The Morning Hark - 8 Jan 2024
Today’s focus... ISM Emp trumps NFP. ETF week at last? More QT exit chat, The Week Ahead and a sprinkle of Arthur Hayes.
Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil lost their bid tone overnight with Brent and Crude March futures currently off close to two percent at 77.70 and 72.80 respectively. Despite the continuing Red Sea tensions oil took a step back overnight with the news that Saudi Arabia would be reducing its selling price for oil across all regions in response to overall weakness in the crude market. The tensions will continue to give some support to the sector but the underlying macro theme remains a perception that the year will be dominated by weak global demand.
EQ - Asian equity markets a sea of red overnight once again led by Hang Seng futures as they tumble a further two percent to 16,230. The tech sector again leading the route with it down well over three percent to its lowest level since the end of 2022. The Nikkei futures off a touch at 33,300.
The US indices flat overnight with the S&P currently at 4730 whilst the Nasdaq is at 16,435. The Nasdaq had its worst week since March with the much vaunted Magnificent 7 erasing all their December gains.
Gold - Gold starting to leak lower with US yields firming up with the Feb futures trading at 2040.
FI - Global yields retaining their firm footing overnight with the US2y and US10y currently at 4.39% and 4.06% respectively after Friday’s round trip. Taking a step back from the noisy price action we can see that financial conditions have tightened the most since October last week. All eyes on CPI and Fed chatter this week.
European yields following the US lead higher to close the week with the German 10y at 2.16% and the Italian 10y yield at 3.82%.
UK gilt 10y equally so at 3.79%.
FX - The USD consolidating overnight with USD Index currently at 102.41. The JPY, EUR and GBP currently sitting at 144.20, 1.0945 and 1.2715 respectively.
FX option expiries today little of note.
Others - Bitcoin and Ethereum in a holding pattern ahead of the much anticipated ETF news this week from the SEC. Currently the pair at 43,850 and 2210 respectively.
The WTF/ETF is still bubbling away with the report at the tail end of last week that the SEC had “no additional feedback” on the ETF paperwork after the latest amendments. The final applications have been submitted and the SEC committee are expected to vote in the coming week.
A great piece, as ever, from Arthur Hayes describing his Bitcoin trading strategy for the first quarter. Also, rather timely, he discusses the reverse repo mechanism in the US which will come into sharper focus this year as last week’s FOMC minutes pointed to the start of discussions surrounding the Fed QT exit process and the Fed’s Logan added to the debate over the weekend. As always Arthur is on point and current point at that! (Remember I flagged his previous piece, Panda Power, last month which is well worth a reread with the upcoming elections in Taiwan at the weekend).
Arthur Hayes’ Crypto Trader Digest is well worth a read . . .
Superb long reads on the general markets with a crypto slant interspersed with incredible knowledge, dark humour and deep thought. I love them!
Macro Themes At Play
Recap
EU Inflation Report for December showed that uptick the ECB had been flagging with the MoM coming in at 0.2% versus -0.6% last and taking the YoY measure back to 2.9%. Base effects from falling energy prices in December 2022 were in the main held responsible for the uptick.
Core however softened with the YoY dipping a touch to 3.4% indicating that the general trend remains to the downside albeit the harder miles lie ahead.
Canada Labour Report for December were weaker than expected with almost no jobs added in the month versus expectations of 13.5k and the unemployment rate remaining steady at 5.8%. Worryingly for the BoC the average hourly earnings had a big jump higher to 5.7% YoY from 5% previously, its highest growth in almost three years.
Canada Ivey PMI for December printed its best level since April at 56.3.
November US Factory Orders decent upside surprise to 2.6% MoM taking it to its highest print of the year and its biggest jump since January 2021.
ISM Services PMI for December were a disappointment falling sharply to 50.6 well below last month and expectations, its worst print in seven months.
The component parts were all disappointing especially Employment which fell off a cliff to print 43.3 and back to pandemic type levels. Indeed this is the fourth worst plunge for this component in the history of the survey. For reference the other three occasions were; the pandemic, the GFC and the severe winter storms of 2014.Something more sinister afoot or an anomaly? New Orders also dropped back to 52.8 its worst print in three months whilst Prices eased slightly to 57.4. Wait lets get back on that early Fed rate cut train as we get back towards an over 70% chance of a March cut. Indeed Friday saw the unusual scenario of a NFP report being upstaged by the employment component of an ISM survey.
NFP Review
Another month another upside beat of estimates with the headline printing back above 200k for the first time in three months to 216k. The unemployment rate matched last month’s print at 3.7%. Hopes for the that early Fed rate cut look further away than ever with average hourly earnings remaining elevated at 0.4% MoM. The YoY broke a six month downward trend with a slight uptick taking the YoY to 4.1%.
As we always note, the revisions to the previous months’ headlines always seem to be to the downside (10 out of the last 11 months). Again this is true with a combined 71k downward revision to October and November’s headline prints.
Post number March Fed rate cut probability is now a 50/50 chance. That was until the ISM intervened.
Central Bank Speakers
Fed’s Barkin was fairly mundane. The Fed should normalise rates as the economy normalises with the labour market moving in a very steady, softening pattern. Potential for additional rate hikes remains on the table.
Logan was a touch more interesting as she addressed the QT question. Her view was that the Fed should slow the runoff from the balance sheet as the reverse repo dwindles.
She also did not rule out a further rate hike (do you see a pattern here?). If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made.
The Week Ahead
Swiss Inflation Report. One of the few economies where inflation is within the central bank’s target range and this month’s print will likely remain comfortably in that range at 1.5%. However the SNB has two more inflation prints before its next meeting and currently CHF strength and the ECB’s future rate path remain more prevalent than the inflation print.
Norway Inflation Report. December saw the Norges Bank surprise markets with a 25bp hike taking rates to 4.5% on the back of “persistent inflation risks” and the weak NOK. On that basis the early year inflation prints will be key to the future rate path for the Norges. Expectations are for the MoM prints remaining elevated with the YoY remains sticky suggesting that the Norges may have further work to do or at the very least hold rates steady for quite some time, as they have indicated. The market however, as is its want, has anticipated a shift in policy earlier with a rate cut fully priced for May.
US Inflation Report. The last inflation print of the year, PCE, showed mild deflation for the month and a YoY heading back towards the 2% target with a 3.2% print encouraging the market that the Fed could cut rates earlier and more aggressively in 2024. However the latest PMIs, and especially the services, have shown a sticky nature to the inflation components and expectations are for the MoM measures to stay at elevated levels. If indeed they remain sticky it will be a further blow to those rate cut expectations and potentially bringing the market back in line with the Fed’s 75bps of cuts for the year. Expectations see a slight uptick for headline but a similarly slight fall for core on the MoMs with a similar theme for the YoY stats. On inflation I post Jim Bianco’s great thread on the potential for higher goods inflation due to the current problems with global shipping. Fascinating read and very much plays onto his core theme that we are going to see much higher US yields in the coming year. JimBianco - Potential Return of Goods Inflation
China Inflation Report. After last month’s deflation print this report takes on greater significance. Falling pork prices and lower gasoline contributed to the lower print last month but both sectors are seen as not falling as swiftly in December contributing to a slower decline for inflation. The negative prints are sure to grab some headlines but the trend would appear to be heading back to a more mundane flat reading.
UK GDP. Touch of “pin the tail on the donkey” about recent UK GDP prints with growth fluctuating between boom and bust. Last month’s print was decidedly in the latter camp at -0.3% however this month is expected to claw some of that contraction back with a 0.2% showing. All a bit too much information this monthly print malarkey!
Fed Speakers. At the tail end of the year the market was taking more cues from the Fed speakers than it was from the actual data prints. With the FOMC minutes and payrolls out of the way and the subsequent sharp paring back of rate cut expectations it will be interesting to say the tone of the Fed speakers as they start to reappear after their Festive hibernation. Williams is the only one scheduled, at present, for the week but he’s an influential voice on the committee so worth noting. Remember he was one of the first Fed speakers out of the traps post the last Powell presser, pushing back on the rate cut frenzy the market had got itself into. Expect more of the same. Plus some more QT exit chat?
Taiwanese Elections. These take place over the weekend with all eyes on whether the pro China candidate will win. The DPP, the party currently in power, are seeing their lead in the polls being eaten into by the pro-China KMT. The polls suggest that whilst the DPP will retain the presidency there will be no overall parliamentary majority. If the DPP were to win both then the TWD we would expect some pullback on the TWD’s recent appreciation. However if the KMT were to surprise the pollsters and win both we would expect further short term support for the TWD on the basis that their pro-China stance would, at least in the short term, have a calming effect on geo-political tensions in the area and also help to promote more cross strait trading.
