Summary: Hot Spanish and French inflation data, along with a soft US consumer confidence report and month-end flows, made for a bumpy ride in equities and bonds to close the month of February. Dollar strength however prevailed at the close of the month despite a bump higher in EUR and GBP earlier in the day. A big miss in Australia’s Q4 GDP and January inflation saw AUDUSD plunge 30bps. Target beat earnings estimates but missed margins and lowered annual guidance. On watch today will be China PMIs, German inflation and US ISM manufacturing.
The major U.S. equity indices posted their second negative month in three - despite starting the year higher. Treasury yields are denting sentiment amid fears that higher Fed Reserve rates would remain in place for longer after inflation fears have been creeping back into the market - while stronger European inflation data strengthened the case for more hikes. On Tuesday, the S&P 500 dropped 0.3% and Nasdaq 100 slipped 0.1% following an unexpected decline in the Conference Board Consumer Confidence and a weaker Chicago PMI print. Most sectors within the S&P500 were down while materials, communication services, and financials inched up. Target (TGT:xnys) gained 1% after the discount store chain beat earnings estimates but missed margins and lowered annual guidance.
With traders again reducing bets that the Fed will cut rates this year, the S&P 500 was down 2.6% last month. In contrast, European indices closed in gains for the month of February, with France’s CAC up 2.7%, Euro Stoxx 600 up 1.8% and German DAX up 1.6% despite a big surge in European yields as well.
Yields on U.S. Treasuries climbed in early trading following the sell-off in European government bonds in response to hot inflation prints in France and Italy. The long end of the Treasury curve recovered after the Chicago PMI, Richmond Fed Manufacturing Index, and Conference Board Consumer Confidence unexpectedly slipped. The 10-year notes pared most losses and finished Tuesday only 1bp cheaper at 3.92% while the yield on the 2-year was 4bps higher at 4.82%. The 2-10 year curve flattened to -89.
The Hang Seng Index and CSI300 index finished February with the first monthly loss since October 2022, ending a three-month streak of gains. In February, Hang Seng Index fell sharply by 9.4% while A-shares’ broad benchmark CSI300 outperformed, sliding moderately by 2.1%. The weakness in Hang Seng Index was driven by large declines in mega-cap e-Commerce platforms. Weighed on by the prospect of intensifying competition, JD.com (09618:xhkg) tumbled 25%, Meituan (03690:xhkg) down 22.4%, and Alibaba (09988:xhkg) down 19.6% over the month. Baidu (09888:xhkg) bucked the market trend and weakness among peers, climbing 1.8% on traction gained in AI-generated content solutions.
In the near term, investors will be having a gauge into the strength of the economic recovery from the official NBS Manufacturing PMI, Non-manufacturing PMI, and Caixin China Manufacturing PMI scheduled to release today. After that, the focus will be on the State Council’s Government Work Report which includes, among other items, the growth target for 2023, delivered to the National People’s Congress on 5 March, and then the reshuffling of top leadership in the State Council and other key offices of the Chinese government during the National People’s Congress.
Focus today is on commodities – with oil and copper moving higher, while the broad market is being pressured with markets adjusting to higher for longer CPI. We will be watching the reaction to China PMIs - which are expected to boost sentiment in commodities.
Australian GDP data showed fourth-quarter economic growth slowed down to pace of 2.7% YoY as expected- quashed by higher inflation and interest rates. Meanwhile, headline monthly CPI showed inflation is cooling – falling to a pace of 7.4% YoY vs the 8.1% price growth forecast. This theoretically pressures the Aussie dollar lower in the shorter term, while the US dollar is continuing to move up – with the dollar index up 4% from its lows - with the market pricing in more Fed rate hikes and potentially no Fed cuts this year – which is in line with our view. Our view is that the Aussie dollar could see strength return in Q2, and we maintain a longer-term bullish view on the Aussie dollar in line with our positive commodity outlook. In other news, Sydney property prices, the bellwether of the Australia market, rose for the first time in 13 months in February in - this is a positive sign for home values – but goes against the grain of what the RBA expected and supports the notion of the RBA keeping rates higher for longer.
The dollar closed firmer at the end of the month which spelled inflation concerns coming back and sent the short-end yields surging to record highs. AUDUSD was the weakest on the G10 board as a beating of the risk sentiment and weaker metal prices saw pair test 0.67 despite the return of RBA’s hawkish stance. Yen had a double blow from surging yields and Ueda’s dovish read, and USDJPY tested 137 last night before getting back below 136.50. EURUSD touched highs of 1.0650 after the French/Spanish inflation prints last night but is back below 1.0570 now. GBPUSD also got in close sights of 1.2150 but back closer to 1.2000 now.
The oil prices rose 1.5% with traders reading between the lines at IEA commentary - which alluded to Chinese demand rising - while there is a bigger worry for the EU - should there be a complete halt to Russian flows - which would be a bullish scenario for oil and perhaps see prices move back up to last year's unsustainable highs.
