Summary: U.S. treasuries and stocks sold off after the hotter-than-expected PPI prints which suggest inflation not cooling enough and making the water murkier in the week of CPI and FOMC. The 10-year yield surged 10bps to 3.58%. Other key central bank meetings from the ECB to Bank of England also on watch this week. Hong Kong and Chinese stocks rallied on Friday on continuous optimism about reopening from Covid restrictions and supportive economic policy from the Chinese authorities. The Chinese Communist Party’s Central Economic Work Conference is expected to convene this week.
U.S. equities edged down after the producer price Index (PPI), headline as well as core, came in stronger-than-expected and stirred up concerns about risks of pushing the Fed back towards a more hawkish leaning. Nasdaq 100 declined by 0.6% and S&P500 fell by 0.7%. 10 of the 11 S&P sectors declined, with energy, healthcare, and materials dropping the most. Lululemon (LULU:xnas) plunged 12.9% after a gross margin miss, inventory build-up, and below-expectation full sales guidance. Tesla (TSLA:xnas) bounced 3.2%.
U.S. treasuries sold off on the hotter-than-expected PPI headline as well as core prints. With heavy selling in the 10-year and 30-year segments, the yield curve became less inverted. Two-year yield rose 4bps to 4.34% and 10-year yield surged 10bps to 3.58%. The 2-year-10-year yield curve closed at 76bps on Friday, after hitting as low as 85bps during the week. The money market curve is predicting a 77% probability for a 50bp rate hike on Wednesday.
Hang Seng Index rallied 2.3% on Friday on continuous optimism on the prospect of a recovery in the growth of the Chinese economy in 2023 as the country reopens from Covid containment restrictions and more supportive government policies. Premier Li Keqiang said China will strive to achieve steady growth. Defaulted Chinese property developer Sunac (01918:xhkg) said it is in discussion with creditors to restructure USD9 billion of debts, including swapping USD3-4 billion of debts into ordinary shares or equity-linked instruments. Reportedly another defaulted mainland developer Evergrande is meeting offshore creditors to discuss restructuring proposals. The Chinese authorities are considering allowing REITs to invest in long-term rental and commercial real estates. Leading mainland Chinese property developers listed in Hong Kong surged 5% to 18% with Longfor (00960:xhkg) soaring the most. A day after shortening the home isolation period for people infected with Covid-10 to five days from seven days, a Hong Kong health official said the city is considering to end its vaccine pass scheme. Hong Kong local property developers gained 2%-5%. In A shares, the CSI300 Index rallied 1%. The Chinese Communist Party is expected to convene its annual Central Economic Work Conference this week to formulate the macroeconomic policy blueprint for 2023.
There are a couple of economic readouts that could move the market needle, the ASX200 (ASXSP200.1) this week. Weakening confidence is expected; starting with Consumer Confidence for December (released on Tuesday), followed by Business Confidence for November. Employment reports are due on Thursday for November, and likely to show employment fell; 17,000 jobs are expected to be added, down from the 32,200 that were added in October. So focus will be on the AUD and a potential pull back if the data is weaker than expected. On the equity side, with iron ore (SCOA) trades at four month highs $110.80 but is lower today. We mention on Friday the price of iron ore has been rallying as China on easing restrictions and because of whispers that Chinese property developers will get more support, which would support demand for iron ore rising. However we mentioned why iron ore could pull back, as buying volume appears slowing. So be mindful of potential pull back in iron ore pricing and mining equities. Secondly, consider seasonable halt of Chinese steel plants ahead of the Lunar New year. Restocking typically occurs 5-8 weeks before the holiday, but plants could be closed earlier, due to poor profits and weak demand. So keep an eye on iron ore majors, Fortescue Metals, Champion Iron, BHP and Rio as they could see profit taking as well after rallying ~25-55% from October.
