Podcast of the day
Preview: Freaky Friday
- WSJ’s Timiraos Index of 50 basis points from Fed in December inspires stocks, bond rally and USD sell-off
- BoJ intervention sends USD/JPY down from ¥151.60 to low of ¥146.23
- Risk reversal on US stocks sends AUD up from 0.6210 to near 0.64
- UK/GBP markets disrupted by prospect of Boris return, possible postponement of Oct 31 budget
- Big week ahead: “flash” PMI; new British Prime Minister; CPI AU; ECB, BoC & BoJ; GDP of China in the third quarter?
Friday’s offshore markets produced as many fireworks as we’ve seen on just about any day this year. The mere suggestion that the Fed move from 75 basis points to a gradual 50 basis point rate hike in December produced a strong rally in US equities, a partial reversal of the recent surge in US Treasury yields and a smart reversal of the US dollar, the latter resulting in a jump of nearly two cents in AUD/USD. The BoJ was called upon to act, producing an intraday reversal of over ¥5 in USD/JPY. Earlier on Friday, UK markets were clearly unsettled by the prospect of a phoenix-shaped return of Boris Johnson as UK Prime Minister, as well as a possible postponement of the October 31 budget promised so far due to the (last) Conservative Party leadership race. After the New York close, Moody’s joined the fray (after S&P, Fitch) by putting the UK’s sovereign credit rating on a negative outlook.
At midnight Sydney time (9am NY), “up to date” WSJ Fed Watcher Nick Timiraos tweeted, “Some managers are more keen on calibrating their rate setting to reduce the risk of over-tightening. But they won’t want to ease financial conditions significantly if and when they rise by 50 basis points (instead of 75). This meeting could allow officials to align on the next steps”.
US Treasuries Friday and Weekly
In his next WSJ column, Timiraos wrote, “Federal Reserve officials are heading for another 0.75 percentage point interest rate hike at their Nov. 1-2 meeting and will likely debate then. whether and how to report plans to approve a smaller December increase. “We will have a very in-depth discussion on the pace of tightening at our next meeting,” Fed Governor Christopher Waller said in a speech earlier this month. If officials are eyeing a half-point rate hike in December, they will want to prepare investors for that move in the weeks following their Nov. 1-2 meeting without provoking another sustained rally. One possible solution would be for Fed officials to approve a half-point hike in December, while using their new economic projections to show they could raise rates a bit higher in 2023 than they expected. had planned last month.
Between Timiraos’ Tweet and his following WSJ column, the San Francisco Fed President Marie Daly was quoted Friday, during a lecture at the University of California, Berkeley, as saying, “Now is the time to start planning for resignation.”
The result was that market prices for Fed rate hike on the combined November and December meetings reduced from 144 bp to 136 bp, SPI Futures Contracts jumped over 1%, before extending intraday gains to over 3.5% at the close, while 2-year US Treasury yields fell from a high of 4.63% to 4, 45% at noon New York time (end of the session at 4.47%, 14bps down on the day). The US 10 fell from a new cycle high of 4.335% to 4.215% (down just 1bp at the New York close on Thursday, such was the speed and magnitude of Friday’s selloff). Over the week, the US 10 is 20bp higher vs -2.2bp for the 2, with the 30yr up more than 34bp, which of course will directly fuel a similar rise in 30yr mortgage rates .
Friday and weekly actions
Adding to the excitement was the inevitable instruction from Japanese MoF for BoJ to intervene against USD/JPY , after the pair nearly hit ¥152 (¥151.91 high). This saw USD/JPY fall in the space of over 3 hours to a low of ¥146.23 – a drop similar in size to the BoJ’s last intervention on September 22 (¥145.90 at ¥140.26). We may get an indication of the extent of BoJ USD selling when they release their preliminary estimate of Tuesday’s money market settlements at 6pm JT Monday. Chances are it will be at least as big/bigger than September 22 (~$19B). The precise amounts will not be known until the MoF publishes its monthly statement at the end of October).
