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US equities (US500.I and USNAS100.I): strong rally as bond yields decline
US equities rallied strongly on Friday with S&P 500 futures gaining 1.7% pushing above the 4,000 level closing at 4,050 with the momentum extending this morning. The rally in US equities came on the back of a ISM report showing the US economy is still humming along. US bond yields declined on Friday together with a weaker USD helping lift sentiment in equities which was an odd move given that inflation expectations were rising last week. This week we have Fed President Powell’s speech that could impact equities (read our preview below). In S&P 500 futures the 4,100 is a key upside level to watch if momentum extends.
Hang Seng Index and CSI 300 oscillated on a modest Government Work Report
The Hang Seng Index and CSI 300 Index oscillated after China set out a modest GDP growth target for 2023 and signalled a measured approach to fiscal and monetary policies as well as balanced support to the housing sector with avoiding systemic risks as a key priority. Lenovo (00992:xhkg) rising over 4% and reaching a new high, was the biggest gainer. The PC and server maker gained following its arch-rival in the server business, Inspur (000977:xsec) might be having difficulties in getting US parts after Inspur’s parent being put on the US ‘entity list’.
FX: GBP recovers post-Bailey losses
The USD was broadly weaker last week after a run higher in February on expectations that most of the Fed’s tightening is priced in and yields are potentially reaching close to their peaks. This week brings a test of this rhetoric with Chair Powell’s testimony and the US jobs report scheduled for release. GBPUSD once again found support at 1.1920 despite a dovish turn by BOE Gov Bailey last week, and returned to 1.2040. AUDUSD worth a watch again this week with support at 0.67 being eyed as the RBA meets Tuesday and China’s lower growth expectations may weigh. USDJPY has reversed back below 136 as yields gains ease, but if US yields continue their run higher and/or Governor Kuroda stays overly dovish at his final Bank of Japan meeting this week then a return to 137+ remains likely.
Crude oil whipsaws with no clear direction yet to emerge
Crude oil prices faced strong two-way action on Friday with an initial move lower by over 2% on a WSJ report, later denied, saying the UAE is debating internally whether to leave OPEC, before finishing on a strong note on short covering after across market risk appetite improved and traders looked to China’s policy meetings over the weekend for support. Overnight, however, crude declined after China, the world’s top oil imported, announced cautious growth targets and avoided any larger stimulus measures. Crude oil remains stuck within narrowing ranges, Brent between $81 and $89 with focus returning to the US and speeches from Powell to policy makers on Capital Hill Tuesday and Wednesday, as well as Friday’s job report.
Gold supported by drop in US real yields
Gold rallied strongly last week after the market started pricing in higher long-term inflation, thereby challenging the FOMC’s own targets. While support was provided by US ten-year yields dropping back below 4% on Friday to end the week close to unchanged, it was developments in Breakeven (inflation) up 14 bps on the week and real yields, down 13 bps that helped support gold’s recovery. The close back above the 21-DMA on Friday, now at $1844, signaling a return of positive momentum, the strength of which may still be challenged this week with Powell speeches and Friday's job report the focus. For the current recovery, to attract support from technical buyers, prices as a minimum need to break $1864, and silver $22 to signal an end to the recent period of weakness.
Copper takes China’s cautious growth target on the chin
Copper trades close to unchanged after China set a cautious economic growth target with no major new stimulus measures being announced. With the focus primarily on supporting and stabilizing the economy, the metal could still be challenged in the short term by long liquidation from bulls having bet too heavily on the recovery story and increased spending towards infrastructure projects. Especially considering the recent buildup in inventories monitored by futures exchanges in London and not least in Shanghai. We maintain our long-held bullish outlook for copper and industrial metals in general but with China not providing growth stimulus, the short-term outlook may equally depend on whether other large economies can avoid a recession.
US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) rallied with the 10-year yield reversing to below 4%
After spending one day above 4% on Thursday, yields on the 10-year Treasury notes reversed and returned to below 4% and settled at 3.95% to close the week on Friday. Headlines were light. The decline in the ISM Services Index in February was smaller than expected and initially saw the short-end lower in prices and higher in yields before the losses faded and reversed as strong bids emerged in the long ends in the afternoon. The 2-10-year spread bull flattened 7bps to -91.
What is going on?
China’s 2023 GDP growth target at “around 5%”
China sets a real GDP growth target of "around 5%" for 2023 in the Government Work Report to the National People's Congress. This target is at the lower end of expectations ranging from 5% to 5.5% going into the meeting. Other key macroeconomic targets include adding 12 million jobs to urban area employment for 2023, a consumer inflation target of 3%, and a fiscal deficit target of 3% of nominal GDP. The report emphasizes the importance of boosting domestic aggregate demand, particularly household consumption, and aims to deepen the reform of state-owned enterprises. For more details, see our note here.
