Market Insights Today: Hot US CPI, wild markets, China CPI on tap, Bank earnings kickoff – October 14, 2022
APAC Strategy Team
Summary: A choppy session in equity and bond markets despite a hot US CPI print for September pushing up Fed funds rate expectations by over 25bps on the terminal rate projections which limits the room for Fed officials to out-hawk the markets. Japanese yen suffers the biggest blow as intervention remains weak, while GBP and Gilts generally supported higher with another potential U-turn in UK fiscal plan. Further tightening from Monetary Authority from Singapore boosts the SGD, and China’s CPI will be on watch in the Asian session before Bank earnings take away the limelight later in the day.
What’s happening in markets?
The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) indices plunged after hot CPI data then whipsawed higher, moving in a ~5% range
Core inflation (which excludes volatile food and energy items) rose to a 40-year high in September which gives the Federal Reserve reason to continue with its aggressive interest-rate hikes. The Nasdaq 100 fell over 3% and the S&P500 fell 2.35% before both major indices whipsawed higher with the Nasdaq ending up 2.3% and the S&P500 up 2.6%. Short covering and macro trading would have played a huge role in the reason markets whipsawed higher. ETF volume accounted for 39% of the turnover, just a touch lower than the record high of 40%. In terms of sectors, financials and energy led the benchmark index higher. Amid the energy crisis, there are the most rising-free cash flows in energy markets, which offer value.
U.S. treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) made new highs before waning
U.S. treasuries had a volatile after the hot CPI prints. Now the money market fully prices in a 75bps hike in the November FOMC and a terminal rate of 4.9% early next year. The front end of the treasury curve was hit most with 2-year yields rising to as much as 24bps to 4.53% before paring back some of the move to finish the day 17bps higher at 4.65%. 10-year yields made a new high, hitting 4.08% soon after the CPI but spent the rest of the session waning to up only 4bps to close at 3.94%, despite a weak 30-year auction in the afternoon. The sharp rally (yields falling by over 20bps across the curve) in U.K. gilts contributed to stabilising U.S treasuries. The Bank of England bought a record £4.68 billion of gilts in its emergency bond purchase programme which is set to end on Friday. Traders snapped up gilts on speculation that the Truss government will announce the reversal of some of the tax cuts in the mini-budget when the Chancellor of the Exchequer Kwasi Kwarteng returns from the IMF meeting in Washington.
Australia’s ASX200 (ASXSP200.1) may likely meet a similar fate to US equities and have a wild day of trade
In Australia a similar situation is playing out with the futures market is now pricing in interest rates will peak at 3.9% next year. We have seen the RBA express ‘peak hawkishness’, is behind it. But the market is still pricing in rate rises will continue, but at a steady pace. This means growth sectors remain pressured and value strengthens. Consider; amid the energy crisis, there are the most rising-free cash flows in energy markets, which offer value and support share price growth. This is worth perhaps reflecting on, especially given coal prices hit fresh highs and we are not at peak coal demand season (January) yet. As such energy prices seem supported higher.
Hong Kong’s Hang Seng (HSIU2) China’s CSI300 (03188:xhkg)
Hong Kong and mainland China equities retreated, Hang Seng Index down 1.9% and CSI300 lower by 0.8%. HSBC (00005:xhkg) outperformed and gained 0.7%. Country Garden Services (06098:xhkg), tumbling 14.1%, and Country Garden Holdings (02007:xhkg), falling 9.8% were the worst performers in the Hang Seng Index, as the China property space continued to sell off. Machinery stocks declined on weak excavator sales in China. Weaknesses in China Internet and EV stocks dragged the Hang Seng Tech Index (HSTECH.I) down by 3.4%. On the other hand, local Hong Kong developers, Sun Hung Kai Properties (00016:xhkg), up 2.7%, New World Development (00017:xhkg), up 2.2%, and CK Asset Holdings (01113:xhkg), climbing 1.2% were among the best performers in the benchmark index, following news reports saying the Hong Kong Government is considering to relax the 15% extra stamp duty that non-resident buyers need to pay when buying a property in Hong Kong. In addition, Hong Kong is considering allowing 12 people instead of the currently 4 to gather in public. Macao casino stocks dropped from 1.9% to more than 7% on the dim prospect of relaxation on zero-Covid policy in mainland China. The head of China’s Epidemic Response and Disposal Leading Group, Liang Wannian, said on TV that China had no timeline for an exit from its Covid strategy. Sands China (01928:xhkg) was also troubled by a lawsuit in the U.S. in which the claimant is seeking more than USD7.5 billion in compensation. Healthcare stocks gained at the Hong Kong and mainland bourses. In the A-share market, computing, software, and digital currency concept stocks gained, following China’s central bank’s pledge to promote the development of the digital renminbi.
