What’s happening in markets?
US equities (US500.I and USNAS100.I): stocks decline on higher bond yields
Equities ended its rising steak with the S&P500 declining 0.6% to 4,537 while the Nasdaq 100 sliding 0.2% to 15,464. A series of unexpectedly strong economic data saw the 10-year Treasury yield jump to 4%, weighing on stocks. The weakness was broad-based except in the communication services sector which was supported by a 4.4% in Meta Platforms (META:xnas) after reporting strong Q2 results.
Lam Research jumped 9.3% after the semiconductor equipment maker guided strong sales growth. Textron (TXT:xnys) soared 11.9% following the aerospace company beat earnings and gave an upbeat outlook citing higher pricing for business jets. Royal Caribbean (RCL:xnys) surged 8.7% on a higher profit forecast for 2023. McDonald’s (MCD:xnys) added 1.2% after an earnings beat despite noting growth slowing.
Banking shares declined, seeing the KBW Bank Index falling 1.2% as the Federal Reserve and the Federal Deposit Insurance Corp (FDIC) held meeting to consider a plan to require additional capital at large banks.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields jumped on strong economic data
Treasuries sold off on Thursday first stemmed from unexpected increases in the Q2 GDP and durable goods orders and a decline in the initial jobless claims, all suggesting a more resilient US economy than expected. Later on an increase in pending home sales, contrary to the consensus forecast of decline, and a Nikkei story saying the BoJ will discuss broadening the cap on the 10-year JGB yield (adjusting the YCC policy) further weighed on Treasuries prices. Finally, a poorly received 7-year auction that was awarded at 1.2bps cheaper than the level at the auction deadline and a 2.48 bid-to-cover (vs previous 2.65) added fuel to the selling. The 2-year yield finished the day 8bps higher at 4.93% while the 10-year yield jumped 13bps to 4.0%.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): XPeng soars 34% on a VW stake
The Hang Seng Index rallied 1.4%, paced by gains in China property, auto, and consumer stocks. Country Garden (02007:xhkg) continued to surge, rising nearly 11.8% to top the performance within the Hang Seng Index. Automaker Geely (00175:xhkg) jumped 8.6%. Xiaomi (01810:xhkg) advanced 5.6% following media stories suggesting the company’s new foldable smartphone Xiaomi Mix Fold 3 has been approved by the regulator to launch.
The Hang Seng Tech Index rose strongly by 2.9%, topped by a dramatic 34% surge of XPeng (09868:xhkg) after Volkswagen said the German automaker is making an investment and developing two EVs jointly with the Chinese EV maker. Leading China Internet names gained around 1%, led by Alibaba’s (09988:xkg) 1.7% advance and fueled by the People’s Bank of China’s pledge made at a meeting titled “Financial Support to Technological Innovation, enhancing the real economy” to support technological innovation. Southbound flows were net selling of HKD3.68 billion while overseas investors Northbound funds remained net buying of RMB10.65 billion.
In the A-share market, the CSI300 Index edged down 0.1% with telecommunication, media, electronics, media, and light industries falling while steel-making, banks, autos, food, and beverage lagged.
FX: EUR and GBP plunge 1% on dovish ECB hike, JYP strengthens on reportedly BoJ discussion of YCC tweak at today’s meeting
After a dovish and well-anticipated rate hike by the ECB which turned data-dependent for its next move, EURUSD plunged nearly 1% to 1.0980. The rise in US Treasury yields on strong economic data also weighed on EUR. Likewise, GBPUSD declined by 1.1% to 1.2790. On the other hand, the Japanese Yen strengthened by 0.6% against the US dollar for the day to 139.20, in an intraday move in USDJPY of as much as 1.5% between the day high of 141.32 and the low of 138.71. The dramatic move stemmed from a Nikkei article saying that the Bank of Japan, when it meets today, will discuss allowing the 10-year Japanese government bond yield to rise above the upper bound of the allowable range of 0.5%.
What to consider?
ECB hikes 25bps and the next move turns data dependent
The ECB raised policy rates by 25bps, as widely anticipated. The statement changed to saying rates will be “set at” sufficiently restrictive levels rather than previously saying “brought to” sufficiently restrictive levels. At the press conference, ECP President Lagarde’s message was that the ECB’s next move would be data-dependent, especially on the incoming data about domestically generated inflation and services inflation while some other measures of inflation showed signs of easing. She said the incoming data will determine “whether and how much more ground” for future rate hikes to cover. Lagarde opened the door to skip a rate hike at the upcoming meeting in September as the Fed did in June.
The BOJ reportedly to discuss YCC policy adjustments at its policy meeting today
The Bank of Japan (BoJ) holds its monetary policy today. Overnight, a Nikkei said that the BoJ will “discuss tweaking its yield curve control policy” at today’s meeting “to let long-term interest rates rise beyond its cap of 0.5% by a certain degree” and “under the more flexible policy being considered, the BOJ would permit gradual increases above the 0.5% threshold, but still clamp down on any sudden spikes.” This, if happens, will be a hawkish turn for the BoJ and stir up speculation on how much the BoJ will allow the 10-year JGB yield to rise above 0.5%.
US Q2 GDP grows 2.4%, above expectations
The US Q2 GDP unexpectedly grew 2.4%, rising from 2.0% in Q1 and contrary to the forecast of a decline to 1.8%. Durable goods orders increased 4.7% (vs 1.8% in May; consensus: 1.3%) in June on strong aircraft orders. The weekly initial jobless claims fell to 221k from 228k, contrary to an expected increase.
Today's US data focus on core PCE deflator, the employment cost index, and the U of Michigan survey
The focus of today’s data from the US will be on the Personal Consumption Expenditure (PCE) deflator and the core PCE deflator, both are expected to slow in June. According to the Bloomberg survey, the median forecast of the growth in the headline PCE deflator is at +0.2% M/M (vs +0.1% in May) or +3.0% Y/Y (vs +3.8% in May) and that of the core PCE deflator is at +0.2% M/M (vs +3% in May) or +4.2% Y/Y (vs +4.6% in May). One important to note is that some of the drivers for a soft core CPI we saw earlier this month were not present in the core PCE. For example, the core CPI captured a sharp decline in airline fares while the core PCE used a different measure of passenger transportation costs in its calculation. Core PCE deflator is the Fed’s preferred measure of inflation.
The growth in the employment cost index (ECI) is expected to slow to +1.1% Q/Q in Q2 from +1.2% in Q1. The ECI includes stickier components such as non-wage benefits and government wages so it may lag some other measures but it is the preferred measure of wage inflation of the Fed.
Also scheduled to release today is the University of Michigan consumer sentiment survey. The median forecasts for the sentiment reading to remain at 72.6 while the 5-10 year inflation expectation softens to 3.0% in July from 3.1% in June.
China's industrial profits decline in June
In June, China's industrial profits had a setback, with an 8.4% Y/Y contraction. However, amidst these challenges, there was a glimmer of hope on a sequential basis, as industrial profits showed a moderate improvement with a rise of 3.5% seasonally adjusted, not annualized. Profit margins experienced a decline in June. Notably, the upstream profit margins took a hit, further exacerbating the industrial landscape. On the other hand, there was a silver lining as downstream profit margins exhibited signs of improvement.
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