What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities plunged after a blowout employment report as it increased the odds for the Fed to stay on its course to raise rates into next year. The market however managed to recoup most of the losses with S&P 500 down 0.16% and Nasdaq 100 off 0.78% at the close. Among the constituents of S&P500, 431 companies have reported as of Friday and 53% of them reported earnings beating market consensus by more than one standard deviation. Better-than-feared earnings have been lending supports to the equity market.
U.S. treasuries sold off on a very strong employment report
The July employment report was exceptionally strong with payroll, unemployment rate and hourly earnings all surprised to the upside. U.S. treasury yields moved sharply higher right after the job data hit the wires. The front-end sold off the most as 2-year yield soared 18 basis points to 3.23%. 10-year yields climbed 13 basis to 2.83. The 2-10 year yield curve went further inverted to negative 40 basis points. The front-end treasury curve and money market rates have repriced the September FOMC with a likely 75 basis point hike.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
After spending the morning treading water, A-shares rallied strong in the afternoon and the northbound flows reversed from over USD 300 million outflow to more than USD400 million net inflow into A-shares. CSI300 closed 1.4% higher. More media reports talking about additional and front-loaded infrastructure investment and the prospect of government hangout of consumption vouchers help boost sentiment. SMIC (00981:xhkg) and Hua Hong (01347:xhkg) surged the third day in a row, rising 7.1% and 13.3% respectively on optimism of government support and potential increase in demand if domestic users of semiconductors shift from Taiwanese suppliers to local suppliers.
US Dollar gained against major currencies following a blowout job report
US dollar trade higher across the board and gained the most against the Yen, the most interest rate differential sensitive currency. As U.S. 10-year yield jumped 10 basis points, the Yen lost 1.6% to the greenback. USDJPY is trading at 135.13 as of writing.
What to consider?
A 75-basis-point hike back to the table for the September FOMC following Friday’s job data
The nonfarm payroll report surprised to the upside and showed that the U.S. added 525k jobs in July, more than doubling the 250K consensus as per the survey by Bloomberg. The previous two months together had a net upward revision of 28K. Unemployment rate fell from last month’s 3.6% to 3.5% in July, the lowest level since 1965. Average hourly earnings rose 0.5% in July, above market expectation of 0.3% and June average hourly earnings were revised up 0.1 percentage point to 0.44%. The strong hourly earnings data rebuts the peak inflation thesis and points to upside risks in inflation. The market has put a 75 basis points back on the table for the September FOMC meeting. Last Monday, we put forward the idea of shorting September 2023 3-month SOFR futures (SR3U3) at 97.20 or 2.80% yield to implement the view of rebutting the peak inflation and peak rate these. SRS3US is trading at 96.76 or 3.24% yield.
Over the weekend, Fed Governor Michelle Bowman reiterated the Fed’s duty to bring inflation down to the 2% target and said that “similarly-sized increases should be on the table until…inflation declining in a consistent, meaningful, and lasting way.”
The U.S. may go ahead with an 1% excise tax on share buyback
The Democratic Party in the U.S. is working on getting an 1% excise tax on share buyback into legislation.
China’s exports grew 18% YoY in July
In U.S. dollar terms, China’s exports grew +18% YoY in July, exceeding market expectations (Bloomberg consensus 14.1%). The growth was broadly based, +18.5% with Japan, 32% with ASEAN, +22.9% with the EU and +10.9% with the US.
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