Market Insights Today: Cable bounces, double-digit German inflation, Putin and PCE to take the limelight today – September 30, 2022
APAC Strategy Team
Summary: Fresh lows return in US equities with more hawkish Fed comments and fear of earnings downgrades picking up as the Q3 earnings season draws closer. Cable extended its rally despite UK PM’s commitment to fiscal plan and weakening BOE hike expectations, while the EUR gained strength on the back of hot German CPI and uptick in ECB rate hike expectations. Talks of OPEC+ production cuts are gaining momentum, and focus today will be on China PMIs. Also watch for Eurozone CPI, US PCE data as well as Putin’s speech in the day ahead.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) fall to 22-month lows
US stocks sank to their lowest levels since November 2020 after another round of Fed speakers continued with hawkish remarks, while oil maintained gains on expectations of OPEC+ cuts. Nasdaq 100 was down almost 4% at one point, but trimmed the losses before closing 2.9% lower, while the broader S&P500 met a similar fate nearing 3,600 before ending 2.1% down. All 11 sectors of the S&P 500 dropped, with Utilities falling the most and followed by Consumer Discretionary. Retail favorites Tesla (TSLA) and Apple (AAPL) led the declines falling 6.8% and 4.9% while chip makers followed with AMD (AMD) down 6.2% with PC demand falling away. On the upside, oil stocks like Devon Energy (DVN), and Diamondback Energy (FANG) and Occidental (OXY) moved higher. Separately the European Commission announced an eight package of sanctions that would include a price cap on Russia’s oil exports.
U.S. treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) climbed again
After plunging sharply the day before on the Bank of England move, yields of U.S. treasury securities rose, with the 10-year note yields rising 6bps to 3.79% on Thursday. Yields initially crept higher on bounces of U.K. Gilt yields and higher German regional CPI data, but paring their rise in the afternoon.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Hong Kong and mainland equity markets opened higher on Thursday and pared the gain through the day and settled moderately lower, with the Hang Seng Index down by 0.5%, and CSI300 little changed. The news of the imposition of a 3-day mandatory PCR test in the financial district, Lujiazui in Shanghai due to one new Covid-19 case triggered some fears among investors. In spite of PBoC’s supportive statement coming out from its quarterly monetary meeting saying that the central bank will expand its special lending program to ensure the delivery of delayed housing projects, Chinese developers declined, with Country Garden (02007:xhkg) plunging 11.6%, Longfor (00960:xhkg) down by 7.5%, and CIFI (00884:xhkg) tumbling 16.3%. Chinese EV maker, Zhejian Leapmotor (09863:xhkg), tumbled 33.5% in its first day of trading after an IPO priced at the bottom of a guided range. XPeng (09868:xhkg) dropped 5.3%. Trading in the China Internet space was mixed with Alibaba outperforming (+2.9%).
Australia’s ASX200 (ASXSP200.1) likely to follow Wall Street lower: futures suggest a 0.3% fall today, aluminum stocks to be bright spark
As above, on the ASX today, it’s worth keeping an eye on aluminum related stocks on the ASX including Rio Tinto (RIO) and Alumina (AWC). Meanwhile, diversified miners including the major retail favorites, like BHP (BHP) are worth watching after the Iron Ore (SCOA) price remains supported with China ramping up housing support. This morning the iron ore price (SCOA, SCOV2) pushed up ~1.1% to US$96.50. In NY BHP closed 0.6% higher, implying the ASX primary listing of BHP will likely move up, especially after the aluminum and iron ore prices rose.
Cable stays bid and Euro follows
The US 10-year yields as well as the dollar could not catch a strong bid on Thursday, which helped other G10 currencies gain some ground. Sterling was the strongest on the G10 board, with GBPUSD now testing 1.12 in early Asian hours. BOE’s emergency bond-buying measures however hints at a push lower in gilt yields, and GBP will likely come back under pressure if the surge in global yield resumes. This will need a focus shift back on Fed tightening as we think there is still some room for upward repricing of terminal rate Fed expectations and higher-for-longer rates. Meanwhile, expectations for an ultra-aggressive BOE hike in November cooled slightly. EURUSD also surged above 0.98 with ECB rate hike expectations for October meeting picking up after the hot German inflation, and with the ECB downplaying the chance of an emergency move to prop up Italian bonds. EURGBP was however lower from 0.8950 to 0.88.