COT reporting on Brent and (delayed) gold
Hedge funds raised bullish bets on Brent crude oil by 9.4k lots to near a 15-month high at 286k lots in the week to February 28. The cost of holding a short position in Brent, reflected through the current backwardation, supported a continued collapse in the gross short to a 12-year low at 22k lots. While the ICE Europe Exchange is up to date in its reporting, the US CFTC is still catching up following a January 31 cyberattack on ION Cleared Derivatives, a third-party software and service provider for derivative trading. The latest report covered the week to February 7, when gold reached $1975 before crashing to $1885, triggering a 29% drop in the net long to 79k. The CFTC is expected to be up to data around mid-March.
US ISM services stays strong
The headline ISM services cooled less than expected in February, falling to 55.1 from 55.2 in January, better than the expected 54.5. The prices paid component, which raised concerns again about the disinflation rhetoric from the manufacturing ISM report last week, cooled only slightly to 65.8 from 67.8 in January, showing sticky services prices. Employment rose to 54 from 50.0, matching the highest since March 2022 and therefore showing more signs of a tight labour market. New orders accelerated to 62.6 from 60.4 but business activity slowed to 56.3 from 60.4.
Fed members continue to sound hawkish, eyes on Powell
Fed member Mary Daly (non-voter in 2023) was on the wires over the weekend, and sounded hawkish as she raised the prospects of an upward shift in the Fed’s dot plot as well. She said that inflation is still high, and the Fed has to think about 'continuous tightening', signalling higher rates and remaining at elevated levels for a longer period of time, if inflation stays hot. Another member Barkin (non-voter in 2023) also clearly said that there will be no rate cuts this year. Focus will be on data in the runup to the Fed’s March meeting, but Chair Powell’s testimony before the Congress and the February jobs report this week will be key for the markets, as noted below..
Japan unions pushing for record wage increase
The Japanese Trade Union Confederation (JTUC, more commonly known as Rengo) says its survey of 2000+ unions in the country shows an average pay rise request of 4.49% this year. This is the highest since 1998's 4.36% and is much higher than the 2.97% sought in 2022. The Bank of Japan continues to highlight that wage growth is key for achieving sustained demand-pull inflation. Japan's "shunto" spring wage talks will be key to watch this month as any larger than expected increase in wages will fuel more tightening expectations for the Bank of Japan, having a profound impact on global liquidity as well.
What are we watching next?
Busy agenda this week for central banks, topped by BoJ on Friday
It’s a busy week for central bank messaging this week. First up is the RBA, which we expect will hike the policy rate another 25-basis points to 3.60%. This is not fully priced into market expectations, and the market has priced a total of 52 basis points of tightening over the next three meetings, including tonight’s. The terminal rate is currently priced near 4.15%. On Wednesday, the BoC will discuss the pace of monetary policy, but at its last meeting signaled that it would like to pause the hike cycle to assess the economy, given the steep pace of policy tightening. We expect interest rates will remain unchanged at 4.5% after eight consecutive hikes. In the US, Fed Chair Powell will testify before Senate and House panels on Tuesday and Wednesday, respectively, on the economy and monetary policy. He will face hours of questioning and political posturing from Congress members. Finally, the most anticipated central bank meeting of the week will be Friday’s Bank of JA
France general strike against pension reform
France will face a rolling general strike against the pension reform starting tomorrow. The strike is likely to be prolonged for at least 10 days according to the trade unions. This could push the country’s GDP into contraction this quarter. Union representatives at EDF warned of the risk of reduced power output from France’s nuclear power plants due to the strike.
US February labor market data up on Friday
The US Feb. Nonfarm payrolls change report for February will be released on Friday. In January, US job creation increased at a very strong pace (507k). Consensus expectation look for a return to trend in February (consensus at +200k). The February unemployment rate is expected to marginally increase to 3.5% from the multi-decade low of 3.4% posted in January. Overall, the U.S. labor market is still very resilient, in a very good shape. This is unlikely to influence the Fed’s monetary policy decisions in the short-term.
Earnings to watch
This week’s most important earnings releases are listed below with the most market attention going to earnings from Adidas, CATL, and JD.com. Adidas has a huge inventory of Yeezy sneakers following the abrupt end to the partnership with Ye that caused a massive writedown in the previous quarter and investors have generally lost short-term trust in Adidas following a string of bad results. Analysts expect Adidas to report Q4 revenue of €5.2bn up 1% y/y and EBITDA of €-419mn. CATL is the world’s largest battery maker and is firing on all cylinders with analysts expecting Q4 revenue growth of 87% y/y and EPS of CNY 2.65 down 11% y/y as the company has not passed on all input costs to its EV customers after a significant surge in lithium carbonate prices last year.
- Monday: Trip.com
- Tuesday: Ashtead Group, Sea Ltd, Ferguson, Crowdstrike
- Wednesday: Ping An Bank, Thales, Adidas, Geberit
- Thursday: CATL, Deutsche Post, JD.com
- Friday: Daimer Truck, AIA Group, Oracle, DiDi Global
Economic calendar highlights for today (times GMT)
0930 – UK Feb. Construction PMI
1000 – ECB Chief Economist Lane to speak
1000 – Eurozone Jan. Retail Sales
1500 – Canada Feb. Ivey PMI
1500 – US Jan. Factory Orders
2330 – Japan Jan. Labor Cash Earnings
0030 – Australia Jan. Trade Balance0330 – Australia RBA Cash Rate Target announcement