Bond. Long Bond(s)
Chief Investment Officer
Summary: The Fed paused, but US equities, bonds and the dollar wobbled on Wednesday as a hawkish shift in the FOMC dot plot guiding for another 50bps of rate hikes in the pipeline were offset by Powell’s dovish comments at the press conference where he advocated a data-dependent approach. Focus now shifts to China’s activity data due today and any further easing measures from the PBoC. Later in the session, ECB meeting will take the headlines.
Following the hawkish pause by the Fed, stocks initially plummeted but later recovered as Powell downplayed the certainty of the rate hike projections. The rally was driven by the AI theme and mega-cap tech stocks. The Nasdaq 100 Index strongly bounced back from intraday lows, finishing the session 0.7% higher at 15,005. Nvidia (NVDA:xnas), Intel (INTC:xnas), and Broadcom (AVGO:xnas) led the surge, each registering an increase of over 4% or nearly 5%.
The broader market benchmark, S&P 500, closed nearly unchanged at 4,372. Among the 11 S&P sectors, health care and energy experienced the most significant declines. UnitedHealth (UNH:xnys), the largest health insurer in the U.S., tumbled 6.4% after its CFO warned about rising costs during an investment conference. This led to a wave of selling in other health insurers, causing Humana (HUM:xnys) to plummet 11.2% and CVS Health (CVS:xnys) to slide 7.8%.
Regional banks also suffered, with the SPDR S&P Regional Banking ETF (KRE:arcx) sliding 2.9%. Small caps, represented by the Russell 2000, lagged behind, declining by 1.2%. The VIX, a measure of the implied volatility of the S&P 500 Index, declined to 13.9, once again falling below the 14-handle.
Traders reacted to the FOMC’s Summary of Economic Projections by selling the front end of the Treasury curve. The FOMC projected a median of 5.625% for the mid-point of the Fed fund target range by the end of 2023, suggesting another 50bp hike following the pause in June. As a result, the 2-year yield surged to 4.80% at one point, reaching a level not seen since March 10, three months prior. However, the yield increase started subsiding after a significant block buying in the 2-year futures market. The decline in yield continued when Powell stated during the news conference that the FOMC had not yet reached a decision for the upcoming meetings. The 2-year yield managed to recover most of its losses and ended the volatile session with a 2bp increase, yielding 4.69%.
On the other hand, demand remained strong for the longer end of the curve, leading to a 3bp drop in the 10-year yield to 3.79% and a 4bp decline in the 30-year yield to 3.88%. This caused the 2-10-year yield curve to flatten by 5bps, reaching -90bps. The market appears sceptical about the additional 50bp hike projected by the Fed. Traders are currently pricing in the expectation that the Fed fund rate will peak around 5.3% in September and then ease to 5.2% by the end of 2023.
Despite the positive impact of monetary easing measures on market sentiment, investors' risk appetite toward Hong Kong and Chinese equities remains subdued. They are eagerly awaiting a larger-scale stimulus package aimed at boosting demand. This sentiment was reflected in the performance of the Hang Seng Index, which dropped 0.6%, while the CSI300 Index showed minimal changes.
Following the People's Bank of China (PBoC) cutting OMO reverse repo and standing lending facility rates, as well as the release of weak loan data, shares of Chinese banks experienced a retreat. China Merchant Bank (03968:xhkg) and ICBC (01398:xhkg) each saw their shares decline by over 2%.
On the other hand, electric vehicle (EV) makers surged. Leading the charge was NIO (09866:xhkg), which saw a 6.6% increase in its share price. Li Auto (02015:xhkg) and Xpeng (09868:xhkg) also experienced gains of 5.4% and 4.5% respectively.
Chinese white liquor companies performed well in both Hong Kong and mainland bourses, with ZJLF Group (06979:xhkg) soaring by 11.7%. In the A-shares market, other industries that outperformed included beauty and personal care, food and beverage, communication, and retailers.
The USD was sold-off in the run upto the Fed announcement, spiking higher later on the hawkish dot plot but giving up the gains later as Powell’s commentary guided for a data-dependent approach. NZD led the gains overnight but NZ Q1 GDP data reported this morning was somewhat softer than expectation at 2.2% YoY (2.3% prev and 2.6% exp). A technical recession was also confirmed as GDP fell 0.1% QoQ after a decline of 0.7% QoQ in Q4. NZDUSD fell from overnight highs of 0.6236 to break below the 0.62 handle but gains started to return later. China’s activity data remains key to watch today and PBoC is also expected to cut the MLF rate. AUDUSD – now close to 0.68 – may be prone to volatility. EURUSD stayed above 1.08 overnight with ECB expected to hike rates today as against Fed’s pause, but forward guidance will be key. USDJPY took a roundtrip sliding to 139.40 but now back above 140 with BOJ decision eyed for Friday.
Crude oil prices were down again by 1.5% on Wednesday, with WTI prices back below $69 and Brent below $74. A hawkish shift in the Fed’s dot plot aided further demand concerns. Meanwhile, US crude oil stockpiles rose by 7.92kbbl last week, according to EIA data. This was exacerbated by inventories at the key storage hub of Cushing hitting its highest level since 2021. Gasoline and distillate stockpiles were also higher, rising 2,108kbbl and 2123kbbl respectively. Meanwhile, after Goldman Sachs, now JP Morgan has cut its 2023 Brent forecast to $81/barrel from $90 earlier. Focus will be on China’s activity data today and any further easing measures that can help to lift the demand outlook.
