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Market Insights Today: D-day for Bank of Japan; ECB’s dovishness; China’s growth is a positive surprise but population falls - 18 January 2023

APAC Research

Summary:  The focus is squarely on the Bank of Japan decision today and significant volatility may be on the cards. Mixed earnings, ranging from a weaker Goldman Sachs report but better-than-expected Morgan Stanley results, kept the US equity markets broadly range-bound. China’s activity data surprised to the upside, but population decline is a concern. Stage is being set for a dovish turn in the ECB, and UK’s CPI will be on the radar today. Industrial metals regained momentum, while Gold continues to face correction risk.


What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) finished nearly unchanged while the Dow Jones Industrial slipped 1.1% on Goldman’s miss in earnings

Nasdaq 100, up 0.1% and S&P 500, down 0.2% were little changed in a choppy session, supported by a 7.4% gain in Tesla (TSLA:xnas) and an increase of 4.8% in Nvidia (NVDA:xnas).  The Dow Jones Industrial however fell 1.1%, dragged by the declines of 6.4% in Goldman Sachs (GS:xnys) and 4.6% in Travellers (TRV:xnys). Goldman Sachs reported a 66% Y/Y fall in Q4 earnings to USD3.32 per share, much below the USD5.56 consensus estimate. On the other hand, Morgan Stanley (MS:xnys) rose 5.9%, after reporting a 40% fall in earnings to USD1.26 per share, beating the USD1.25 expected by street analysts. Among sectors in the S&P, the material sector, falling 1.1%, was the biggest laggard.

US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) ended mixed as curve steepened

A much weaker-than-expected print of the Empire Manufacturing Index, shrinking to -32.9 vs consensus of -8.7, and a Bloomberg report suggesting that the ECB may slow its next rate hike to 25bps in March from 50bps, saw the yields on the Treasury front ends lower. Yields on the 2-year fell 3bps to 4.20%. Yields on the longer ends however rose. The 10-year notes finished 4bps cheaper at 3.55%. On Wednesday, traders are eyeing the outcome from the Bank of Japan.

Hong Kong’s Hang Seng (HIF3) retreated and China’s CSI300 (03188:xhkg) was flat despite Q4 GDP better than feared

The Hang Seng Index pulled back 0.8% and the CSI300 Index was flat despite China’s Q4 GDP, industrial production, retail sales, and fixed asset investment coming in better than feared. Q4 GDP grew 2.9% Y/Y (consensus 1.6%; Q3: 3.9%). Healthcare names were the biggest drag to the Hang Seng Index as Wuxi Biologics (02269:xhkg) tumbled 6.1% on placement by its majority shareholder. XPeng (09868:xhkg) slipped 2.3% after cutting the prices of its EVs by around 12% and dragged down the share prices of other EV makers. Chinese property names finished the session mixed in a tug-of-war between optimism from supportive policies and continuously sluggish sales data. China’s residential property sales fell 26.7% Y/Y in December. Infant and toddler product stocks fell on the record low 0.677% birth rate released in China. In A-shares, baijiu (Chinese white liquor), food and beverage, bank, media, and pharmaceutical names retreated while electronics, defense, and machinery stocks gained.

FX: All eyes on JPY

GBPUSD was the best performer in the G10 FX space on Tuesday, rising to test the 1.23 handle, as labor market data came in better than expected. Focus shifts to the UK CPI release today where a further deceleration in price pressures remains likely. NZD and AUD also gained further, bumped higher more so in the US session rather than China’s better-than-expected activity data in the Asian hours. AUDUSD may be looking at another break above 0.7000. EURUSD plummeted from 1.0869 to 1.0775 on dovish ECB expectations (read below). The key focus today however will be on USDJPY and yen crosses with BOJ decision due today.

Crude oil (CLG3 & LCOH3) pushes higher

Crude oil edged higher as OPEC set a more optimistic tone on demand. Secretary General Haitham Al Ghais said he’s optimistic about the outlook for the global economy. The oil producer group said that a potential slowdown in advanced economies is countered by accelerating growth in Asia. The market is expected to tighten as Russia’s supply suffers from G7 price caps and China’s demand recovery underpins. Meanwhile, the growing case of a soft-landing this year has cooled off global demand slowdown concerns, while reports of ECB’s slowing the path of its rate hikes (read below) also underpinned. WTI futures rose to $81/barrel while Brent was at $86. IEA’s monthly market outlook will be released today.

