All eyes are on Chair Powell’s post FOMC press conference
APAC Strategy Team
Summary: With a 50bp hike and announcement of balance sheet reduction baked in the cake, market directions hinge on Fed Chair Powell’s remarks at the press conference.
What’s happening in markets that you need to know?
US major indices likely to remain volatile. US stocks pushed higher for the second day; The Nasdaq 100 rose 0.2% and S&P 500 rose 0.5%. So this supports clients So we could see a dead cat bounce over next few weeks. But medium – longer term, the outlook is still bearish with slower economic growth, peak inflation expectation and smaller overall company profits.
The Federal Reserve’s FOMC meeting entered its 2nd day; expected to raise the overnight Fed Fund rate by 50 basis points and remove liquidity from the financial system at a rate of up to USD95 billion a month starting from June. Market interest rates and futures are pricing for the targeted overnight Fed Fund rate band to rise to 2.75%-3.00% by the end of this year, which implies another 200 basis point hike in total in the five meetings from June to December 2022. For long term investors this means, companies with rising free cash flows, strong market positions will be favoured, (like commodities), while tech stocks and consumer discretionary will likely feel the most pinch ahead.
Apple (AAPL) has hired a 31-year Ford (F) exec to ramp up electric car work, who has experience developing EVs and working through regulatory issues. Apple shares are up slightly (up 0.13% in after hours trade.
Chip makers surprisingly beat the street: AMD (AMD) reported better than expected results and forecasts and their shares are up 7% after hours. Nvidia (NVDA) shares are also higher after hours after it guided for stronger margins ahead. It is however worth noting that this included the acquisition of Xilinx which closed in February, and some analyst estimates may not have reflected the consolidated forecasts. Still, concerns around softness in PC sales were rampant and PC demand is in a secular downtrend. - a warning we also shared last week. AMD gained share in high end computing and gains in cloud and enterprise data centers may sustain. However, it is hard to imagine growth in semiconductor firms can continue at this pace amid the supply chain challenges and diminishing demand outlook.
The Australian share market adjusts following the RBA’s first rate hike in a decade yesterday. The ASX200 swum from a profit on Wednesday to a loss (down 0.1%), extending its downtrend, despite the economy strengthening. Laggards include; stay at home economy stocks like 4WD accessory business ARB (ARB) falling 11% and buy now pay later big loser Zip (ZIP) falling 9.1% today (taking its drop from the 2021 high to 92%). Adding fuel to the tech stock fire are spiking Australian bond yields, as investors continue to sell off bonds. On the upside: bond holders like Insurance Australia Group (IAG) and investment groups Macquarie (MGQ) trade higher, with IAG shares up 2.1% in anticipation of profits potentially jumping 8-10% (Bloomberg). On the economic news front today; Australian preliminary retail sales rose more than expected in March (rising 1.6%, vs 0.5% expected). And better than expected home loan data for March came out; showing Australian home loans rose 0.9% (the market expected loans to fall 2%, following the 5% drop in Feb). But don’t be fooled, lending is expected to continue to fall from the April 2021 high, as rates rise.
Hang Seng TECH Index fell 2.8% following JD Health’s (06618) majority shareholder cutting its stake and the U.S. SEC’s probe on Didi (DIDI). The shares of JD Health fell 11% after Chairman and majority shareholder Richard Liu unloading 5 million shares. The U.S. SEC’s investigation on Didi’s 2021 U.S. IPO has also dampened sentiments towards Chinese internet stocks. Alibaba (09988), Meituan (03690), JD.COM (09618), Tencent (00700) and Bilibili (09626) fell 3% to 6%. As we suggested in our previous note, the hype in Chinese internet stocks from last Friday is set to fade.
Asian equities brace for Fed’s jumbo hike. Equity markets in Asia traded with a cautious start on Wednesday even as S&P 500 futures rose marginally. China and Japan markets remain closed for holidays. Singapore’s STI Index (ES3) was trading near neutral as Yangzijiang Financial Holding (YF8) dropped close to 10% while Venture Corp (V03) – a global tech services firm – rose over 4% after solid results reported last Friday.