The Fed left rates unchanged at 5-5.25% as expected, but crucially, ramped its 2023 rate dot forecast 50bps to 5.6% from 5.1%, suggesting that there will be two more rate hikes coming. The 2024 dot was raised to 4.6% from 4.3%, 2025 raised to 3.4% from 3.1% - overall reducing the scope for rate cuts that may be seen following this tightening cycle. In terms of economic projections, there was a material increase in its real GDP 2023 forecast to 1% from 0.4% in March, with Core PCE forecast rising to 3.9% from 3.6% and the unemployment 2023 dot tumbling to 4.1% from 4.5%. There was lack of evidence of any credit contraction following the banking crisis, which led to upgrading of economic forecasts.
However, turning the page over to Powell’s presser suggested that the Fed’s approach will still remain data-dependent, which may not leave much room to hike further as noted in this article yesterday. Powell stressed that the Dot Plot was not a plan or a decision and Fed will continue to make decisions on a meeting-by-meeting basis. He saw the labor market in a better balance, albeit still tight, but bringing inflation to target will need below-trend growth and some softening of labor market conditions. Powell described July meeting as ‘live’ and data-dependent. Following the meeting, there is little change to market’s Fed expectations. A 25bps rate hike for July is now priced in by the markets with 60% probability (a notch lower than pre-meeting), while terminal rate is still seen lower than Fed projections at 5.3%. No rate cuts are priced in for this year.
May PPI data was cooler than expected, declining by 0.3% MoM from the prior +0.2% and a deeper fall than the expected -0.1% print. The YoY print also cooled to 1.1% from 2.3% and came in below the 1.5% forecast. On the core, PPI came in at 2.8% YoY or +0.2% MoM, lower than 3.1% YoY, +0.2% MoM previous and the 2.9% YoY, +0.2% MoM expected. The report added to the argument that inflation is cooling but the decline remains mostly energy-driven. Focus today turns to the May retail sales print in the US and a lower-than-expected print could once again spark concerns of consumers pulling back on spending after the markets have been on a risk-on with banking sector and debt ceiling concerns having eased.
The reduction in the OMO reverse repo and Standing Lending Facility rates sent strong indicators that the most crucial policy rate, the 1-year Medium-term Lending Facility Rate (MLF rate), is highly likely to be cut by 10bps to 2.65% today.
Scheduled to release today, China's retail sales growth is expected to slow to 13.7% Y/Y in May, compared to 18.4% in April, due to factors such as robust automobile demand and recovery in catering services, offset by a higher base from last year. Industrial production is projected to soften with a growth rate of 3.5% Y/Y in May, down from 5.6% in April, as suggested by weakening exports and steel production. Fixed asset investment growth is also anticipated to drop to 4.4% Y/Y from 4.7%, as indicated by the deceleration in the PMI construction sub-component. These trends indicate a moderation in retail sales, industrial production, and fixed asset investment, leading to expectations of stimulus measures from the Chinese authorities to address the slowing growth rates.
The European Central Bank is widely expected to hike rates by 25bps on Thursday to take the deposit rate to 3.50%. Since the last meeting when the ECB slowed down the pace of rate hikes from 50bps increments to 25bps headline Eurozone CPI has cooled to 6.1% from 7.0%, whilst the “super-core” measure fell to 5.3% from 5.6%. Furthermore, the ECB’s Consumer Expectations survey for April saw the 1yr ahead inflation expectation decline to 4.1% from 5.0% and 3yr view fall to 2.5% from 2.9%. That said, despite the disinflationary impulses, President Lagarde has reiterated that inflation “is too high and is set to remain so for too long”, adding that the ECB will “keep moving forward” as the bank is still behind the curve. However, growth trajectory is also worrisome with Germany and Eurozone in a technical recession, and if the ECB decides to (like Bank of Canada) remove all forward guidance, it could mean a firmer downside for EURUSD below 1.08.
AMD stock got a lift on Wednesday as Reuters reported that Amazon.com Inc.’s AWS cloud-computing business was considering using the company’s new artificial-intelligence chips. While the deal is not finalized, but sentiment on chip manufacturer AMD was lifted after it disappointed a day earlier by not disclosing its key customers. AMD is considered to be the closest competitor to the biggest AI winner for this year, Nvidia, and it is up 97% YTD compared to gains of 194% for Nvidia.
Adobe is set to announce its fiscal year 2023 Q2 earnings on Thursday, after the close of the US market. Analysts anticipate year-on-year revenue growth of 9% and an EBITDA of $2.36 billion, compared to $1.74 billion in the previous year. The company has intensified its focus on profitability following the slowdown in 2022 and the impact on equity valuations due to rising interest rates.
According to Peter Garnry, Saxo’s Head of Equity Strategy, investors will closely watch the potential Figma acquisition, which could face regulatory hurdles due to competition concerns. While the failure of the deal would likely be celebrated by investors and the equity market in the short term, it could have a negative impact on future revenue growth. Adobe has been leveraging the AI trend, and recent product updates have incorporated various AI-related functionalities, generating excitement in the content creation industry. It will be intriguing to see if this excitement translates into the company's outlook for the future.
U.S. Secretary of State Antony Blinken is set to visit China this weekend in an effort to maintain open lines of communication between the two countries, which have seen a deterioration in their relationship. This visit marks the highest-ranking U.S. official's trip to China since President Biden took office. Additionally, last week, Robert Kaproth, Deputy Assistant Secretary of the Treasury for Asia, visited Hong Kong to engage with individuals from both the public and private sectors in the special administrative region, contributing to the ongoing efforts to foster dialogue and understanding.
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Bond. Long Bond(s)
Bond. Long Bond(s)
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.