The Day Ahead
The November German Trade Balance has just printed with a much larger trade surplus than had been anticipated at over €20bn for November driven by strong export numbers which showed a sharp rise of 3.7% MoM.
Swiss Inflation Report for December up next with the rest of the day pretty sparse before we get the Tokyo Inflation Report for December overnight.
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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
Switzerland Inflation Rate MoM Dec consensus -0.2% vs previous -0.2% (07.30 GMT)
Switzerland Inflation Rate YoY Dec consensus 1.5% vs previous 1.4% (07.30 GMT)
Japan Tokyo CPI YoY Dec consensus % vs previous 2.6% (23.30 GMT)
Japan Tokyo Core CPI YoY Dec consensus 2.1% vs previous 2.3% (23.30 GMT)
Fed Speakers
Bostic (17.30 GMT)
Tuesday
EU Unemployment Rate Nov consensus 6.5% vs previous 6.5% (10.00 GMT)
ECB Speakers
Villeroy (17.30 GMT)
Fed Speakers
Barr (17.00 GMT)
Wednesday
Australia Monthly CPI Indicator Nov consensus 4.4% vs previous 4.9% (00.30 GMT)
Norway Inflation Rate MoM Dec consensus % vs previous 0.5% (07.00 GMT)
Norway Inflation Rate YoY Dec consensus 4.9% vs previous 4.8% (07.00 GMT)
Norway Core Inflation Rate MoM Dec consensus 0.2% vs previous -0.2% (07.00 GMT)
Norway Core Inflation Rate YoY Dec consensus 5.6% vs previous 5.8% (07.00 GMT)
ECB Speakers
de Guindos (08.20 GMT)
Schnabel (09.00 GMT)
BoE Speakers
Bailey (14.15 GMT)
Breeden (14.15 GMT)
Fed Speakers
Williams (20.15 GMT)
Thursday
US Inflation Rate MoM Dec consensus 0.2% vs previous 0.1% (13.30 GMT)
US Inflation Rate YoY Dec consensus 3.2% vs previous 3.1% (13.30 GMT)
US Core Inflation Rate MoM Dec consensus 0.2% vs previous 0.3% (13.30 GMT)
US Core Inflation Rate YoY Dec consensus 3.8% vs previous 4% (13.30 GMT)
ECB Speakers
Vujic (15.30 GMT)
Friday
China Inflation Rate MoM Dec consensus % vs previous -0.5% (01.30 GMT)
China Inflation Rate YoY Dec consensus % vs previous -0.5% (01.30 GMT)
China Balance of Trade Dec consensus vs previous $68.39bn (03.00 GMT)
China Exports YoY Dec consensus % vs previous 0.5% (03.00 GMT)
China Imports YoY Dec consensus % vs previous -0.6% (03.00 GMT)
UK GDP MoM Nov consensus 0.2% vs previous -0.3% (07.00 GMT)
UK GDP 3m Avg Nov consensus -0.1% vs previous 0% (07.00 GMT)
UK GDP YoY Nov consensus 0.1% vs previous 0.3% (07.00 GMT)
UK Industrial Production MoM Nov consensus 0.1% vs previous -0.8% (07.00 GMT)
UK Industrial Production YoY Nov consensus 0.7% vs previous 0.4% (07.00 GMT)
UK Manufacturing Production MoM Nov consensus 0.3% vs previous -1.1% (07.00 GMT)
UK Manufacturing Production YoY Nov consensus % vs previous 0.8% (07.00 GMT)
US PPI MoM Dec consensus 0.1% vs previous 0% (13.30 GMT)
US PPI YoY Dec consensus 1.3% vs previous 0.9% (13.30 GMT)
US Core PPI MoM Dec consensus 0.2% vs previous 0% (13.30 GMT)
US Core PPI YoY Dec consensus 1.9% vs previous 2% (13.30 GMT)
ECB Speakers
Lane (12.30 GMT)
Fed Speakers
Kashkari (15.00 GMT)
Weekend
Taiwanese Presidential Elections
Good luck.
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