Market Insights Today: Softer US Core PCE, ISM Manufacturing Index entering the contractionary territory – 2 December 2022

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) finished Thursday flat after softer economic data

U.S. stocks fluctuated between modest gains and losses and finished the session nearly flat. Investors were weighing the decline in bond yields resulting from the softer Core PCE prints and the ISM Manufacturing Index entering into the contractionary territory and the concerns about a contraction in manufacturing activities. Eight of the 11 sectors within the S&P 500 were lower with the exception of communication services, healthcare, and information technology which registered modest gains. Salesforce (CRM: xnys) dropped 8% after the enterprise software maker reported an earnings miss, a weak outlook, and CEO resigning. Dollar General (DG:xnys) shed 7.5% on disappointing results and an outlook cut. Snowflake (SNOW:xnys) gained 7.8% on an earnings beat. Netflix (NFLX:xnas) gained 3.7% on news that the company is expanding a program to seek comments from preview audiences.

US treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) fell on softer PCE and ISM Manufacturing

A softer core PCE at 0.219% M/M (vs consensus 0.3%; Sept: 0.463% and 4.984% Y/Y in October (vs consensus 5.0%; Sep 5.182%), together with the slide of the ISM Manufacturing Index to 49.0 triggered buying in treasuries. The 2-year yield dropped 8bps to 4.23% and the 10-year yield was 10bps richer, closing at 3.50%.  The long-end outperformed as the 30-year yield fell 14bps to 3.60%. Fed Governor Michelle Bowman echoed Powell’s “somewhat higher” rhetoric as she said that “expectation would be that we ould have a slightly higher rate than I had anticipated in September”.

Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg) gained on a less hawkish Powell and more signs of China preparing to ease Covid restrictions further

Hang Seng Index climbed 0.8% and CSI300 Index gained 1.1% following the less-hawkish-than-feared speech from the U.S. Fed Chair Powell overnight and China’s Vice-Premier Sun Chunlan, who is in charge of containing the spread of Covid-19, acknowledged in a pandemic control export workshop that the Omicron variant is less deadly. China is reportedly instructing local authorities to get 90% of the population over 80 years old vaccinated in two months. Caixin China PMI Manufacturing came in at 49.4 in November, above the consensus estimate of 48.9 and October’s 49.2. EV maker XPeng (09868:xhkg) jumped 12.8%. See our update here on a brighter outlook for A shares in 2023, supported by the trend of credit impulse.

FX: Yen gained nearly 2% to 135.40 vs the dollar on lower US bond yields and a BOJ board member calling for a review of Japan’s monetary policy

The Japanese Yen gained almost 2% to 135.30 versus the dollar as U.S. bond yields fell on a less hawkish Powell and Naoki Tamura, a Bank of Japan board member said that “it would be appropriate to conduct a review at the right time, including the momentary policy framework and inflation target”.

What to consider?

October U.S. Core PCE softer than expectations

The U.S. Core PCE decelerated more than expected to 0.219% M/M (vs consensus 0.3%; Sept: 0.463% revised), and 4.984% Y/Y in October (vs consensus 5.0%; Sep 5.182%). The Core Services Prices excluding Housing Services sub-index, which Fed Chair Powell highlighted as the “most important category for understanding the future evolution of core inflation” in his speech at the Brookings Institution on Wednesday, moderated to 0.33% M/M in October, down from 0.48% M/M in Sep. Headline PCE came in at 0.3% M/M (consensus: 0.4%; Sep 0.3%) and 6.0% Y/Y (consensus 6.0%; Sep: 6.3% revised). 

Dropping to 49.0, the U.S. ISM Manufacturing Index entered the contractionary territory

 The November ISM Manufacturing Index dropped by 1.2 percentage points to 49.0 (vs consensus 49.7; Oct 50.2) and entered the contractionary territory. It was the lowest since May 2020. The weakness was broad-based with new orders falling to 47.2, order backlogs dropping to 40.0, employment down to 48.4, and prices paid sliding to 43.0.

U.S. job data is the key thing to watch today

The U.S. Labor Bureau of Statistics is scheduled to release the November job data on Friday. According to the Bloomberg survey of economists, the median forecasts are looking for a 200,000 increase in non-farm payrolls, down from 262,000 in October, and an unchanged unemployment rate at 3.7%. Average hourly earnings are excepted to come in at 0.3% M/M (vs Oct 0.4%) or 4.6% Y/Y (vs Oct: 4.7%)

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