APAC Strategy Team
Summary: More volatility is to come to the equity markets as the Fed begins to shrink its balance sheet this week, and May jobs/earnings growth will be key as a September pause starts to build into expectations. Eurozone inflation is also on the cards and will drive ECB tightening expectations. Over in Asia, China May PMIs will likely stay weak, and focus is squarely on easing of restrictions in Shanghai and Beijing. Meanwhile, agricultural stocks will be in the spotlight amid food protectionism stepping up.
Liquidity risks from Fed’s start of QT. After lower-for-longer interest rates and a massive expansion of the Fed’s balance sheet to $9tr, the game is now turning. The Fed plans to shrink its bond portfolio much faster this time compared to the previous QT in 2017-19, targeting to shed $95bn per month from June to September, compared to the last QT’s $50bn maximum runoff. This brings an additional layer of uncertainty to the markets, and Fed minutes of the May meeting also saw several policymakers noting “unanticipated effects” on markets.
US jobs report and ISM manufacturing. US non-farm payrolls (NFP) data is due on Friday, and with a couple of 50bps rate hikes priced in by the markets, the bar for a hawkish surprise is limited. April data showed sustained tightness in the labor market, in contrast to the Fed’s desire to slow job gains and increase labor force participation in order to ensure a healthier labor market. The risks lie on the dovish side now, with some expectations of a Fed pause in September building in. Consensus estimates are pencilling in a moderation in annual earnings growth to 5.2% in May from April’s 5.5%. We also have the US ISM manufacturing index out this week, and the rotation of demand from goods to services is expected to weigh on manufacturing activities. Bloomberg survey is calling for a 1-point decline in the May ISM manufacturing index to 54.5, the third consecutive decline.
Eurozone inflation. The energy price shock has been bigger for Europe, and May prints are due for Spain, Germany, France, Italy and the Euro-area in the week ahead. Food price pressures are also building up amid the supply shortages, and further gains in May will add more weight to the ECB’s resolve to exit negative rates from Q3 with more aggressive tightening. EUR has gained 1.5% against the USD last week, and is now trading above 1.07, and resistance is seen near 1.0780 and the 1.0800 big figure.
China and Asia PMIs. The focus will be on how much the May data has improved from April, given the number of cities under some sorts of lockdown has fallen to 26 (accounting for 20% of national GDP) from 44 cities (accounting for 38% of national GDP) a month ago. Bloomberg survey expects the official manufacturing PMI to rebound by 1.6 percentage points to 49. Official non-manufacturing PMI is expected to increase to 45.0 from 41.9. Caixin manufacturing PMI which surveys more SMEs, is expected to rebound to 49.5 from 46.0 previously. Most components of PMIs in May are expected to remain in contractionary zone. The relaxation of mobility restriction Shanghai is happening at a measured pace and Beijing is asking over half of its population to stay at home. The improved China PMIs may feed into the regional PMIs as well, and the broader reopening theme remains at play as well. Increased supply pressures will likely remain a key theme but it remains to be seen how well demand has coped up to these pressures.
AUD and Aussie stocks on watch with Australian economic growth and balance of trade data due. Firstly, Australian GPD data due Wednesday is expected to show economic growth fell from 4.2% YoY to 3% YoY in Q1. Quarterly GPD is expected to grow just 0.7%, following the 3.4% rise in Q4. If data is stronger than what consensus expects, the RBA has more ammunition to rise rates more than forecast, so the AUDUSD might rally. If GPD is weaker, then, the AUD will likely fall. For equities, Australian financials could rally if data is stronger than expected, so watch CommBank (CBA), and Macquarie (MQG) for example. Secondly, Australian Export and Import data is released Thursday. The market expects Australia’s surplus income (Export income minus imports payments) rose from $9.4b to $9.5b in April. But as the iron ore price fell 13% in April, the trade data could miss expectations.
Meituan (03690) is scheduled to report Q1 results on June 2. Bloomberg’s survey of analyst estimates expect the company’s Q1 revenue to come at RMB45.3 billion, a 22% year-on-year increase and to have an adjusted net loss of RMB4.8 billion in the quarter. Last week, Alibaba (09988), Pinduoduo (PDD) and Baidu (09888) reported better-than-feared results and their shares surged 12% to 15% on the day post result announcement. The large movement in share prices may attribute to the low expectations and positioning in these Chinese Internet stocks into the results.
Sectors and Stocks to watch. Agricultural prices hit fresh highs today and - Firstly in agriculture, wheat, palm oil, meat, sugar and other ag prices appear to be heading back to record high levels. The wheat price is up 50% this year after Asian nations freshly restricted exports to protect their own supply, which adds to ailing global supply amid bad weather and Russia/Ukraine supply being cut off. This has driven up the share price and earnings growth for many agri stocks including Australian grain trader GrainCorp (GNC). Although GNC shares are pulling back from their record high as investor take profits, GrainCorp’s earnings are expected to continue to grow. Separately, the ETF MSCI Global Agricultural Producers ETF (VEGI) has also been thrust into the spotlight, after gaining 45% this year with its biggest holdings like lithium and fertilizer company SQM (SQM) hitting a new record on Friday after trading momentum mounted after SQM delivered stronger than expected 2022 forecasts.
Key economic releases this week
Monday 30 May
Tuesday 31 May
Wednesday 1 Jun
Thursday 2 Jun
Friday 3 Jun
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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