Summary: Markets gyrated rather wildly yesterday as a strong September ISM Services saw US treasury yields jumping back higher and challenging the narrative that has developed this week of “central bank pivot.” Alas, equities and sentiment were able to overcome the surge in yields and the US dollar interestingly followed the direction of sentiment rather than yields. The next test for sentiment, the US dollar and global yields will be tomorrow’s US September jobs report ahead of earnings season, which will kick off next week.
US equities were selling off yesterday with S&P 500 futures declining as much as 1.8% before erasing most of the losses which was a strong given the US 10-year yield rallied higher to 3.75%. The ISM Services Index was incredibly strong yesterday suggesting the US services sector remaining robust despite tighter financial conditions which maybe reduces the risk of negative earnings surprises during the Q3 earnings season. This morning S&P 500 futures are trading above the 3,800 level again with the 3,820 level being the natural resistance level on the upside to watch.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Hang Seng Index took a pause after yesterday’s 5.9% rally. I traded lower in the morning but pared losses after returning from the mid-day break to little change from the previous close. Wharf Real Estate (01997:xhkg) and Cathay Pacific (0293:xhhg) were among the best performers, up by 4.8% and 3.5% respectively. Automakers were laggards, with leading names falling from 2.5% to 7%. The stock markets in Shanghai and Shenzhen remain closed for a national holiday.
The US dollar very correlated with the direction in risk sentiment yesterday, and less so with the direction in treasury yields, which rose quite sharply yesterday, at first helping to support the greenback as sentiment was spooked by the comeback in yields as strong data challenges the “central bank pivot” narrative afoot this week. But the big USD weakened later in the session as US equities closed near the highs and followed through weaker still overnight on a further brightening of sentiment. EURUSD is a microcosm of the general USD direction and will be a bellwether pair to watch after parity was nearly touched over the last couple of sessions before the action swooned to below 0.9850 briefly yesterday and a subsequent rally retraced about half of the sell-off into this morning.
Gold (XAUUSD)
Gold trades higher after briefly dipping to and finding support at $1700 during Wednesday’s round of fresh dollar strength. Supported by hopes that central banks will begin to ease away from the tightening of the last many months after at least one weak US data point this week, saw yields a bit lower and precious metals surging. The move through the key 1,680-1,700 area on Monday will be further solidified on a break above 1,725, the 50-day moving average, and not least the recent high at 1735. OPEC’s decision to cut production thereby forcing prices of energy higher will only add to concerns about central banks' ability to get inflation under control before an economic slowdown forces a rethink on rates, a development that may end up adding additional support to gold and silver.
Crude oil (CLX2 & LCOX2)
Crude oil rallied after OPEC+ producers as speculated, decided to cut their baseline production by 2 million barrels per day. A decision that given the undercompliance from several major producers, including Russia, Nigeria and Angola would likely translate into a somewhat lower impact of around 1 million barrels per day. Cutting production at this time is somewhat controversial given the fact the price has not fallen much below the 90-100 Brent range that seems to be acceptable to most producers. What makes this cut even more difficult to understand from a supply and demand perspective is the comment from Novak that Russian production may fall further over the coming months. This decision risks agitating the US while potentially leading the FOMC to keep tightening for longer as inflation will become stickier. The result being a global economic slowdown that may end up taking longer to reverse.
Copper as well as zinc trade higher after the London Metal Exchange said it would restrict deliveries from Ural Mining & Metallurgical. The industry has been grappling with the question of how to handle supplies from Russia - a major producer of aluminum, nickel and copper - since the invasion of Ukraine in February, and the debate has intensified over the past month. Copper traded in New York trades near a one-month high at $3.57 with the news offsetting continued worries about demand amid a global economic slowdown, not least in China and Europe. Next level of interest being the September high at $3.69.
US treasury yields jumped above 3.75% at one point yesterday, up 20 bps from the recent lows, in the wake of a stronger than expected Sep. US ISM Services survey and as the private ADP payrolls came in solidly in line with expectations, with upward revisions. The cycle high of 4.00% that was posted during the wipeout in the UK gilt market is the next focus if the bond market remains weak.
