Global Market Quick Take: Asia – July 13, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): Market rallies on softer CPI, Domino’s Pizza surges

US equities gained after softer-than-expected CPI prints which reduced the likelihood of further rate hikes beyond the 25bps widely anticipated at the upcoming FOMC meeting ending on July 26. The S&P 500 advanced 0.7% to 4,472, its highest level since April last year. The Nasdaq 100 surged 1.2% to 15,307. Nine of the 10 S&P 500 sectors gained, led by communication services and utilities.

Meta Platforms (META:xnas) and Nvdia (NVDA:xnas) led the gains among mega-cap tech stocks, rising 3.7% and 3.5% respectively. Domino’s Pizza, rising 11.1%, was the top performer of the S&P 500 as the company had reached an agreement with Uber to list its menus on the latter’s food-delivery apps.

Recursion Pharmaceuticals (RXRX:xnas) soared 78.2% after the biotech company said Nvidia had made a USD50 million investment into it.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): 10-year yield fell by 11bps to 3.86%

Treasuries rose in price and fell in yields after the headline and the core CPIs came in softer than expected. The 2-year yield dropped by 13bps to 4.75% while the 10-year yield shed 11bps to 3.86%, bull steepening the curve by 2bps to -87bps. The 10-year note auction was awarded at 3.857%, 0.9bps higher than the when-issue trading at the time of the bidding deadline. Nonetheless, the bid-to-cover ratio of 2.53 was higher than the 2.36 in the prior auction.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index gains, fueled by robust loan growth and government support for internet companies

The Hang Seng Index continued its rally for the third consecutive day, posting a 1.1% gain. China's loan growth in June surpassed expectations, providing a boost to investor sentiment. In a study released on Wednesday, the National Development and Reform Commission commended the top 10 internet platform companies based on market capitalization, which included Alibaba (up 1.2%), Meituan (up 4.3%), and Tencent (+1.9%), for their substantial investments in semiconductors, autonomous driving, new energy, and agriculture. Premier Li Qiang reinforced the importance of platform companies during a meeting with senior management from key internet firms such as Meituan and Alibaba’s Alicloud. These developments led to a 2.0% increase in the Hang Seng Tech Index.

A prominent US investment bank initiated a "buy" rating on Xpeng (09868:xhkg) and BYD (01211:xhkg). While XPeng climbed 2.5%, BYD experienced a minor setback, declining by 1.1%.

On the mainland, the CSI300 Index faced a 0.7% decline, primarily driven by underperformance in the telecommunications, media, electronics, and computing sectors.

FX: the Dollar Index (DXY) falls 1.2% on softer US CPI

The US Dollar tumbled after the softer-than-expected CPI prints against major currencies. The Dollar Index (DXY) fell 1.2%. USDJPY fell by nearly 1.5% to 138.32, extending its consecutive losses since last Friday. The combination of robust wage data and BoJ Deputy Governor Uchida's comments last Friday have stirred up expectations for adjustments to the BoJ's ultra-loose monetary policy at the upcoming July 28 meeting and has been supporting the Yen to strengthen against not just the US dollar but also other currencies. 

What to consider?

US core CPI inflation slowed to 4.8%, headline CPI fell to 3.0%

Both the June headline and the core CPI came in softer than expected. The headline CPI inflation increased to + 0.18% M/M in June from +0.12% in May but below the median forecast of +0.3%. On a year-on-year basis, CPI inflation slowed to +3.0% in June from +4.0% in May and was below the +3.1% expected.

Notably, core CPI slowed sharply to +0.16% M/M in June from +0.44% in May versus the median forecast of +0.3% and it was the slowest month-on-month change since February 2021. On a year-on-year basis, core CPI inflation fell to 4.8% in June from 5.3% in May and below the 5.0% anticipated by the median forecast. In the composition, used car prices dropped by 0.5% M/M while new car prices were unchanged. Rent increased by 0.46% M/M and owners’ equivalent rent added 0.45% M/M, slowing from +0.49% and +0.52% in May respectively. The report adds to the notion of the July rate hike will likely be the last hike in this cycle.

Separately, the Atlanta Fed's core sticky CPI, a weighted basket of items that change price relatively slowly, fell to +2.8% on a one-month annualized basis in June from +4.0% in May. On a 3-month annualized, it slowed to +3.8% from +4.4%. On a year-on-year basis, the measure slowed to +5.6% from +6.0%.

Tonight, the Bureau of Labor Statistics will release June PPI. The median forecasts are anticipating PPI at +0.2% M/M (vs -0.3% in May) and +0.4% Y/Y (vs +1.1% in May), and PPI ex-food and energy at +0.2% M/M (vs +0.2% in May) and +2.6% Y/Y (vs +2.8% in May).

The Fed’s Beige shows overall increases in economic activity, some easing in the labor market

The Fed’s Beige Book that was prepared for the July FOMC meeting reported “overall economic activity increased slightly since late May which was an improvement from the description of “little changed” in the prior report. It also reported hiring had become more selective and many Fed districts saw more labor availability. Some districts reported lower input prices for manufacturing.

Chinese authorities embrace mega-cap internet companies in pursuit of technological innovation

China’s National Development and Reform Commission (NDRC) commended in its study the top 10 internet platform companies based on market capitalization for having invested over RMB500 billion in Q1 this year in pursuit of innovation in semiconductors, autonomous driving, new energy, and agricultural technology, which represented a 15.6% increase from the last year quarter. The NDRC specifically praised Tencent for its investment in high-end AI microchips, Alibaba for its investment in agricultural technology, and Meituan's investment in support of autonomous driving.

Separately, Premier Li Qiang gathered senior management from some leading internet companies, including Meituan, Alibaba's Alicloud, and Doujin on Wednesday afternoon to discuss how to regulate the platform economy so as to enhance its healthy and sustainable development. Premier Li praised the platform economy for its contribution to economic stability and people's livelihood.

The comments from the NDRC and Premier Li signify that the Chinese authorities are turning to mega-cap internet companies as an instrument to pursue industrial policies, create employment, and attempt to tackle choke points in critical technology.

Japan’s PPI slowed to 4.1% Y/Y in June

Japan’s PPI declined 0.2% M/M in June, versus a decline of 0.7% in May and the median forecast of a 0.2% increase. On a year-on-year basis, PPI inflation slowed to 4.1% in June from 5.1% in May, below the 4.4% expected by the median forecast.

Bank of Canada raises policy rate by 25bps

The Bank of Canada hiked rate by 25bps to 5% which was inline with market expectations.

Reserve Bank of New Zealand holds rates unchanged

The Reserve Bank of New Zealand (RBNZ) held the official cash rate unchanged at 5.5% at its meeting today, as widely anticipated by the market. The RBNZ said in a statement that current levels of “interest rates are constraining spending and inflation pressure”.

For a detailed look at what to watch in markets this week – read our Saxo Spotlight.

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