Market Insights Today: S&P500 hit fresh 2022 low after Fed minutes, U.S. CPI in focus– Oct 13, 2022
APAC Strategy Team
Summary: The S&P500 hits new 2022 lows as investors await Thursday's CPI data and digest FOMC minutes. Oil fell back and gold climbed. Equity futures are suggesting a negative day of trade in Australia and APAC. Aluminum-related stocks could be a bright spark, while lithium instruments could decline. Bank of England buys 4.56 billion pounds of bonds, its biggest round of buying since the intervention began, seeing the US 10-year yields fell 5 bps to 3.90% and the US dollar lose strength after the pound jumped over 1%. We cover the biggest US stock movers and what to watch today.
What’s happening in markets?
The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) indices close in the red for the 6th day
The US major indices searched for direction awaiting US inflation data, while also parsing through the latest hawkish comments from the Fed before closing lower. The S&P500 skidded ending 0.3% down (with the index now down over 9% from its 50-day moving average), while the Nasdaq ended just 0.1% lower but almost 12% under its 50-day moving average. The Fed minutes showed Fed officials are committed to hiking rates, even as US employment slows, although the pace of hikes would be calibrated to avert “significant effects on the economic outlook”. In the S&P 500; travel stocks were the best performers collectively, after Carnival (CCL), Norwegian (NCLH), and Royal Caribbean (RCL) surged over 10% each after a series of analyst upgrades. Oil and Gas stocks were also a highlight, with investors buying the dip into oil stocks, including Valero Energy (VLO) which rose 5%, despite the oil price falling 2% (pressured by the higher US dollar).
Noteworthy US company news and moves
Moderna (MRNA) closed 8% higher, which is its biggest gain in two months after Merck (MRK) said it would ramp up its collaboration to work on a cancer vaccine. Pepsi (PEP) shares rallied 4% after the drinks giant reported better-than-expected third-quarter profits while raising its forecast for the year, seeing organic sales rise 12% (up from 10%). Also of note, even though Pepsi is paying more for commodities such as sugar, corn, and potatoes, the maker of Lay chips, Mountain Dew and Quaker Oats cereals reported earnings per share of $1.97, which was well above Wall Street estimates. Lithium giants like Albemarle (ALB) fell 7.9%, while SQM (SQM) fell 8.3% after lithium prices reportedly fell sharply in Chile.
U.S. treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) fell after PPI and the FOMC Minutes
U.S. treasury yields rose initially after stronger-than-expected PPI data but paring the rise and finished te session 2bps in the 2-year notes at 4.29% and 5bps lower in the 10-year notes at 3.90%. The September FOMC minutes suggest a hawkish Fed near-term but the hawkish may be approaching its peak. U.K. gilt yields stabilized and off their intra-day high after the Bank of England purchased £4.56 billion gilts, the largest amount since it started its emergency bond purchase program.
Australia’s ASX200 (ASXSP200.1)
Aluminum-related shares may be of interest today after Biden’s administration weighs a potential ban on Russian aluminum in response to Russia’s military escalation in Ukraine. Stocks to watch include Alumia (AWC) and Rio Tinto (RIO. Lithium stocks will also be a focus today after customs data showed a decline in lithium prices in China to $55 from $70 per ton in September, according to Morgan Stanley. So keep an eye on Australia’s listed lithium stocks that could fall, including Pilbara Minerals (PLS), Lake Resources (LKE), Liontown (LTR), , Allkem (AKE), and Mineral Resources (MIN). Last week we wrote about possibly expected a pullback in lithium in the wake of car makers potentially seeing softer demand with US interest rates continuing to rates – with the thinking being this sentiment could perhaps feed through to lithium.