Weak verbal intervention in the Japanese yen
USDJPY traded to a fresh record high of 147.67 overnight, and stayed above the 147 handle despite a reversal in US dollar strength later in the session. Only some weak comments were noted from Japanese authorities, with FinMin Suzuki saying that FX volatility was discussed at the G20 meeting. There was also some speculation of more Japanese intervention after some sudden price movements in the Yen yesterday as USDJPY hit a high of 147.47 before knee-jerking lower to 146.52, albeit if it was intervention it wasn't successful with USDJPY back above 147.00. That is perhaps a reason why Japanese MoF official has stayed away from confirming or denying Thursday’s intervention. BOJ Governor Kuroda kept easing bias saying not appropriate to raise rates in Japan now, and with US yields still seeing some more room on the upside, there could be more room for yen weakness. Our technical analyst highlights that if USDJPY breaks 147.65 resistance, 149.34 level is not unlikely.
Crude oil (CLX2 & LCOZ2) followed the USD price action
While there were enough drivers for the oil prices overnight, price action in crude oil generally followed the USD trend which initially rose after the hot US CPI report cementing expectations for another 75bps rate hike at the November meeting and a small chance of a 100bps rate hike, but it fell later as risk sentiment revived. The IEA's monthly oil market report saw its Q4 demand view lowered by 300k BPD, while its 2023 demand outlook was cut by 470k BPD (both are still expected to show growth). But supply concerns also remained with the weekly US inventory reporting tight market in distillates following a decline of 4.9mln barrels in domestic supply. Crude stocks build was significantly above expectations (9.88mln vs an expected 1.75mln), while stocks at Cushing drew down by 309k; and gasoline posted a surprise build (2.023mln vs an expected -1.825mln). US-Saudi tensions also continue to slide downhill as the White House accused Saudi Arabia of coercing other OPEC+ members into agreeing to a huge output cut, and said it had asked the kingdom for a pause.
What to consider?
Hot US CPI pushing Fed tightening expectations higher – can Fed members continue to out-hawk the markets?
Core US inflation jumped to a 40-year high of 6.6% y/y in September, making more jumbo Fed rate increases inevitable. Headline CPI also came in higher than expectations, at 8.2% y/y with shelter, food and medical care contributing to the biggest gains. Fed funds rate expectations have pushed higher, with a full 75bps rate hike priced in for November with increasing expectations of a 75bps rate hike in December as well. March 2023 terminal rate expectation pushed higher by about 30bps to 4.94% now. This is above the 4.6% depicted by the Fed’s dot plot, and may leave little room for the Fed members to continue to out-hawk the markets. Fed speakers George, Cook and particularly Waller will be on the wires today.
Reports of another potential UK fiscal U-turn
There’s no ending the drama in the UK markets, with reports of another potential U-turn in the fiscal plans of Liz Truss government. Now, there are talks that the government is mulling hiking corporation tax despite initial plans to scrap the corporation tax hike and keep it unchanged. Such reports, along with the BOE’s increased bond-buying thus week, could help put a floor on UK assets next week as the central bank halts its bond purchases today. Still, the credibility of UK authorities remains in question, and that would mean it remains hard to include Gilts in asset allocation.
Treasury Secretary Yellen warned about the risk of a loss of liquidity in the U.S. treasury market
U.S. Treasury Secretary Janet Yellen voiced concerns about a potential breakdown in treasuries trading when answering questions yesterday and said that the Treasury is “worried about a loss of adequate liquidity in the market”. The concern about the potential risk of a sudden loss of liquidity or even a breakdown of trading in the U.S. treasury market has recently risen among some traders as the treasury market loses the largest buyer, the Fed in quantitative tightening. After rounds of QE and large fiscal deficits, the outstanding amount of treasuries has grown to USD23.7 trillion. The daily turnover in treasuries was USD627 billion a day in September. The turmoil across the pond in the U.K. gilts markets has also added to the worries among traders and probably policy makers in the U.S.
U.S. Bank earnings, potential CET1 capital shortfalls to watch
Several leading U.S. banks, including JPMorganChase (JPM:xnys), Morgan Stanley (MS:xnys), Citigroup (C:xnys), Wells Fargo (WFC:xnys), US Bancorp (USB:xnys), PNC Financial (PNC:xnys), First Republic Bank (FRC:xnyc) are reporting on Friday. The market focus will be on JPMorganChase, Morgan Stanley, and Citigroup. The key things to watch for are these banks’ net interest margins and their updates on the quality of their loan books, as well as the impact of mark-to-market losses incurred to their available-for-sale investment portfolio, which are largely treasuries and agency mortgage-backed securities, on their common equity tier-1 (CET1). Some of the banks may be hit by falling bond prices and are facing CET1 capital shortfalls.
