Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Equity markets rushed back higher despite treasury yields maintaining altitude, with much of the activity on the day around Fed Chair Powell’s interview, which sparked considerable two-way volatility before the market decided that he wasn’t sending too hawkish a message. With strong risk sentiment, the USD was mixed and commodity currencies are trying to stage a comeback from their recent sell-off. Oil posted its strongest rally in weeks yesterday.
Powell’s interview yesterday saying the US jobs market is so strong that more rate hikes are needed was interpreted by the equity market as a positive thing. Investors are clearly weighing growth above the discount rate for now, but that is only until rates hit a level in which it slows down the economy. The downside risk to Powell’s comments is that while inflationary pressures are easing in the goods economy, the services sector, which has more sticky inflation components, could underpin high inflation for much longer than anticipated. If S&P 500 futures can break above the 4,200 level again and close above then the cyclical top around 4,300 from back in August is the next major level to watch out for.
Hang Seng Index and CSI300 tread water and are nearly flat as investors wait for signs of recovery in China after the initial month-long rally that has repriced equities higher to reflect the change in policy directions in China. The benchmark Hang Seng Index was dragged by Meituan (03690:xhkg) which tumbled 6.5% on news that Douyin is launching food delivery service in March. In A-shares, northbound flows returned to net buying after three days of net selling. Real estate names outperformed and solid-state battery concept stocks were among the top gainers.
The US dollar was choppy as Powell initially reiterated his remarks from last week but later made a comment that the Fed could do more if the data stays hot (see more blow on Powell’s interview). Still, market pricing of the Fed’s path was little changed, and dollar ended the day broadly lower against all G10 currencies. The Japanese yen recouped come strength despite somewhat higher Treasury yields, with USDJPY falling as low as 130.49 before bouncing back higher to as high as 131.50 overnight. AUDUSD, although still waiting for the upturn is Chinese demand, was supported by RBA’s Tuesday guidance to hike more. AUDUSD above 0.6960 in early Asian hours, with AUDNZD moving above 1.1000 to near 3-month highs. EURUSD was a laggard as it took a look below 1.07 before bouncing back to 1.0720+ levels subsequently. GBPUSD tested its 200-day moving average near 1.1950 but managed a rebound back well above 1.2000 yesterday.
WTI prices jumped 4% and Brent was up 3% after Powell stayed away from turning significantly more hawkish after the bumper jobs report last Friday. Meanwhile, demand outlook continues to improve as signalled by Saudi Aramco’s price increases, and API also suggested a draw in US crude stocks. API reported US crude stockpiles declined by 2.2mm barrels last week, compared to expectations of a 2.5mm barrels increase. Both OPEC and EIA have been upbeat on China’s demand recovery as well. The market shrugged off reports that flows through the 1mb/d Ceyhan oil terminal in Turkey will resume shortly, and supply side issues remained in focus as well. The Energy Information Administration lowered its forecast for US crude oil production in 2024.
Gold remains supported around the $1860 level despite another increase in US yields overnight. Buying by central banks remains buoyant, with China raising its gold reserves for a third straight month in January, up 6.9% MoM. The downside momentum below $1900 has failed to follow through, so far suggesting the move remains a correction in the larger bullish trend. Eyes on next supports at $1845 and $1828 if selling resumes.
Fed Chair Powell’s comments made at the much-anticipated moderated discussion before the Economic Club of Washington, D.C. were less hawkish than feared as noted below. Yields and markets swung wildly after he started by repeating that the disinflation process had begun, which saw yields on the front end tumbling 10bps before quickly reversing after Powell said that last Friday’s payroll report was “certainly strong-stronger than anyone I know expected” and that inflation going away “quickly and painlessly” is not the Fed’s base case and the Fed has to “do more rate increases”. More treasury selling came after a weak 3-year action that was awarded 4bps cheaper than the market at the time of the auction, and the bid-to-cover ratio dropped to 2.33 from 2.84 last time. The corporate supply of around USD15 billion of new issues, including USD11 billion from Intel (discussed below) also weighed on the market. The 2-year pared almost all its early gains to settle 1bp richer at 4.46% while yields on the 10-year rose 3bps to 3.67%.