US dollar remains on the front foot going into the FOMC. The USD has eased slightly but it remains near its peak going into the FOMC meeting today. AUDUSD reversed somewhat after the kneejerk following the hawkish RBA surprise yesterday, but AUDNZD remains above the critical 1.10 at near 4-year highs. Even though the RBA has been late to the tightening game, AUD crosses are generally likely to push higher as RBNZ cannot match what's to come from the RBA now. Meanwhile, critical levels remain on test with the USDJPY stuck near the 130-level and EURUSD still near 1.0500 but unable to break below convincingly.
Asia PMIs broadly higher in April. Asia’s factory output have been modestly higher in April, despite China’s lockdowns as US demand growth offset. Better manufacturing PMI prints were reported from South Korea, Philippines, Myanmar and Indonesia. While the run rate is unlikely to be maintained as supply constraints get worse with China's zero covid and the prolonged war, it is still a big contrast to the euro area which reported April PMIs at 15-month lows.
What to consider?
The U.S. labor market remains “tight to an unhealthy level”. The U.S. Job Openings (JOLTS) data released yesterday increased 206K to 11.55 million. This brings the job opening to unemployment ratio to a new record high of 1.94 times, i.e. every 1.94 job openings per one unemployed person. It is worthwhile to note that Chair Powell said at the March FOMC press conference that the U.S. labor market was “tight to an unhealthy level” when making reference to this ratio at 1.7 times. The JOLTS data support the scenario of a hawkish Powell at the conference tonight.
Australian banks pass on the RBA interest rate hike already, after RBA hike rates larger than expected yesterday. Despite lending rates falling for months now, construction slowing, and bond yields rising 0.11% to 3.12%, all of Australia’s biggest banks passed on the rate hike almost immediately. And it’s in the thick of reporting season. Australian 8th biggest company and the 4th biggest bank, ANZ Bank (ANZ) reported results. ANZ’s cash profit rose 4.1% y/y to $3.1billion (vs $2.89billion expected) in the half financial year, while its net interest margin only rose 1.58% y/y, missing already low expectations for 1.63% y/y growth. This highlights banks are also finding it hard to make money, at a time when lending growth has already slowed.
The AUDUSD rises for the second day after bond yields rise. After the RBA rose rates more than expected yesterday the Aussie dollar rose of its January low. Remember, as a central bank rises rates, their currency traditionally gains value. But given the largest bank in the world, US Fed is poised to rise rates (Wednesday in the US), the AUD is likely to potentially lose value. If the Fed is more hawkish, the USD will likely rise, and the AUD will probably fall. If the Fed is more dovish, the AUD will likely rise for the third day.
Musk watch: As Elon Musk is working out finances to takeover Twitter (TWTR) and make it a private business, Musk announced he wants to take Twitter public down the track. Tesla (TSLA) shares rose 0.7% on Tuesday.
Gold (XAUUSD) at 11-week lows ahead of FOMC. Gold prices have dropped to their lowest levels since mid-February, amid expectations of a hawkish Fed and a higher USD. Still, the Ukraine war and rampant global inflation continues to drive demand for the precious metal. From a technical perspective, gold is testing the $1850 support and a reversal could take it back to $1920.
Wilmar (F34) headwinds on a rise. Wilmar reported robust Q1 earnings last Friday on the back of strong performance in plantation and sugar milling segments. However, a muted Q2 outlook due to the ban on Indonesia’s palm oil exports, as well as China’s demand slowdown amid lockdowns will start to weigh. High commodity prices are also expected to impact margins in Food Products segment, and this could mean more downgrades to come after Morgan Stanley’s move to Hold from Buy earlier.
Trading ideas to consider
How to trade the Fed? With a series of 50bp and 25bp Fed rate hikes priced in by the markets, focus will be on Fed Chair Powell’s remarks at the post meeting press conference. If he hints at being open to multiple 50 bp hikes (instead of 25 bps) beyond May or even 75bp increases in some meetings, we could see a further run higher in US treasury yields and the US dollar and selling in equities. If he dismiss this and risks getting perceived as dovish and behind the curve, that could mean a sharp reversal in USDJPY, EURUSD or USDCNH – each of which have been key plays in the policy divergence theme.
Key economic releases this week:
- Wed, May 4: Singapore PMI, US April ADP, US March trade, US FOMC
- Thu, May 5: NZ employment, Australia building approvals, Australia March trade, China Caixin services PMI, Singapore retail sales
- Fri, May 6: Japan Tokyo CPI, US non-farm payrolls
For an update on Saxo’s global look at markets – tune into the Special Edition with Steen Jakobsen podcast.
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