Summary: The blowout U.S. employment report surprised the market and took treasury yields and the dollar higher. The market has repriced a 75-basis-point hike being on the table for the September FOMC. Stock markets were resilient and managed to recoup most intraday losses.
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities plunged after a blowout employment report as it increased the odds for the Fed to stay on its course to raise rates into next year. The market however managed to recoup most of the losses with S&P 500 down 0.16% and Nasdaq 100 off 0.78% at the close. Among the constituents of S&P500, 431 companies have reported as of Friday and 53% of them reported earnings beating market consensus by more than one standard deviation. Better-than-feared earnings have been lending supports to the equity market.
The July employment report was exceptionally strong with payroll, unemployment rate and hourly earnings all surprised to the upside. U.S. treasury yields moved sharply higher right after the job data hit the wires. The front-end sold off the most as 2-year yield soared 18 basis points to 3.23%. 10-year yields climbed 13 basis to 2.83. The 2-10 year yield curve went further inverted to negative 40 basis points. The front-end treasury curve and money market rates have repriced the September FOMC with a likely 75 basis point hike.
After spending the morning treading water, A-shares rallied strong in the afternoon and the northbound flows reversed from over USD 300 million outflow to more than USD400 million net inflow into A-shares. CSI300 closed 1.4% higher. More media reports talking about additional and front-loaded infrastructure investment and the prospect of government hangout of consumption vouchers help boost sentiment. SMIC (00981:xhkg) and Hua Hong (01347:xhkg) surged the third day in a row, rising 7.1% and 13.3% respectively on optimism of government support and potential increase in demand if domestic users of semiconductors shift from Taiwanese suppliers to local suppliers.
US dollar trade higher across the board and gained the most against the Yen, the most interest rate differential sensitive currency. As U.S. 10-year yield jumped 10 basis points, the Yen lost 1.6% to the greenback. USDJPY is trading at 135.13 as of writing.
The nonfarm payroll report surprised to the upside and showed that the U.S. added 525k jobs in July, more than doubling the 250K consensus as per the survey by Bloomberg. The previous two months together had a net upward revision of 28K. Unemployment rate fell from last month’s 3.6% to 3.5% in July, the lowest level since 1965. Average hourly earnings rose 0.5% in July, above market expectation of 0.3% and June average hourly earnings were revised up 0.1 percentage point to 0.44%. The strong hourly earnings data rebuts the peak inflation thesis and points to upside risks in inflation. The market has put a 75 basis points back on the table for the September FOMC meeting. Last Monday, we put forward the idea of shorting September 2023 3-month SOFR futures (SR3U3) at 97.20 or 2.80% yield to implement the view of rebutting the peak inflation and peak rate these. SRS3US is trading at 96.76 or 3.24% yield.
Over the weekend, Fed Governor Michelle Bowman reiterated the Fed’s duty to bring inflation down to the 2% target and said that “similarly-sized increases should be on the table until…inflation declining in a consistent, meaningful, and lasting way.”
The Democratic Party in the U.S. is working on getting an 1% excise tax on share buyback into legislation.
In U.S. dollar terms, China’s exports grew +18% YoY in July, exceeding market expectations (Bloomberg consensus 14.1%). The growth was broadly based, +18.5% with Japan, 32% with ASEAN, +22.9% with the EU and +10.9% with the US.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