Taiwan’s TSMC, South Korea’s SK Hynix, and Samsung Electronics secured U.S. approval for getting U.S. equipment for 1 year
Taiwan Semiconductor Manufacturing Co said the company had secured a 1-year license from the U.S. government to continue to get U.S. chip-making equipment for its expansion in manufacturing capacity in China for the next 12 months. Likewise, South Korean chip maker, SK Hynix said it had gotten a 1-year waiver from the U.S. government to import American equipment to its factories in China. Reportedly, Samsung Electronics got a similar waiver. On the other hand, China’s top semiconductor equipment maker Naura Technology was said to have told the company’s American engineers to stop working on research and development projects with immediate effect.
The Chinese Communist Party convenes its 20th National Congress on Oct 16
General Secretary Xi Jinping will make a speech and presents the Work Report of the 19th Central Committee to the 20th National Congress of the Chinese Communist Party (CCP) on Oct 16. From Oct 16 to 22, around 2,300 delegates from all over the country will elect 205 full members and 171 alternate members of the 20th Central Committee and select the members for the 20th Central Commission for Discipline Inspection. On Oct 22, the 20th National Congress will vote to approve the Work Report of the 19th Central Committee and approve an amendment to the charter of the CCP. The 20th National Congress ends on Oct 22 and the newly elected 20th Central Committee will hold its 1st plenary session on Oct 23 and decide on the most important 25-member Politburo and its 7-member Standing Committee, as well as members of the Central Military Commission and Central Secretariat. Nomination of Premier and Vice-premiers of the State Council are matters to be decided not this time but later in the 2nd plenary session which may be held in February 2023 and that nomination will need to be approved by the National People’s Congress in March 2023.
ECB QT likely to begin in Q2 2023, lower ECB terminal rate
ECB discussed possible timeline for balance sheet reduction at Cyprus meeting earlier this month. Consensus appeared to emerge for quantitative tightening to start sometime in Q2 2023. Reports suggested that the ECB could already tweak its language on reinvestments at its October meeting and then could provide a detailed plan possibly in December but more likely in February. Meanwhile, Reuters reported that an ECB staff model puts the terminal rate in Europe at 2.25%, beneath the 3% that markets are currently pricing in; however, the response from ECB policymakers was mixed, with some fearing the model contains errors.
China’s CPI is expected to rise to 2.9% in September
China is releasing CPI and PPI data on Friday. The median forecast in the Bloomberg survey is expecting the CPI to rise to 2.9% Y/Y in September from 2.5% Y/Y in August. The rise is likely attributed to higher food prices, including pork prices during the month. PPI is expected to fall to 1.0% Y/Y in September from 2.3% in August, helped by a high base last year.
China’s export growth is expected to decelerate in September
The median forecast in Bloomberg’s survey of economists calls for a sharp deceleration of China’s export growth in USD terms to +4.0% Y/Y in September from +7.1% in August, citing tightened pandemic control measures and a high base of last year.
China’s LNG imports are set to decline this winter
Bloomberg analysts estimate that China’s LNG import in November and December will be 12.7 million metric tons, a decline of 17% from last year, citing Chinese LNG users canceling LNG import terminal access slots.
Singapore avoids a technical recession, MAS re-centres currency band
Solid Q3 GDP growth of 4.4% y/y in Singapore according to advance estimates, crushing estimates as construction and services industries outperformed. This reaffirmed that Singapore not only avoided a technical recession, but is on a solid recovery track after the pandemic restrictions were removed. Q/Q growth turned positive to come in strongly at 1.5% from -0.2% previously. This has given further room to the Monetary Authority of Singapore (MAS) to tighten the policy, and it announced re-centring of its currency policy band to the prevailing level. No changes to the width or slope of the band were announced, meaning the boost to the SGD could remain temporary as potentially more USD gains remain likely for now.
What is the thinking about what will happen to interest rates in Australia?
In Australia the futures market are now pricing in interest rates will peak at 3.9% next year. We have seen the RBA express ‘peak hawkishness’, is behind it. But the market is still pricing in rate rises will continue, but at a steady pace. This means growth sectors remain pressured and value strengthens. Consider; amid the energy crisis, there are the most rising-free cash flows in energy markets, which offer value and support share price growth. This is worth perhaps reflecting on, especially given coal prices hit fresh highs and we are not at peak coal demand season (December-January) yet. Also consider oil prices have moved off their lows. As such energy prices look supported higher for longer despite A.
Most traded instruments at Saxo Australia this week
The most traded stocks this week at Saxo in Australia are Tesla, Apple, Whitehaven Coal (hit new high), Coles, and Bank of Queensland results. What’s the takeaway here? We need to reflect on the trends. Trends are your friends when it comes to making profits in markets. In the banking sector; we heard from Bank of Queensland who is forecasting house prices to drop and loan growth to slow. Coal prices are moving up and continues to be supported. And in when it comes to the most transacted upon futures, in commodities; we've seen a pick-up in buying of Crude oil Futures; with the OPEC and EIA still predicting demand will outpace supply in 2023, meaning we could expect higher oil prices into next year.
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