Summary: Fed Chair Powell signaled the moderation of the tightening pace could start as soon as December and the terminal Fed Fund rate would be “somewhat higher” than the FOMC’s September projections. His tone was overall less hawkish than feared. S&P 500 rose to its two-month high and Hong Kong’s Hang Seng had its best month since 1998. Bond prices surged with the 10-year treasury yield falling to 3.61%. Crude oil and commodity currencies gained.
Fed Chair Powell signaled that the Fed would start to moderate the pace of rate hikes as soon as December and the terminal rate might just be “somewhat higher” than the September FOMC’s projections. The less-than-feared comments stirred up another round of risk-on buying in equities. The sentiment was also bolstered by more signs coming out of China on the country’s course to ease Covid restrictions gradually despite the recent outbreaks. The S&P 500 rose by 3.1% to a two-month high. All sectors within the S&P 500, led by information technology and communication services, each rising by around 5%. Nasdaq 100 surged 4.6% to 12,030. The Dow Jones Index rose 2.2% and was said to have technically entered a bull market, after rising more than 20% from is September closing low.
Yields edged up a few basis points after a mixed bag of data in the morning until Fed Chair Powell’s speech hit the wire in the New York afternoon, seeing yields reversing and yields of the 2-year up to the 5-year tumbling by more than 15bps almost immediately from the intra-day highs. The 5-year performed the best and finished the day 19bps richer at 3.74%. The 2-year yield dropped 16bps to 4.31% and the 10-year yield was 14bps lower to settle at 3.61%. Powell reiterated his well-telegraphed higher-for-longer message but did not add additional hawkish pushback as some feared. He said that it makes sense to moderate the pace of rate increases as the Fed “approach[es] the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting”. Further, his remark of terminal rate being “somewhat higher” than the Fed’s September projection was less hawkish than feared.
The Aussie market is up 12% from its October low, with commodities back in focus and rallying after the Fed signals a possibly smaller pace of rate hikes ahead. That has pressured the US dollar, with the US dollar index now down 5.4% from its peak, and that’s supported commodity prices higher, plus, as above, there is forward looking optimism on China. Locally, equites also appear supported in Australia as monthly inflation data came out weaker than expected yesterday, which supports the RBA remaining dovish and likely only hiking by 25bps (0.25%) next week. However, the important inflation read (quarterly CPI) is due early next year, which will be a more accurate reflection of price rises, and will likely show inflation in Australia is more sticky than monthly inflation read alluded to. Also consider if the best performers of late (who are all commodity companies) can continue to build momentum if stimulus continues in China’s property sector. In November, copper-gold company Sandfire (SFR) rose 45%, energy business Origin Energy gained 41% while Australia’s fourth biggest iron ore company, Champion Iron (CIA) rose 35%, with Nickel company Nickel Industries (NIC) following up 33%. So, it’s clear to say we are watching commodity companies closely as we believe the world will still struggle with the lack of tangible supply.
Hong Kong stocks surged on Wednesday afternoon after Guangzhou lifted the lockdown in four districts even when the number of new cases was still rising in the city. Hang Seng Index climbed 2.2% with consumer discretionary, consumer staples, and industrials rising the most. In the consumer space, food and beverage names surged, with Haidilao (06862:xhkg) up 15.5% and Xiabuxiabu Catering (00520:xhkg) up 10.9%. Bilibili (09626:xhkg) jumped nearly 17% on the earnings beat. The three Chinese airlines listed in Hong Kong gained around 5% each on reopening optimism. The share prices of automakers jumped 4% to 11% on speculation for an extension of purchase tax credits for petrol vehicles. EV maker XPeng (09868:xhkg) surged 16% ahead of earnings. Another EV maker, Li Auto (02015) surged 8.9%. Hang Seng finished November up more than 26%. It was the best monthly performance since October 1998 at the end of the Asian financial crisis. After Hong Kong market closed, XPeng reported Q3 results, missing analyst estimates but the share price of its ADRs jumped 46%. In A shares, CSI 300 was flat with auto names outperforming.
Lower yields drove the US dollar lower after Powell’s speech lacked any hints of keeping the door open for 75bps in December or laying out a path for rate hikes through the course of 2023. The Euro was supported by Powell's dovish speech taking EUR/USD back above 1.04, but lacked conviction as hawkish ECB bets also retreated after a softer Eurozone CPI for November. The biggest gainers were NOK and NZD, and NZDUSD broke above the pivotal 0.63 which is the 200dma. USDJPY heading lower for a test of 137 with 200dma next in sight at 134.50.
