Market Insights Today: Geopolitics, US ISM manufacturing on the radar – October 3, 2022
APAC Strategy Team
Summary: The S&P500 broke below 3600 into the close on Friday as US 10-year yields surged above 3.8%. Risk off seen from multiple forces heading into the new month/quarter as corporate earnings misses continue to raise the threat of an ugly earnings season ahead. Meanwhile, the war could take a turn for the worse if Russia decides to escalates after losing a key city to Ukraine again over the weekend. China heads into the Golden Week holiday and OPEC+ meeting in focus this week with expectations of over 1mn b/d output cut on the table. UK crisis will also take more attention this week along with key US ISM manufacturing data due today and the payrolls data at the end of the week.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) had three down quarters in a row
U.S. equities continued to sell off on Friday. S&P500 dropped 1.5% for the day and ended the month more than 9% lower. Nasdaq 100 declined 1.7% on Friday, falling nearly 11% in September. 10 of the 11 sectors in the S&P 500 declined, with Utilities, Information Technology, and Consumer Discretionary leading the charge lower. Real Estate was the only sector that gained on Friday.
Big U.S. stock movers
Being another latest signal of weakening U.S. consumer demand, Carnival (CCL:xnys) tumbled more than 23% after the cruise operator reported occupancy for the quarter ending Aug 31 below market expectations. Nike (NKE:xnys) plunged 12.8% on rising inventories and margin misses. For a detailed discussion on last week’s earnings warning signs from Nike, Micron, and H&M’s margin misses, please refer to Peter Garnry’s analysis here.
U.S. treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) climbed again
U.S. treasury yields fell initially during London hours on Friday in tandem with the intraday swings in the U.K. Gilts and then pared the decline in yields in New York hours following the slightly stronger than expected PCE data and Fed Vice-Chair Brainard’s reiteration that the Fed will avoid pulling back from rate hikes prematurely. Yields decisively soared higher in the last hour of trading with 2-year yields rising 9bps to 4.28% and 10-year yields climbing 4bps to 3.83%.
September was Hang Seng Index’s (HSIU2) worst month in 11 years
Hong Kong and mainland China markets were treading water ahead of the week-long National Day golden week holiday in the mainland, with Hang Seng Index up by 0.3% and CSI 300 Index sliding 0.6%. Despite the lackluster trading last Friday, September was the worst month for the Hang Seng Index, which had fallen 13.7%, over the past 11 years. Chinese developers rallied to recoup some of the recent losses following incremental supporting measures from regulators. CIFI (00884:xhkg), Country Garden (02007:xhkg), and Guangzhou R&F rebounded 11%, 9%, and 8% respectively. Chinese EV maker, Zhejian Leapmotor (09863:xhkg), tumbled another 22% last Friday after having collapsed 33.5% the day before on its first day of trading. Other Chinese EV names traded in the Hong Kong bourses plunged from 4% to 7% even after more subsidies and support were announced by the Ministry of Commerce and the Shanghai Municipal Government. Chinese restaurant operator Jiumaojiu (09922:xhkg) plunged by 20.4% following its announcement to pay RMB1 billion for a 26% equity stake in the Guangzhou IFC Mall project which will give the company 30,000 sqm for self-use as headquarter and R&D centre.
GBP ends a volatile week strongest against the USD
Sterling ended the week strongest in the G10 pack against the USD despite a flash crash last week and risks of a pension fund crisis in the UK on top of the current energy crisis and the runaway inflation issues at hand. Rising Russia tensions mean that the energy situation could get a leg up this week, but focus for the sterling will remain on any possible rollback of the loose fiscal policy. The political pressure is certainly mounting after the latest YouGov poll showed Labour with a 33-point lead in the polls, the widest margin since the 1990’s. GBPUSD is testing a break above 1.1235, but that for now seems to be underpinned by a softer USD and lower US yields, and it remains to be seen if that story will continue this week as we get past the rebalancing flows.
