The Morning Hark - 7 Feb 2024
Today’s focus...Higher neutral rate the new plaything for the central bankers and NYCB is officially “junk”
Overnight Highlights
Prices are at 7.00 GMT/2.00 EST, with changes reflecting movement from midnight GMT
Oil - Oil having a firmer tone yesterday although trading flat in Asia with Brent and Crude April futures at 78.70 and 73.30 respectively. US’s Blinken warned that US attacks in the Gulf would continue in a “sustained way” helped the sector retain its bid tone. Furthermore the EIA report saw overall oil inventories falling with US production contributing to that fall.
EQ - Asian equity markets mixed with the relief rally in China fizzling out as we are back one percent lower at 16,140. Meanwhile the Nikkei futures little changed at 36,080.
The US indicies flat in Asia with the S&P currently at 4975 and the Nasdaq at 17,640.
Gold - Gold little changed with April futures currently trading flat at 2048.
FI - Global yields retracing a touch in Asia after their sell off yesterday on the back of the US regional bank weakness and a good old bout of profit taking. Currently the US2y and US10y yields up smalls at 4.40% and 4.10% respectively.
European yields pretty much unchanged with the German 10y at 2.30% and the Italian 10y yield at 3.87%.
UK gilt 10y similarly at 3.96%.
FX - The USD off smalls in Asia as it continues to retrace from its recent 3m high. Overall the USD was softer yesterday with Yellen’s comment that incentives to move away from the USD exist as well as the regional bank ugliness. The USD Index currently at 104.13. The JPY, EUR and GBP all a touch firmer with them sitting at 148, 1.0760 and 1.26 respectively.
Today’s FX option expiries sees in the Eur €1.5bn at 1.0725 and $1bn at 1.35 in USDCAD.
Others - Bitcoin and Ethereum steady as she goes as they remain bid overall at 42,950 and 2364 respectively.
Macro Themes At Play
Recap
Eurozone Retail Sales for December a smidge worse than expected at -1.1% MoM taking the YoY to -0.8%.
Canada Ivey PMI for January saw a small uptick on expectations at 56.5 and its highest level since April.
BoC’s Macklem remained hawkish claiming that he was not working to a timetable on rate cuts especially as more time is needed to bring inflation down. Officials are focused on how long to keep rates at 5% as the path to 2% target is likely to be slow and risks remain with inflation remaining persistent.
Again the higher neutral theme came through with Macklem claiming that it will be a bit higher than the 2/3% range.
NYCB at a near 27y low as it is revealed that the Bank had conversations with the Office of the Comptroller of the Currency (lovely name) prior to its announcement last week. Moody’s has also cut its rating to “junk” and noted that a third of its deposits are uninsured.
More details here for those that wish.
Central Bank Speakers
More of the same from the various officials. In the US cuts will come in good time but, as the economy is in a good place, we see no rush to move. The ECB likewise trying to brazen it out with the same rhetoric but given the contrast in the US/EU economic prints it’s hard to believe. Whilst Dhingra, the dove of the BoE, was pleading for cuts.
One point of note would be the theme of a higher neutral rate which is getting wheeled out quite a bit as a reason for delaying rate cuts. BoC, ECB and the Fed all used it yesterday.
Fed’s Kashkari claimed that recent inflation data has been surprisingly positive. We are not quite there yet on a YoY basis but 3m and 6m measures are basically there. However I don’t want to say we are done yet and with the benefit of hindsight we were latte raising rates. In addition the possibly higher neutral rate means the Fed can take more time to assess upcoming data before beginning rate cuts.
Mester was open to rate cuts if it was clear that inflation was easing further although she did warn against cutting rates too soon and too quickly. Again the Fed was in no rush to cut rates and she still favours three cuts for this year.
Harker said that a “soft landing” was in sight for the US economy and is seeing “real progress” on getting inflation back to 2% target. Consumer has been resilient, labou market better balanced and inflation falling. What’s not to like!
ECB’s de Cos was confident that inflation is heading back to target and hence the next move in rates for the ECB will be a cut.
Vujcic urged the ECB to not rush the start of the cutting cycle. Equilibrium level of ECB interest rates likely to now be higher than it looked some years ago.
Schnabel cautioned that the recent incoming data did not allay his concerns that the last mile may be the most difficult one.
The BoE’s Dhingra, she of the cutting vote at last week’s MPC, urged the Bank not to take a risk with the UK economy. She felt that we are still looking at a restrictive period of monetary policy even after you start the moderation. She also was not worried at the credibility risk of cutting too early.
The Day Ahead
Overnight the q4 NZ Labour Report showed some easing but overall the market remains tight.
Unemployment Rate rose back to 4% from previous although the uptick was smaller than anticipated. Labour Costs Index increased to 1% stronger than expected whilst the overall
Employment Change rose to 0.4%. NZD and NZ yields firmed a touch on the print.
As we go to print the Swiss Unemployment Rate for January ticked up to 2.5% its highest level in almost 2 years. Meanwhile German Industrial Production data for December saw a seventh consecutive month of contraction at -1.6%. Yesterday’s factory orders seem a mere distant memory now!
Fairly sparse day with the minutes released by the Riksbank and BoC of their recent meetings as well as some central bank speakers.
Early doors tomorrow China’s Inflation Report for January prints.
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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:
Wednesday
Riksbank Monetary Policy Meeting Minutes rates held at 4% (08.30 GMT)
Riksbank Theeden Speaks (10.30 GMT)
BoC Summary of Deliberations (18.30 GMT)
Fed Speakers
Kugler (16.00 GMT)
Collins (16.30 GMT)
Barkin (17.30 GMT)
Bowman (19.00 GMT)
BoE Speakers
Breeden (08.40 GMT)
Woods (14.15 GMT)
Early Thursday
China Inflation Rate MoM Jan consensus 0.4% vs previous 0.1% (01.30 GMT)
China Inflation Rate YoY Jan consensus -0.5% vs previous -0.3% (01.30 GMT)
Riksbank Jansson Speaks (07.00 GMT)
Good luck.
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