Summary: A chorus of hawkish Fed speak and weakening US PMI data, together with global tightening concerns elevating further last week, continued to weigh on risk sentiment. The Japanese yen will remain in focus amid BOJ policy review chatter as the central bank meets this week. Musk’s Twitter saga continues, weighing further on Tesla. China’s reopening concerns also remain as the Covid waves spreads rapidly, but a steady economic growth focus by the authorities is seen. Oil and gold start the week being bid.
On Friday, the U.S, stock market continued to slide for the third day in a row since Fed Chair Powell’s hawkish leaning comments on the post-FOMC presser on Wednesday. Remarks from several other Fed officials reiterating that the Fed may have a long way to go and may need to raise rates beyond the 5.1% peak projected added to the risk-off sentiment. S&P 500 shed 1.1% and Nasdaq 100 declined 0.9%. All sectors within the S&P 500 lost, with real estate, consumer discretionary, and utilities falling the most. Ford Motor (F:xnys) was the biggest losing stock within the S&P500. The automaker dropped nearly 7% on Friday after it announced a price increase for its electric truck due to rising material costs and supply chain issues. Tesla (TSLA:xnas), falling 4.7%, was the second biggest laggard with the Nasdaq 100, following Moderna (MRNA:xnas) which declined 6.7%. Adobe, gaining 3% after reporting an earnings beat, was the best performer within Nasdaq 100, followed by Meta (META:xnas) which rose 2.8% on an analyst upgrade.
The 2-year notes were well bid and finished the Friday session 6bps richer at 4.18%. The 2-year notes are now yielding not only less than the 3-month Treasury bills but also the lower bound of the Fed Fund target rate. Softer than expected S&P Global US manufacturing as well as services PMI added fuel to the demand for the front end of the Treasury curve. Hawkish comments from the Fed’s Williams, Daly, and Mester might have contributed to the selling in the long end of the curve. Yields on the 10-year notes rose 4bps to 3.48%.
Hong Kong and mainland Chinese stocks had a morning session on Friday. Hang Seng Index opened lower on the back of tumbling overseas markets overnight despite the positive news from the US accounting regulatory body removing the delisting risk of Chinese companies listed in the U.S. bourses for now. Stocks had a rally on market chatter of reopening of the border between Hong Kong and the mainland earliest next month before the gains waned and the Hang Seng Index was 0.4% higher. The front page editorial at the mouthpiece People’s Daily this morning is upbeat about growth in China but it does not catch much attention from investors. Leading Chinese property developers outperformed, gaining 2% to 6%. In A-shares, CSI300 was modestly lower, driven by profit-taking in semiconductor names and weaknesses in autos. Real estate and educational services outperformed. In the evening, a readout was released setting out the key results of the Central Economic Work Conference.
The US dollar ended last week lower again, albeit modestly, with majority of weakness against the NOK. EURUSD also took a brief look above 1.07 on ECB hawkishness but is heading below 1.06 this morning as peripheral spreads remain a concern and continue to cast doubts on how far ECB’s hawkishness can run. USDJPY had a volatile week as a drop below 135 was not maintained despite US yields remaining capped. A fresh bout of strength in coming to JPY this morning on reports of Japan PM Kishida considering a tweak in BOJ’s 2% inflation goal next year (read below). GBPUSD also reversed back below 1.2200 after a look above 1.2400 last week. AUDUSD traded close to 0.67 to start the new week, with one eye on RBA minutes due this week but another on China reopening delays resulting from a large number of workers calling in sick.
Oil prices started the week on a firmer footing, with WTI rising towards the $75/barrel mark and Brent heading back towards $80. While there are unconfirmed reports of massive number of cases and fatalities in China from the spread of Covid, the government’s official message continues to stress upon the need to expand consumption as the key economic priority for 2023. This helps paint a better demand outlook for oil, as global demand slowdown concerns continue to mount. Moreover, it was reported that the US is starting to replenish the Strategic Petroleum Reserve (SPR), starting with a 3-million barrel, fixed-price purchase.
A number of Fed speakers on Friday continued to highlight the case for higher-for-longer inflation as investors give too much weight to peaking inflation in the US. Fed’s Daly (non-voter in 2023) said she was prepared to hold peak rates for more than 11 month if necessary, and highlighted the core services ex-housing inflation which is still quite elevated. Mester (non-voter in 2023) said she expected the Fed to hike more than its median forecast, and the Fed will need to maintain rates for an extended period once hikes are done. Williams (2023 voter) said it is possible that Fed hikes more than terminal rate forecast.
Flash December PMIs for the US slumped to fresh lows, sending more warning signals about the economic momentum going into 2023. Manufacturing PMI came in at 46.2, below last month’s 47.7 and the expected 47.8, while the services PMI receded to 44.4 from 46.2 previously. Markets have however understood the Fed’s message on hiking rates into a possible recession, and do not take bad news as good news anymore.
Reports suggested that Japan PM Kishida plans to revise a ten-year-old accord with the BOJ and will consider adding flexibility to the agreement's 2% price goal. Kishida will discuss the matter with the next central bank governor, who'll take office in April. Furthermore, some more comments from officials this morning continued to signal that the authorities may be considering a policy review in 2023, and more hints are awaited at the BOJ meeting tomorrow. Ex-BOJ Deputy Governor Yamaguchi said that the BOJ must stand ready to tweak YCC next year if Japan's economy can withstand overseas economic risks, while also warning that once inflation expectations become entrenched, it is very hard to control them.
The Chinese Communist Party held its annual Central Economic Work Conference (CEWC) on Dec 15 and 16 to formulate China’s macroeconomic policy frameworks for 2023. According to the readout released, the CEWC emphasized policy priorities as being economic stability and high quality of development. Fiscal policies will be expansionary and monetary policies will be forceful and precise. The focus is however more on quality than quantity and the choice of words tends to imply “best effort” rather than hard targets. Mainland economists are expecting the GDP growth target, which will not be released until the two-session meetings in March 2023, to be around 5% for 2023. While there will be supportive measures to ensure stability in the housing markets, the rhetoric of “housing is for living in, not for speculation” is once again in the readout. Domestic consumption is a key focus. In industrial policies, weak links in manufacturing technology, energy, mining, agriculture, new energy, AI, biomanufacturing, green and low carbon, quantum computing, and the digital economy are priorities. Encouragingly, the CEWC removes last year’s “preventing the disorderly growth and expansion of capital” from its readout this year and instead pledges “support to platform enterprises in leading development, creating employment, shining in competing globally” and “support the development of the private sector and private enterprises”.
The EU nations are likely to discuss cutting the gas price cap by almost a third today after the EUR275 per megawatt-hour was proposed last month. As energy crisis continues to threaten a fresh surge in inflation and growth slowdown in the region, it is also stretching government budgets to maintain popularity. But this will eventually be inflationary again, as price caps hardly work effectively.
Elon Musk is seeking new investors for Twitter at the same price he paid when he took the company private in October, Semafor reported. Musk is asking on Twitter the question that “should I step down as head of Twitter? I will abide by the results of this poll”. He said he is going reverse his prior decision to suspend the Twitter accounts of several journalist and reinstate them based on the results of a Twitter survey. Meanwhile, Musk's actions are weighing heavily on Tesla shares — and the selloff may continue.
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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.
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.
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.