Metals boosted by upbeat China data

Better than expected economic data from China helped boost sentiment in the base metal sector. China’s December activity data came in better-than-expected, while protests in Peru continued to cloud the supply outlook for Copper. HG Copper was back above $4.20. Prices for Iron ore also rose in Singapore to back above $120, locking in gains of over 1%. Gold, however, continues to face correction risk as ETF flows and risk reversals have remained flat for weeks with no sign of demand despite the recent rally. We believe the direction in gold is correct but the timing is wrong, raising the risk of a short-term correction driven by recently established speculative longs.

 

What to consider?

Bank of Japan meeting playbook – bracing for volatility

The highly-watched Bank of Japan policy decision due Wednesday has spooked tremendous volatility and warrants a cautious stance. But whether we see further policy tweaks this week or not, speculation for BOJ to remove its yield curve control will likely to build into BOJ chief nominations due February 10, spring wage negotiation in March and a change of hands at the helm in April. Read our full preview here or listen to yesterday’s podcast.

China GDP and activity data came in better than expected

At 2.9% Y/Y, China’s Q4 GDP print was well above the consensus forecast of 1.6% while decelerating from 3.9% Y/Y in Q3. Full-year GDP growth came in at 3% in 2022, higher than the consensus forecast of 2.7%. Retail sales, shrinking 1.8% Y/Y in December (vs consensus: -9.0%, Nov: -5.9%), were better than feared. Nonetheless, the positive surprise largely came from a surge of 39.8% Y/Y in medicine sales and a rise of 10.5% Y/Y in food sales on stockpiling in December when China abandoned Covid-19 containment measures. Industrial production growth slowed to 1.3% in December, above the median forecast of 0.1%, from 2.2% in November. Fixed asset investment growth picked up to 3.1% Y/Y in December from 0.8% Y/Y in November, with infrastructure investment slower to 10.4% Y/Y in December from 13.9% Y/Y in November and manufacturing investment improved to 7.4% Y/Y in December from 6.2% in November.

China’s population declined for the first time in six decades

According to the National Bureau of Statistics, China’s population fell to 1.4118 billion in 2022, a decline of 0.85 million, from 1.4126 billion in 2021. The birth rate slipped to 0.677%, the lowest since records began in 1949.

China is planning new restrictions on live streaming

According to the Wall Street Journal, Chinese regulators are planning to impose new regulations to cap internet users’ digital tipping as well as tighter censorship of the content.

ECB’s dovish surprise likely as inflation slows

The ECB is considering a slower pace of rate hikes than Christine Lagarde indicated in December. While a 50bps increase next month remains the most likely outcome, a 25bps move in March is gaining support. Inflation in the Eurozone is slowing, and a sharp drop in natural gas prices suggest that we can continue to expect lower inflation in the months to come atleast until the 2023 winter risks emerge. The final CPI print for December for the Euro-are will be released today and ECB’s minutes of the December meeting are due tomorrow.

Gloomy US survey data – NY Fed manufacturing

The NY Fed's Empire manufacturing survey tumbled to -32.9 in January from -11.2 in December, well beneath the consensus -9 and marking the lowest level since mid-2020 and the fifth worst reading in the survey’s history. Both new orders and shipments plummeted sharply, and moderation in input and selling price growth was seen. Fed member Barkin (non-voter) repeated that median CPI is still too high, saying that he needs to see inflation convincingly back to target before Fed pauses rate hikes and that he is not in favour of backing off too soon.

UK December claims data improves, November earnings data rises again, CPI up next

The UK reported November Employment and earnings data yesterday, with the Unemployment Rate steady for the month at 3.7%, while Employment Change rose 27k vs. 0k expected. Average Weekly Earnings rose more sharply than expected at 6.4% YoY ex Bonus vs. 6.3% expected and 6.1% in Oct. Also out this morning were December Jobless Claims data, which rose 19.7k vs. 16.1k in November (revised down from 30.5k, while the Payrolled Employees Monthly Change rose +28k vs. +60k expected and the November number was revised down to +70k from +107k. UK CPI is due to be released today.

Vietnam’s political shakeup

The latest political shakeup in Vietnam highlights the stability risks that emerging markets generally face. President Nguyen Xuan Phuc has announced he is stepping down, sparking a potential power shift among the communist-ruled country's leaders. The news that he is quitting comes during an anti-corruption drive led by hard-liners. The shift in power could potentially have repercussions on the ability of Vietnam to continue to capture manufacturing moving out of China.

 

For a look ahead at markets this week – Read/listen to our Saxo Spotlight.

For a global look at markets – tune into our Podcast.

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