As for other commodities - Copper moved further above the key $4 mark after rising almost 2%. Aluminium rose 0.6%, while other metals were lower. At Saxo - our view is that the Commodity bull market will be on pause - before restarting strongly in Q2 with material demand expected to rise from China.
A rally in crude oil prices to the top of last week’s trading range is suggesting some early signs of a recovery towards the top of the trading range that has been established since late 2022. With the Fed rate hikes now well priced in by the markets, focus is moving back to sanctions on Russia that continue to threaten supplies. Meanwhile, sentiment on China demand recovery may be back with the Two Sessions likely to announce a strong policy commitment to growth rebound this year. This is offsetting global demand concerns emanating from API data showing a 10th straight weekly crude build. WTI prices touched $78 overnight and Brent was at $84.
The Conference Board's US consumer confidence index saw a surprise fall to 102.9 in February (vs. exp 108.5) from January’s 106 which was also revised lower from 107.1. The present situation index looked resilient at 152.8 from 151.1 and reaching its highest levels since April 2022, but the forward expectations index declined to 69.7 from 76.0 previously. While the headline figures may be a small input for the Fed, the labor-supply mismatch has become more evident from the consumer confidence report.
The report showed that the labor differential improved to 41.5 in February from 37 in the prior month, rising for a third consecutive month and reaching its highest levels since April 2022. The differential represents the percentage of respondents who say jobs “are plentiful” less those who say jobs “are hard to get”. Its rise could be an early indication of labor market strength heading into next week’s payrolls and JOLTs reports. Focus turns to ISM manufacturing survey today which is expected to accelerate but still remain in contraction.
Consumer prices in France jumped by a record 7.2% YoY in February as food and services costs increased, while Spain saw a stronger-than-expected 6.1% YoY advance. The strong inflation now results mostly from companies passing through to consumers higher prices in the service sector and higher food prices. Looking at the French data, food prices (price increase of+14.5% YoY) contribute twice more to inflation than energy prices.
The increase of prices in the service sector (which represents about 50% of the CPI basket) is another source of worry. Expect it to get worse in the short-term. We also see a similar trend in most European countries (the situation is even uglier in the CEE region), with the first print of German February inflation due today and the Eurozone print due tomorrow. Euro bonds slid with German yields up 7bps and Spanish yields up 6bps as ECB terminal rate pricing briefly touched 4%.
Scheduled to release on Wednesday, the official NBS Manufacturing PMI, according to survey from Bloomberg, is expected to bounce further into expansion at 50.6 in February from 50.1 in January and the Non-manufacturing PMI is forecasted to climb to 54.9 from 54.4. Despite the sluggishness in exports, Caixin China PMI is expected to return to the expansionary territory at 50.7 in February, from 49.2 in January. The Emerging Industries PMI jumped to 62.5 in February from 50.9 in January adding to the favourable forecasts for the NBS and Caixin PMIs.
Target (TGT:xnys) reported FYQ4 (ending Jan 31, 2023) EPS of USD1.89, nearly 28% above the consensus estimate of USD1.48. The earnings beat was driven by a stronger-than-expected 0.7% Y/Y growth in same-store sales and a 1.3% Y/Y growth in total sales, while both were expected to fall. Notable strength was found in food and beverage, beauty, and household essentials. Discretionary categories remained soft. Weakness, however, showed up in the gross margins which declined to 22.7% in Q4 from 25.7% in the prior-year quarter. EBIT margins fell to 3.7% from 6.8% a year ago. For the current fiscal year’s annual guidance, the management is expecting between a low-single-digit decline and a low-single-digit increase in same-store sales and a below-consensus operating income of about USD 4.9 billion.
Budweiser Brewing Co (1876 HK), the Asia distributor - is due to release results today. Q4 revenue is expected to get a little boost from the FIFA World Cup trading - but is still expected to dive. Its outlook could be tainted as higher beer taxes are ahead for South Korea - while Budweiser’s APAC brands are on notice with proposed liqueur taxes there looming – which could slow business growth. The world’s largest brewer Anheuser-Busch InBev SA/NV (BUD) reports on Thursday, and could see higher volatility - for more click here.
Tesla is continuing to march ahead with its lofty EV production goals - and now looks set to build a plant in northern Mexico. The news precedes Wednesday's reveal of Elon Musk's next phase "master plan," which will test the resurgent enthusiasm for the EV maker. Further details of the Mexico plan are expected to also be released this week. Meanwhile, Tesla’s competitor, Rivian forecasts 50,000 EVs will be produced this year – which was weaker than the market expected. Its fourth quarter revenue also missed expectations making $663 million – vs the $717 million consensus expected.
For what to watch in the markets this week – read or watch our Saxo Spotlight.
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
