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Althea Spinozzi
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Market Insights Today: Softer inflation prints from France, solid JOLTS job openings report, mixed messages from the FOMC minutes – 5 January 2023
APAC Research
Summary: European and U.S. equities as well as bonds gained on a large-than-expected decline in the rate of inflation in France. Hong Kong stocks had a strong day in anticipation of more economic stimulus, support to the real estate sector, and relation on regulations over the internet sector in mainland China. The U.S. JOLTS job openings report shows the Fed has more work to do to cool off the labor market. The December FOMC minutes sent mixed signals of warning against an easing of financial conditions and concerns about two-sided risks of under- and over-tightening.
What’s happening in markets?
Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) ended higher in a choppy session
U.S. stocks had a strong start on Wednesday through the morning and then oscillated after the release of the FOMC minutes in the afternoon digesting the hawkish warnings from the Fed about an unwarranted easing in financial conditions and the dovish signal of an increasing number of Fed FOMC members being concerned about two-sided risks. S&P 500 ended the session 0.8% higher and Nasdaq 100 climbed 0.7%. The rally was broad-based as all 11 sectors within the S&P 500 gained. The interest rate-sensitive real estate sector was the best performer while the energy sector was close to flat as crude oil slid nearly 5%. Tesla (TSLA:xnas) rebounded 5%. Micorsoft (MSFT:xnas) plunged 4.4% on analyst downgrades and concerns about the company’s cloud computing business. The next key focus of investors will be the employment report this Friday.
US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) gained on softer French CPI prints, and the FOMC minutes showed more Fed officials concerned about two-sided risks
Treasuries caught some strong bids in tandem with the European bond markets that rallied on softer-than-expected CPI prints from France. The market pared some gains after a stronger-than-expected JOLTS job openings report and position squaring ahead of the release of the FOMC minutes. Yields, in particular, those in the longer-end segment, fell again after the FOMC minutes. The 10-year finished Wednesday 6bps richer to 3.68% which yields on the 2-year falling only 2bps to 4.35%. The December FOMC minutes highlighted Fed officials’ worries about “an unwarranted easing in financial conditions” due to a misinterpretation by the market of the Fed’s downshift from 75bp to 50bp hike as a pivot. Nonetheless, the minutes showed that “many participants” argued for balancing the two-sided risks of under- and over-tightening in the December meeting. Minneapolis Fed President Kashkari said in an article that he saw rate hikes “at least at the next few meetings”, leading to a terminal rate of 5.375%.
Hong Kong’s Hang Seng (HIF3) and China’s CSI300 (03188:xhkg)
Hang Seng Index rallied for the second day in a row in 2023, registering an impressive gain of 3.2% and rising to above its 250-day moving average. A pledge of fiscal expansion from China’s Finance Minister fueled investors’ optimism in more economic stimulus measures. Hang Seng TECH Index surged 4.6%, led by Alibaba (09988:xhkg) which soared 8.7% following the news that the Chinese authorities approved an increase in registered capital of the consumer finance unit of Ant Group. Shares of Chinese developers and property management services providers climbed on anticipation of state support, following the state-owned Economic Daily emphasizing the importance of the real estate sector to the economy in its editorial, a recent message from the Financial Stability and Development Committee to support “systematically important” property developers, and Asset Management Association of China’s decision to resume approvals for private equity funds investing in property projects. Longfor (00960:xhkg) and Country Garden Services (06098:xhkg) each jumped more than 11%, being the two biggest gainers within the Hang Seng Index. Sunny Optical (02382:xhkg), a supplier to Apple (AAPL:xnas), plunged 10% on analyst downgrades and a Nikkei report that “Apple has notified several suppliers to build fewer components for Airpods, the Apple Watch and MacBooks for the first quarter, citing weakening demand”. Semiconductors names were among the laggards as China was reportedly going to slow its investment push for developing the country’s chip-making industry due to pressures on its fiscal budget. In A-shares, CSI 300 finished the day little changed, with real estate and financials outperforming and weakness in semiconductors and new energy.
FX: AUD gained 1.6% to 0.6840 as China is considering resuming coal imports from Australia
The Australian dollar was the best performer among major currencies against the dollar following news headlines saying that China is considering ending its import ban on Australian coal. EUR and GBP also rebounded from the loss the day before and each up about 0.7% against the dollar. The Japanese yen was the laggard among major currencies and weakened to 132 against the dollar.
Crude oil fell nearly 5% to USD73.17
WTI crude oil fell 4.9% to US73.17 on concerns of a slowing global economy and higher-than-average temperatures in Europe and the U.S.
What to consider?
FOMC minutes warned about an unwarranted easing in financial conditions while highlighting a shift toward risk management
The FOMC minutes sent out mixed messages. FOMC participants worried that the downshift from a 75bp hike to a 50-hike would be interpreted by the market as the signal of a pivot and warned that “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability”. Nonetheless, the minutes showed that “many” participants argued for balancing two risks: the risk “insufficiently restrictive monetary policy could cause inflation to remain above the Committee’s target for longer than anticipated” and the other risk of “the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity”. That points to a data-dependent risk management approach going forward.
Fed’s Kashkari expects the Fed to raise the policy rate another 100 basis points
Saying in an article, Minneapolis Fed President Neel Kashkari said that “it would be appropriate to continue to raise rates at least at the next few meetings” and indicated that he saw the ultimate rate going 100 basis points higher to 5.25%-5.50%, in 2023. He suggests that any sign of slow progress that keeps inflation elevated for longer will warrant the policy rate potentially much higher.
Softer-than-Expected French CPI
A day after a softer-than-expected German CPI report, December CPI in France also came in softer. French December headline CPI decelerated to 5.9% Y/Y from 6.2% in November as opposed to the expectation of a rise to 6.4% Y/Y. French CPI EU Harmonized slowed to 6.7% Y/Y in December (consensus estimate: 7.3%) from 7.1% in November.
U.S. JOLTS job openings stronger than expected
U.S. JOLTS job openings declined to 10.46 million in November, above the consensus estimate of 10.01 million, from a revised 10.51 million (previously reported 10.33 million) in October. It implies that the ratio of vacancies to unemployment is 1.74, above the pre-pandemic level and the labor market will be considered by the Fed as being too tight.
U.S. ISM Manufacturing Index fell to 48.4, slightly below expectations
The ISM Manufacturing Index slid more than expected to 48.4 in December (consensus: 48.5) from 49.0 in November. New orders were weak, falling to 45.2 from 47.2. The price-paid sub-index decelerated to 39.4 in December (consensus: 42.9) from 43.0 in November.
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