Q2 2023 Outlook: The Fragmentation Game
Saxo’s quarterly outlook is out, and it looks at global fragmentation and how it will impact a variety of asset classes, geographical regions and macroeconomic topics in Q2 and beyond. Discover how it challenges the outlook for equities, creates discrepancies between forex pairs, shapes intriguing investment opportunities in different Asian regions, and how commodities and interest rates may affect and be affected by the Fragmentation Game. Get our in-house analysts' views on the investment landscape in a tough macroeconomic world and plan your investment strategy for Q2 2023 and beyond
What is our trading focus?
US equities (US500.I and USNAS100.I): big miss on jobs openings resets narrative
S&P 500 futures exhausted their momentum yesterday after initially looking to push higher ending the session 0.6% lower. The decline in US equities was led by capital goods, energy and semiconductor industry groups as worse than expected JOLTS jobs openings for February tilted the probability in favour of the US economy is slowing down and could slip into a recession. The 12-month change in JOLTS jobs openings is now the most negative since the Great Financial Crisis if we remove the data points during the pandemic lockdown. Nervousness about the economy also pushed the 10-year yield to its lowest close for the cycle suggesting hedging. The narrative around interest rates could change here from that of lower yield being good for equities to that of lower yields are a sign of recession and thus negative impact on earnings ahead and thus lower equities.
FX: NZD jumps on larger than expected RBNZ hike. JPY firm, USD weak
After RBA’s pause yesterday, the RBNZ surprised with a 50bps rate hike today against expectations of a 25bps rate hike and a potential dovish turn in commentary. The RBNZ stressed that inflation remains too high and continued to diverge from the RBA as it said job losses will be needed to curb price pressures. NZDUSD jumped as high as 0.6379, nearly a percent higher than the prior day’s close before easing back in early European trading. AUDNZD slid from 1.0780+ levels to sub-1.0650 levels amid the central bank divergence. RBA’s Lowe said in a speech today that a pause doesn’t signal rate cuts are coming and the balance of risks is still tilted towards more rate hikes. Meanwhile, GBPUSD reached the 1.25 handle to 11-month highs, largely on a eaker US dollar after the soft JOLTS job openings survey (more below). Traditional safe haven currencies CHF and JPY gained against the weaker US dollar and on lower yields.
Crude Oil: OPEC-driven rally running out of steam
Crude oil prices saw some further gains yesterday as the OPEC+ decision at the weekend to cut output continued to reverberate through markets, but prices slid lower as weaker US job openings data underpinned concerns of a slowdown in economic momentum. The White House also said that the US will continue to work with producers, and others, to ensure energy markets and lower prices for the American consumer. However, a weaker dollar provided support, as did the draw in API inventories which showed US crude inventories falling by 4.3mn barrels last week. Official EIA inventory data will be on tap today. WTI and Brent rebounded from dips overnight, with WTI near 81 and Brent near 85 in early European trading today.
Gold (XAUUSD) and silver (XAGUSD): strong rally as Treasury yields slip
The precious metals saw a broad rally on Tuesday as US job openings fell, escalating concerns of a growth slowdown and bringing Treasury yields lower. Rate cuts of 75bps from the peak are now fully priced in for this year. Both gold and silver rose to their highest levels in a year, with gains of 1.8% in gold and over 4% in silver. Gold prices pierced through $2,000 level to reach a high of $2,020, up over 25% from the lows in September. The previous high of $2,078 will be in focus with $2,000 serving as a support now. Silver touched $25 levels, and strong resistance is seen in the 25.85-26.45 area.
US Treasury yields fall further on soft US jobs openings survey
US treasury yields slump sharply on the soft US Feb. jobs opening survey (more below), with the 2-year dropping nearly 15 basis points to a low of 3.82% as Fed rate hike expectations for May were marked lower (and probability of cuts beginning as soon as Q3). The 10-year yield dropped to close near 3.35%, its lowest daily close since last September, with the intraday lows from March just above the 3.25% level the next downside focus.
What is going on?