Crude oil (CLX2 & LCOX2) prices waiting for a large OPEC+ production cut
Crude oil ended last week mixed but mostly lower on Friday after some gains initially on expectations of an OPEC+ production cut coming this week. It is being reported that OPEC+ is mulling a possible reduction of 0.5-1mn barrels/day, after the September output rose 210k barrels/day from August. Some delegates said over the weekend that output cut could exceed 1 million barrels/day, and this has helped crude oil see a 3% jump at the Asia open. Given that the meeting is in-person for the first time since March 2020 also raises expectations of a large cut. WTI futures were seen above $82/barrel while Brent futures rose towards $88. Still, demand worries especially with China’s lockdowns and rapid global tightening pace will continue to put downside pressure on oil prices.
Wheat futures (ZWZ2) higher on supply concernsOn Friday, the USDA published its Quarterly Stocks and wheat production reports. Corn stocks were lower and soybeans higher than expected. December wheat (ZWZ2) jumped 2.8% with stocks in line but production in all categories falling short of expectations. Meanwhile, geopolitical concerns are on the rise with Russia threatening use of low-yield nuclear weapons as its military advantage starts to diminish. This has again raised concerns over the fate of the Black Sea export corridor and the supply situation in agri commodities may continue to be challenged.
What to consider?
Hot US PCE paves the way for another CPI surprise this month
US PCE data came in stronger-than-expected, with the headline up 6.2% YoY from 6.3% YoY prior and 6.0% YoY expected. The core measure was at 4.9% YoY, coming in both higher than last month’s 4.6% YoY and the expected 4.7% YoY. This will likely push up the pricing of another 75bps rate hike from the Fed at the November meeting, as the CPI report out this month is generally likely to follow the same trend of remining close to its highs. Meanwhile, the final estimate of University of Michigan survey was revised lower to 58.6 from preliminary print of 59.5 due to the slide in expectations to 58 from 59.9, even as the current conditions fared better at 59.7 from 58.9 previously. The inflation metrics also diverged with 1yr consumer inflation expectations edging higher to 4.7% (prev. 4.6%), although the longer term 5yr slightly fell to 2.7% (prev. 2.8%).
Stronger Q3 Atlanta Fed GDP and more calls for restrictive Fed policy
The economic momentum in the US is still strong, as hinted by the big upward revision in Atlanta Fed’s Q3 GDP estimate to 2.4% from 0.3% earlier with higher contribution expected from private domestic investment and net exports. The advance Q3 GDP report is due on October 27, so that will likely give more ammunition to the Fed to raise rates aggressively at the November meeting. Meanwhile, more Fed speakers were on the wires on Friday continuing to push for interest rates to move towards or above the median of the dot plot. Fed Vice-Chair Brainard noted policy will need to be restrictive for some time, while Mary Daly (2024 voter) was more specific to say that she expects to hold rates steady for at least all of 2023 after rate hikes. Barkin (2024 voter) echoed the Saxo view that Fed has decided that they’d rather be wrong by tightening too much rather than tightening too little. He said it would be a good news story if the Fed did a bit too much and inflation came down.
Eurozone inflation remains painfully high
The September eurozone consumer price index (CPI) reached double-digits at 10% year-over-year versus prior 9.1% and expected 9.7%. The core CPI (excluding volatile components) is up to 4.8% year-over-year versus expected 4.7% too. What is clearly worrying is there is an acceleration in price pressures beyond energy and food prices. This is a signal that inflation is now broad-based. In France, the EU-harmonized CPI was out at 6.2% year-over-year in September. This is much lower than what the consensus expected (6.7%). It stood at 6.8% in July and 6.6% in August. On the downside, the producer price index (PPI) for August reached a new high at 29.5% year-over-year against expected 27.6%. This matters. The PPI usually represents the pipeline in inflation which will be passed on to consumers, at least partially. This means that the peak in inflation is likely ahead of us in France and in all the other eurozone countries. Expect to reach it in the first quarter of next year, at best.