Crude oil markets extended recent gains amid signs of strong demand. US crude oil inventories fell by 12.6mbbl last week, the biggest decline since June 2019, according to EIA data. Meanwhile, Chinese authorities announced relaxation of Zero Covid policies in Guangzhou despite worsening Covid outbreak, signalling a better demand outlook as well. The lack of escalation in Powell’s speech also turned the dollar lower. WTI futures rose to $81/barrel while Brent futures rose above $85. The focus is now shifting to the weekend OPEC meeting, with some expecting a cut while others suggest a rollover of the current deal is more likely.
Silver broke above the key 22 level to its highest levels since May this year as Powell signalled that the pace of interest rate hikes will slow in December. Gold edged higher as well and finished the month up over 8%, the biggest gains since July 2020. Next key levels to watch in Gold will be the 200dma and key level at 1808 while Silver may likely be heading to the 0.618 retracement at 23.35.
Fed Chair Powell repeated his comments from the November FOMC and what we have heard more generally from the Fed speakers over the course of the month. He said it makes sense to moderate the pace of interest rate hikes and the time to moderate the pace of hikes may come as soon as December, while he added it seems likely that rates must ultimately go somewhat higher than what was thought in the September SEPs. Powell also said they have made substantial progress towards sufficiently restrictive policy but have more ground to cover and they will likely need to hold policy at a restrictive level for some time. While his comments still tilted towards the hawkish side but there was no escalation that the markets had hoped for. His comment that he does not want to over-tighten but cutting rates is not something to do soon was a slight contrast to his earlier acceptance that risk of tightening less is greater that the risk over-tightening. Fed's Cook (voter) also said it is prudent for the Fed to hike in smaller steps as it moves forward and how far the Fed goes with hikes depends on how the economy responds, overall sticking to the consensus.
The private ADP jobs report showed US payrolls rose 127,000 this month, the slowest pace in nearly two years, as wage gains moderated. Job openings also fell in October to 10.334mln from September's 10.687mln, reversing a surprise jump in the prior month but still remaining elevated, according to the JOLTS report. The biggest downside surprise came in Chicago PMI for November which came in at 37.2 against an expected 47.0, falling from a prior 45.2. While monthly surveys can be noisy, but this one is now flirting with pandemic lows and puts the focus on ISM manufacturing due today. The only ray of positive news came from the Q3 GDP release which was upwardly revised by to 2.9% from 2.6% previously.
Euro inflation slowed for the first time in 1.5 years to 10% in November from 10.6% YoY in October. ECB officials have highlighted the data will be key for their next rate decision, suggesting lower chance of another 75bps rate hike at the December 15 meeting. Still, it remains hard to say that inflation in the Eurozone has peaked. ECB members also remain broadly hawkish and suggest that the commitment to bring inflation back to target will stay.
Guangzhou, the third largest city in China and the capital of the southern province of Guangdong, removed the “temporary control areas” restrictions of several districts even though the city’s daily new cases of Covid-19 stayed at nearly 7,000. It was an encouraging sign pointing to China’s willingness to continue the fine-tuning measures that it had recently started despite the surge in new cases across the country. Speaking at a pandemic control policy workshop, Vice Premier Sun Chunlian emphasized the importance of gradually fine-tuning the pandemic control measures in response to the lower fatality of the Omicron, higher vaccination rate, and the accumulation of experience in containing the spread of the virus.
It’s the world’s first festive season not in lockdown (excluding China), so we are watching retailer shares given they will likely benefit from retail shopping rising. It’s worth watching travel and tourism companies with the market forward looking and seeing that travel-services revenue could likely continue to gain momentum. Carnival shares are up 44% from October with the company seeing some of its strongest sales since pre-covid, Royal Caribbean shares are up 83% from July. We are also watching other travel affiliated companies do well, like Boeing, which is up 48% from September, as well as airlines, such as Singapore Airlines, Qantas, Air New Zealand. However, we think although the travel and tourism sector, especially airlines, will likely see a pick-up in sales amid the seasonality, we wonder if airlines will be able to extend their share price rally into 2023 as fuel costs are not expected offer respite into 2023. This means, those larger companies or those with a wide moat, might be more in focus, as they will be more likely able to sustain the costs pressures.
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy