What’s happening in markets?
US equities (US500.I and USNAS100.I): Higher Treasury yields weighed
The S&P 500 closed just above 4,500 and the NASDAQ 100 above 15,350 despite closing in the red as long-end Treasury yields rose to multi-month highs on the ramped Treasury supply calendar announced this week. US ISM services data and jobless claims continued to signal strength in parts of the economy and fears of persistent inflation, also further asserting the Fed’s higher-for-longer message. After the close, Amazon earnings were stellar on cloud growth but Apple disappointed with iPhone sales continuing to slow. Focus turns to NFP data due today.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Strong China Caixin services PMI and more stimulus hopes
China’s Caixin services PMI came out stronger than expected on Thursday, but Chinese stocks got a fresh shock as Morgan Stanley downgraded them from overweight to equal weight. HSI slid 0.5% with XPeng closing almost 4% higher after announcing that its deliveries of smart electric vehicles jumped 28% on a month-on-month basis. CSI300 however closed up by 0.9% and focus turns to a press conference scheduled at 10am Beijing time today to introduce a combination of macro policies to promote high quality economic growth. With focus on “quality” growth, expectations of a big-bang stimulus should remain restrained.
FX: Yen gains defying higher yields
The dollar was marginally lower with gains led by NOK and risk currencies JPY and CHF. USDJPY fell from highs of 143.89 to lows of 142.07 despite BOJ’s unscheduled JGB buying to cap 10-year yields at 0.65% as well as higher Treasury yields in the NY session. GBPUSD slumped to lows of 1.2621 on the BOE’s decision to raise rates by only 25bps, but recovered back to 1.27+ subsequently.
Crude oil: Saudi Arabia extends production cuts to September
Crude oil prices jumped by over 2% on reports that Saudi Arabia will extend the voluntary production cuts into September. It also warned that it may be extended or deepened. Russia also said it will extend its own production cut into next month, although at a lower rate of 300kb/d. Russia had already committed to cutting its oil output by around 500,000 bpd from March until year-end. These supply cuts are finally tightening the oil market, especially at the time of peak summer demand. Focus may shift to macro data as US NFP is reported today and a strong print will signal demand could remain upbeat.
What to consider?
US ISM services sending stagflation warning
The headline for the services PMI in US continues to hold up while manufacturing is weakening. ISM Services in July remained in expansionary territory for the seventh straight month but fell to 52.7 from 53.9, short of the expected 53.0. However, the details looked disappointing and sent warning signals on a stagflation. Business activity and new orders fell to 57.1 (prev. 59.2) and 55.0 (prev. 55.5), respectively, in addition to employment declining to 50.7 (prev. 53.1) ahead of the payrolls report on Friday. However, the inflationary gauge of prices paid eerily lifted to 56.8 from 54.1.
US jobless claims still low
A slight rise seen in this week’s jobless claims print, but the headline at 227k from 221k prior is still not enough to demand any need for rate cuts from the Fed. The 4wk average of initial claims fell to 228k from 234k. Focus now turns to non-farm payroll data due later today.
Bank of England hiked rates by 25bps
The Bank of England decided to raise rates by 25bps on Thursday to 5.25%, matching consensus expectations against some calls of a 50bps rate hike. There were three dissenters, two of whom voted for a 50bps increase. The MPC said current policy is restrictive but left the door open for further action if inflation persisted, and emphasized that rates have to stay higher-for-longer. The bank reduced its growth forecast for the next two years and raised its medium-term inflation outlook, suggesting the economic path will likely remain tough to navigate.
Amazon earnings: Strong cloud growth helps smash estimates
Amazon’s Q2 results topped analysts' estimates and the company also delivered upbeat guidance for Q3 as growth in its cloud business topped estimates. Amazon reported Q2 EPS of $0.65 on revenue of $134.4bn, beating estimates of $0.35 on revenue of $131.45bn. Amazon Web Services, its fast-growing cloud revenue segment, grew 12% to $22.1bn, ahead of estimates of 10.2%. Q3 guidance was also stellar. The company sees net sales between $138.0 billion and $143.0 billion, or to grow between 9% and 13% well above consensus estimates of $138.3bn. Stock was above 10% post-market.
Apple earnings: record services growth but slower iPhone sales
Apple reported fiscal Q3 earnings after the close and it delivered a beat both on topline and bottom-line. Revenue of $81.80bn (-1.4% YoY) was above expected $81.55bn and EPS of $1.26 was above last year’s and expected $1.20. iPhone revenue, which makes up nearly half of total revenue, fell to $39.67bn from $40.67bn a year earlier, missing estimates. Revenue from Apple’s service business including Apple News, Apple TV+ and iCloud, however grew to $21.21bn in Q3 from $19.60bn a year earlier, and topped estimates driven by over 1 billion paid subscriptions. China sales were a pleasant surprise, coming in at $15.76bn (+7.9% YoY), beating estimates. Stock was down over 2% in after-market.
US NFP jobs data on watch to get clarity on how soon the cycle can turn
Goldilocks continues with disinflation trends being a key focus for the markets while economic growth is holding up well too. This is giving room for markets to rally until something breaks as the effects of Fed tightening pass through. Labor market could be one of those, and a sharp rise in unemployment rate could trigger more calls for a recession and an eventual turn in the Fed policy. However, if tight labor conditions persist, it will remain hard to see an end of the inflation problem and the Fed tightening cycle. Bloomberg consensus expects headline NFP change to remain near 200k after gains of 209k in June and unemployment rate could remain steady as well while average weekly earnings is expected to slow to 0.3% MoM/4.2% YoY from 0.4% MoM/4.4% YoY previously. Still, a lot more data is due before the September Fed meeting and market may not read too much into this month’s report. For a better understanding of US non-farm payrolls, read this primer.
For a detailed look at what to watch in markets this week – read our Saxo Spotlight.
For a global look at markets – tune into our Podcast.