The Morning Hark - 5 May 2022
Today’s focus ……..All hail Chair Powell and over to you BoE
Daily roundup - all prices are at 7.50 BST with changes reflecting movement from midnight BST
Oil?- Both Brent and WTI futures up on the day as they consolidate their gains from yesterday at 111 and 108.50 respectively. Yesterday’s gains came, as we discussed, on the further details for the EU embargo on Russian oil imports, with a 6 month time line for Russian crude and year end deadline for refined products. It also gave a month’s deadline for the mechanics of the transportation of Russian oil by EU companies to be ceased ie. insurance, shipping, finance, etc. One caveat is that it needs to be ratified unanimously by all 27 member states and of course, there is the other issue of where can they turn to for their replacement supplies.
EQ?- A lot of green in equity futures land with a lot of the indices in positive territory. In Asia, the Hang Seng is up close to a percent at 20,900 catching the bid from the post FOMC rally. US indices have backed off a touch after the FOMC and Chair Powell’s press conference rally which saw both the S&P and Nasdaq rally 3%. They currently stand at 4,290 and 13,500 respectively.?
Gold?- Gold flat up close to 2% on the day at 1900. Gold continued its post FOMC rally in the Asian session fuelled by the relief that the market and Fed are in step with no nasty surprises round the corner just yet.
FI?- US yields up on the session with the US10y at 2.94. Post the Fed we saw a bond rally which saw the 10y yield come off 10bps from its 3% level. The short end had an even more spectacular move with a move down to 2.62 off its pre announcement levels at 2.80.
FX?-?The USD followed in step with the other asset classes with a sharp reversal from its recent trend. The USD Index dipped from 103.40 to 102.50 before stabilising back to 102.80. The EUR and GBP have backed away from their precarious levels and trade at 1.0600 and 1.2540 respectively. USDCNH has given itself some breathing space away from the 6.70 level to 6.64 and even the JPY has had some fun at one point USDJPY was trading as low as 128.75 but has since bounced somewhat to 129.55.?
Others?- Bitcoin and Ethereum joined the party, albeit without troubling the upper bands of their recent ranges, and now trade at 39,500 and 2,930 respectively.?
Unsurprisingly given the backdrop the MOVE and the VIX have continued their offered tone with both closing lower yesterday at 121.99 and 25.42. The VIX declining some 13% on the day and?some 30% from its high on Monday.?
All hail Chair Powell! I think it often gets lost by market people, in all the turmoil and emotions of markets and the immersive experience that markets bring to traders lives, that the Fed, whilst caring about market reaction, actually are focusing on the people of the country. Chair Powell in his opening remarks directly addressed those people. He stated that “inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down”. He went on to say that they “have both the tools we need and the resolve it will take to restore price stability”. From a market’s perspective, he did everything the market needed to back away from those critical levels we spoke about yesterday and bring some relief to all asset classes. The relief came from a signal that 50bp hikes in the coming months are likely but for now, 75bp hikes are not being considered. The unanimous vote also helped to soothe market’s fears that the upcoming Fed speakers will not be ratcheting up the hawkish rhetoric in the coming days as they had done after the last FOMC. From a rates perspective, it looks we shall get towards 2% with the June and July hikes and then have the summer to reassess the landscape as we head into the September meeting and the midterm elections. Given the more relaxed approach to the Fed speakers, the market’s focus will turn to data going forward with tomorrow’s payrolls print the first milestone. The headline will capture the attention but the average hourly earnings print will be equally important. The next milestone after that will be next week’s April CPI print (11th May) especially given that yesterday Powell alluded to the fact that he felt PCE had started to peak.
On the balance sheet reduction side it was as is with no need for Powell to start the process earlier than 1 June or in a more aggressive manner than the already signalled $47.5bn run off per month stepping up over three months to cap at $95bn per month.?
So a 50bp hike in rates and close to $50bn balance sheet reduction was taken as dovish. This was the largest rate hike in the US in over 20 years yet stocks rose 3%, bonds sold off and the USD took a big step back. The Fed have done a good job at playing catch up and getting the market ahead of itself in terms of pricing. It remains to be seen if the euphoria we experienced last night and into today is sustainable. The balance sheet run off hasn’t hit home yet and perhaps its only when that process starts that we can assess whether the relief is permanent or transitory in nature. Remember too the Bloomberg opinion piece we have mentioned a few times previously by ex NY Fed Dudley that inflation will be hard to get back down without investor suffering and on that basis, equities need to take some of that strain. If we get a continued rally in stocks will we see Fed speakers start to turn up the hawkish tone again?
Hard act to follow for BoE governor Bailey and the BoE rate decision. The market is pricing in approximately 30bp for today and a cumulative 160bp for 2022. This seems overcooked given the differences in the US and UK in terms of the economic data landscapes. The expectations are for a fourth consecutive 25bp hike with 1 or 2 dissenters for the hike out of the 9 board members. We expect some tempering of the market’s enthusiasm for a more aggressive hiking path with the worsening economic path and for the Bank to generally sound less hawkish than previously. They will also release their forecasts which won’t be pretty. The usual mix of lower growth expectations, higher inflation and a softening employment landscape are hardly a good mix for an aggressive hiking rate path.?
???The main highlights for the week in terms of data and speakers:?
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Thursday
Norway’s Norges Bank Rate Decision?- no change expected but the surprisingly Riksbank tone of late has put analysts on alert for a spillover into its near neighbour. (09.00 BST)
BoE Rate Decision and Monetary Policy Report?- 25bp hike priced in by markets to get rates to 1% and on a par with the US (12.00 BST). The vote split will be of much interest given the recent poor growth, sentiment and economic prints which all seem to be trending down in contrast to the higher inflation points of late. Will there be some forward guidance that the BoE having been proactive in shifting rates up will pause and let the data settle as the recent rate rises filter into the economy. Remember the forward guidance has already been dialled down from “likely to be” in terms of further hikes to last time’s “modest tightening in monetary policy may be appropriate in the coming months” and further dilution would cause some market disruption given where GBP is currently trading and the aggressive nature of what’s priced into the curve.?
OPEC Meeting?- despite the supply constraints caused by the conflict in Ukraine and the potential banning of Russian exports of oil into Europe there is no change expected from the OPEC countries in terms of tweaking output
UK Local Elections?- Boris judgement day?
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Friday
RBA Statement on Monetary Policy?- post rate hike commentary? (02.30 BST)
Canadian Employment Report April?- Unemployment rate previously at 5.3% expectations at 5.2% (13.30 BST)
US NFP April?- headline expected at 390k versus 431k previously
Canadian Ivey PMI April?- previous print 74.2
Fed speakers?- post Wednesday’s meeting and Powell press conference we have the first Fed speakers to raise their heads. Williams (14.15 BST) and Bostic (20.20 BST) both speak and their comments on the rate decision, balance sheet run off and of course and further forward guidance will be keenly anticipated by the markets. Note too in the early hours of Saturday Waller and Daly also have speeches lined up.?
Good luck.
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???Articles discovered on?Harkster?exploring some of the current key macro themes in more depth:
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The Fed
The BoE
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???Top 5 trending links on Harkster yesterday:
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