Summary: A Fed downshift to 25bp hikes may be firmer in the cards with the in-line 0.3% M/M increase in the core CPI bringing the measure to 3.1% on a three-month annualized basis. Yields on the 10-year Treasury notes plunged 10bps to 3.44% and the S&P 500 closed just below its 200-DMA. The Japanese Yen was the biggest winner in the currency space on speculation for further policy shifts by the BOJ next week. Bank of America, JPMorgan Chase, and Citigroup report Q4 earnings today.
U.S. stocks climbed, following CPI data that support the Fed to slow the pace of rate hike to 25bps in February. Nasdaq 100 gained 0.5% and S&P 500 edged up 0.3%. Closing at 3983.17, the S&P 500 has its 200-day moving average of 3,984.39 within reach. Energy, rising 1.9, was the best-performing sector within the S&P 500 as WTI crude oil climbed over 1% to USD78.29. Interest rate-sensitive REITS was the other top winning sector. American Airlines (AAL:xnys) surged 9.7% on upbeat revenue growth and earnings guidance and a debt reduction plan.
After choppy initial reactions when traders digested the CPI prints, U.S. Treasuries advanced and their yields slid decisively. The headline and core CPIs in December were in line with expectations. Investors noted the decline of the core inflation on a three-month annualised basis to 3.1% and the softness in core services excluding shelter and concluded that the Fed is on track to downshift to a 25bp hike in February. Comments from Fed’s Harker (voter) that “hikes of 25bps will be appropriate going forward” added conviction to the notion. The strong results from the USD18 billion 30-year auction saw yields on the long end richer further. Yields on the 10-year finished the session 10bps lower to 3.44% and those on the 2-year were 4bps lower to 4.12%.
The Australian share market (ASXSP200.I) opened 0.8% higher, with most other Asian markets are set to open in the positive. Ahead of Australia’s company reporting season kicking off next month, we’re thinking we could likely see many commodities companies upgrade their outlooks for 2023, expecting higher earnings as many resources prices have quickly entered bull markets amid China easing restrictions sooner than expected. However today, eyes will once again be on commodities and affiliated equites; as the oil price jumped for the 6th day, moving up to $78.30, after rising 1.1%, The copper price rose 0.1% to $4.17 on the COMEX market in New York. Iron ore (SCOA) is 0.6% higher at $123, a new 6-month high.
After making a new six-month high, Hang Seng Index reversed and pared gains to finish Thursday only 0.4% higher. Profit-taking weighed on recent policy beneficiaries, such as mainland Chinese property developers, domestic consumption names, mega-cap internet stocks, and Macao casino operators. Country Garden, down 6.3%, was the biggest loser within the Hang Seng Index. Shares of EV makers bucked the market trend of retracement to advance, led by BYD (01211:xhkg) which was up 5.3% and was the top winner among Hang Seng Index constituents. NetEase (09999:xhkg) outperformed other China internet names with a 3.7% gain on collaborating with the state-owned CCTV to broadcast the Lunar New Year gala on the company’s metaverse platform. FIT Hong Teng (06088:xhkg), a subsidiary of Foxconn, soared 17.2% on speculation that the company might replace GoerTek (002241:xsec) to assemble AirPods for Apple. In A-shares, telecommunication, electric equipment, EV, non-bank financials, and new energy outperformed as the domestic consumption space retraced. CSI300 climbed 0.2%.
After US CPI data showed US prices have continued to fall, the US dollar vs the AUD continued to fall, taking its fall from its peak to 10%. Inversely, Australia's trade balance data released yesterday, as well as Aussie retail and Aussie CPI earlier in the week, plus the all-important easing of China’s restrictions sooner than expected, all support upside in the AUD. As such the Aussie versus the US rallied to new four-month highs, 69.67 US. The next resistance level, the psychological 70.00 US is the next hurdle to get over. Aussie home loan data released today is the next catalyst to watch. If it’s stronger than expected, the AUDUSD could march on up.
The Japanese yen was the biggest gainer on Thursday, boosted both by lower US yields as well as speculation around a policy tweak by the Bank of Japan at the next week’s meeting. USDJPY slid from 132.50 to 129 handle. Japanese 10-year bonds continued to test the upper limit of the permitted trading band, and rose higher to 0.53% in early Asian hours testing the central bank’s resolve on a dovish policy. EURUSD broke above 1.08 to fresh highs of 1.0867 with expectations of Fed-ECB divergence setting a bullish tone.
