APAC Strategy Team
Summary: The week starts with the Japanese cash market returning from a long weekend after the Ministry of Finance’s (MOF) intervention last Thursday to stop the Yen to weaken in response to the hawkish stance of the Fed and the Bank of Japan maintaining an ultra-loose monetary policy. Any follow-up actions from the MOF, if the high of the USDJPY is tested again, will be the focus of the market. Investors will listen carefully to speeches from Fed and ECB officials this week for hints on the magnitude of the next rate hikes. On the data front, the highlights of the week will be the U.S. PCE, Eurozone CPI, and China’s PMIs.
The Japanese authorities intervened in the currency markets for the first time in two decades last Thursday. USDJPY’s move above 145 following a hawkish FOMC and a still-accommodative Bank of Japan prompted the intervention, and dragged the pair to sub-141 levels before some of the move was retraced. However, Japan was closed on Friday for a holiday, and returns to trading today. Moreover, Governor Kuroda will make a speech and talk to reporters today. We believe the yen could weaken further given the pressure from yield differentials between the US, which continues to rise to fresh highs, vs. the yields in Japan which continue to remain capped. Meanwhile, the intervention last week has been possibly unilateral, suggesting it may not be long-lasting. This continues to raise the possibility of further intervention from the Japanese authorities, especially if USDJPY rises back above 145.
China’s September official NBS Manufacturing PMI and Non-manufacturing PMI as well as the Caixin China Manufacturing PMI are scheduled to release on Friday. The median forecast of, economists surveyed by Bloomberg for the NBS Manufacturing PMI is 49.6 for September, a modest improvement from August’s 49.4 but remains in contraction territory. Economists cite the lockdown of Chengdu and restrictive measures in some other cities during most part of the month and the weak EPMI released earlier as reasons for expecting the NBS Manufacturing PMI to stay below 50. The Caixin Manufacturing PMI, which has a larger weight in coastal cities in the eastern region, is expected to slow slightly to 49.4 in September from 49.5 in August, reflecting weaker export-related manufacturing activities and container throughput. The consensus estimate for the NBS Non-manufacturing PMI is 52.3, remaining in expansionary territory, supported by infrastructure construction but slowing slightly in September from August’s 52.6 due to weakness in the housing sector. On the other hand, steel production and demand data in September suggest the PMIs may potentially surprise the upside.
The four Moscow-held regions of Ukraine – Donetsk, Luhansk, Kherson and Zaporizhzhia – began voting on Friday on whether to become part of Russia, and results may be expected this week. The referendums are reminiscent of one in 2014 that saw Ukraine’s Crimea annexed by Russia. The four regions’ integration into Russia – which for most observers is already a foregone conclusion – would represent a major new escalation of the conflict. The threat of nuclear weapons will also keep risk off on the table, with Putin threatening to use “all means” to protect the annexed Russian territory.
ECB President Christine Lagarde speaks on Monday and Wednesday, before we get the Eurozone inflation data on Thursday and Friday. The regional CPI is likely to rise further in September from 9.1% YoY in August amid higher energy prices especially as German price-cut measures come to an end. Higher food prices as well as a jump in services inflation will also likely underpin, as does the further weakness in EUR. The ECB itself raised its inflation projections at the recent policy meeting, with its 2022 estimate upped to 8.1% (prev. 6.8%), 2023 raised to 5.5% (prev. 3.5%), and 2024 lifted to 2.3% (prev. 2.1%). There is chatter that the ECB could discuss a 75bps rate rise at the October 27 meeting if the inflation outlook warrants.
There’s a rich calendar of Fed speakers to give insights into how to interpret the latest Fed decision. Regional Fed presidents Loretta Mester, Charles Evans and Raphael Bostic will discuss the economic outlook at separate events, while Fed Vice Chair Lael Brainard will offer opening remarks at a New York Fed conference. It appears that the Fed rhetoric will continue to back the fight against inflation, as tightening of financial conditions remains the key focus. The Fed’s preferred inflation measures, the PCE is due at the end of this week, and it will likely echo the same message as given by the last strong CPI number which has made the Fed even more hawkish in the last few weeks since the Jackson Hole. Headline numbers may be lower due to the decline in gasoline prices, but the price pressure on services side will likely broaden further. Last week, the Fed also raised its forecasts for inflation, with the central bank now seeing core PCE at 4.5% by the end of this year (it previously projected 4.3%), moderating to 3.1% next year and at 2.1% at the end of its forecast horizon in 2025, but thinks that headline PCE prices will be at its 2% target by then. The third estimate of Q2 GDP will also be released in the US, likely confirming that the US economy remains in a technical recession.
The highlight in this week’s earnings calendar is Nike reporting FY23 Q1 (ending Aug 31) on Thursday. In our colleague Peter Garnry’s note “Can Nike weather the inflation storm?”, he suggests that the biggest potential risk Nike’s results, is missing the anticipated bounce in the EBITDA margin to 15.8%. “Given the ongoing demand destruction among consumers and the strong USD it is likely that revenue could disappoint again and that margins cannot bounce back”, Peter remarks. If Nike misses expectations or guides for a bearish outlook the stock will likely fall. The technical indicators for Nike are quite bearish with the monthly chart showing further downside is likely ahead, with next level of support around perhaps $87.03.
Australia’s economy has remained resilient despite the global growth slowdown, and this has been reflected in its stock market outperforming global markets this year. However this week, Australia’s economic pulse checks are likely to weaken with retail sales and private sector credit (borrowing) both expected to fall, with the data on watch on Wednesday and Thursday respectively. If data is weaker than expected, consumer spending equities and banking stocks will likely face pressure. Meanwhile, in currencies, The AUDUSD will be a currency pair to watch, which could face further downside over the longer term. Inversely, speaking of currencies, the AUDGBP is a pair to watch with Australia’s surplus at records, vs UK deficit likely to widen.
2024: The wasted year
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Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.