US February JOLTS job openings tumble, weakening Fed tightening bets
The February JOLTS job openings survey in the US fell to 9.93mn from 10.56mn (revised lower from 10.82mn), more than the expected decline to 10.5mn and also outside of the range of analyst expectations (10.2-10.7mn). The latest print is the lowest since May 2021, and has prompted traders to pare bets for Fed’s tightening. Expectations of a 25bps rate hike in May have dropped from 57% to 45% as per the CME FedWatch, and the December 2023 FOMC meeting is priced at a policy rate of 4.18% (versus current 4.75-5.00% Fed Funds rate). The ratio of unemployed per job opening fell to 1.7, the lowest since November 2021, while the Quits Rate rose to 2.6% from 2.5%. Attention now turns to the NFP on Friday to further help shape Fed expectations, although the March CPI, PPI and PCE and retail sales data will also be key ahead of the Fed's May meeting.
China-Japan tensions on the rise
Last week, Japan announced plans to expand curbs on exports of 23 types of chipmaking equipment to countries including China as early as July. Together with measures from US and Netherlands, this is another step in the chip wars and more broadly, the fragmentation game. China has expressed “grave concern” and warned of “decisive measures” to safeguard its concerns. China is the world’s largest semiconductor market and Japanese companies that could get affected by these curbs include Tokyo Electron, Nikon Corp, Screen Holdings, or Lasertech Corp.
UK Ofcom says study suggests anticompetitive behaviour in cloud industry
The UK’s communications regulator says that the cloud industry should face an in-depth probe into its practices as the behaviour suggest anti-competitive forces are at play. The study finds that customers have difficulties switching to another cloud provider or use multiple providers at the same time. This could put focus on Microsoft, Amazon, and Alphabet in today’s session.
Donald Trump indicted on 34 felony charges linked to 2016 election
The charges by the New York court in Manhattan are that Trump tried to suppress information with a variety of payments to avoid embarrassing revelations about extramarital affairs during the 2016 election. Falsification of business records in recording payments is also a part of the accusations. Observers note that the bar for getting a conviction on these charges as felony (versus a misdemeanor) is high because the court must prove that the falsification of records was a crime committed in order to commit further crimes. Trump left New York after pleading not guilty and returned to Florida for a rally at which he claimed the case was a sham and purely politically motivated. He will not have to appear before a court again until December.
What are we watching next?
After weak JOLTS survey, next data take on added importance
The sharp market reaction to a more than month-old survey of US job openings (the Feb. JOLTS survey noted above) suggests the market will be highly sensitive to further incoming data that confirms a softening of the US economy, particularly employment data for now as the March CPI figure is not up until next Wednesday. Up today we have the ADP Employment Change data, a measure of private payrolls change that is often at odds with the official surveys. It is expected to show a rise in payrolls of +210k vvs. +242k in February. In past cycles, the weekly jobless claims numbers have been a more timely indicator thatn the monthly surveys of a deteriorating jobs market, generally showing a consistent rise on a moving average basis for several weeks before the official payrolls change data turn south. These claims data points have been consistently very low of late, but the latest is up tomorrow, expected at 200k. The official BLX nonfarm payrolls change release for March is up on Friday (a market holiday, it is worth noting) and is expected to show +240k growth in payrolls after a robust +311k in February.
Earnings to watch
Today’s earnings focus is Conagra Brands which is expected to deliver FY23 Q3 (ending 28 Feb) revenue growth of 6% y/y and EBITDA of $579mn up from $479mn a year ago as the US manufacturer of packaged foods continues to keep up with inflation.
This week’s earnings releases:
- Wednesday: Industrivärden, Conagra Brands, Sodexo
- Thursday: Seven & I, RPM International
- Friday: Aoen, Yaskawa Electric
Economic calendar highlights for today (times GMT)
0715-0800 – Eurozone Final Mar. Services PMI
1200 – Mexico Mar. CPI
1215 – US Mar. ADP Employment Change
1230 – US Feb. Trade Balance
1230 – Canada Feb. International Merchandise Trade
1345 – US Mar. Final S&P Global Services PMI
1400 – ECB Chief Economist Lane to speak
1400 – US Mar. ISM Services
1430 – US DoE Weekly Crude Oil and Product Inventories
0130 – Australia Feb. Trade Balance
0145 – China Mar. Caixin Services PMI