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US equities (US500.I and USNAS100.I): wage pressures and inflation pressures haunting again
US equity futures moved big yesterday as the US 10-year yield hit 3.95%, the highest level since November, with S&P 500 futures declining 2% closing at 4,005 putting the 4,000 level into as play as we have highlighted for week. If S&P 500 futures decline below the 4,000 level, then the 200-day moving average at the 3,981 level will quickly be tested. Home Depot earnings release was received very negatively by the market sending its shares down 7% as the home improvement retailer indicates that the wage pressures are still excessive. This could accelerate the margin compression theme in equities when the Q1 earnings are out in April and May.
FX: USD rebounds as US treasury yields lift to new highs
The US dollar was modestly higher as US 10-year yields reached a YTD high and in close sight of the key 4% mark, closing at 3.95%. Higher-than-expected preliminary February PMIs in the US further faded recession concerns, bringing the market expectations of Fed terminal rate to a new high of 5.37%. The USD has also perhaps founds support from escalating geopolitical tensions as Putin suspended the Nuke deal with the US. GBP was the outperformer after very strong UK Flash Feb. PMIs (more belowø). GBPUSD touched highs of 1.2147 from 1.1987 before pulling back. AUDUSD was hurt by falling risk sentiment despite hawkish RBA minutes out yesterday and fell toward the range lows in the low 0.6800’s overnight, with the 200-day moving average a bit lower still. AUDNZD reversed sharply lower on the RBNZ’s surprisingly hawkish turn (more below). FOMC Minutes tonight in focus for the US dollar.
Crude oil (CLJ3 & LCOJ3) still pressured lower
Crude oil prices dipped further with dollar strength in play as the expectations of rate hikes from the Fed continued to ramp up. WTI crude traded close to $76/barrel while Brent was below $83. Geopolitical concerns still running high this week, potentially providing a floor to oil prices. Overall, the oil market remains rangebound, in Brent between $80 and $89 and WTI between $73 and $82, as the market weighs the impact of rising demand in China and India versus a potential slowdown elsewhere.
Gold (XAUUSD) soft as maximum pressure applied by USD and yields
Gold is slightly softer but holding up reasonably well, given the pressure from the stronger US dollar and US treasury yields rising to new highs for the cycle. The support zone below the recent lows is critical for the status of the trend in gold, as 1,800-1,810 was pivotal on the way up, and the 200-day moving average looms below at 1,776.
Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) lift to new cycle high
US Treasury yields lifted to new cycle highs all along the curve as the Fed is priced to reach a terminal rate near 5.35% this year now (so effectively three further 25 basis point rate hikes expected from the Fed this year. A two-year auction was middle of the range in terms of bidding metrics, but well below the strong prior auction. The 10-year yield nudged higher to 3.95% yesterday, a new high since November of last year. A 5-year T-note auction is up today, and 7-year auction tomorrow.
What is going on?
Strong UK Services PMI not cooperating with the recession playbook
The preliminary UK February PMI’s were released yesterday and suggest solid expansion in the UK’s Services sector, sparking a strong 17 basis-point surge in 2-year UK rates on the implications for further Bank of England tightening. The February reading for the services sector was 53.3 versus 49.2 expected and 48.7 in January, while the Manufacturing PMI reading was 49.2 versus 47.5 expected and 47.0 in January.
More green shorts in the EZ data but…
The EZ February PMIs are quite good at first glance. The French PMI composite was out at 51.6 versus prior 49.1 – this is a 7-month high and the first expansion above the 50 thresholds since October 2022. The German PMI composite is in the expansion zone too (at 51.1). But if we dig beneath the surface, this is not as good as expected. In France, the PMI report contains a warning about new export orders: “Overall, this marked a twelfth successive monthly decline in new export orders. Notably, manufacturers recorded the steepest slump since the first COVID-19 lockdown period in the first half of 2020”. We see a similar weakness in German data with a stagnation of exports to non-EU countries in January. Basically, in both cases, the order book and the manufacturing side look challenged while the services are the main drivers of the PMI composite. We still expect the eurozone will avoid a recession this year.
