Summary: U.S. stocks surged over 2% following the ISM services index shrinking to 49.6 and average hourly earnings growth slowing to 0.3% M/M in December from a downward revised 0.4% in November (previously reported 0.6%). Investors became more optimistic about inflation having peaked because of these unexpected weaknesses in services and wages. Yields on 10-year Treasury notes plunged 16 basis points to 3.56%. The dollar fell against all G10 currencies with the Dollar Index shedding 1.1%. Gold and copper advanced.
Bad news once again was good news for equities last Friday when the U.S. released slower wage growth in December as well as in November (a downward revision) and the ISM services index plunged unexpectedly by 6.9 points to 49.6 and into the contraction territory. Investors noted that Fed Chair Powell had emphasized in his recent speeches that the price of core services other than housing, which was driven by wages and service sector activities, is the most important price category to consider for understanding the future evolution of inflation. Despite the higher-than-expected prints in non-farm payrolls and a lower unemployment rate, Nasdaq 100 rose 2.8% and S&P 500 climbed 2.3%. All 11 sectors within the S&P500 gained, with materials, up 3.4%, leading, followed by information technology, and real estate.
Tesla China has cut again the price of its Model 3 by 13.5% to RMB 20,990 (USD3,350) and Model Y by 10% to RMB 25,990 (USD3,790) in China within three months from the prior price cut. Following the news, shares of Tesla (TSLA:xnas) plunged as much as 7.7% in early trading but recovered throughout the day and managed to finish the Friday session 2% higher.
Costco reported U.S. comparable sales rose 6.4% in December 2022, above the 5% expected by street analysts. The strong holding sales performance saw the bulk retailer’s share price advance 7.2% last Friday.
Treasuries were bid following the growth in average hourly earnings slowed to 0.3% M/M and 4.6% Y/Y from a revised down 0.4% M/M (previously reported 0.6%) and 4.8% Y/Y (previously reported 5.1%). Yields oscillated for a while as investors weighed the soft wage growth against the solid payrolls and fall in unemployment rates. Decisive declines in yields came after the release of the ISM Services Index which unexpectedly collapsed to 49.6 in December from 56.5 in November, indicating contracting activities in the service sector. A service sector in contraction may help cool down inflation in core services excluding housing which is the focus of Fed Chair Powell. Yields on the 2-year notes fell by 21bps to 4.25% and those on the 10-year notes became 16bps richer to 3.56%.
The Australian share market (ASXSP200.I) opened 1% higher today, following the stellar close of US shares. This week we could also see some money deployed that was removed from the market from the end of US financial year two weeks ago. In terms of key pockets of potential gains to watch; Commodity stocks could likely to do well as there is room for the Fed to not be as hawkish. The copper price rose 2.4% to its highest level since November, which will could likely boost copper stocks today and this week, and spot gold price jumped 1.8% to a range it last traded in June last year. Also keep an eye on coal stocks this week, as coal demand usually peaks in January and Chinese authorities are in discussion on a partial end to the Australian coal ban. So keep an eye on Whitehaven Coal and New Hope. Meanwhile, iron ore equities may be possible laggards. Vale, Champion Iron, Fortescue Metals, BHP and Rio will be on watch as the Iron ore price (SCOA) has fallen 1.3% from its five month high as buying of iron ore is expected to grind lower as China heads to lunar new year holidays.
Hong Kong stocks consolidated in a choppy session. Shares of Chinese developers surged in the morning session, following China’s central bank and bank regulator jointly issued a directive to allow banks in cities with declining home prices to lower mortgage interests below the floor dictated current policies. Adding to fuel the rally in property developers was the comment from China’s Minster of Housing and Urban-Rural Development in an interview with the People’s Daily, pledging support to the financing needs of developers and reports suggesting that China is considering relaxing the “three red lines” that constraining highly leveraged developers from getting new financing. Stocks however turned to the south after the lunch break. President of the China Society of Economic Reform said the Chinese Government will roll out “some forceful measures” to redistribute income and “establish a mechanism to regulate wealth accumulation” in order to advance “common prosperity”. Hang Seng Index finished last Friday 0.3% lower. Alibaba Health (00241:xhkg), Meituan (03690:xhkg), and Haidilao (06862:xhkg) were among the biggest losers with the Hang Seng Index. EV stocks fell, following the news that Tesla China has cut again the price of its Model 3 and Model Y in China within three months from the prior price cut. In A-shares, China’s CSI300 advanced by 0.3% with solar names, lithium battery makers, electric equipment, non-ferrous metal, petrochemicals, and basic chemicals leading.
The USD posed a bullish breakout from the three-week range at the start of 2023 but aggressively snapped back after a disappointing PMI release on Friday as 10-year yields dipped back towards 3.55%. NOK, AUD and NZD were the biggest gainers against the USD on Friday, with AUD also benefitting from China reopening. AUDNZD remains supported above 1.0800 with USDCNH testing support at 6.8200 on the Chinese reopening wave with extra vigour via strong PBoC midpoint fixes and measures aimed at propping up the ailing real estate sector. USDJPY slid to 132 with BOJ Governor Kuroda sticking to dovish intentions but PM Kishida once again saying over the weekend that he will have 'discussions' with new BOJ governor.
