Chief Investment Strategist
Summary: The strong equity performance extended further on Friday with tech stocks leading as softer core PCE print was reported. Cooling inflation along with AI exuberance brought NASDAQ 100 to close in on H1 gains of 40%. Apple’s market-cap closed above USD 3 trillion, to become the first company to reach the mark, while Nike tumbled after a weak earnings report. The US dollar declined on Friday, and gains were being led by NZD and AUD. Crude oil prices also gained, while grain prices reflected the US acreage report results.
US equities advanced solidly on Friday, with the tech-heavy Nasdaq 100 boasting its biggest first-half gain in 40 years (+40%) as inflation showed signs of cooling while Apple closed with a $3 trillion market valuation for the first time. All the S&P 500's 11 major industry sectors advanced, with technology leading the charge, up 1.8%. Real Estate was the weakest, up 0.5%. Nike fell 2.6% after it forecast Q1 revenue below expectations. On the other hand, Carnival shares jumped 9.7% after a sell-side analyst upgraded the cruise operator's stock to "buy" from "hold". Small cap stocks were also attracting attention with the Russell 2000 index closing up 0.4% in its fifth straight day of gains, its longest winning streak since the five sessions ending March 3.
Treasuries bull-flattened after softer PCE data was accentuated by a wave of long-end buying into quarter/month-end. 2-year yield was up 3bps while 10-year was slightly down after touching highs of 3.89% earlier and remaining in close sight of the key 4% level.
Hong Kong stocks closed nearly flat on Friday as sentiment was downbeat after China’s activity data for June remained in contraction for a third consecutive month. China’s official NBS manufacturing PMI came in as expected at 49 in June (vs 48.8 in May) and the non-manufacturing PMI came in just a touch weaker at 53.2 than 53.5 expected. XPeng soared by over 10%, extending its streak of 3-day gain to over 25% as optimism around the EV maker’s new mid-sized electric SUV G6 underpinned last week, and Tesla’s better-than-expected delivery numbers may underpin the EV names again today. CSI 300 was up 0.5%.
The dollar was sharply lower on Friday when core PCE came in a tad below expectations on a y/y basis, even as market pricing for the Fed was little changed. A holiday-shortened week in the US may now mean lower liquidity, and ISM manufacturing print will also be eyed today, especially the inflation metrics. NZD and AUD were the outperformers on Friday, with AUDUSD touching highs of 0.6672 as RBA rate hike best for tomorrow are also picking up. GBPUSD rose above 1.27 despite dovish speeches from BOE members Dhingra and Tenreyo. USDJPY still above 144 with intervention risks still not completely out of the way.
Oil rallied on Friday as easing inflation pressures sparked a risk-on tone across markets and led to a decline in USD. WTI was back above $70 and Brent rose back above $75. Going into Q3, oil prices could remain dependent on demand concerns, but OPEC’s supply cut will start to underpin and may be extended to August. The US CPR refilling is also likely to pick up traction, and keep demand outlook supported, especially if the US recession continues to be fleeting.
Our Head of Commodity Strategy, Ole Hansen, tweeted on Friday that the USDA delivered a massive planted acreage surprise which saw corn plunge by 6.4% below $5/bu while soybeans jumped 6.1% to $13.43. Against estimates, the government report raised US corn acreage by 2.22m acres to 94.096 while soybeans was cut by 4.18m to 83.505.
Friday’s US core PCE came in a touch beneath the expected at 4.6% YoY and cooling from last month’s 4.7% YoY. All other measurements revealed prints in-line with expectations with core up 0.3% MoM or headline up 3.8% YoY and 0.1% MoM. The report spurred relief that key inflation metrics continue to cool, although concerns around a tight labor market continue to underpin risks. Market still continues to price in about 80% chance of a July Fed rate hike and a terminal rate at 5.4%, unchanged from the pre-PCE pricing.
Tesla posted its second-quarter vehicle production and delivery report for 2023 on Sunday. The company delivered 466,140 cars in the April to June quarter, up 10% from the preceding quarter to reach a record level, and 83% higher from a year earlier. The numbers beat analyst estimates (Bloomberg estimate 448,350), as Musk’s price cuts paid off to boost volumes and market share even as margins are declining. The company also managed to trim the gap between production and deliveries — a figure closely watched by analysts — to 13,560 units in the second quarter vs. 18,000 in Q1. Q2 earnings is scheduled for July 19.
Pan Gongsheng, a deputy governor of the People’s Bank of China (PBOC), has been appointed Communist Party chief of the central bank. The appointment is seen as a confirmation of policy continuity, with targeted easing measures and encouraging banks to lend more to targeted sectors. However, given the little significance of Pan in the central party committee, the decision is being seen as weakening the influence of the central bank in the overall economic decision making. Pan will also take up the role of PBOC governor. Meanwhile, speculation of a currency intervention has picked up as PBOC warned against big swings in the currency last week.
Japan’s Tankan survey is a quarterly gauge to assess the confidence of manufacturers. In the large manufacturers, the index improved to 5 in Q2 from 1 in Q1 with their outlook also improving to 9 from 3 in the previous quarter. The small manufacturer index is also seen at -5 in Q2 from -6 previously with their outlook at -1 from -4 in Q1. This is a clear indication that supply chain pressures are easing and commodity prices are also far more manageable, which together with improving global demand is helping to underpin a recovery in confidence and could provide room to BOJ to tweak policy if inflation pressures accelerate.
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