Summary: U.S. equities and bonds faded the initial hype after softer CPI prints and ended the volatile session with muted gains. USD sold off and USDJPY dipped below 135 at one point. Crude rallied for the second day in a row, rising 3% as supply issues remained. A 50bp hike at today’s FOMC is cemented and the market’s focus will be on the dot plot about the Fed’s rate projections for 2023 and Powell’s comment at the press conference.
After a strong opening, soaring at much as 4% in the S&P 500 and 3.9% in Nasdaq 100, the U.S. market spent the rest of the day pulling back from the intraday highs. S&P500 finished the volatile session at 4019.65, up 0.7%, and Nasdaq 100 closed at 11834.21, 1.1% higher. A large portion of the early surge was in ETFs. A huge USD3.9 trillion notional value of options expiring this Friday may tend to pin the benchmark S&P 500 as well. All sectors with the S&P 500, except consumer staples, advanced. The interest rate-sensitive real estate sector was the top gainer, rising 2%, which was followed by the energy sector which was boosted by a 3% rise in the crude oil price. Meta Platforms (META:xnas) gained 4.7% as Republican Senator Rubio is seeking a pass a bi-partisan bill to ban Tik Tok from operating in the U.S. Moderna (MRNA:xnas) soared 19.6% on news of positive trial data from an experimental skin cancer vaccine in collaboration with Merck (MRK:xnys). Merck climbed 1.8%. Airlines were notable laggards on Tuesday. A 3% drop made airfares one of the largest items contributing to the softness in the CPI report. In addition, Alsska Air (ALK:xnys) warned about slowing corporate travel and JetBlue (JBLU:xnas) which was more leisure travel-focused, mentioned weaker bookings in Q4.
Immediately after the release of the soft CPI data which increased the chance of further downshift to a 25bp hike instead of 50bps in February, the whole yield curve shifted down with the 2-year at one point shedding 24bps to 4.13% and the 10-year 20bps richer to as low as 3.41%. The money market curve now prices the terminal rate at around 4.82% in 2023, down from 4.98%. The long-end however did not manage to keep their gains after some large block selling in the 10-year contracts and a weak 30-year auction. The 10-year gave back nearly half of the gain to close the session 11bps richer at 3.50%. The 2-10-year curve steepened to 72bps. The yield on the 30-year long bonds finished the day only down 4bps at 3.53%.
Hang Seng Index advanced by 0.7% after Hong Kong lifted all travel restrictions on visitors arriving in the city and relaxed the QR code scanning requirements for residents. Catering and retailer stocks outperformed. Cosmetic chain operator Sa Sa (00178:xhkg) jumped 14.2%. Local developers and commercial landlord stocks rose by 3% to 4%. Cathay Pacific climbed 3.2%. Macau casino operators gained between 1% and 4%. Shares of the semiconductor industry jumped on media reports suggesting that the Chinese Government is going to spend RMB 1 trillion to support the industry. SMIC (00981:xhkg) gained 9.7% and Hua Hong Semiconductor (01347:xhkg) soared 17.4%. In A-shares, the CSI300 index was little changed. Farming, textile, and transportation stocks outperformed.
The US dollar sold off on Tuesday following the softer November CPI print in the US saw US yields plunge lower. AUDUSD was however seen paring some of the gains in early Asian trade and slid below 0.6840 amid concerns on China’s Covid cases ramping up further which also led to the postponement of the Central Economic Work Conference. USDJPY took a brief look below 135 after the CPI release but some of the move was erased later. EURUSD surged to 1.0673 and remains supported above 1.0620 ahead of Fed meeting today and ECB meeting tomorrow.
Crude oil prices gained further on Tuesday after a softer-than-expected US CPI print for November spurred hopes that the Fed will slow down its pace of rate hikes. Supply side issues were also supportive. TC Energy Corp has yet to submit a restart plan for the Keystone pipeline following a leak last week, and plans have been delayed by bad weather. Russia’s President Putin is planning to sign a decree banning the sale of Russian oil through any contract that specifies the recipient as a nation that joined the G7 price cap. OPEC urged caution as its members implement the recent 2mb/d production cut. It now expects to see a finely balanced market in Q1 2023, instead of the deficit implied by its forecasts a month ago. It sees demand increasing by 2.2mb/d next year to average 101.77mb/d. Demand concerns may pick up further in Asia today as Covid cases in China continue to rise and impede the reopening trade, but caution will prevail ahead of Fed meeting later today.
The November CPI report was cooler-than-expected across the board, highlighted by the headline cooling to 7.1% from 7.7% (exp. 7.3%), with a M/M gain of 0.1%, slowing from the prior 0.4% and beneath the expected 0.3%. Core metrics saw Y/Y print 6.0% vs 6.3% prior and beneath the 6.1% expectation, while the M/M saw a 0.2% gain, lower than the prior and expected 0.3%. The market pricing has shifted towards a 25bps rate hike for February after we potentially get a 50bps today, while the terminal rate forecast has drifted lower to 4.82%. If we dig into the details, the disinflation is clearly driven by goods and energy, while services prices continue to rise further. This means wage pressures will continue and provides room for the Fed to continue to beat the drum on rates being higher-for-longer.
The Fed is expected to lift its Federal Funds Rate target by 50bps to 4.25-4.50%, according to the consensus as well as the general commentary from Fed officials signalling a downshift in the pace of rate hikes. The updated economic projections will also be released, and are expected to show a higher terminal rate than the September projections (4.6%), as has been alluded to by Chair Powell at the November FOMC and in remarks made in December. Easing financial conditions and expected China stimulus could mean Fed continues to chase the inflation train from the back into the next year as well, so Powell’s press conference remains key to watch. There will have to be a lot of focus on pushing out the rate cuts of ~50bps that are priced in for next year, and emphasise that the Fed will not ease prematurely if Powell and committee want to avoid further easing of financial conditions.
According to Bloomberg, which cites unnamed sources, the Chinese Communist Party is postponing the Central Economic Work Conference that was previously scheduled for this week due to the spread of Covid-19 inflections in Beijing. No signs, however, show that the Chinese authorities are reversing the recent trend of relaxing pandemic restrictions.
New Zealand Treasury Department issued 2022 half-year economic and fiscal update, forecasting three quarters of negative GDP growth from Q2 2023. Overall, the forecast calls for 0.8% contraction in 2023. Still, comments from RBNZ this morning suggested inflation focus will continue to drive more rate hikes, even as spending slows and unemployment levels increase as more people join the workforce over the coming year, partially helped by improving migration levels.
Sentiment among Japan's large manufacturers deteriorated slightly in the three months to December amid concerns over the global economic slowdown. The main index for sentiment among large manufacturers was +7, compared with +8 in Q3, according to the Bank of Japan's quarterly Tankan survey. Non-manufacturers still took a more positive view as the economic reopening gathered momentum, and large non-manufacturer index rose to 19 in Q4 from 17 previously.
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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.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
