Summary: The 8-minute speech from Powell focused on one message: no pivot to easing in 2023. The hawkish remarks sent U.S. equities sinking the most since June and down more than 3% across major indices. Policymakers in the ECB also sent out hawkish comments and brought a 75 basis point hike to the table at the September ECB meeting. The U.S. and China regulators announced a deal on audit work papers and removed for the time being the risk of compulsory delisting of Chinese companies from U.S. bourses.
U.S. equities sank last Friday after Powell spent all his Jackson Hole speech on one thing: pushing back on the market’s speculation that the Fed would pivot and start easing next year. The tech-heavy Nasdaq dropped 4.1%, leading the charge lower, Alphabet (GOOG:xnas) -6.4%, Amazon (AMXN:xnas) -4.8%, Nvidia (NVDA:xnas) -9.2%. Apple (AAPL:xnas) fell 2.8% after the U.S. Department of Justice announced working on a potential antitrust case against the company. S&P 500 had its worst day since June and plunged 3.4%, Dell Technologies (DELL:xnys) -13.5%, HP (HPQ:xnys) -8.9%. The post-Powell speech selloff capped off a two-week losing streak of the markets and turned major indices’ performance in August into the red. Earlier in the week, the market sentiment was dampened by downbeat comments from the management of retailers on a glut of inventory and plans to cut prices.
After Fed Chair Powell’s hawkish comments about the need to keep raising rates until inflation is under control regardless of pains incurred to the economy and employment, the U.S. yield curve twisted and flattened, with the 2-year to 5-year yield rising by 3bps to 3.37%, 10-year nearly unchanged at 3.04%, and the 30-year yield falling by 5bps to 3.19%. The money market continued to unwind the 2023 rate cut bet and the SOFR Dec 22-Dec 23 (SR3Z2 vs SR3Z3) spread narrowed to -24bps. Weakness on the front ends began even before Powell’s comments as the market took notice of the ECB’s readiness to consider a 75bp rate hike in its meeting in September due to a deterioration in the inflation outlook.
Hang Seng Index, +1% last Friday and +2% for the week staged an impressive bounce from the trough of a 2-month losing streak on Thursday and continued to charge higher on the back of reports that the U.S. and China regulators were reaching a deal to avoid the delisting of Chinese companies from U.S. bourses due to disagreement on access to audit work papers. Later on Friday after the Hong Kong market close, the U.S. and China regulators separately announced that an agreement had been signed and released some details. Chinese ADRs opened higher in the U.S. session but finished the day 0.7% lower as being dragged down by the sharp decline in the U.S. equity market. CSI 300 was little changed last Friday and was down 1% for the week. With U.S. index futures continuing to decline this morning in Asia, the markets’ focus today is likely to be shadowed by the development in the U.S. markets rather than much follow-through from the confirmation of the U.S.-China deal on audit working papers.
The dollar continued its run higher in the early Asian hours on Monday after a hawkish tone from Fed Chair Powell on Friday resulted in some volatility but eventual dollar bid. AUDUSD was the weakest in the Asian morning, sliding below 0.6900 amid volatile commodity prices. USDJPY broke above 138 to 1-month highs and USDCNH surged to 6.9000+ levels. EURUSD ended last week below parity and slid further lower to 0.9936 this morning with a tough week ahead as Nord Stream 1 maintenance will likely cause a step up in energy supply concerns. With corporate month end on Monday, and a UK holiday, the scope for further dollar gains remains.
Crude oil prices ended last wee in gains on supply concerns taking centre stage again, primarily with Saudi Arabia flagging the risk that OPEC+ may cut production to stabilise volatile markets. Demand picture stabilized, and higher gas prices increased the gas-to-fuel switching demand. But oil prices eased in the Asian morning session with Brent futures back at $100/barrel and WTI futures below $93. A warmer winter in the early weeks is putting a lid on demand, and hawkish central bank messages have also hinted at slowdown concerns. Meanwhile, OPEC+ member states, including Iraq, Venezuela and Kazakhstan, suggested readiness within the 23-strong oil producing alliance to intervene and restore balance in the oil market. This is building up concerns on a potential OPEC cut at its Sept 5 meeting.
US corn futures rose to a fresh 2-month high in early Asian hours, following last week’s gains supported by concerns that hot and dry weather in the Midwest during the final crop development period may limit the production outcome. USDA’s crop progress report found a 2% decline in the share of the crop rated good or excellent, with 55 percent of fields falling in those two categories. The rating was a new five-year low for this time of year and the second lowest rating since the drought year of 2012. This comes on top of slow shipments from Ukraine and drought in China.
Fortuecue Metals (FMG) posted a 40% drop in full-year profits. Despite posting record shipments to China, the steep declines in iron ore prices saw the company record a A$6.2 billion profit, down from the A$10.35 billion last year. The result still marked Fortescue’s second-highest profit on record, with the company to pay a final dividend of A$1.21 per share, taking the total payout to A$2.07 (which is a 75% payout on NPAT).
