Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief China Strategist
Summary: US equities received a boost from subdued inflation data, with the June PPI showing its slowest growth in almost three years at 0.1% Y/Y. This led to a 0.9% gain in the S&P 500 and a 1.7% surge in the Nasdaq 100, driven by strong performances from tech giants Nvidia and Alphabet, which both saw a 4.7% increase. PepsiCo also rallied 2.4% after reporting robust Q2 results and raising its full-year guidance. The focus shifted to the quarterly results of JPMorgan, Citigroup, and Wells Fargo. Meanwhile, the US dollar weakened due to softer inflation data and lower Treasury yields, resulting in between 0.7% and 1.5% gains for the euro, pound, and Australian dollar. The Japanese Yen and CNH lagged, seeing only modest gains against the dollar. The Hang Seng Index surged 2.6% on improved sentiment towards Chinese interest stocks.
Equities were bolstered by another set of softer inflation data as the June PPI slowed to 0.1% Y/Y, marking its slowest growth since Aug 2020. The S&P 500 gained 0.9% to reach 4,510, while the Nasdaq 100 surged 1.7% to reach 15,571. The charge higher was led by mega-cap tech companies, with Nvidia (NVDA:xnas) and Alphabet (GOOGL:xnas) each surged 4.7%. Amazon (AMZN:xnas) also saw a gain of 2.7% despite its Prime Day Sales only growing by 6.1% Y/Y, falling short of the anticipated 9.1% growth. PepsiCo (PEP:xnys) rallied 2.4% after reporting strong Q2 results and raising its full-year guidance. Today's main focus will be on the quarterly results of JPMorgan (JPM:xnys), Citigroup (C:xnys), and Wells Fargo (WFC:xnys).
US Treasuries extended the post-CPI rally after a softer PPI report, with yields falling around 12-13bps in the front ends and the belly of the yield curve. The 2-year yield finished 12bps lower at 4.63% while the 10-year yield shed 9bps to 3.76%. A poorly received 30-year auction, awarded at 2bps cheaper than the level at the bidding deadline and a relatively low 2.4x bid-to-cover ratio. The yield curve continued to steepen, seeing the 2-10 year steepened by 3bps to -87. The 3-month SOFR interest rate futures contracts for H2 2024 ad H1 2025 saw around 20bps decline in yields.
The Hang Seng Index soared by 2.6%, extending its winning streak to 4 consecutive days, fueled by positive remarks made by Premier Li Qiang regarding the platform economy on Wednesday. This continued to boost internet stocks and improve market sentiment. The Hang Seng Tech Index experienced a remarkable surge of 3.8%. Notably, internet and healthcare companies led the market gains, with Wuxi Biologics and JD Health (06618:xhkg) surging over 8%, while Kuaishou ((01024:xhkg), Sensetime (00020:xhkg), and Bilibili (09626:xhkg) rose more than 7%. Conversely, profit-taking was observed in EV stocks, and banks struggled to keep up. Despite the larger-than-expected declines in China's exports and imports in June, the market response remained muted. Southbound flows resulted in a modest net selling of HKD0.3 billion.
Moving on to A shares, the CSI300 index gained 1.3%, driven by the performance of media, telecommunication, semiconductors, electronics, and beauty care stocks. Northbound flows had a net buying of RMB13.6 billion.
The US dollar continued to weaken, dragged down by softer inflation data and lower Treasury yields. The dollar index (DXY) decreased by 0.7%. EURUSD rose around 0.9% to reach 1.1226 and GBPUSD gained 1.1% to 1.3136. AUDUSD surged by 1.5% to 0.6890. The Japanese Yen was a laggard, gaining only 0.3% against the dollar to 138.05 overnight in New York trading. This morning in Asia, USDJPY broke below 138 to trade down to 137.87 as of writing. CNH also lagged, gaining 0.2% against the dollar to trade at 7.1530 on the back of a 12.4% Y/Y decline in exports in China.
The US PPI increased by 0.1% M/M in June, below the median forecast of 0.2%. For May, the PPI was revised downward from -0.3% to -0.4%. On a year-on-year basis, the PPI rose by 0.1% compared to the median forecast of 0.4%. May's figure was also revised downward from 1.1% to 0.9%. Excluding food and energy, the PPI increased by 0.1% M/M in June and 2.4% Y/Y. The median forecast for June was 0.2% M/M and 2.6% Y/Y. Both May's figures were revised downward to 0.1% (from 0.2%) and 2.6% (from 2.8%), respectively. Overall, the report indicates a soft trend and potentially reinforces a disinflationary outlook.
In contrast, initial jobless claims for the week ending July 8 came in at 237,000, which was lower than the median forecast of 250,000. The previous week's reading was revised to 249,000.
Export growth decelerated to -12.4% year-on-year (Y/Y) in June, a decline from -7.5% in May and lower than the projected median forecast of -10.0%. Similarly, import growth declined to -6.8% Y/Y in June, compared to -4.5% in May and below the median forecast of -4.1%. These discouraging export and import figures suggest sluggish economic performance in China.
JPMorgan, Citigroup, Wells Fargo, and State Street are scheduled to report their quarterly results today. Investors will closely monitor the potential rise in deposit costs for banks, including the larger ones, as they compete with money market funds for deposit funding. Higher deposit costs could exert downward pressure on net interest margins and consequently impact profitability. Investors will also keep a close eye on these banks' exposure to the troubled commercial real estate sector. Saxo’s Head of Equity, Peter Garnry, noted in this article that US banks are going into the Q2 earnings season with very low expectations as earnings estimates have not meaningfully recovered since the US regional banking crisis back in March. Now the question is whether the results from JPMorgan, Citigroup, and Wells Fargo later today can beat estimates. Our view is that the market has gotten too negative on banking stocks and that strong net interest income will surprise investors, offsetting the weakness in capital markets.
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