Earnings recap: Walmart, Home Depot
Despite beating against earnings estimates, Walmart’s profit forecast for this year fell short of analyst estimates and a cautious outlook suggested a lingering impact from the inventory build-up of last year as well as shifting consumer demand patterns considering the higher inflation and interest rates. Walmart shares recovered after gapping lower and closed higher for the session. It was a different story for home improvement retailer Home Depot, which missed expectations and gave a dull operating margin guidance – expecting FY operating margin at around 14.5% due to the extra wage costs, compared to an estimate of 15.1%. Home Depot shares plunge to close almost 7% lower and below the 200-day moving average. The results send a warning for other retailers like Target and Lowe’s due to report on March 1.
Domino’s Pizza Enterprises crushed 23% in Australia after reporting earnings
Dominos Pizza Enterprises is the Australian based franchise owner of Domino’s Pizza in Australia, New Zealand, Japan, Taiwan and several European countries. Its EBIT fell 21% Y/Y to A$113.9 million in the HY, with sales growth coming in weaker than expected as customers turned away from its higher prices. European operations faced significant geopolitical disruptions and were hit by the highest inflation levels across its business. Asian sales were materially stronger than pre-Covid - but its EBIT was lower. Guidance was weak and it cut its half-year dividend to A$0.674 per share. Domino’s Pizza shares fell 23% to A$54.71, which erased 2023’s gains.
Australian wage growth comes in below expectations, AUD weaker
Australian wage growth rose 3.3% YoY in Q4, slightly below the 3.5% expected and seen raising few new alarm bells at the RBA after evidence of a more precautionary hawkish shift recently. Construction data was weak in the quarter at –0.4% QoQ vs. +1.5% expected, but the Q3 data was revised up to 3.7% from 2.2%. Australian 2-year yields dropped 10 basis points, with money markets pricing a peak rate near 4.2% in August 2023. AUD weakened overnight, reversing back below 1.1000 in AUDNZD terms on a hawkish RBNZ meeting, while AUDUSD is heavy ahead of the range lows near 0.6800, with the 200-day moving average looming slightly lower still. The next data the RBA will look at - will be next week’s release of retail sales, private sector credit and net exports of GDP.
RBNZ surprises hawkish, reaffirms expected terminal rate of 5.5%
The RBNZ hiked the rate 50 basis points to take the policy rate to 4.75% and reaffirmed a forecast for the peak policy rate to reach 5.5%, if over a longer period than previously. With recent disastrous floods raising expectations that the RBNZ might go with a smaller hike or no hike at all, this decision read hawkish and NZD sjumped versus the AUD and was somewhat resilient against the firmer US dollar.
What are we watching next?
FOMC minutes on tap today
The minutes of the February 1st Fed meeting will be out later today (3am SGT), and will be key for the cues on inflation expectations and terminal rate forecasts as a gauge for what to expect in the dot plot in March. Still, the hotter than expected inflation print for January (both CPI and PPI) were released after the FOMC meeting and that has shifted the narrative to a hawkish. The criteria for a pause may be on the lookout, and whether that is any push to driving the market’s rate cut expectations further out.
Earnings to watch
Today’s key earnings release is Nvidia reporting FY23 Q4 earnings (ending 31 Jan) after the US market close with analysts expecting revenue of $6bn down 21% y/y and EPS of $0.81 down 32% y/y. With cryptocurrencies rallying lately there might be an upside surprise in the outlook as crypto mining activity might have increased the demand for GPUs.
- Wednesday: Rio Tinto, Genmab, Danone, Lloyds Banking Group, Iberdrola, Nvidia, TJX, Stellantis, Baidu, eBay
- Thursday: EssilorLuxottica, Deutsche Telekom, Munich Re, Kuaishou Technology, Eni, Anglo American, BAE Systems
- Friday: BASF, Monster Beverage
Economic calendar highlights for today (times GMT)
0800 – Sweden Riksbank Governor Thedeen to speak
0900 – Germany Feb. IFO Business Climate Survey
1800 – US 5-year US T-note auction
1900 – US FOMC Minutes
1910 – New Zealand Governor before parliament committee
2130 – API's Weekly Crude and Fuel Stock Report
2230 – US Fed’s Williams (Voter) to speak on inflation