Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: With FOMC meeting minutes out and two Fed speakers to stand up, the USD is on watch along with equities that could be at risk of taking a haircut. Any hint of more hawkish comments could spark a knee-jerk reaction to the upside in the USD, which means equities could move into a risk-off mode. Focus is also on NZD with RBNZ poised to hike by 0.75%. The NZDAUD is worth watching given the RBNZ is hiking harder than the RBA can, which theoretically supports NZDAUD. In China, attention will be on how local authorities respond to outbreaks and how commodities respond. Companies that make most of their revenue from China are also in focus like Fortescue Metals (FMG). Plus why buy now pay later equities are again on notice. And the Saxo Strats 2022 World Cup Predictions are here.
The FOMC minutes from the November 2 meeting are scheduled to be released on Wednesday, just ahead of the Thanksgiving holiday. The key message delivered by Powell at this meeting was that the pace of rate hikes will slow down as needed, and that will likely remain the highlight of the minutes as well. However, Powell managed to deliver this message hawkishly at the press conference, but the risk from the minutes remains tilted to the dovish side. There is likely to be little consensus about whether the rates are in restrictive territory or there’s still room for that, and the divide within the committee remains key to watch as investors remain on the edge to expect a Fed pivot sometime in 2023. We have heard multiple Fed speakers over the past week, after a significant downside surprise in US CPI prompted a move lower in Fed’s terminal rate projections and fuelled significant easing of financial conditions as equity and bond markets rallied and the US dollar weakened. Waller and Bullard have tilted on the hawkish side, while the usual-dove Brainard remained more balanced as she repeated the message on cumulative tightening and being data-dependent. Daly, Mester, George and Bullard will be on the wires this week.
The economic calendar in China is light this week. However authorities may respond to China’s first Covid-related death in almost six months and the surge in new cases, which have hit their highest levels since April last year. There is concern there could be tighter restrictions, while China implements its new 20-point tweaking covid restriction plan, aimed at minimising disruptions to people’s daily lives and the economy, while adhering to zero-Covid. Officials will find it difficult to balance this, as well as the surge in cases. As such, commodities pegged to Chinese demand are front and centre again this week. The iron ore price is lower on Monday down 4% on fears China could increase restrictions, but the key steel ingredient holds onto a gain of 23% this month. This means stocks that make most of their revenue from China are also in focus like Fortescue Metals (FMG) which is up 30% this month, after China announced a somewhat property rescue package. Oil prices will continue to remain volatile as well as global growth and China lockdowns remain on watch, and the deadline for European sanctions on Russia crude also looms.
The S&P flash PMIs for the US, EU and UK will be released in the week, and will likely test the soft landing rhetoric that has been gaining traction. We will likely see further broad-based easing in the metrics from the October prints, as consumer spending remains constrained amid high inflation and a rise in interest rates. While expectations for December remain tilted towards a downshift in rate hikes for the Fed, ECB and the BOE, the upcoming data point will be more key in determining the terminal rate pricing. Markets are now back at pricing 5% levels for the Fed, but the ECB’s pricing for the terminal rate is still sub-3% while UK’s is 4.7% with fiscal austerity being delayed.
The monetary policy decision from the Reserve Bank of New Zealand (RBNZ) will be key on Wednesday to determine the direction of NZD, which has seen strong gains over the past month from higher hawkishness. After a series of 50bps rate hikes, there are some expectations that RBNZ could deliver a 75bps rate hike this week, as inflation and labour market conditions support the case for further front-loading. Inflation has reached 7.2% YoY in Q3 – well above the RBNZ’s 1-3% target. Most members of the RBNZ shadow board also supported a 75bps rate hike. Meanwhile, the Riksbank has been lagging other G10 central banks in tightening policy and is now playing catch up after delivering a 100bp hike in September. The Riksbank is expected to deliver a 75bps hike on Thursday while another 100bps hike can’t be ruled out.
Virgin Money, which is one of the UK’s biggest banks reports earnings this week, as well as the agricultural giant Deere & Co and the PC juggernaut, Dell. Separately, as discussed in Peter Garnry’s note, the highlight may be from Kuaishou Technology and Xioami, as Chinese equities have recently rallied amid the country’s fine-tune pandemic control measures. Nonetheless, increasing regulation in the private and technology sectors have still caused headwinds. The two Chinese earnings results are not expected to be blockbusters, but their outlooks may give investors a glimpse through the curtain.
Buy now pay later (BNPL) companies could be further bruised this week, with the Australian government considering policies that could see BNPL firms subject to the same rules as credit card providers. This could not only affect Australian firms but global companies which operate in Australia, such as Block (SQ, SQ2) - which owns Afterpay and Affirm (AFRM). The Australian government is weighing up options to strengthen the BNPL Industry Code, and perhaps introduce an affordability test or put the BNPL companies under the Credit Act. Such a move would ensure BNPL companies that operate in Australia, would work within the guardrails as other credit providers. Companies to watch include Zip, Block and Affirm. Sentiment could also flow to other BNPL companies including Japan’s GMO Payment Gateway and India’s Paytm.
In this article, Peter Garnry, Saxo’s Head of Equity Strategy shows how Saxo Strats used quantitative analysis to predict the winner of the 2022 World Cup and came up with a non-consensus result: expecting the Netherlands to win.
Monday, Nov 21
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