Fed Chair Powell’s message last night was only marginally more hawkish compared to last week’s Fed meeting, giving markets enough reasons to continue to give more emphasis to data on the sense that Powell was not pushing back against the market reaction last Wednesday. Powell qualified his ‘disinflationary’ remark from last week’s Fed meeting by saying it is at a very early stage, and only in the goods sector. He was surprised by the strength of the jobs report, and said that the Fed probably needs to hike rates further and they have still not reached a sufficiently restrictive level. Powell expects 2023 to be a year of a significant decline in inflation, but it will certainly take into next year to get down close to 2% - in fitting with the December SEP's. Market’s pricing of the Fed rate path saw no material change following Powell’s comments. Meanwhile, Fed member Kashkari (voter) was more hawkish saying if he had to pick a rate forecast, would not lower it from his Dec SEP forecast of 5.4% but rates may have to be held at a higher level for longer. He added that markets are more confident than he is about inflation falling.
Fortinet, one of the largest cyber security companies on revenue, reported Q4 revenue and EPS that beat estimates and the FY23 outlook on operating margins and revenue were in line with analyst estimates. It was clear that investors had lowered their expectations below that of analysts as the FY23 outlook hitting estimates led to a 16% rally in extended trading. Maersk is reporting lower than estimates Q4 revenue and EBITDA in line, but the FY23 outlook on EBITDA of $8-11bn vs est. $13.5bn is a big miss and maybe a bit too conservative if the cyclical upturn gathers steam. Vestas is reporting a FY23 outlook that signals further challenges and weakness in the wind turbine business with FY23 revenue outlook at €14-15.5bn vs est. €14.8bn and adjusted EBIT margin of –2% to +3%. Shares are indicated down 5% in pre-market trading.
Germany’s industrial production for December saw a steeper fall than expected, coming in at -3.1% MoM (vs. estimated -0.8%) while the November print was revised higher to +0.4%. After a technical delay last week, Germany’s inflation prints for January will be released today. Spain and France printed higher-than-expected CPI for the month, while the region-wide printed was softer last week. This suggests Germany’s inflation likely eased due to energy price increases being more subdued than previously expected. Meanwhile, adjustments in the CPI basket could also likely result in a softer print. Bloomberg consensus expects 10.0% YoY from 9.6% YoY in December, with the MoM print also turning positive at 1.3% from -1.2% previously.
In Biden’s State of the Union address last night, the US President claimed autocratic regimes were growing weaker and suggested that China and its leadership are in a challenged position, shouting at one point “Name me a world leader who’d change places with Xi Jinping. Name me one, name me one.” and later saying that “I am committed to work with China where it can advance American interest and benefit the world....but make no mistake: as we made clear last week [in shooting down purported Chinese spy balloon] if China threatens our sovereignty, we will act to protect our country, and we did.”
To fund its expansion of production facilities, funding working capital and refinancing existing debt, Intel has placed some $11 billion in funds via corporate bond issuance yesterday, a series of 7 bonds with maturities of 3-, 5-, 7-, 10-,20-,30- and 40 years. The last of these features a yield that is 2.15% higher than US 30-year T-bonds, some 20 basis points tighter than anticipated (The US 30-year T-bond yield is currently near 3.70%). By comparison, the current dividend yield on Intel stock is near 5.00%.
Incoming data may have more primacy for moving US treasury yields than Fed speakers, but we do have a rather heavy schedule of FOMC voters on tap for today, including the NY Fed’s Williams, who will be interviewed at a live WSJ event. Board of Govern’s members Lisa Cook and Michael Barr are also out speaking as noted in the calendar highlights below. The hawkish Minneapolis Fed president Kashkari and Board of Governors member Waller are out speaking later in the day, the latter of these discussing the economic outlook. After the recent resurgence in treasury yields and yesterday’s weak 3-year treasury auction, plenty of attention as well on today’s 10-year treasury auction.
Today’s US earnings focus is Uber Technologies and Walt Disney. The on-demand ride hailing service Uber will report before the market opens with analysts expecting revenue growth of 47% y/y in Q4 with the EBITDA margin expending further into positive territory as the company prepares to become fully profitable in FY23. Disney reporting after the market close is expected to see revenue growth of 7% y/y in Q4 and EBITDA margin bouncing back from the low point in Q3.
Poland Base Rate Announcement
1415 – US Fed’s Williams (voter) to speak
1500 – US Fed’s Barr (Voter) and Bostic to speak
1530 – US EIA Weekly Crude Oil and Product Inventories
1730 – US Fed’s Kashkari (Voter 2023) to speak
1800 – US 10-year Treasury auction
1830 – Canada Bank of Canada publishes summary of deliberations
1845 – US Fed’s Waller (Voter) to speak
0001 – UK Jan. RICS House Price Balance