APAC Daily Digest: What is happening in markets and what to consider next – September 14, 2022
APAC Strategy Team
Summary: The much stronger than expected CPI prints quashed the optimism of peak inflation and the stocks markets, sending the latter tumbling most in two years, losing 4%-5%. The market is now pricing in a sure 75bp hike and some 25% chance of a 100bp increase in the Fed fund when the FOMC meets next week and a terminal rate close to 4.3% in Q1 next year. 2-year yields soared 18bps in response to upward revision in rate hike expectations while long-end yields were anchored the notion that more rate hikes will eventually slow the economy.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities had their biggest single-day decline since June 2020 after the hotter-than-expected CPI data, S&P 500 -4.3%, Nasdaq 100 -5.5%. All 11 sectors in the S&P 500 fell with communication services, information technology, and consumer discretionary leading the decline. Meta Platforms (META:xnas) plunged 9.4%, and BlackRock (BLK:xnys), Boeing (BA: xnys), Nvidia (NVDA:xnas), Advanced Micro Devices (AMD:xnas), and Micron Technology (MU:xnas) all dropped more than 7%. The 8.3% headline and 6.3% core CPI prints quashed the hope of investors who were expecting peak inflation and a less hawkish Fed down the road. Twitter (TWTR:xnys), +0.8%, was one of the only five stocks in the S&P 500 that gained yesterday, following the company’s shareholders approving Elon Musk’s buyout.
Cheniere, the US’ biggest LNG exporter, was the one shining light on Wall Street overnight
Cheniere (LNG) shares rose 3.1% while markets saw a sea of red when inflation data came out higher than expected. The LNG exporter boosted its full-year 2022 profit forecast beyond analysts’ expectations as the largest US exporter of liquefied natural gas revealed shipments will depart will leave its dock sooner than anticipated. Cash flow probably will be $1.2 billion higher than forecast at a midpoint of $8.4 billion (according to Bloomberg). Cheniere has been a beneficiary of booming overseas LNG demand as European buyers seek replacements for Russian gas, amid a bitter geopolitical standoff over its invasion of Ukraine. Separately, the company also announced its reached a final investment decision to expand its Corpus Christi Stage 3 Liquefaction project in Texas, which the company says will generate over $20 billion in cash through 2026.
U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
The yield of 2-year treasury notes jumped 18bps to 3.75%, a new high since 2007, after the much hotter August headline and core CPI data. The headline did not drop on the lower oil price as much as economists expected and the core month-on-month increase of 0.57% was nearly double of the 0.3% forecasted on broad-based gains in shelter costs, education, restaurants, medical services, and personal care. The money market curve is now completely pricing in a 75bp hike plus a more than 25% probability of a 100bp increase at the September 21 FOMC meeting. The market is expecting a 4% Fed fund by the end of this year and a terminal Fed fund rate at around 4.3% in Q1 next year. The curve substantially flattened as the 10-year note yield rose only 6bps to 3.41%. After a strong auction which stopped 1.9bps richer than the when-issued trading before the announcement of auction results, the 30-year yield finished yesterday’s session 2bps lower at 3.49%.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
After returning from a long weekend, Hong Kong, Shanghai, and Shenzhen had a lackluster trading day with Hang Seng Index sliding 02% and CSI 300 gaining 0.4%. HSBC (00005:xhkg) climbed 1.7% after its CFO said the bank was considering resuming share buybacks in the second half of next year and raising staff pay in 2023. Suppliers to Apple (AAPL:xnas) climbed following the latter announcing strong pre-order data of the new iPhone 14, BYD Electronic (00285:xhkg) +6.3%, Cowell E (01415:xhkg) +5%, Sunny Optical (02382:xhkg) +2.3%. NIO (09866:xhkg) jumped 16.8% following analysts reiterating “buy” with upbeat recommendations on the EV maker.
Chinese biotech stocks traded in Hong Kong fell after U.S. President Biden signed an executive order to develop a strategy to “mitigate risks posed by foreign adversary involvement in the biomanufacturing supply chain”, Wuxi Biologics (02269:xhkg) -19.9%, Wuxi AppTec (02359:xhkg) – 16.8%, Pharmaron Beijing -14.7%, Asymchem Laboratories (06821:xhkg) -12.4%. Lepu Biopharma (02157:xhkg), Genscript Biotech (01548:xhkg) -8.4%, which jumped 284% last Friday on progress in drug development, fell 39% today.
USDJPY tests 145 again
The dollar bull run returned after the US CPI print, as we had expected, with the DXY index rising towards 110 once again. Further upward pricing in market expectations for the path of Fed rate hikes took the 10-year yield to highs of 3.40%, widening the yield differential further for Japan and further weighing on the Japanese yen despite some strong verbal intervention last week. USDJPY rose to test the 145 resistance again, sparking concerns of another verbal intervention. However, verbal interventions will continue to have a temporary effect at best, as will real intervention if at all that happens. The only possible way for the yen to turn around will be softer US yields and/or a possible Bank of Japan tweak in its yield curve control policy. EURUSD dropped back below parity and GBPUSD also below 1.1500.
Australian dollar heads to two-year low, with the Fed set to hike rates more than the RBA can
The Australian dollar plunged 2.5% when US inflation came in stronger than expected, with the Aussie dollar against the US now trading below US$0.67 and approaching the lowest level in 2 years. US inflation reinforces the view that Fed will continue to tighten aggressively making, the USD more attractive to investors, with the market now pricing in a 0.75% hike. Meanwhile, after the RBA Governor Lowe signaled the case for a slower pace of rate hikes being needed, the market is pricing in the RBA will deliver a smaller 0.25% hike. The next catalyst for this currency pair to watch is Australian employment data released Thursday. If less jobs are added than expected (35,000 consensus) then the RBA will have less ammunition to rise rates next month, which will could pressure the currency pair, the AUDUSD lower again. The next level of support is 0.6142.
