The Morning Hark - 4 Dec 2023
Today’s focus... Gold ATHs and Crypto not doing too badly either, so what could possibly go wrong? The Week Ahead and a touch of OpenAI espionage and Napoleon to finish off.
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Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil starting the week off as the previous weeks have with it very much on the back foot. Brent and Crude February futures currently down close to one percent at 78.20 and 73.70 respectively. The OPEC+ decision, or rather its opaqueness, its voluntary nature and the fact that there was clear descent in the ranks, has weighed on oil, on top of a suspicion of impending weakening global demand. Oil clocked up its sixth week of declines and its hard to see where it will get its next break.
EQ - Asian equity markets softening again in the Asia session with the Hang Seng and Nikkei futures down one percent at 16,710 and 33,050 respectively.
The US indices consolidating in Asia with the S&P currently at 4595 whilst the Nasdaq is at 15,975, both holding onto their post Powell gains.
Gold - Gold all time highs and all that. Since the break of the previous high around 2085 its been a one way street for the futures all the way up to a new high of 2150. Short term the previous high will provide some support but there’s not a lot up here in terms of resistance other than market over exuberance and potentially a “leaked” Fed story! The Feb gold futures currently at 2095.
FI - Global yields a touch firmer after Friday’s fireworks. Currently the US2y and US10y sitting at 4.59% and 4.23% respectively. At one point the 10y dipped to a fresh 3 month low below 4.20%.
European yields softening again with the belief that the major central banks are done with the hiking cycle and, despite central bankers protestations, rate cuts will start early next year. The German 10y closed the week at 2.36% and the Italian 10y yield similarly at 4.10%.
UK gilt yields less so, with the belief the BoE will need to hold rates higher for a touch longer than their peers, with the 10y closing at 4.14%.
FX -Quiet Asian session with the USD Index little changed at 103.30. The JPY, EUR and GBP all equally quiet with them currently sitting at 146.70, 1.0870 and 1.2680 respectively.
Interesting to note that although he USD Index is little changed from where we were on Friday the constituent parts of the index have changed quite a bit. The JPY has strengthened further and through the 100dma around 146.89 whilst the EUR is lower.
FX option expiries wise today in the EUR we see €1.5bn rolling off at 1.0925 and €1.2bn at 1.0860. Whilst in USDJPY we have $1.1bn at 147.
Others - Bitcoin and Ethereum been bid all weekend and continued in the Asian session with enthusiasm returning in force to the sector on the back of rate cut expectations. The pair at levels last seen in the middle of last year currently sitting at 41,490 and 2255 respectively.
Macro Themes At Play
Recap
Swiss GDP for q3 was far from inspiring showing a growth rate of 0.3% YoY whilst their Manufacturing PMI Nov came in a touch better than forecast at 42.1.
Final German, Eurozone and UK Manufacturing PMIs for November all came in a touch better than expected and all up from the previous month’s readings at 42.6, 44.2 and 47.2 respectively.
Canada Labour Report for November was a mixed bag. The headline showed more job gains than had been expected at 24.9k but the unemployment rate ticked up to 5.8%. Average hourly wages YoY remained steady at 5%.
Canadian Manufacturing PMI slowed in the month to 47.7 as did the US equivalent to 49.4
More importantly the US ISM Manufacturing PMI for November showed worrying traits. The headline print came in at 46.7 matching last month’s and lower than had been expected. The underlying measures had a strong whiff of stagflation with the employment component dipping to its second lowest print of the year but prices paid at their highest level since April. New orders also had a decent jump.
On the back of the data the Atlanta Fed has downgraded its q4 estimate for GDP to 1.2%.
Powell Recap
The obvious highlight of the day was the Powell show and he tried to walk a measured line for the markets. Sadly for him the markets nodded sagely and then ignored him. Stocks rallied, US yields and the USD sold off and gold (digital and otherwise) soared.
In the last week the market has gone from 75bps of cuts next year starting in June to 125bp of cuts starting in March (fully priced for May). Some move!