Fortescue sees iron ore shipments being 187m-192m tones in the year ahead (that's another record). Fortescue also overhauled its management and wants to accelerate its push into clean energy. Its clean energy business, Fortescue Future Industries aims to produce an initial 15 million tons a year of green hydrogen by 2030, to help sectors including heavy industry and long-distance transport, decarbonize. $600-$700 million will be spent on clean energy in the coming financial year. As we covered last week in our BHP interview, iron ore demand is likely to slow over the coming 30 years (that’s where Fortescue’s income comes from). Meanwhile, the world requires double the amount of green metals. So the question remains; can Fortescue diversify its business in time? Fortescue’s shares are up 21% from their July low, with investors hoping China infrastructure stimulus will support iron ore demand and boost the company’s earnings.
While Powell still stayed away from clearly defining a rate path or the expected terminal rates for the Fed, his strong message did suggest that the fight against inflation is far from over. Powell reiterated that the decision on September 21st on whether the Fed will lift rates by 50bps or 75bps will be driven by the “totality” of data since the July meeting. That puts a great deal of emphasis on the US jobs report due on September 2nd, and the US CPI report due September 13th. There was also some emphasis on rates being held at the peak rate for some time, but there isn’t a substantial change to the market’s expectation of the Fed path yet, with cuts still seen for next year by the money markets.
Inflation remains the overarching theme in all the Fed talk, and no comfort is being taken from the softening in July inflation. Mester (2022 voter) accepted Fed hasn’t reached neutral rates yet, and said that rates need to go above 4% and held there for some time. Bostic (2024 voter) also suggested a higher terminal rate of 3.5-4.75% compared to what was reflected in the June dot plot, and said rates need to be held there for some time and rate cut talks are premature.
Market chatters about a deal between the U.S. and China regulators regarding the allowance to the U.S. regulators access to audit work papers of the auditors of Chinese companies listed on U.S. bourses first emerged last Thursday and the deal was announced by the U.S. and China regulators on Friday. According to the Public Company Accounting Oversight Board (PCAOB), the agreement gives the U.S. regulator, “complete access to the audit work papers, audit personnel, and other information [the PCAOB] need[s] to inspect and investigate any firm ‘the [PCAOB] choose[s], with no loopholes and no exceptions. But the real test will be whether the words agreed to on paper translate into complete access in practice”. On the other hand, in its announcement and Q&As with reporters, China Securities Regulatory Commission emphasized “the principle of reciprocity” and that “the two sides will communicate and coordinate in advance to plan for inspections and investigations”. The materials such as audit work papers that the U.S. regulator need[s] access to will be obtained by and transferred through the Chines side. The Chinese side will also take part in and assist in the interviews and testimonies of relevant personnel of audit firms requested by the U.S. side.”
Meituan (03690:xhkg) reported a 16% YoY growth in revenues to RMB 51 billion, above market expectations across segments better performance. Adjusted net profits turned positive to RMB 2.1 billion versus a loss of CNY 2.2 billion in Q1 and analyst consensus of an over RMB 2 billion loss. The company’s food delivery business a strong recovery and the management said that the recovery continued into July and August, with order volumes rising in low-teens YoY in July and at about 20% YoY in August month to date.
Lower pump prices cooled price pressures in July, and this has been re-confirmed by the PCE print on Friday. Headline came in at 6.3% YoY (vs. 6.8% expected) while core was at 4.6% YoY (vs. 4.7% expected). The market reaction to these softer numbers was however restrained as the hawkish message from Powell at Jackson Hole took the limelight. The magnitude of the September rate hike still remains a coinflip, but the Fed members have refused to take comfort with the softer CPI print and continue to push for an aggressive fight against inflation.
A host of ECB speakers on the weekend continued to push for aggressive rate hikes to fight inflation. Schnabel, speaking at Jackson Hole, said rates must be raised, even into a recession. Kazaks also emphasised on further front-loading of rate hikes after the 50bps rate hike announced by the central bank in July. In fact, there were hints of a 75bps rate hike. There were also some concerns on a weaker EUR, as that fuels further inflationary pressures and the benefit of cheaper exports is diminished by supply chain disruption. Villeroy said that the neutral rate should be reached before the end of the year while Kazaks said he would get there in the first quarter of next year.
Australian retail sales data showed how resilient the Aussie consumer is, with retail spending rising for the 7th straight month, up 1.3% vs the +0.3% consensus expected. As electricity bills in Australia are at a record high, and likely to rise, people are layering up this Aussie winter, so retail spending surged to another new record high, A$34.7 billion in July. The Australian winter spending spree saw Department Stores sales surge 3.8% and clothing (footwear and personal accessory retailing) rocket up 3.3%. Australians are living through one of their coldest winters in history; as such spending rose the most in the coldest climates; Victoria and the ACT. Yet spending at cafes and restaurants remained strong, surging to yet another brand new record high (A$5 billion in July), up from 1.8% from the prior month. All this, is despite a softening Australian housing market and the quickest succession of rate hikes in history.
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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.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