Aluminum and aluminum stocks on watch
It’s worth watching aluminium related shares across the Asian-Pacific region today after the record jump in Aluminum price on the LME after Bloomberg reported plans to discuss a potential ban on new Russian metal supplies. The metal jumped 8.5% (its biggest intraday jump in record) before paring back.
Crude oil (CLU2 & LCOV2) prices maintain gains
Crude oil prices maintained the momentum with OPEC+ production cuts becoming a key factor going into the next week’s meeting. OPEC+ commenced discussions around an output cut with one saying it a cut is “likely”, according to Reuters sources. This comes after previous reports that Russia will likely propose OPEC+ reduces output by around 1mln BPD. Demand conditions are likely to weaken as global tightening race heats up, and this has prompted expectations for a supply cut as well. Brent futures touched $90/barrel mark but reversed slightly later, while WTI futures rose to $83/barrel before some decline later in the session.
What to consider?
German inflation sparks EZ inflation fears
German inflation touched double digits, as it came above consensus at 10.9% YoY for September from 8.8% YoY previously. Germany is also preparing to borrow an additional €200 billion to finance a plan to limit the impact of soaring energy costs, which could keep consumption high even as shortages loom. Up today will be the September eurozone inflation print. Expect a new record which will increase the pressure on the European Central Bank to hike interest rates by at least 75 basis points in October. The economist consensus expects that the headline harmonized index of consumer prices (HICP) will reach 9.7% YoY against 9.1% in August. The core rate is expected to climb to 5.6% YoY against 5.5% previously. The spread between the headline and the core inflation figures is mostly explained by a decrease in oil and natural gas prices in recent months. However, this is clear that inflation is becoming broad-based, including in the services sector. This means that inflation is here to stay for long. The HICP is likely to continue increasing in the coming months. A peak in inflation in the eurozone is possible in the first quarter of 2023, in our view. This is much later than in the United States.
Fed speakers push for more hikes
Loretta Mester remains more hawkish than the Fed’s median dot plot, and said that rate are not in restrictive territory yet and more rate hikes will be needed. No signs of concern on economy or dollar strength were noted, while inflation remained the key point of concern for her. James Bullard also made some key comments on ‘bad idea to mess’ with the inflation target while the labor market conditions remain tight and recession is only a risk. Mary Daly was more cautious, saying officials should work to avoid "inducing a deep recession." However, she still raised the bar on expectations on the Fed funds rate saying that she is comfortable with median Fed rate path projection of 4%-4.5% by year end, 4.5%-5% in 2023 (pointing to upside risks as the dot plot suggested 4.6%, or 4.5-4.75% if we talk in ranges).
US initial claims come in strong again
Initial claims came in lower than expected at 193k with last week’s also revised lower to 209k from 213k. Continued claims cooled to 1.347mln from 1.376mln despite the expected rise to 1.388mln. The data shows how tight the labour market is in the US and Fed's Bullard labelled today's claims metric as "super low". Meanwhile, the third estimate of Q2 GDP was confirmed to decline 0.6%, notably with consumer spending revised higher to 2% from 1.5% previously.
Australian inflation rose 7% in the year to July, based on new monthly CPI
At this rate it doesn’t appear CPI will peak at just shy of the 8% the RBA forecasts, given price pressures have resumed this month from the largest inflation contributors. Based on the ABS’s new monthly CPI print, some of the largest price jumps year-on-year to July were in fuel (+29.2%) and fruit & vegetables (+14.5%). The concern is that, with La Nina set to hit Australia and population growth continuing, food and housing (rent) prices will continue to rise apace. In September alone, contributors to food prices have risen markedly, as the global supply outlook has weakened amid poor crop conditions. This could tilt the RBA back toward a more hawkish stance.
Australian rents to drive higher, adding to inflation woes
Australia’s population growth resumed after borders reopened and business employment remains strong for the time being, at 50-year highs. New office and residential supply is expected be subdued in 2023 as interest rates rise; which supports the notion of falling vacancy rates. According to Colliers and the ABS, Sydney CBD rents rose 3.6% to $5.22 per square foot in the June quarter, driven by competition for top-quality office space.
