APAC Strategy Team
Summary: Last week, bonds, commodities, and equities markets got a lift from a Powell speech that seems to have passed the peak hawkishness for now and a new round of encouraging signs of easing pandemic control restrictions in China and braved the hotter-than-expected wage inflation data on Friday. A light economic and earnings calendar plus the Fed entering into a blackout period before the December FOMC, this week will provide investors time to reassess and rebalance their portfolios in the final month of the year. In China, the politburo meeting will be a key event to monitor.
Last week was quite a whipsaw for the markets after a dovish reaction to Fed Chair Powell’s speech which failed to add any new information for the markets that have been trained for a hawkish surprise from him over the last few months, to an expectedly higher US NFP print and a jump in the average hourly earnings data for November as well as October revision on Friday which showed sustained tightness in the labor markets. The Fed now goes into a quiet period ahead of the December 14-15 meeting so the focus turns to incoming data (or WSJ’s Nick Timiraos articles/tweets) for further direction in the yields and the dollar. US 10-year yields traded below the support at 3.50% at Friday’s close despite turning higher after the NFP, and the reaction of the dollar was also short-lived. Key data to watch this week will be the ISM services today, to see if the market is gaining sensitivity to recession concerns or still trying to celebrate the slower pace of rate hikes, and PPI on Friday which will likely continue to show a modest deceleration.
Before the Central Economic Work Conference convenes in mid/late December, the Chinese Communist Party’s Politburo will meet in early December to discuss economic policies and establish the direction and policy framework for the work conference. Investors will pay close attention to the readout from the Politburo meeting for hints about the macroeconomic policy priorities and how they are balanced with the pandemic control strategy.
The Bloomberg consensus is expecting China’s PPI to shrink further by -1.5% Y/Y in November (vs Oct: -1.3% Y/Y) and CPI to slow to +1.6% in November from +2.1% in October. Weak industrial demand in the midst of countrywide pandemic control-related restrictions during the month and weakness in energy prices would likely have contributed to the decline in the PPI. November CPI would have been dragged by base effects and weakness in food prices.
Market economists, as surveyed by Bloomberg, are expecting China’s new aggregate financing to bounce to RMB 2,100 billion in November from RMB 907.9 billion in October and new RMB loans to rise to RMB 1,350 billion in November from RMB 615.2 billion as People’s Bank of China urged banks to extend credits to support private enterprises including property developers. Less bond issuance by local governments and corporate and weak loan demand however might have weighed on the pace of credit expansion in November.
On Tuesday the Australian dollar will be a focus with the RBA expected to make its 3rd consecutive quarter-point hike, taking the cash rate from 2.85% to 3.1%. Australian monthly inflation data out two weeks ago showed AU inflation is slowing, while weaker than expected jobs data also supports the RBA remaining dovish. However, the closely watched inflation quarterly print is due out early next year, and will be a more accurate reflection of price rises. It will likely show inflation is more sticky with food and energy prices rising, which is contrary to what the monthly CPI alluded to. The bottom line is, the monthly CPI was a little delusionary. At Saxo, we see energy prices continuing to rise into 2023, which is also line with the RBA’s view. Especially as coal prices are back at record high territory ahead of peak demand season. Meanwhile consider the AUDUSD is up ~10% from its October low on hopes of commodity demand picking up from China, with major cities increasingly start to ease restrictions. As for what else to watch in Australia; third-quarter GDP growth data is released on Wednesday; expected to show GDP grew at 6.2% YoY. Then on, Thursday Australia’s trade data and balance is released for October; expected to show a softening, with the trade surplus expected to fall from $12.4 billion to $11.8 billion. Still the AUDUSD is up ~10% from its October low on forwarding thinking that commodity demand from China will increase as some major cities have started to ease restrictions.
The G7 nations have agreed to cap the price of Russian seaborne oil at $60/barrel, with a motive to diminish Russia’s revenues. This price cap is to go in effect on December 5, and represents a discount of ~$27 to the current price for Brent crude, but Urals has been trading at a discount of about $23 in recent days. However the risk of setting a price cap too low is that Russia could slash its output, which would roil markets. It will be important to watch for Russia’s reaction this week, after Putin has repeatedly said that they will not supply oil to countries that implement the price cap.
Earnings next week are a mish-mash of companies, and include high-end homebuilder Toll Brothers on Tuesday, as it will be interesting to hear their outlook on the new home market after the enormous surge in US mortgage rates and collapse in home sales activity. Broadcom (AVGO: xnas) is the market cap giant of the week to report, with the CEO of the company having said that the semiconductor market will not be affected by the US’ new export restrictions on technology to China.
U.S. ISM Services (Nov)
Eurozone Sentix (Dec)
Eurozone Retail Sales (Oct)
China Caixin PMI Services (Nov)
Singapore Retail Sales (Oct)
Tuesday, Dec 6
Germany Factory Orders (Oct)
U.K. PMI Construction (Nov)
Japan Consumer Spending (Oct)
Japan Total Cash Earnings (Oct)
Australia Reserve Bank of Australia Policy Meeting (Dec)
Wednesday, Dec 7
Germany Industrial Production (Oct)
Eurozone GDP (Q3, final)
Japan Reuters Tankan (Manufacturing) (Dec)
Japan Economic Coincident Index (Oct)
China Exports (Nov)
Australia Real GDP (Q3)
Thursday, Dec 8
U.S. Initial Jobless Claims (Dec 3)
Japan GDP (Q3, sec)
Japan Current Account (Oct)
Friday, Dec 9
U.S. PPI
U.S. University of Michigan Consumer Sentiment (Dec)
Japan M2 (Nov)
China PPI (Nov)
China CPI (Nov)
From Dec 9 to 15 (not fixed)
China New RMB Loans, Aggregate Financing, and Money Supply (Nov)
Key earnings releases this week
Tuesday: MongoDB, AutoZone, Toll Brothers, Ferguson
Wednesday: Brown Forman, Campbell Soup, GameStop
Thursday: Broadcom, Costco, Lululemon, Chewy
Friday: Oracle Corp, Li Auto
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.