The gist of the speech was that a soft landing in the US is now the Fed’s base case. They will raise rates again if needed but there is still some restriction from previous rates in the pipe line.
Reading between the lines the Fed’s stance is; no more hikes unless some shock rears its head, cuts will start next year but we cant say that directly yet. #DotPlot Mayhem Dec 13 here we come.
One point of note he did not mention the touchy subject of financial conditions at all. This when we have seen the largest monthly move in financial conditions last month which, according to GS, has been worth 4 rate cuts. Guess they only mention FC when it suits…..
Some of the main money lines below with the highlighted ones being those of most note.
We think GDP is slowing based on the limited data that we have;
Consumer spending has been surprisingly strong;
There is a path to getting inflation down to 2% without large job losses, and we are on that path;
The economy has repeatedly surprised us and other forecasters;
Been surprised on the upside this year with inflation coming down “meaningfully” but growth and jobs continuing;
Data will tell us whether we’ve done enough, whether we need to do more;
Policy is “well into restrictive territory”;
Inflation still well above target but moving in the right direction;
Need to see more progress on lowering inflation to 2%;
Fed to move “carefully” on interest rates with risks “more balanced”;
Will raise rates again if needed to lower inflation;
Premature to speculate on when policy may ease; and
Monetary policy is thought to affect economic conditions with a lag, and the full effects of our tightening have likely not yet been felt.
Central Bank Speakers
The ECB’s Villeroy disinflation is faster than expected. Absent of any shocks rate hikes are over. We will look at rate cuts when time comes in 2024.
On that note the market now fully pricing in 125bps of cuts from the ECB next year.
The Fed’s Goolsbee if inflation is not on path to 2% even if unemployment rate is going up we would not stop tightening.Shocks are still possible and soft landings have been derailed by those.
Key thing we have to watch is housing inflation.
The Week Ahead
RBA Rate Decision. Similar to the RBNZ, a near 100% probability of rates remaining at 4.35%. The previous meeting saw them hike 25bps and tweak guidance on further hikes to be data and risk dependent. RBA chatter has been on the hawkish side and Governor Bullock has recently reiterated her concerns surrounding the broad nature of inflation and the fact further tightening may be needed. However the recent softening in the inflation numbers should see the RBA hold rates steady and then look to reassess in the new year. WestPac - RBA
Australia q3 GDP. A rather benign 0.4% worth of growth is expected for the third quarter matching last quarter’s reading and taking the YoY to 1.8% below trend growth. A softening in domestic demand and weakening of growth from the country’s major trading partners are the expected headwinds to GDP. WestPac - Aussie GDP
Bank of Canada Rate Decision. The BoC is expected to complete the full sweep of “on holds” from the USD bloc central banks on Wednesday by keeping rates at 5%. The announcement is a “statement only” one with no press conference although the next day both Macklem and Gravelle speak which offers the BoC a platform to express their views on the market. Recently Macklem noted that rates might now be restrictive enough hence tilting the market more towards an “on hold” bias. Similar to the Fed the BoC is expected to push back on the market’s expectations for cuts in the new year where currently over 100bps of cuts are priced in starting from March. The statement and the two speeches offers the Bank that opportunity although, like the Fed, whether the markets listen to them is another matter. ING - BoC Preview
China Trade Balance. The market will take this as a good barometer for the overall health of both domestic and overseas demand. Given the weakness in last week’s official PMIs we’d expect to see the trade data reflect this with exports remaining in negative territory whilst imports should weaken with the holiday season and its related spending patterns.
US Payrolls Report. Expectations are for a slight uptick from last month’s 150k headline print which whilst, below recent trend growth, would be a welcome sight for the Fed given the series is not falling off a cliff. Unemployment rate is expected to remain steady at 3.9%. Average earnings expected to tick up a touch but enough to warrant any intervention from the Fed and as ever with this report look out for the revisions.