The US dollar suffered its longest streak of weekly falls in two months. So that’s supporting other currencies higher. In particular, the commodity currency, the Aussie dollar broke above its 200-day moving average, which could be seen as a bullish sign. The Aussie dollar trades at two-month highs of 68.85 US cents. What's also supporting the Aussie dollar is that China’s reopening is expected to add considerably to Australia’s GDP. Some economists predict a 0.5% addition to GDP in a year once Chinese students and tourists return. JPMorgan thinks over the next two years Aussie GDP will grow near 1% thanks to inbound Chinese students and holiday makers likely returning.
The first week of 2023 was tough for crude oil, with global demand concerns weighing and China outlook remaining mixed. Despite removing most virus-related restrictions, a surge in cases across the country could stifle economic activity. Meanwhile, the IMF warned that a third of the global economy could be in recession in 2023. Supply side concerns are also seen with European sanctions on Russian oil having kicked in, while OPEC has reiterated that it is willing to step in with further production cuts. WTI futures traded slightly higher to $74/barrel in Asian morning while Brent was close to $78.90.
Gold is off to a positive start in 2023, and a further boost was seen on Friday after the mixed jobs report and weakness in ISM services saw a plunge in the USD. However, demand ahead of Lunar New Year is likely to stay strong, and central banks are also active in the physical market. People’s Bank of China bought another 30 tonnes of gold in December 2022, following 32 tonnes in November, boosting the country's stash of gold to 2,010 tonnes. Speculation remains rife that these are steps for China to move away from dollar-based trading as geopolitical tensions remain high. Gold prices are testing $1870 this morning and support at $1808 will be key to hold to maintain the uptrend. US CPI data due this week remains key.
Copper is leading a rebound in base metals as China looked to support its property sector. Beijing may allow some firms to add leverage by easing borrowing caps and push back the grace period for meeting debt targets. These were part of the “three red lines” policy that contributed to the downturn in recent years. HG Copper broke above resistance at the 200-day at $3.8525, and will be targeting the $4 per pound next.
The ADP report from last week had set up expectations for a stronger NFP print on Friday, and while the headline came in stronger and with a drop in unemployment but the market instead focused on significantly slower wage growth and the reaction was dovish, with the US dollar sagging. Still, the report doesn’t change the fact that US labor market remains tight and WSJ’s Timiraos also noted that Friday’s employment report does little to clarify how much the Fed will raise interest rates at its next policy meeting. Nonfarm payrolls showed US employers added 223,000 jobs last month, from a downwardly revised 256,000 in November, with the unemployment rate hitting a cycle low of 3.5% again. Wage growth however slowed to 4.6% YoY (0.3% MoM) in December from a revised 4.8% YoY (0.4% MoM) in November, keeping the market reaction to the overall jobs report mixed, before the big disappointment from ISM services which surprisingly dipped into contraction for the first time since May 2020 to 49.6 vs. expected 55. The forward-looking sub-indicator, new orders, fell 10.8 pts to 45.2 but details were still mixed with 11 of the 18 services sector remaining in expansion.
A host of Fed speakers were on the wires on Friday, and key message was the need for more rate hikes still despite signs of price pressures cooling. Cook (voter) said inflation is "far too high" and "of great concern" despite recent encouraging signs, while Bostic (non-voter) said the Fed needs a target rate above 5% and he expects Fed to hold at a peak policy rate for an extended period, "well into 2024". Barkin, another non-voter, touched more on inflation saying that that the Fed is still resolute on inflation, and needs to stay on the case until inflation is sustainably back to the 2% goal. Retiring member Evans however called for a slower pace of rate hikes.
It was largely expected that the eurozone inflation would cool down in December. But the first estimate is actually much lower than forecasted, at 9.2 % versus prior 10.1 % in November. This is a positive development and it goes in the right direction, of course. But this is still a high number. Looking at the main components, energy had (without surprise) the highest annual rate in December at 25.7 %), followed by food, alcohol and tobacco (13.8 %), non-energy industrial goods (6.4%) and services (4.4%). What is worrying is that core CPI continues to increase at 5.2 % versus prior 5.0 % and expected 5.1 %. This will push the European Central Bank (ECB) to keep hiking interest rates in the short-term. But the peak in interest rates is getting closer (Mario Centeno) and the eurozone macroeconomic outlook is not that bad actually (if there is a recession underway, it is at the mild end according to the ECB chief Philip Lane).
According to a statement released by the company on 7 January, Jack Ma terminated his acting-in-concert arrangement with other individuals. Under the new structure, 10 individuals, including Mr. Ma, have independent voting rights in the management of the company, as opposed to the prior arrangement that gave Mr. Ma indirect control of 53,46% of the voting rights. Mr. Ma’s stake in Ant Group is reduced to 6.2% from 10.6%.
President of the China Society of Economic Reform, which is under the National Development and Reform Commission (NDRC), said in a reform forum that the Chinese Government is launching “some forceful measures” to redistribute income, increase taxes, social security, and transfer payments, and “establish a mechanism to regulate wealth accumulation” in order to advance “common prosperity”. Establishing a mechanism to regulate wealth accumulation was first mentioned in President Xi’s work report delivered at the Chinese Communist Party’s 20th National Congress as a means to advance common prosperity.
According to Bloomberg, the Chinese authorities are considering to relax restrictions on highly-leveraged property developers from increasing their borrowings. The uplift of the restrictions would be important addition to the recent support measures to the real estate sector in China. The three red lines that were introduced in 2020 restrict developers’ ability to borrow if their debts have gone beyond the stipulated limits relative to assets, net debt, or cash.
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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.
