The Morning Hark - 4 Jan 2024
The Morning Hark - 4 Jan 2024
Today’s focus...FOMC minutes more hawkish than the event itself and at last some push back on FCs. Bitcoin hokey cokey continues.
Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil continuing to firm overnight with Brent and Crude March futures currently up close to one percent at 78.90 and 73.60 respectively. Red Sea tensions back in the driving seat with Maersk suspending shipments through the Red Sea indefinitely. In addition the killing of a senior Hamas official, explosions at a ceremony in Iran causing multiple deaths and the shutting down of Libya’s largest oilfield all added to more uncertainty for the sector.
The API data did little to help with crude stocks showing an unexpectedly large drawdown although this was tempered somewhat with builds elsewhere.
After the chatter it was confirmed that OPEC+ would hold a “monitoring meeting” on February 1. I’m beginning to think they are starting to have all the effect of FIFA on the world stage. The cartel slowly starting to lose its influence?
EQ - Asian equity markets starting to find some footing for the first time this year with the Hang Seng futures up a touch at 16,700. The Nikkei futures similarly at 33,250.
The US indices stabilising in a quiet Asian session after yesterday’s continuing sell off. The S&P currently at 4752 whilst the Nasdaq is at 16,565.
Gold - Gold backed off yesterday again after its early year exuberance however the Feb futures have found some bids with them trading now at 2055 but in the bigger picture all very no man’s land.
FI - Global yields little activity overnight with the US2y and US10y currently at 4.31% and 3.92% respectively.
European yields backed up a touch yesterday with the German 10y at 2.03% and the Italian 10y yield at 3.70%.
UK gilt 10y closing flat at 3.64%.
FX - The USD consolidating overnight with USD Index currently at 102.42. The JPY, EUR and GBP currently sitting little changed from yesterday at 143.60, 1.0930 and 1.2675 respectively. JPY weakness been the main feature of the year thus far with the BoJ exit from negative rates facing further hurdles with the need to support markets in the wake of the earthquake.
FX option expiries wise a couple of note with a Aud1.5bn at 0.6755 and in USDJPY $1bn at 144.
Others - Bitcoin and Ethereum having some fun over the last few sessions with the festive season hokey cokey continuing into the strat off the year with the will they/won’t they ETF saga. Currently the pair at 43,165 and 2240 respectively.
Matrixport report on the SEC denying all Bitcoin spot ETFs was enough for that early digital asset enthusiasm to drain from the market. I guess the Genslers got to give and maybe its not now. Market wise Bitcoin was very overextended seen by the high funding rates and cost to be long Bitcoin I guess also had an edge to ithe downside move. All a tad brittle but it’ll get there eventually.
Later it was reported that the SEC was having discussions with Nasdaq, NYSE and CBOE surrounding the ETF launch and Goldman were reported to be eyeing up an ETF offering via Blackrock and Grayscale. Hmmm if the squid is getting involved seems like they may have a better idea of something afoot than Matrixport?
January 10 is still the touted date for a final decision so plenty of time for more volatility.
Macro Themes At Play
Recap
The US ISM Manufacturing PMI for December was an upside surprise in contrast to yesterday’s PMI. However the headline print, 47.4, was the fourteenth consecutive month of contraction. The underlying measures were a touch mixed with prices paid dipping and the employment component taking a nice jump to the topside. However, similar to the PMI, new orders are seeming to lag again on the back of slowing demand.
The US JOLTs report for November showed further cooling in the labour market with the number of job openings falling for the third consecutive month to their lowest level since March 2021. The ratio of job openings to unemployed people dropped further to 1.4.