China’s manufacturing PMIs are expected to stay in the contractionary territory
China’s September official NBS Manufacturing PMI and Non-manufacturing PMI as well as the Caixin China Manufacturing PMI are scheduled to release today. The median forecast of, economists surveyed by Bloomberg for the NBS Manufacturing PMI is 49.7 for September, a modest improvement from August’s 49.4 but remains in contraction territory. Economists cite the lockdown of Chengdu and restrictive measures in some other cities during most part of the month and the weak EPMI released earlier as reasons for expecting the NBS Manufacturing PMI to stay below 50. The Caixin Manufacturing PMI, which has a larger weight in coastal cities in the eastern region, is expected to remain at 49.5 as export-related manufacturing activities and container throughput were weak. The consensus estimate for the NBS Non-manufacturing PMI is 52.4, staying in the expansionary territory, supported by infrastructure construction but slowing slightly in September from August’s 52.6 due to weakness in the housing sector. On the other hand, steel production and demand data in September suggest the PMIs may potentially surprise the upside.
Buying activity up in food and Agricultural instruments, stocks and ETFs
Food prices are supported higher as the global crop outlook dampens for 4 reasons; concern lingers over Ukraine’s exports being cut off, South America has been hit by rains and frosts, the US has been plagued by drought and dry conditions and as Hurricane Ian made landfall in the, US conditions are likely to go from bad to worse. And lastly - La Nina is expected to hit Australia for the third year in a row. So we are seeing clients buy into Wheat and Corn. Both prices are up 20% off their lows. Secondly, buying has been picking up in agricultural stocks like General Mills (GIS) and GrainCorp (GNC). And lastly, clients are biting into agricultural ETFs like Invesco DB Agriculture Fund (DBA) and iShares MSCI Agricultural Producers ETF (VEGI).
Fed preferred inflation measure, US PCE, on the radar today
The Fed’s preferred inflation measure, the PCE is due today, and it will likely echo the same message as given by the last strong CPI number which has made the Fed even more hawkish in the last few weeks since the Jackson Hole. Headline numbers may be lower due to the decline in gasoline prices, but the price pressure on services side will likely broaden further. Last week, the Fed also raised its forecasts for inflation, with the central bank now seeing core PCE at 4.5% by the end of this year (it previously projected 4.3%), moderating to 3.1% next year and at 2.1% at the end of its forecast horizon in 2025, but thinks that headline PCE prices will be at its 2% target by then.
Putin's speech due today after Russia annexed parts of Ukraine
Vladimir Putin will address legislators after Russia signs treaties today to absorb four occupied regions, with Ukrainian forces threatening to encircle a pocket of the Donbas region. There is also growing resistance to Putin’s decision to call up 300,000 reservists. Market focus will likely be on Putin’s warnings to the West about any potential threats of using nuclear weapons, which may mean risk aversion getting another leg up.
Nike sank on concerns about inventory build-up and margins
Nike (NKE) reported slightly better than expected revenues and inline earnings but below expectation gross margins and a 65% surge in inventories for the North American market. In the earnings call, the company’s CFO pledged to take “decisive action to clear excess inventory” and such efforts will have “a transitory impact on gross margins this fiscal year”. Investors took note of the implication on demand and profitability and sold stock to more than 9% lower in the extended hour trading.
Apple fell on analyst downgrade
After being sold on the company’s announcement to back off plans to increase iPhone production this year on the day before, Apple’s shares fell another 4.9% yesterday after an analyst downgrade from a U.S. investment bank. In this Market Daily Insights piece yesterday, we mentioned the warnings from Peter Garnry, Saxo’s Head of Equity Strategy, about the likelihood that Apple’s revenue could slip into negative growth for the current quarter ending Sep 30 and you can find more details of his analysis from here. In his note, Peter also warns that analysts may be way off in their estimates for the S&P 500 for Q3 and it is highly probable that there will be significant misses to the downside followed by gloomy comments from company management about the outlook on margins.
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