Effects Friday & Weekly
Earlier Friday – actually during our day – came the news that Boris Johnson was considering a bid to resurrect his post as Prime Minister (ended ignominiously in July with the furor surrounding his covid restriction offences). With a report from the UK Times that the October 31 budget promised by current Chancellor Jeremy Hunt, the night must be delayed due to the Conservative Party leadership race, The GBP was independently weak on Friday morning in London, GBP/USD dropping from above $1.12 to below $1.11 (low $1.1061). Its subsequent rally above $1.13 was entirely a function of USD weakness, with GBP tying the CHF as the “less strong” G10 currency on Friday amid a drop of around 0, 8% of USD indices.
Ahead of the (currently still scheduled) budget statement on October 31, Britain’s Telegraph reported on Saturday that Chancellor Jeremy Hunt is considering up to £20 billion in tax increases. The report, which does not cite sources, said Hunt may seek to reform capital gains rules and drop a government-funded two-year removal of green levies on energy bills.
Also in the UK, after NY closed on Friday, Moody’s joined earlier S&P and Fitch stocks in revise its outlook on the British sovereign to negative from its hitherto stable Aa3 rating, reflecting “the heightened unpredictability of policy-making amid weaker growth prospects and high inflation…and risks to the affordability of US debt”. UK due to likely higher borrowing and the risk of a lasting weakening of political credibility”.
In contrast to the pound’s modest rally, gains of 2.4% for the S&P500 and 2.3% for the NASDAQ, largely attributed to the WSJ’s Timiraos report, saw AUD rallies almost like the BoJ-backed JPY, up just over 1.5% on the day to hit a high of 0.6393 before closing in NY at $1.6379, its best level since October 10. Positive evidence that as risk sentiment bottoms out, the AUD will be among the biggest beneficiaries of the ensuing USD selloff. The Aussie outperformed the Kiwi on Friday (last +1.25%) but over the week, the NZD was the best performing G10 currencyup 3.4% vs. 2.9% for the AUD.
Goods Friday and Weekly
- Along with various potential “known unknowns”, the calendar of “known known” economic events contains many things to keep the market lively this week.
- Today we get “flash” PMIs from around the world, with European likely to generate the most interest in the market and where Eurozone, German and UK are all down slightly from the already restrictive September readings (below 50).
- 2pm Monday UK time is the deadline for Britain’s next budding prime ministers to officially declare their candidacy, assuming they have secured the required support of at least 100 Tory MPs. The leadership contest will be resolved no later than Friday by party members (via an online ballot) if more than two MPs are in the running, or earlier in the week, without a ballot, otherwise.
- Australian Treasurer Jim Chalmers delivers his first budget on Tuesday, which he has already told us about, will have high inflation as the main influence. We will have Germany’s IFO survey (expected down by all accounts) and an important speech from BoE Chief Economist Huw Pill ahead of the next MPC meeting currently scheduled for November 3rd.
- Wednesday brings Australia’s third quarter CPI report here that headline inflation is up 1.6% in the quarter to 7.0% yoy, from 6.1% in Q2 (also September monthly CPI, seen at 7.1%) , the largest truncated mean nucleus showing an increase of 5.5% against 4.9% (1.5% q/q). the Bank of Canada is expected to rise 75 basis points overnight (77 basis points at Friday’s close).
- Thursday brings US Q3 GDP (consensus 2.3% saar) and an expected rate hike of 75 basis points from the ECB.
- Friday brings the BoJ, where economic and inflation forecasts are expected to be updated, but not alongside a policy change. And at some point this week, after China’s NPC concludes, we should get third quarter GDP and September trade and activity numbers. The decision not to publish them while the APN was in progress inevitably fueled the suspicion that they will not make good reading.
- More than 200 S&P500 companies are reporting this week, including Apple, Microsoft, Alphabet and Amazon.
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