Summary: Markets sold off yesterday in continuation of Fed Chair Powell’s blast of hawkish rhetoric at the Wednesday FOMC meeting, although a slightly softer than expected October ISM Services survey helped reverse the rise in yields yesterday and pushed back against further USD strength. As the lows for the cycle in the US equity market have now zoomed into view again, the next important event risk is today’s US October jobs report and whether it continues to drive Fed tightening expectations and with them, the US dollar higher still.
US equities declined again yesterday with mega cap technology stocks being weak, but the news that China is working on a plan to ease Covid restrictions is lifting overall equity sentiment. S&P 500 futures are trading around the 3,735 level with yesterday’s low at 3,704 being the critical support level to watch on the downside and yesterday’s open price of 3,767 being the key level on the upside. Today’s key event is the Nonfarm payrolls for October with the most important sub-release being the average hourly earnings figures as the wage pressures are what will keep inflation alive for longer.
Euro STOXX 50 (EU50.I)
More rumours in China that the country is getting closer to ease its Covid restrictions are driving equity sentiment higher in Asia with spillover into European equities. STOXX 50 futures are staging a comeback this morning up 0.6% trading around the 3,614 level with the 3,620 level being the first resistance level just above. European equity futures are also receiving some tailwinds from strong earnings this morning from Societe Generale significantly beating estimates.
Hong Kong’s Hang Seng (HSIX2) and China’s CSI300 (03188:xhkg)
Stocks in Hong Kong and the mainland surged on intensification of speculation on relaxation (not abandoning but relaxing) of the Dynamic Zero-Covid strategy, newswire stories reporting that the U.S. Public Company Accounting Oversight Board (PCAOB) has completed the first round of inspection on Chinese ADR ahead of schedule, and an article from Vice-Premier Liu He on the People’s Daily pledging to boost domestic aggregate demand. Hang Seng Index jumped more than 7% and CSI300 surged 3.5%. China Internet stocks climbed 10% to 20%, with Alibaba (09988:xhkg) up 15%, and Tencent (00700:hkxg) up nearly 10%.
FX: USD strength reversed further in Asian session overnight ahead of US jobs report later today
The US dollar posted fresh local highs only to see strength fading on a weaker than expected October ISM Services survey, which tempered the rise in yields. The US dollar weakened further overnight, with USDCNH correction particularly sharply even after a weaker than expected fixing of the onshore CNY rate that the CNH tracks, suggesting improved CNH sentiment. The critical next test here after Fed Chair Powell’s blast of hawkish rhetoric at the FOMC press conference and the ensuing jump in US treasury yields is today’s US October jobs report, with an eye not only on the payrolls change data (expected around +200k after +263k in September) but also on the Average Hourly Earnings (more below).
Gold (XAUUSD)
Gold trades higher on short covering after once again finding support in the key $1615 area. The bounce being supported the dollar and US Treasury yields both pausing their advances following a weaker than expected October ISM Services Survey. Also supporting the price is a further inversion of the yield curve signaling increased risks of an economic slowdown. The benchmark 2-10 year Treasury yield spread has risen to a four-decade extreme at –57 basis point. Having returned to safer ground the market will be watching the incoming economic data, starting with US payrolls today. Support as mentioned at $1615 while the first key upside challenge awaits in the $1675-80 area where we find a recent high, the 50-day moving and trendline from the March high.
Crude oil jumped to a one-week high overnight, thereby reversing the shallow dip that followed the hawkish FOMC meeting on Wednesday. Just like earlier in the week, the market is once again responding to rumours on social media that China may change its Covid zero policy. A change is increasingly a question about when, not it, and once it happens several key commodities look set to receive a boost from the prospect of a pickup in demand from the world’s top consumer of raw materials. In addition, the market is trying to weigh the bullish implications of the OPEC production cuts and EU sanctions on Russian crude next month against a global economic slowdown. Brent resistance at $97.25 and $98.75 while WTI, having broken above $90, may look at $93.64 next.
Cotton, down by more than 50% since May on worries about the health of the global economy and with that demand for garments from consumers, has bounced 16% since last Friday. Despite renewed dollar strength weighing on other agriculture commodities cotton has bounced on signs China’s yarn production seems to be picking up. A story supported by weekly US export sales to China showing a 98% jump from a year ago.
The short end of the curve remains just below the highs for the cycle posted yesterday, with the 2-year yield trading near 4.70% and peak Fed expectations for next year near 5.15%, while the US 10-year treasury yield benchmark rise was tempered yesterday by a slightly weaker than expected October US ISM Services survey, rolling back lower toward 4.14% this morning from a 4.20% high. The next test for treasury yields is today’s October jobs report, with strong numbers likely lifting the entire curve higher. For the 10-year yield, the focus is on the cycle highs at 4.34%. Next Thursday’s October CPI release will be the next nail-biter for US treasuries and all markets.
