Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Equity markets were churned by the July US jobs report on Friday, first falling sharply as treasury yields jolted higher on the day, but later rallying back to close the day only modestly lower. The US yield curve is about 10 basis points from its most dramatic inversion since 1982 as the market eyes an incoming recession despite the strong US jobs data and July ISM Services data last week. This week’s chief data focus is the Wednesday US July CPI data release.
US equity markets saw a very choppy session on Friday as interest-rate sensitive growth stocks dipped sharply on the strong July US jobs report. The broader market recovered most of the lost ground intra-day, but performance across themes was very mixed, with our Energy Storage basket the best performer among our “theme baskets”, likely on the passage of the climate bill by the US Senate (more below). Earnings season is winding down for the quarter, but a few prominent names are set to report this week, including Walt Disney on Wednesday.
Alibaba (09988:xhkg) -4%, Tencent (00700:xhkg) -2% and Meituan (03690:xhkg) -2% dragged the Hang Seng Index 0.8% lower. Semiconductors names retraced lower after three days of outperformance, SMIC (00981:xhkg) -2%. Cathay Pacific (00293:xhkg) claimed 2% following Hong Kong’s announcement of cutting inbound travelers’ hotel quarantine to 3 days from 7 days. In the mainland, the lockdown of Hainan, a southern resort island, triggered some buying of traditional Chinese medicine and Covid-treatment related names. CSI300 was flat in midday.
The USD was jolted higher by the strong July jobs report on Friday, taking EURUSD, for example, sharply back lower after its attempt the prior day to push up toward 1.0250+ resistance. That pair has traded in an impossibly constricted range for nearly three weeks between 1.0100 and 1.0300, perhaps waiting for a more determined signal from risk sentiment or the longer end of the US yield curve for a sustained directional move. The action is similar elsewhere, save for USDJPY, which has traded in a wider range on the swings in treasury yields and heavy positioning. The jobs data drove a sharp rally from 133.00 before the Friday US jobs data to close the day above 135.00. The 61.8% retracement of the sell-off from the 139.39 to comes in a 135.91.
Brent crude oil has started the week trading around $95/b while WTI remains below $90/b driven by expectations for softer demand into the autumn months and a general economic slowdown concern. Key crude oil spread differentials have narrowed in recent weeks, suggesting less tightness in the market while refinery margins have tumbled from the record levels seen in June. Overall, worries about the supply outlook from major producers are likely to keep prices supported at or near current levels. With the peak holiday season upon us liquidity will remain low, thereby raising the prospect of outsized market reactions to the news. Focus this week on monthly oil market reports from the EIA tomorrow followed by OPEC and the IEA on Thursday.
The July employment report was exceptionally strong with payroll, unemployment rate and hourly earnings all surprising to the upside and jolted US treasury yields sharply higher right after the data hit the wires. The front-end sold off the most as 2-year yield soared 18 basis points to 3.23%. 10-year yields climbed 13 basis points to 2.83. The 2-10 year yield curve inverted further inverted to negative 40 basis points. The front-end treasury curve and money market rates have repriced the September FOMC with a likely 75 basis point hike.
The original bill discussed all year was on the $3 trillion scale, but was too large for centrist Democrats, who helped to whittle down the bill to some $370 billion on new climate-related spending initiatives, new measures that allow the US government to negotiate with drug-makers on pricing, and 15% minimum tax on large corporations, and a 1% tax on stock buybacks. Among the climate-related initiatives are $10 billion in investment tax credits for manufacturers who build EV-production or renewable energy-production facilities, and tax credits of up to $7,500 for EV purchases and even $4,000 for the buying of used EV’s. The House will have to pass the bill and President Biden will then have to sign it for the bill to become law.
The nonfarm payroll report surprised to the upside and showed that the U.S. added 525k jobs in July, more than double the 250K consensus while the unemployment rate fell to 3.5% in July, the lowest level since 1965. Average hourly earnings rose 0.5% in July, above market expectation of 0.3% and June average hourly earnings were revised up 0.1 percentage point to 0.44%. The strong hourly earnings data rebuts the peak inflation thesis and points to upside risks in inflation. Over the weekend, Fed Governor Michelle Bowman reiterated the Fed’s duty to bring inflation down to the 2% target and said that “similarly-sized increases should be on the table until…inflation declining in a consistent, meaningful, and lasting way.”
The main measures are : an increase in pensions and welfare payments by 4 % (this is still lower than inflation, however), a cap on rent increases at 3.5 %, pay rise of 3.5 % for civil servants, private companies will be encouraged to offer employees an annual tax-free bonus of up to €6,000, raised from a previous limit of €1,000 and the state-funded fuel price rebate worth 18 cents a liter will be increased to 30 cents in September and October. In addition, French lawmakers approved an updated budget to pay for the renationalisation of the utility company EDF.
On Friday, the Reserve Bank of India hiked its repo rate by 50 basis points to 5.4 %. Expect more hikes to come. But the pace of tightening may be diminishing as inflation looks set to fall. There have been several signs indicating that inflation will likely moderate in the short-term: gasoline prices have been lowered by the state petroleum companies and global agricultural prices are much lower than a few months ago. In Egypt, the country’s funding problem is becoming more acute. By end-2023, the country will need to pay $41b covering both the current account deficit and maturing debt. International reserves can only partially cover these (currently standing at $33b). There are no real other sources of financing. Only a currency devaluation could be helpful. This would cut the trade deficit (making exports more competitive and imports more expensive). On the downside, it is likely to increase inflation. However, there is certainly no better option.
This should be a low energy report (due to the recent decrease in energy prices), but a strong upside surprise could generate a considerable reaction. The economist consensus looks for headline and core CPI to increase by 0.1 % month-over-month and 0.6 %, respectively. The retracement in energy prices should provide some relief, at least at the headline level. The first estimate of the U.S July PPI report is out on Thursday.
Q2 earnings have jumped to a new all-time high in the MSCI World Index highlighting how inflation is lifting all boats. The energy sector is the big winner with earnings jumping 279% y/y due to surging oil and gas prices. This week, the pace of earnings releases is set to slow, but the list below highlights the most important earnings to track. The names in bold are those that can move sentiment overall or in the company’s respective industry.
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