bankers believe that, with “transitory” still haunting them and the cloak of the pandemic still shadowing their thoughts, this time it will be different.

To me it feels like the market is not playing the data but rather pricing in a financial stability event.

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Main Highlights Ahead

All times in GMT (EST+5 / CET-1 / JST-9)

The main highlights for the week ahead ahead in terms of data and speakers:

Monday

Tuesday

BoJ Interest Rate Decision rates to remain on hold at -0.1% (03.00 GMT)

BoJ Quarterly Outlook Report (03.00 GMT)

US Richmond Fed Manufacturing Index Jan consensus  vs previous -11 (15.00 GMT)

US Richmond Fed Services Index Jan consensus  vs previous 0 (15.00 GMT)

NZ Inflation Rate QoQ q4 consensus 0.5% vs previous 1.8% (21.30 GMT)

NZ Inflation Rate YoY q4 consensus 4.7% vs previous 5.6% (21.30 GMT)

Australia Judo Bank Manufacturing PMI Flash Jan consensus  vs previous 47.6 (22.00 GMT)

Australia Judo Bank Services PMI Flash Jan consensus  vs previous 47.1 (22.00 GMT)

Japan Balance of Trade Dec consensus Jpy-122.1bn previous Jpy-776.9bn (23.50 GMT)

Japan Exports YoY Dec consensus 9.1% vs previous -0.2% (23.50 GMT)

Japan Imports YoY Dec consensus -5.3% vs previous -11.9% (23.50 GMT)

Wednesday

Japan Jibun Bank Manufacturing PMI Flash Jan consensus  vs previous 47.9 (00.30 GMT)

Japan Jibun Bank Services PMI Flash Jan consensus  vs previous 51.5 (00.30 GMT)

Germany HCOB Manufacturing PMI Flash Jan consensus 43.7 vs previous 43.3 (08.30 GMT)

Germany HCOB Services PMI Flash Jan consensus 49.5 vs previous 49.3 (08.30 GMT)

EU HCOB Manufacturing PMI Flash Jan consensus 44.8 vs previous 44.4 (09.00 GMT)

EU HCOB Services PMI Flash Jan consensus 49 vs previous 48.8 (09.00 GMT)

UK S&P Global Manufacturing PMI Flash Jan consensus 46.7 vs previous 46.2 (09.30 GMT)

UK S&P Global Services PMI Flash Jan consensus 53.5 vs previous 53.4 (09.30 GMT)

US S&P Global Manufacturing PMI Flash Jan consensus 48 vs previous 47.9 (14.45 GMT)

US S&P Global Services PMI Flash Jan consensus 51 vs previous 51.4 (14.45 GMT)

BoC Interest Rate Decision rates to remain on hold at 5% (15.00 GMT)

BoC Monetary Policy Report (15.00 GMT)

Thursday

RBA Bulletin (00.30 GMT)

Germany Ifo Business Climate Jan consensus 86.7 vs previous 86.4 (09.00 GMT)

Germany Ifo Current Conditions Jan consensus 88.6 vs previous 88.5 (09.00 GMT)

Norges Bank Interest Rate Decision rates to remain on hold at 4.5% (09.00 GMT)

Norges Bank Press Conference (09.30 GMT)

ECB Interest Rate Decision rates to remain on hold at 4.5% (13.15 GMT)

US Durable Goods Orders MoM Dec consensus 1% vs previous 5.4% (13.30 GMT)

US GDP Growth Rate QoQ Adv q4 consensus 2% vs previous 4.9% (13.30 GMT)

US GDP Price Index QoQ Adv q4 consensus % vs previous 3.3% (13.30 GMT)

US PCE Prices QoQ Adv q4 consensus % vs previous 2.6% (13.30 GMT)

US Core PCE Prices QoQ Adv q4 consensus 2% vs previous 2% (13.30 GMT)

ECB Press Conference (13.45 GMT)

US New Home Sales Dec consensus 0.64m vs previous 0.59m (15.00 GMT)

Japan Tokyo CPI YoY Jan consensus % vs previous 2.4% (23.30 GMT)

Japan Core CPI YoY Jan consensus 1.9% vs previous 2.1% (23.30 GMT)

BoJ Monetary Policy Meeting Minutes (23.50 GMT)

Friday

US PCE Price Index MoM Dec consensus 0.2% vs previous -0.1% (13.30 GMT)

US PCE Price Index YoY Dec consensus 2.6% vs previous 2.6% (13.30 GMT)

US Core PCE Price Index MoM Dec consensus 0.2% vs previous 0.1% (13.30 GMT)

US Core PCE Price Index YoY Dec consensus 3% vs previous 3.2% (13.30 GMT)

US Personal Income MoM Dec consensus 0.3% vs previous 0.4% (13.30 GMT)

US Personal Spending MoM Dec consensus 0.4% vs previous 0.2% (13.30 GMT)

ECB Speakers

Panetta (07.30 GMT)

Kazaks (09.00 GMT)

Vujcic (09.30 GMT)

Good luck.

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