Summary: Markets rebounded as the Fed caught up with expectations but indicated a slower pace of tightening after the neutral rate is reached. We believe more pain is to come as inflation will likely stay higher-for-longer and there is still room for the Fed to surprise on the hawkish side. Bigger focus this week is the Bank of Japan especially after the markets tested their easy policy strongly yesterday, but the pressure has been somewhat released as bonds recovered today.
Market jitters calm for now, seeing risk come back in; Bond yields fell (but remain at 11-year highs after the 10-year briefly hit 3.48% before paring back) while equities rose as Fed hiked rates by 0.75% as expected. Remember the market likes when things work as expected. So, we think a very short-term relief ninja rally could continue for now, given the next two inflationary monthly reads might be disillusioned calm, but after that caution will kick in again as food price and oil inflation will likely continue to rise up and hit new highs given the energy and food crisis is largely unresolved. For example, IEA yesterday afternoon said there is not enough supply to keep up with demand in 2023. While over in Australia, their electricity trading market suspended spot trading as they can’t get enough energy supply for the grid. So, the big picture remains weak with a lot of risk in the air given inflation will probably rise above the 7% Fed forecasts, and could hit 9%, closer to Saxo’s prediction from last year.
Australia’s ASX200 is higher for the first time in 5 days rallying by 0.4% the back of Wall Street’s upbeat mood. The major theme is that the downbeat stocks and sectors of the year - Real Estate and Tech - are seeing a short-term relief rally, leading the market higher, but it’s going to be short lived as these sectors will probably continue to suffer as the RBA becomes more aggressive and hikes rates more than expected. The biggest risk to Australia right now is that consumer confidence levels are falling, along with business confidence levels, so we remain bearish long term on banks. Lending has been falling for some time now and is going to get stiflingly worse. Consumers are apprehensive to go out and get a mortgage given rates will probably be at over 4%. Okay we have full employment, but who can afford an extra $850 per month in mortgage payments. The average mortgage payment has already doubled in a month. That being said, banks in Australia could see a very short-term rally before heading lower again. Japan’s Nikkei (N225.I) led gains in the region, up 1.9%, following the relief rally from Wall Street as the pace of Fed tightening is likely to ease off after the neutral rate is reached. The Fed caught up with the market expectations, but has left room to tilt dovish down the year. Singapore’s STI (ES3) was also up close to 1% as REITs and banks led the advance.
After opening higher, Hang Seng Index (HSI.I) and CSI300 (000300.I) fluctuated between gains and losses. While sentiments towards Chinese equities have improved amid better-than expected headline economic data over the couple of weeks, investors remain cautious about the growth outlook of the Chinese economy, citing persistent weaknesses in the volume data of power, cement and steel. Shanghai will start doing city-wide mass COVID-testing every weekend. An online story about a Hong Kong based Chinese financial institution having suffered a huge loss from its investment in Chinse corporate offshore USD bonds was widely circulated in the market yesterday. Despite the post FOMC relief rally in the U.S. equity markets overnight, the Fed’s determination to fight inflation implies tighter global financial conditions and slower economic growth in the coming months.
Iron ore is lower for the 5th day, down 2.8% today.
The Federal Reserve hiked rates by 75bps (although Esther George dissented with a vote for 50bps hike) as was expected especially after the hot May CPI and inflation expectations surveys on Friday. The dot plots have all been revised higher by a substantial amount seeing year-end rates at 3.4% (FFR target range of 3.25-3.50%), with increases continuing to a terminal rate of 3.8% in 2023 before rate cuts occur in 2024 back to 3.4%. Rate guidance was key, and suggested that July could be either 75bps or 50bps hike but beyond that, Powell does not expect 75bps hikes to be common. In essence, after we reach neutral (~2.5%), the pace will slow down from there, which means there is still a room for a hawkish surprise from the Fed down the year.
The ECB indicated they will apply flexibility in reinvesting PEPP redemptions. This was expected. In addition, a new tool to manage sovereign spreads is likely to be announced soon. We don’t have many details for the moment. Based on Isabel Schnabel’s recent comments, we can assume it will be some kind of Outright Monetary Transactions programme with light conditionality, for a temporary period of time and with shorter maturities than PEPP (perhaps between two to five years).
Firstly, monthly employment rose by 61k in May vs 25k expected. Unemployment rate was a notch higher at 3.9% vs 3.8% expected. While employment to population is at a record high. Higher employment means higher wage inflation, higher business costs. We think the RBA will probably rise rate by 0.75% at the next meet in July. Why? Well wage price inflation will continue. Australian Minimum wage were risen to 5.2%. And next year more employees will come to market as Childcare subsidy is increased to 90% in July, encouraging parents to return to the workforce. All this comes at a time when energy price inflation for the long term is not fixed with The Australian Energy Market Operator (AEMO) sounded the alarm that it cannot get access to enough electricity supply to keep up with demand. This means, energy inflation is likely to continue. This is why we advocate for investing in larger companies and commodity companies as well... who can sustain higher for longer wage price inflation.... and higher for longer rate hikes.
US retail sales for May came out at -0.3% month-over-month versus expected 0.1% (adjusting for inflation it was out at -1.2%). This is the first drop of the year. Core retail sales (excluding autos, gas) rose 0.1% month-over-month versus expected 0.4% (adjusting for inflation it was out at -0.7%). This is disappointing as it showed that demand destruction is finally happening.
We had New Zealand GDP out this morning, coming in below expectations at 1.2% y/y for Q1 (vs expectations of +2.4%). On a q/q basis, GDP was down 0.2%, although Q2 may rebound as consumption revives on the back of easing restrictions and reopening of borders. With the risk of a recession remaining restrained and inflation likely at about 7% this quarter, RBNZ is likely to continue to tighten.
Japan’s trade deficit widened to a fresh eight-year high in May as the yen’s slide inflated the cost of imports. The trade deficit increased to 2.38 trillion yen, the most since January 2014, as imports soared 48.9% y/y. Exports rose 15.8% y/y, coming in below expectations of 16.1% gain.
The Australian Energy Market Operator (AEMO) has been asking and directing energy companies and states across Australia to put in more supply to the market, while electricity demand soars with a record cold front sweeping Australia, at a time when electricity prices are at records and likely to rise.
IEA expects global oil supply likely to struggle to meet the demand, as consumption growth will accelerate with China exiting lockdowns and consumers to face more pain amid refining capacity shortages. Growth in global oil demand is set to accelerate to 2.2mn barrels a day. Non-OPEC+ supplies will expand by 1.9mn a day. World consumption will average 101.6mn barrels a day, surpassing pre-pandemic levels. Unless we see a major recession threatening a decline in consumption levels, it is likely that oil demand/supply imbalance is set to continue into 2023 and upward pressure on prices will stay.
While the risk of a real policy action from the Bank of Japan has been reduced by the market reaction to the Fed, we cannot completely rule out that markets will continue to test the BOJ’s resolve to keep the yields capped. Longer end futures slumped yesterday and the BOJ had to step in to buy. JGB 10-yr yields also tested the 0.25% limit but are now back a notch lower as global bonds trade higher. USDJPY eased to 133.50 but is now back to 134.50+ levels and more moves in futures can still come in from speculators expecting policy tweaks on Friday.
China’s recent easing of tech regulations has meant that tech stocks are being supported higher; with JD and Alibaba up over 11-23% this month and momentum looks to be picking up with stay home economy boredom trade rising. That’s something to consider.
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy