What’s happening in markets?
US equities (US500.I and USNAS100.I) retreat on weak economic data
As investors turned their focus away from weak economic data’s “good” implication on Fed policies and onto the increasing risk of a U.S. recession, stocks retreated Wednesday, with the S&P 500 down 0.3% and Nasdaq 100 off by 1%. Cyclical stocks faltered and the benchmark S&P500 was dragged down by the consumer discretionary, industrial, and information technology sectors. The defensive and interest-rate-sensitive utilities sector, on the other hand, gained 2.6%.
SPDR S&P Regional Banking ETF (KRE:arcx) dropped 1%. Among regional banks, the focus was on Western Alliance (WAL:xnys) which plummeted 12.4% following its deposits fell by 11% in Q1.
Among other single stocks, Johnson & Johnson (JNJ:xnys) rose 4.5% after reaching a settlement on product liabilities claims related to the company’s talcum powder. Walmart (WMT:xnys) gained 1.7% after reiterating earnings guidance. FedEx (FDX:xnys) climbed 1.5% on consolidation plans to cut costs and a dividend increase.
Treasury gained on soft ADP employment and ISM Services data
Treasuries jumped and yields plunged after the weaker-than-expected ADP employment and ISM Services reports. The yield on the Fed-rate path-sensitive 2-years dropped by as much as 18bps at one point to 3.64% before paring gains to close 5bps richer at 3.78%. Traders added to their bets for rate cuts in the second half of the year, pushing the SOFR June-Dec 2023 spread to a new low at -86bps before finishing at -78bps. The reactions in the longer end were relatively muted, with the 10-years closed 3bps richer at 3.31%, after making an intraday low in yield at 3.26%. We still see value at the 2-year notes at 3.78% and expect the curve to steepen as the odds for the end of the Fed hiking cycle are increasing. Please refer to our recent article for the curve steepening strategy.
Chinese equities (HK50.I) and (02846:xhkg): closed on Wednesday
Markets were closed in the mainland and Hong Kong for Tomb Sweeping Day on Wednesday. It is estimated that around 24 million people traveled in China on the one-day public holiday, rising 22.7% from last year.
FX: JPY leading the charge in Asia on yield drop
The market is no longer taking the “bad news as good news” as the weaker ISM services print overnight weighed on risk sentiment, bringing equities lower and dollar a notch higher. Scandis were the biggest losers on the G10 board, with Japanese yen extended the gains this morning in Asia. USDJPY fell below 131 as 10-year Treasury yields touched a new low for the cycle before closing slightly higher. AUDUSD took a look below 0.67 despite RBA Lowe trying to sound somewhat less dovish, while NZDUSD remained supported above 0.63 after a 50bps rate hike yesterday. EURUSD testing a break below 1.09 with eyes on NFP data on Friday.
Crude oil: stuck in a tight range as eco data disappoints
With a miss in US ISM services print and a weaker-than-expected ADP jobs data out yesterday in the US, sentiment has taken a hit across commodity markets as well. Still, supply side issues provided a floor and kept crude oil prices range-bound. EIA inventory data showed shrinking stocks, with crude stockpiles falling 3.7mn barrels last week. More importantly, gasoline and distillate inventories were down 4.2mn barrels and 3.6mn barrels respectively and there were continued signs of strength in Asian demand. WTI prices remained stuck above the $80/barrel mark while Brent stayed close to $85.
Gold (XAUUSD): heading to $2075?
The gold rally continued as yields fell further to fresh cycle lows and risk sentiment took a hit from weak US economic data. Gold prices pushed to fresh highs of $2032, despite a somewhat stronger US dollar and eyes remain on the all-time high of $2075.
What to consider?
US ISM services falls below expectations
The headline ISM services print in the US slowed to 51.2 from 55.1, weaker than analyst expectations of a fall to 54.5. Inflation pressures eased as well, with the prices component sliding to 59.5 in March from 65.6, the lowest since July 2020,. However recession concerns seem to be at the forefront now and the hefty fall in new orders to 52.2 in March from 62.6 was a bigger concern. Meanwhile the employment sub-index also dropped to 51.3 from 54.0.
US private payrolls ADP adds to signals on loosening labor market
The private payroll ADP data, although not always a reliable indicator of non farm payrolls, was cooler than expected, rising just 145k in March beneath the 210k expected and down from the prior 261k (revised up from 242k). Although the labor market in the US still remains quite tight, the ADP data together with JOLTS job openings earlier in the week are setting up a stage for loosening of labor markets and creating a downside bias for the NFP report due on Friday.
RBNZ’s 50bps rate hike and no signal of a pause
After RBA’s pause a day before, the RBNZ surprised with a 50bps rate hike yesterday against expectations of a 25bps rate hike, and did not guide for an incoming pause either. 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. RBA, in contrast, remains focused on bringing price pressures under control without a spike in unemployment or causing a recession. RBA’s Lowe however said in a speech yesterday that a pause doesn’t signal rate cuts are coming and the balance of risks is still tilted towards more rate hikes.
US NFP – what to expect and how will market react?
Before we head into the NFP report on Friday, another US jobs data point will come from the weekly initial jobless claims today. Bloomberg consensus expects another 200k print, but if it rises towards 250k, we will see further concerns on the job market and economic growth brewing. NFP is still the highlight of the week and will be reported on Friday at 8:30pm SGT/HKT. US equity markets will remain closed that day for Easter but the FX markets will be open so dollar reaction will be key. According to Bloomberg’s survey of economists, non-farm payrolls are expected to grow solidly at 235K in March (lower than 311K in Feb) and unemployment rate will remain unchanged at 3.6%. Consensus estimates for the average earnings are 0.3% M/M (from February’s 0.2%) and 4.3% Y/Y in March (February’s 4.6%).
Given the bias is for a weaker print, any signs of sustained strength in the US labor market (higher headline print, lower unemployment rate, higher wages) could bring USD strength back in focus and Treasury yields higher. EURUSD could dip towards 1.08 and USDJPY could move back above 132. If the NFP data also aligns with other jobs data prints and continues to signal a loosening labor market, we could see the slide the Treasury yields extending further bringing EURUSD close to 1.10 and USDJPY testing a break below 130.
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