The BOE hiked by 75 bps to 3%, as expected by the consensus, but strongly pushed back against expectations for the scale of future moves, saying that the terminal rate priced in currently by the markets would induce a two-year recession. There were also two dovish dissenters at the meeting, one calling for 50 bps rate hike and another for a mere 25 bps. New forecasts were also released, which gave a particularly grim outlook for the economy, looking for a GDP print of -0.5% QoQ in Q3 2022 vs -0.1% expected in September. The inflation forecast now shows a peak around 11% in Q4, which is marginally hotter than the prior meeting’s projection. Sterling was crushed lower, having already fallen heading into the meeting, and traded as low as 1.1150 in GBPUSD and as high as 0.8743 in EURGBP, the latter a huge reversal after the pair threatened support.
There was a slight decline in initial jobless claims to 217k from previous 218k, coming in marginally below the expected at 220k. Still, the US labor market remains tight despite some signs of cooling and continues to provide room to the Fed to continue its tightening cycle. Meanwhile, the ISM services index fell more than expected to 54.4 in October from 56.7 previously, however the prices paid gauge increased by 2% pts to 70.7 and remains elevated.
The French bank is following the rest of the industry beating estimates with Q3 net income at €1.5bn vs est. €1bn and revenue at €6.8bn vs est. €6.3bn. The CEO says that he sees a –2% recession in Europe in 2023.
With expectations split between a 25 or 50bps rate hike, Norges Bank took the dovish path as well despite a deteriorating inflation outlook. However, the Committee continues to place emphasis on the growth situation writing "there are signs that some areas of the economy are cooling down" and acknowledging the tightening effect that the higher policy rate is beginning to exert. For the December gathering, the Committee points to a further hike being likely.
Over the past few days, several European governments announced new measures to limit the increase in energy prices. In Germany, the gas and electricity price brake has been finalized with gas at 12 cents and electricity at 40 cents for households and 13 cents for industrial firms. According to the government, €13bn in total will be made available to further support SMEs and service providers such as hospitals. In Poland, the President signed on Wednesday into law the government’s bill to cap coal prices at 2,000 zloty per tonne for households and electricity prices at 693 zloty per MWh for households (785 zloty per MWh for certain other entities, with certain usage limits). In France, the government mentioned in the draft budget bill for 2023 that energy subsidies will remain in place…until 2027. This confirms the energy crisis is structural and here to stay for long. The fiscal « whatever it takes » will not disappear overnight. But expect that at one point taxation will increase significantly to finance such a high amount of fiscal stimulus.
Dutch TTF benchmark gas has lost 50% of its value during the past two months and the combination of lower prices and congested terminals have resulted in cargoes starting to be diverted away to other destinations. A very mild beginning to the heating season has seen gas demand across the continent plummet, thereby lifting storage closer to full. Four cargoes bound for the region changed course to Asia since October 20, while another shipment has diverted to Colombia, according to Kpler via Bloomberg.
The week may end with further volatility today on any surprises in today’s US jobs and earnings data. The October Nonfarm Payrolls Change is expected around +200k after a +263k in September, while the unemployment rate is expected to tick higher to 3.6% (the cycle- and modern record low unemployment posted in July and September has been 3.5% and is determined by the separate and mroe volatile household survey, where the participation rate is important to watch as well in calculating the rate). Perhaps most importantly: the October Average Hourly Earnings data is expected to come in at +0.3% MoM and +4.7% YoY. The latter would be a low since the summer of 2021. Significantly surprises in the earnings data in either direction would likely drive a large market reaction.
US mid-term elections next Tuesday
Pundits suggest that the Republicans have very strong odds of flipping the House of Representatives in their favour, while the odds look finely balanced for whether the Senate ends retaining the slimmest of Democratic majorities. Republicans taking both houses has few immediate ramifications, as US President Biden has the presidential veto, but a stronger than expected Democratic showing that somehow sees them retaining the House and strengthening their Senate majority would be a game changer – opening for more policy dynamism from the US over the next two years rather than the expected lame-duck presidency. Uncertainty is high as pollsters have had a hard time gathering accurate indications for the election results since Trump’s victory in 2016.
Earnings to watch
Today’s earnings calendar is light in the US with only Duke Energy being one of the larger earnings releases to watch and could be interesting given the recent acceleration in M&A activity in the US utility sector. Analysts will be watching whether Duke Energy is getting along in its review and possible sale of its $4bn portfolio of solar and wind assets.
Economic calendar highlights for today (times GMT)
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.