The US dollar started the week on a firmer footing with a big week ahead as the US CPI and FOMC meeting is eyed. A reversal of the short-term downtrend would however require US 10-year yields to get closer to 4% again. NZDUSD has been a strong performer since the softer October US CPI print and maybe the one to watch if the Fed fails to surprise hawkish this week, given that the RBNZ remains committed to its fight against inflation. Pair dropped below 0.64 in early Asian trading hours this morning as New Zealand Institute of Economic Research (NZIER) published slower GDP growth forecasts through 2025. A higher-than-expected Japan’s November PPI of 9.3% YoY/0.6% MoM, along with an upward revision to last month’s print, may create more talks of a possible policy review (read below) and USDJPY headed higher to 136.80.
Crude oil prices saw a steadier start to the week after plunging sharply last week on demand concerns from a weakening macro backdrop as well as thin liquidity and control of short-term traders. The uncertainty surrounding European sanctions on Russian oil and the related price also kept volatility high, but was overshadowed by recession concerns. The impact of the potential pickup in demand from China as lockdowns continue to ease also started to fade. This week Russia will announce how it intends to counter the introduced price cap with the risk of a production cut potentially adding fresh support to the market ahead of what looks like a challenging 2023 where supply worries in our opinion will keep prices elevated, despite the risk of lower demand. WTI futures rose above $72 in the Asian morning, while Brent was seen above $77/barrel.
Headline PPI rose 7.4% in November Y/Y, above the expected 7.2% albeit down from the upwardly revised 8.1% for October. The core (ex-food and energy) Y/Y was also above expectations at 6.2% (exp. 5.9%), but cooler than the prior upwardly revised 6.8%. on a M/M basis, headline rose 0.3% while core was stronger at 0.4%, beating expectations. While the PPI data continued to show a peak in inflation in the Y/Y terms, but the downward surprise remains limited and may not be enough to support the Fed pivot expectations. Attention now turns to the US CPI data on Tuesday to see if a similar inflation story is seen for December ahead of the FOMC rate decision on Wednesday. Preliminary University of Michigan survey for December was also strong across the board, as the headline rose to 59.1 from 56.8, and above the expected 56.9. The headline was supported by current conditions and the forward-looking expectations both lifting to 60.2 (prev. 58.8, exp. 58.0) and 58.4 (prev. 55.6, exp. 56.0), respectively.
Vladimir Putin said Russia may lower crude output in response to the G-7 price-cap and added the country won't sell to price-cap participants. The price of Russian crude in Asia appears to be holding well above the $60 cap as it finds enough shipping and insurance capacity. While the crude oil prices last week have remained in the grip of technical traders and seen little impact from the price cap decision, there could be more volatility in store this week as Russia’s response is awaited which could range from production cuts to retaliatory measures.
All eyes are turning to who could be the possible replacement of Bank of Japan Governor Kuroda in April 2023. One of the contenders, Takehiko Nakao, said that subtle changes in policy framework should be considered as the leadership is changed next year. This comes after board member Naoki Tamura called for a policy review last week and hinted that it may come as early as next year (before Kuroda retires. However, another board member Toyoaki Nakamura said its too early to conduct a review now. Likewise, board member Hajime Takata also said it is too soon to start a policy review. While the timing may be uncertain, the open discussions about a possible BOJ policy review at some point is keeping expectations of an eventual BOJ pivot alive.
During his visit to Saudi Arabia last week, China’s President Xi Jinping met with King Salman bin Abdulaziz Al Saul and Crown Prince Mohammed bin Salman. The two sides agreed to upgrade the relationship between the two countries with heads of state meeting every two years and moving established joint committees for trade, tech, security, and other areas from vice-premier to premier level. The two countries have signed a large number of agreements and MOUs from petrochemical, hydrogen energy, information technology, and infrastructure projects to cultural exchanges. Xi reiterates his call for using the renminbi more often to settle trades in crude oil and natural gas but it is not clear how well his call has been received by Saudi Arabia and the other oil-exporting countries at the China-Arab summit last week.
China’s CPI inflation decelerated to 1.6% Y/Y in November from 2.1% Y/Y in October, in line with expectations as food inflation slowed and consumer demand was weak during the lockdown. In the PPI, price increases in the raw materials sector decelerated while the price declines the in mining and processing sectors slowed in November.
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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.
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