Crude oil prices gained further on Thursday amid the risk on tone set by further softening in inflation pressures. China’s steady commitment to reopen the economy and provide a stimulus to the economy continued to support sentiment this week, along with Chinese buyers become more active in the physical market as import quotas were increased. WTI futures rose to $79/barrel while Brent moved above $84/barrel.
Gold saw another rally with a softer inflation print in the US bolstering the case for a further downshift in the Fed’s rate hike trajectory. A broadly dovish tone from the Fed members also saw a plunge in US yields and weighed on the USD, helping support gains in Gold as well. Silver outperformed gold, and platinum and palladium gained as well.
A further slowdown was seen in US CPI last night, with the headline sliding to 6.5% YoY as expected from 7.1% YoY in November, stepping into the disinflationary territory on a m/m basis with a negative 0.1% print from +0.1% previously. Core inflation also eased in-line with expectations to 5.7% YoY in December from 6.0% YoY previously but still higher on m/m basis at 0.3% from 0.2% in November. Services inflation was still higher, being the more sticky component of inflation, but with six consecutive months of softening in inflation, the Fed could take some comfort that its tightening moves are working. Market is pricing in another step down at the Fed’s next decision on Feb 1 to 25bps rate hike, but the terminal rate pricing still stands at sub-5% levels compared to a unanimous voice from the FOMC members calling for rates over 5%. Meanwhile, US jobless claims unexpectedly fell to 205,000 from a revised 206,000 the previous week, suggesting labor market is still tight. Continuing claims also surprisingly improved, dropping to 1.63 million from 1.7 million.
Patrick Harker (voter) said 25-bp increases "will be appropriate going forward" after data showed inflation moderating. Thomas Barkin (non-voter) also emphasised that Fed has more work to do, although he signalled that "it makes sense to steer more deliberately." Bullard was relatively more hawkish, but he also doesn’t vote this year. He said that he favors getting the benchmark above 5% as soon as possible before holding.
US banking earnings kick off the Q4 earnings season today, most notably from Bank of Bank of America, JPMorgan Chase, and Citigroup. Analysts remain muted on US banks with earnings expected to show another quarter of negative growth compared to a year ago. Peter Garnry, Saxo’s Head of Equity Strategy, wrote in his recent article that the interest rate shock had been bad for banking earnings and activity levels across the investment banking division. As credit portfolios have an average maturity of around seven years banks will slowly begin rolling their assets into higher interest rate levels which will begin to accelerate their net revenue figures improving profitability over time. If the US economy just experience a shallow recession in real terms and strong nominal growth then US banks should be considered as a good tactical trade over the coming years.
CPI in China rose to 1.8% y/y in December from 1.6% in November, in line with expectations. The year-on-year growth was due to a low base. On a month-on-month basis, CPI was unchanged in December. Excluding food and energy, core CPI came in at 0.7% y/y in December, edging up slightly from 0.6% y/y in November but remaining subdued. The change in PPI rebounded less than expected to -0.7% y/y versus -0.1% expected and -1.3% y/y in November. Deflation in the processing sector narrowed to -2.7% Y/Y in December from -3.2% Y/Y in November. The mining component in the PPI swung to 1.7% Y/Y in December from -3.9% Y/Y in November.
The world’s largest foundry of semiconductors beats on net income in Q4 driven by a gross margin of 62.2% versus the 60.1% expected. TSMC says the company is to face margin headwinds in 2023 with revenue growth slowing down. For Q1 2023, the management expects revenues to fall to between USD16.7 billion and USD17.5 billion from USD17.57 billion in Q1 2022. CAPEX in 2023 is expected to be between USD32 billion and USD36 billion, against $36bn in 2022. The company is considering a second manufacturing plant in Japan and a new automotive chips plant in Europe. It has also expanded its 28nm production in China and is planning to mass produce its new 2nm in 2025 in its facilities in Taiwan. TSMC expects that revenues of the global semiconductor industry, excluding memory chips, to fall 4% in 2023.
UK’s monthly GDP numbers are due this week, and consensus expects a contraction of 0.3% MoM in November from +0.5% MoM previously which was boosted by the favourable M/M comparison vs. September, which was impacted by the extra bank holiday for the Queen’s funeral. The economy is clearly weakening, and another quarter of negative GDP print remains likely which will mark the official start of a recession in the UK.
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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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