What is going on?
The NZD rose sharply against the US dollar, challenging the 0.5800 area this morning after a pump-and-dump reaction to the RBNZ’s latest 50 basis point rate hike. Likewise, AUDNZD traded heavily and back toward the pivotal 1.1250 area that was a major resistance point on the way up. Improved global sentiment may be a driver here, as was a rather rosy speech on the prospects for New Zealand avoiding a recession from NZ Deputy Prime Minister Robertson overnight.
In September, U.S. businesses added 208k jobs according to the ADP report. This is more than the consensus of +200k and higher than in August (revised up from +132k to +185k). The biggest gain was in trade, transportation and utilities (147k) ahead of professional and business services and education. On the downside, annual pay growth for job changers went through its biggest deceleration in the three-year history of the data (from 16.2 % to 15.7 %). Should we be worried about this data? Not much. The ADP report hasn’t been the best gauge of the U.S. labor market (even with the recent change in the methodology).
US ISM services softened slightly to 56.7 in September from 56.9 previously, but was far better than expectations of 56.0. New orders slowed to 60.6 from 61.8, but that is a very strong reading. Two of the more positive points in the survey were: the ISM Services employment jumped in September, from 50.20 in August to 53 points. The second one: the services Prices Paid has fallen six months in a row, to the lowest level since January 2021. This means inflation is likely to move lower. This is a rather positive report after a number of negative statistics earlier this week (sharp drop in ISM Manufacturing employment, much lower job openings and bad construction spending).
The Fed's Daly (voter in 2024) noted that the Fed is resolute at increasing rates into restrictive territory before holding rates there for a while, pushing back on talk of a Fed pivot. She added that she doesn’t see a rate cut happening next year “at all”. Raphael Bostic (2024 voter) sounded similar notes, saying he favors lifting the benchmark to between 4% and 4.5% by the end of this year, and hold it there.
The 2022 Beijing Marathon is scheduled for November 6 and registration has started. The event will allow 30,000 runners to compete in Beijing after being canceled in 2020 and 2021. It will be the largest public event being held in the Chinese capital city since the Winter Olympics. Residents from other mainland Chinese cities other than Beijing however are not allowed to attend. Residents of Taiwan, Hong Kong, and Macao, and foreigners plus invited “elite” athletes are allowed to participate.
The US plans to further restrict China’s access to its semiconductor technology
It is reported that the US Commerce Department will launch additional regulations this week to further restrict the exports of semiconductor technologies to China.
What are we watching next?
Equity markets launched an impressive recovery yesterday despite the fresh surge in US treasury yields after the release of the strong ISM Services survey. It's hard to believe the comeback can extend aggressively if strong jobs data tomorrow leads to a further surge in yields. The Sep. Nonfarm payrolls change is expected at +260k after +315k in August and the Average Hourly Earnings are seen rising +0.3% MoM and +5.0% YoY – the latter would be the slowest pace of wage growth since December.
Fed speakers up this evening
Fed members have been rather consistent with a drumbeat of calls for staying on course with further rate tightening. In light of the recent batch of mixed data that has helped push US 2-year treasury yields some 20 basis points lower from their nearly 4.25% peak, it will be interesting to watch the next few Fed speakers of note, which today includes two FOMC voters who are speaking more generally on the economic outlook, including Cleveland Fed President Mester and the Board of Governors’ Waller and Cook also speaking – see calendar below.
Earnings to watch
Today’s earnings focus is Conagra Brands which is US processed foods company. Analysts expect revenue growth of 7% y/y in FY23 Q1 (31 August) and stable operating margin of 17.6%. The company has seen its growth rate slowly increase over the previous quarters and with the ongoing cost-of-living crisis there might be an upside surprise in today’s earnings result.
Economic calendar highlights for today (times GMT)
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2024: The wasted year
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.
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.