Crude oil prices (CLU2 & LCOV2)
Crude oil traded higher yesterday as OPEC, just like the EIA last week and probably also the IEA tomorrow, is still not seeing the slowdown in crude oil demand that the recent price weakness has been signaling. In their latest monthly oil market report they left demand growth forecasts for 2022 and 2023 unchanged at 3.1m b/d and 2.7m b/d. Meanwhile, U.S. crude inventories rose by 6.035 million barrels for the week ended Sept. 9, API reported. That compared with a build of 3.6 million barrels the trade group cited for the previous week to Sept. 2. The official inventory data is eyed today, but the focus has shifted to the stronger dollar for now. However, reports that the Biden admin will bid crude at $80/bbl to refill the SPR sent prices rebounding higher after they were crushed by the hawkish shift from hot CPI. WTI futures reversed some of the gains and were last seen at $87/barrel while Brent futures were at $93+.
What to consider?
US inflation beat sends shockwaves
August headline inflation in the US came in hotter-then-expected, smashing hopes of price pressure relief as the Federal Reserve continues to tighten monetary policy. Headline CPI came in at 8.3% y/y (exp. +8.1%; prev. +8.5%) with gains of 0.1% m/m against expectations of a slight decline. Core CPI, which is closely looked at the Fed, was higher as expected as well, with 6.3% y/y (exp. +6.1%; prev. +5.9%) and 0.6% m/m (exp. +0.3%; prev. +0.3%) seen. While the energy component dragged with -10.1% m/m print, the stickier components offset that with shelter up 0.7% m/m and medical care services up 0.8% m/m as we had feared.
Market expectations of Fed path take a leap
The hotter-than-expected August inflation not only gives the Fed the room to go ahead with its 75bps rate hike, but calls for a bigger 100bps move have gained traction. WSJ’s Timiraos, the reporter generally seen as the Fed’s voice especially in blackout periods, said the data will see the fed implement "at least" a 75bp hike in September and the prospects for hefty increases in coming months have risen and suggested a terminal rate of ~4.50%. Market pricing for the September rate hike have picked up from 73bps before CPI to 83bps now, but more importantly the terminal rate is now being priced in at 4.3%. This leaves little room for an upside surprise from the Fed where an updated dot plot is awaited.
President Xi and President Putin will meet tomorrow for the first time after Russia invaded Ukraine
On the sidelines of a Shanghai Cooperation Organization forum held in Uzbekistan this week, China’s President Xi and Russia’s President Putin will meet for the first time after Russia invaded Ukraine. The market will be listening closely to the readout from the meeting to gauge the state of the Sino-Russian perceived alliance and hints at their respective stance on the development in Ukraine.
La Nina coming for the 3rd summer in a row; a perfect storm for increasing food prices
The Australian Bureau of Meteorology has warned above average rainfall is expected over Australia, particularly in the eastern half of the continent this Australian summer. This means there are risks of heavy rain and flooding in the coming months, which means food price inflation will worsen. The problem with a triple La Nina is that the ground is already very wet, rivers are quite high and creeks are full, so there is less capacity to absorb the likely enormous amount of rain coming. Listed Australian insurance companies may come under pressure from this. Meanwhile, food prices will be pressured higher again as other food belts around the world are facing issues of their own kind; with US crop conditions weakening.
Australian Business and Consumer Confidence surprisingly rebounds
While the outlook for inflation for Australia is expected to worsen in our opinion, Australian Consumer Confidence and Business Confidence levels surprisingly rebounded this month, reversing the fall from August. Business sentiment improved for the first time since November 2021 after the RBA paved out a more dovish tone on rate hikes.
New Zealand food inflation hits a 13-year high, and NZ lifts most COVID restrictions
New Zealand food prices rose 8.3% over the year to August 2022, which is the biggest annual increase since July 2009. The surge was mainly driven by a 8.7% increase in grocery food prices compared to a year ago, after fruit and vegetable prices rose 15%. Prices for staples like, eggs, yogurt, and cheddar cheese saw the largest moves in grocery prices. ASX companies that sell food and dairy products to supermarkets include Costa Group (CGC), A2 Milk (A2M), Bega Cheese (BGA) and Synlait Milk (SM1). Meanwhile at the same time, New Zealand ended most COVID restrictions, scrapping mask wearing rules and vaccine mandates.
UK inflation on the cards today
UK inflation has already touched double digits last month with a 10.1% YoY print. The August inflation is due today, and consensus expects a 10.0% YoY print. Price pressures are likely to remain elevated this month as well, despite some softening in fuel prices, as food and services costs continue to rise. Further gains in inflation can be expected in October, but the capping of household energy bills may help to soothe inflationary pressures thereafter.
Ethereum merge will draw attention
The Ethereum blockchain’s much-anticipated software upgrade, the so-called Merge, is expected to take place this week, according to its core developers. The new system, known as "proof-of-stake", will slash the Ethereum blockchain's energy consumption by 99.9%, developers say. Most blockchains, including bitcoin's, devour large amounts of energy, sparking criticism from some investors and environmentalists. We wrote about this here, and this is a key event to watch this week. The merge could make Ethereum more favourable to pension funds and other institutional investors that are under the scanner for environmental concerns, but there is also come scepticism on how scalable Ethereum could become and if it becomes more susceptible to attacks by hackers.
Tencent got approval of a new game the first time this year
Tencent’s (000700:xhkg) “Defense of Health” educational game was approved under the name of an associate company controlled by Tencent’s executive including co-fond Pony Ma. This is the first time Tencent got a game approval this year though being an educational game, “Defense of Health” is not considered being a material money making title.
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