FOMC Minutes Review
Some of the money lines form the minutes
On Rates
Policy rate at or near its peak
Restrictive policy stance will continue to soften spending and reduce inflation
Policy remaining restrictive for some time until inflation clearly moving down sustainably
Acknowledge projections show cuts by end of 2024
Several said that rates could stay at peak longer than anticipated
Further interest rate increases still possible
Economy and Inflation
Clear progress has been made in 2023 towards 2% inflation target
GDP will cool and labour market rebalancing will continue in 2024
Risks to inflation and employment moving towards greater balance
A few said that they felt the Fed was approaching a point of “trade off” between their dual goals of controlling inflation and maintaining high rates of employment.
High degree of uncertainty surrounding the economic outlook
Financial Conditions
Many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for the Committee to reach its financial goal
On QT
It would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public
So as expected more hawkish than the actual event itself and certainly more so than Powell’s Presser.
In conclusion we got little more clues as to when rate cuts will start.
Market participants are still nibbling at March, albeit less so than previously.
Strategists are sensing more mid year.
Fed gives us a more open ended that it “would be appropriate by the end of 2024”.
This will be the focus for the market as it picks over upcoming Fed speakers.
The Fed’s dual mandate trade off could be seen as jeopardising that much vaunted soft landing. On that front the first signal of potential cracks in the dual mandate will come with Friday’s NFP.
Financial conditions downside push back from the Fed at last. The previous “heavy lifting” comments, regarding rising FC, still remain prevalent in the memory so its good to see they at last acknowledge the flip side of the equation.
QT tapering chatter was perhaps the outlier in terms of expectations and, given these comments, will become much more of a focus for the market moving forward.
Central Bank Speakers
Fed’s Barkin warmed us up for the Fed minutes by expressing that the potential for additional rate hikes remained on the table and that conviction on inflation and the economy, would determine the future rate path. The much vaunted “soft landing” was increasingly conceivable but not inevitable. The risks to this scenario were centred on; delayed impact of higher rates, services inflation and outside shocks.
The Day Ahead
Overnight the final December Services PMIs started to hit the tapes and they proved a touch rosier than their Manufacturing equivalents.
Australia set the ball rolling with a 47.1 print bouncing from its over 2 year low of last month. However its the third month of contraction led by the old weakening of both domestic and external demand scenario.
China had a decent leap to 52.9 making it a full year of growth for the services sector in China. Strong new orders and exports helped the series to its highest level since July.
Japan a little late in proceedings, due to the holidays, had its Manufacturing PMI which followed the global trend of contraction albeit with a higher revision to 47.9. The seveth month of contraction and the steepest drop since February.
The morning is consumed with the Services PMIs from the major European economies. The afternoon gets started with the December German Inflation Report; how much of an uptick? US ADP and the Canadian and US final PMIs finish off the day.
Overnight the catch up Japanese Services PMI prints and just as we go to press German Retail Sales but for November so don’t rush!
I repost this piece for those that missed it yesterday regarding the US primaries; a very good primer!
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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:
Thursday
Germany HCOB Services PMI Final Dec consensus 48.4 vs previous 49.6 (08.55 GMT)
EU HCOB Services PMI Final Dec consensus 48.1 vs previous 48.7 (09.00 GMT)
UK S&P Global/CIPS Services PMI Final Dec consensus 52.7 vs previous 50.9 (09.30 GMT)
German Inflation Rate MoM Prel Dec consensus 0.1% vs previous -0.4% (13.00 GMT)
German Inflation Rate YoY Prel Dec consensus 3.7% vs previous 3.2% (13.00 GMT)
US ADP Employment Change Dec consensus 115k vs previous 103k (13.15 GMT)
Canada S&P Global Services PMI Dec consensus vs previous 44.5 (14.30 GMT)
US S&P Global Services PMI Final Dec consensus 51.3 vs previous 50.8 (14.45 GMT)
Early Friday
Japan Jibun Bank Services PMI Final Dec consensus vs previous 50.8 (00.30 GMT)
German Retail Sales MoM Nov consensus -0.1% vs previous 1.1% (07.00 GMT)
German Retail Sales YoY Nov consensus -0.5% vs previous -0.1% (07.00 GMT)
Good luck.
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