China Inflation Report. October’s report showed early signs of disinflation in the series so the market’s interest will be focused on whether this trend continues. Early consensus forecasts point to a similar small negative reading as last month. Remember too that data may be distorted by the “Singles Day” shopping event which occurred in the middle of the month.
No Fed Speakers. With no Fed speakers, due to the FOMC blackout, to push back on market rate cut expectations, will the market push those expectations even further? The week has started off on that foot and a weak services ISM or payrolls print and who knows where we could end up in terms of 2024 end rates! Perhaps a timely Fed whisperer story in the WSJ will temper the market’s enthusiasm? Separately the ECB Enters its blackout period from Thursday so today’s speech from Lagarde will be her last opportunity to tee up any thoughts for the ECB meeting on the 14 December and perhaps a mention of PPP and reinvestment.
The Day Ahead
Evergrande won the breathing space it was seeking for protection from their overseas creditors as a Hong Kong court delayed their decision on whether it should be wound down or not until 29 January.
Overnight we had the final reading for November for Australia Retail Sales which confirmed drop of 0.2% for the month.
Later the Swiss Inflation Report for November which will be crucial in the run up to the last SNB meeting of the year on 14 December. Recently SNB members have flagged an expected temporary uptick for the inflation series due to rental prices. Whether the Bank is happy to look through any such event however is up for debate. Later the Riksbank Meeting Minutes from last month’s meeting where rates were held at 4%. The outcome had been seen as a tight call between a further 25bp hike and a hold. The minutes hopefully will give us a clue as to how close the call was. Given Governor Thedeen’s recent nod to there being a 50/50 probability of a further rate hike we’d expect the minutes to have a hawkish slant to them. The afternoon sees US Factory Orders for October and the Lagarde speech.
Overnight the final Services PMIs for Australia, Japan and China as well as Japan’s Tokyo Inflation Report for November. Finally the RBA Rate Decision.
Couple of other points of interest for some additional reading for those that feel inclined.
Great article on Sam Altman, OpenAI and a UAE tech firm and their links to China from Katrina Northrop of The Wire.
Also, given the newly released Ridley Scott film, a fantastic read from AT Chartbook on Napoleon which interlinks history and economics brilliantly.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the week ahead in terms of data and speakers:
Monday
Swiss Inflation Rate MoM Nov consensus -0.1% vs previous 0.1% (07.30 GMT)
Swiss Inflation Rate YoY Nov consensus 1.7% vs previous 1.7% (07.30 GMT)
Riksbank Monetary Policy Meeting Minutes left rates unchanged at 4% (8.30 GMT)
US Factory Orders MoM Oct consensus -2.6% vs previous 2.8% (15.00 GMT)
Australia Judo Bank Services PMI Final Nov consensus vs previous 47.9 (22.00 GMT)
Japan Tokyo CPI YoY Nov consensus % vs previous 3.3% (23.30 GMT)
Japan Tokyo Core CPI YoY Nov consensus 2.4% vs previous 2.7% (23.30 GMT)
ECB Speakers
de Guindos (08.45 GMT)
Lagarde (14.00 GMT)
Tuesday
Japan Jibun Bank Services PMI Final Nov consensus vs previous 51.6 (00.30 GMT)
China Caixin Services PMI Nov consensus vs previous 50.4 (01.45 GMT)
RBA Interest Rate Decision rates expected to remain on hold at 4.35% (03.30 GMT)
Germany HCOB Services PMI Final Nov consensus 48.7 vs previous 48.2 (08.55 GMT)
EU HCOB Services PMI Final Nov consensus 48.2 vs previous 47.8 (09.00 GMT)
UK S&P Global Services PMI Nov consensus 50.5 vs previous 49.5 (09.30 GMT)
Canada S&P Global Services PMI Nov consensus vs previous 46.6 (14.30 GMT)
US S&P Global Services PMI Final Nov consensus 50.8 vs previous 50.6 (14.45 GMT)
US ISM Services PMI Nov consensus 52 vs previous 51.8 (15.00 GMT)
US ISM Services New Orders Nov consensus vs previous 55.5 (15.00 GMT)
US ISM Services Employment Nov consensus vs previous 50.2 (15.00 GMT)
US ISM Services Prices Nov consensus vs previous 58.6 (15.00 GMT)
US JOLTS Job Openings Oct consensus 9.35m vs previous 9.553m (15.00 GMT)
Japan Reuters Tankan Index Dec consensus vs previous 6 (23.00 GMT)
Wednesday
Australia GDP Growth Rate QoQ q3 consensus 0.4% vs previous 0.4% (00.30 GMT)
Australia GDP Growth Rate YoYq3 consensus 1.8% vs previous 2.1% (00.30 GMT)
Germany Factory Orders MoM Oct consensus 0% vs previous 0.2% (07.00 GMT)
EU Retail Sales MoM Oct consensus 0.2% vs previous -0.3% (10.00 GMT)
EU Retail Sales YoY Oct consensus -0.9% vs previous -2.9% (10.00 GMT)
US ADP Employment Change Nov consensus 128k vs previous 113k (13.15 GMT)
Canada Ivey PMI s.a. Nov consensus vs previous 53.4 (15.00 GMT)
BoC Interest Rate Decision rates expected to remain on hold at 5% (15.00GMT)
BoE Speakers
Bailey (11.00 GMT)
ECB Speakers
Nagel (15.00GMT)
Thursday
China Balance of Trade Nov consensus $58.1bn vs previous $56.53bn (03.00 GMT)
China Exports YoY Nov consensus -0.8% vs previous -6.4% (03.00 GMT)
China Imports YoY Nov consensus 3% vs previous 3% (03.00 GMT)
Swiss Unemployment Rate Nov consensus % vs previous 2% (06.45GMT)
Germany Industrial Production MoM Oct consensus 0.5% vs previous -1.4% (07.00 GMT)
EU GDP Growth Rate QoQ 3rd Est q3 consensus -0.1% vs previous 0.2% (10.00 GMT)
EU GDP Growth Rate YoY 3rd Est q3 consensus 0.1% vs previous 0.5% (10.00 GMT)
EU Employment Change QoQ Final q3 consensus 0.3% vs previous 0.1% (10.00 GMT)
EU Employment Change YoY Final q3 consensus 1.4% vs previous 1.3% (10.00 GMT)
BoC Gravelle Speaks (17.30 GMT)
BoC Macklem Speaks (17.40 GMT)
Japan GDP Growth Rate QoQ Final q3 consensus -0.5% vs previous 1.1% (10.00 GMT)
Japan GDP Growth Rate Annualised Final q3 consensus -2.1% vs previous 4.5% (10.00 GMT)
Friday
RBA Brischetto Speaks (02.20 GMT)
German Inflation Rate MoM Final Nov consensus -0.4% vs previous 0% (07.00 GMT)
German Inflation Rate YoY Final Nov consensus 3.2% vs previous 3.8% (07.00 GMT)
Canada Capacity Utilisation q3 consensus % vs previous 81.4% (13.30 GMT)
US NFP Nov consensus 180k vs previous 150k (13.30 GMT)
US Unemployment Rate Nov consensus 3.9% vs previous 3.9% (13.30 GMT)
US Average Hourly Earnings MoM Nov consensus 0.3% vs previous 0.2% (13.30 GMT)
US Michigan Consumer Sentiment Prel Dec consensus 61.8 vs previous 61.3 (15.00 GMT)
US Michigan Current Conditions Prel Dec consensus vs previous 68.3 (15.00 GMT)
US Michigan Inflation Expectations Prel Dec consensus vs previous 4.5% (15.00 GMT)
US Michigan 5y Inflation Expectations Prel Dec consensus vs previous 3.2% (15.00 GMT)
Saturday
China Inflation Rate MoM Nov consensus -0.1% vs previous -0.1% (01.30 GMT)
China Inflation Rate YoY Nov consensus -0.2% vs previous -0.2% (01.30 GMT)
Good luck.
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