China’s PMIs were mixed in September
China’s September official NBS Manufacturing PMI came in at 50.1, stronger than expectations (consensus 49.7, Aug 49.4), and returned to the expansionary territory. The strength was found in the output sub-index which rebounded to 51.5 in September from 49.8 in August, which was largely due to the receding heatwave and pent-up demand. The other major sub-indices in manufacturing remained below 50. Exports were weak as the new export orders sub-index fell to 47 in September from 48.1 in August. The Caixin Manufacturing PMI, which has a larger weight in coastal cities in the eastern region, fell to 48.1 (consensus 49.5, Aug 49.5), echoing the weakness in the exports element in the official PMI. The NBS Non-manufacturing PMI came in at 50.6, below expectations (consensus 52.4, Aug 52.6). Among non-manufacturing activities, the construction sub-index rose to 60.2 from 56.5, supported by infrastructure construction, while the service sub-index fell into the contractionary territory, coming in at 48.9, down from August’s 51.9. Retail, air travel, lodging, catering, and other services requiring close contact contracted in the midst of Covid restrictions.
Ukraine’s recapture of key city raises the nuclear threat
Ukrainian troops recaptured the city of Lyman over the weekend in occupied eastern Ukraine, less than a day after Russia announced the annexation of the area and vowed to defend it with all military means. Ukraine's successes have infuriated Putin allies such as Ramzan Kadyrov, the leader of Russia's southern Chechnya region who called on Putin to retaliate by escalating even further against Ukraine, including declaring martial law in the border regions and using low-yield nuclear weapons.
China relaxes mortgage rates’ lower bound for first-time homebuyers and provides tax rebates to homebuyers plus telling banks to lend to the property sector
The People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) announced last Friday to lower or even remove the lower bounds imposed on first-time homebuyers in cities that experienced three consecutive months (from June to August 2022) declines in new home prices both sequentially and year-on-year. The currently lower bound is the 5-year Loan Prime Rate minus 20bps. The new policy will benefit first-time homebuyers in lower-tier cities while tier-1 cities do not meet the above price decline criterion. Among the top-70 cities, eight Tier-2 cities and 15 Tier-3 cities are eligible. The PBoC and the CBIRC also reportedly told the largest banks in the country to extend at least RMB600 billion in net new financing to the housing sector for the rest of the year. In addition, the State Administration of Taxation announced that from Oct 1, 2022, to Dec 31, 2023, homebuyers will be rebated the tax they paid for the sale of their previous home if the sale was within one year from the purchase of the new home.
Tesla reveals a prototype of its humanoid robot
On last Friday’s AI Day, Tesla (TSLA:xnas) showcased a prototype of the EV maker’s first humanoid robot, dubbed Optimus, and reveals the latest updates to the company’s assistant deriving system. Tesla’s humanoid robots are still a long way from commercialization and it plans to deploy them first at Tesla factories.
Intel goes ahead to list its self-driving-car unit
Intel’s self-driving-car unit, Mobileye said on Friday that the company filed with the Securities and Exchange Commission for IPO. Mobileye did not provide information about the expected size and price range for its IPO. Intel acquired Mobileye, an Israeli company that develops driver-assistance systems for USD15.3 billion in 2017. Mobileye said it had agreements in hand to supply 266 million vehicles with the company’s driver-assistance systems by 2030.
US ISM manufacturing on watch today
Due later today, ISM manufacturing is unlikely to dent the optimism around the US economy that has been building up further with positive economic indicators released over the last few weeks. While the Bloomberg consensus estimates show some signs of a slowdown to 52.1 in September from 52.8 in August – that should likely be underpinned by improving supply chains, while new orders should remain upbeat.
On Tuesday, Japan’s Tokyo CPI will see impact of reopening
Japan’s inflationary pressures are likely to continue to reign amid higher global prices of food, electricity as well as a weak yen propping up import prices. Bloomberg consensus estimates point to a slightly softer headline print of 2.7% YoY from 2.9% YoY previously, but the core is pinned higher at 2.8% YoY from 2.6% YoY previously. Further, the reopening of the economic from the pandemic curbs likely means demand side pressures are also broadening, and services inflation will potentially pick up as well.
For a week-ahead look at markets – tune into our Saxo Spotlight.
For a global look at markets – tune into our Podcast.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.