Hong Kong’s Hang Seng (HSIU2) China’s CSI300 (03188:xhkg)
Stocks in the mainland bourses staged an impressive intraday reversal with the Shanghai Composite regaining the 3000 to finish the day 1.5% higher at 3025.5 and the CSI300 rising 1.5% as well. Semiconductors, electric equipment, new energy, and machinery led the charge higher. The A-share rally helped improve the sentiment in the Hong Kong stock markets and the Hang Seng Index at one point bounced to regain 17000 before paring the gain after the close of the A-share market and finishing the day 0.8% lower at 16701. Following the rally in the semiconductor space in the A-share market, Hua Hong Semiconductors (01347:xhkg) surged 9.3% and SMIC (00981:xhkg) pared its early loss to close 1% lower. Chinese EV stocks traded in Hong Kong rallied, with Li Auto (-02015:xhkg) up 6.8%, Xpeng (09868:xhkg) up 4.1%, and BYD (01211:xhkg) +3.2%.
The Yen weakened to near 147
The Yen weakened to near 147, a 24-year low following the Bank of Japan Governor Kuroda reiterated the BoJ’s resolve to keep monetary policy ultra-loose. As the gilts market stabilized somewhat after a large BoE bond buying, GBPUSD bounced to 1.1110. The Australian dollar trades at 0.6277, holding steady ahead of US CPI data being released. The AUDUSD trades around 2-year lows and is vulnerable to another pullback if US CPI is hotter than expected. US CPI is expected to show prices rose 8.1% YoY, and 0.2% MoM according to Bloomberg's consensus data.
Crude oil (CLX2 & LCOZ2) down about 2.5% on lower demand forecasts
WTI crude fell for the third day in a row by 2.5% to USD81.1. The U.S. Energy Information Administration cut its 2023 demand forecast to 101.3 million barrels per day from 101.5 million barrels. Earlier in the day, OPEC lowered its 2023 oil-demand growth forecasts by 360,000 barrels a day to 2.34 million barrels a day.
What to consider?
The FOMC Minutes point to peak hawkishness
In the September FOMC minutes, the Fed showed near-term hawkishness as “participants observed that a period of real GDP growth below its trend rate, very likely accompanied by some softening in labor market conditions, was required” and “many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.” In other words, the Fed is rather erring on the hawkish side rather than not doing sufficiently to bring down inflation, even if that means incurring pains to the economy and employment. However, the minutes seem to support Saxo’s view that we are in the ninth inning and very close to the peak of the Fed’s hawkishness because it says “many participants indicated that, once the policy rate had reached a sufficiently restrictively level, it likely would be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the 2 percent objective.” This statement clarifies that the Fed will pause before inflation falls near the long-term 2% target and will probably stop hiking long before that. When the Fed becomes confident that inflation is falling towards 2%, the Fed will start cutting rates. To sum up, the Fed may be near peak hawkishness as it will front-load more aggressive rate hikes in the coming months and will likely pause before inflation falls back to 2% and keep rates at high levels for longer through 2023.
U.S. PPI rose 8.5% Y/Y in September, higher than expected
The U.S. headline PPI rose 0.4% M/M in September, bouncing from a revised 0.2% decline in August, higher than expectations. On a year-on-year basis, the PPI rose 8.5% vs 8.4% expected and 8.7% in August. Excluding food and energy, the core PPI rose 0.3% M/M and 7.2% Y/Y unchanged from the revised August data.
US CPI is the focus today
US inflation data out on Thursday be the next catalyst to test the Fed’s pivot narrative, and the path ahead for US yields and US dollar. Headline inflation is expected to fall slightly but stay above 8%. Bloomberg consensus expectations are at 8.1% y/y from 8.3% y/y in August, but the m/m print is expected higher at 0.2% from 0.1% previously. The core measure is also likely to swell further, and come in at 6.5% y/y from 6.3% in August. While market reaction to CPI print cannot be ignored as pricing for Fed’s path remains volatile, Fed members have been clear about their intent to keep rates high until inflation comes down materially. This suggests that even if we see further rate cut pricing for 2023, we will get a stronger pushback from Fed members and the markets will need to revise their thinking eventually.
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