Summary: Tech stocks outperformed, led by Nvidia which was named a top pick by a major investment bank, after AI wave has been cooling in the last few days. Japan’s Q2 GDP posted a solid headline growth but details were patchy and USDJPY is slowly moving above 145.50. Yuan remains a bigger focus for now with China activity data on tap. Commodity complex will also be exposed as dollar strength underpins. UK labor data and US retail sales due in the day ahead.
US equities advanced despite rises in Treasury yields. The S&P500 Index added 0.6% to 4,489 while the Nasdaq 100 Index rose 1.2% to 15205. Information technology, gaining 1.8%, was the best-performing sector within the S&P500 Index and led the market higher. Notably, Nvdia (NVDA:xnas) rallied 7.1% on an analyst upgrade, followed by another chipmaker Micron Technology (MU:xnas) which climbed 6.1%.
In a thin trading day in terms of flows and headlines, the 10-year yield rose to as high as 4.21%, the level last seen in November 2022, before ticking down slightly to end the session at 4.19%, up 4bps from last Friday. The 2-year yield climbed 7bps to 4.97%, flattening the 2-10-year yield curve by 3bps to -78.
The Hang Seng Index plunged 1.6%. Chinese developer Country Garden, falling 18.4%, is poised to seek a debt restructuring after suspending trading of its onshore bonds. Adding fuel to the negative sentiment was that a Chinse trust company Zhongrong Trust (m, missed payments on its wealth management products which are short-term high-yield debt kinds of investments sold to retail and corporate investors, and the weak July credit data released last Friday. EV stocks plunged, with BYD dropping by 6.2%, as investors worried about a price war in the industry. Nonetheless, southbound net buying from mainland investors reached HKD8.8 billion.
In the A-share market, the CSI300 index declined by 0.7% and was dragged down by autos, banks, properties, food, and beverage stocks. Northbound flows were a net sale of RMB4.7 billion.
USDJPY saw a mild and temporary downside to 145.40 on Japan’s flash Q2 GDP numbers reporting a solid growth on the headline, although details were less convincing. Still no sign of verbal intervention from authorities as pair reaches highs of 145.58 and more gains remain in sight. EURUSD plunged below 1.09 overnight but recovered above later and GBPUSD still sticking close to the 1.27 handle as labor market data will be in focus today. USDCNH reached a 9-month high of 7.29 and traders are on intervention alert but focus today turns to a host of activity data due in Japan.
Crude oil prices slumped lower on Monday after seven consecutive weeks of gains amid China’s slumping credit data signalling more worries about the economy and property sector debacle also getting worse. Higher dollar also weighed on the commodity complex in general and focus turns today to China’s activity data due to be reported. Further weakness could signal more demand pressures despite IEA’s estimating that global demand is running at a record pace aided predominantly by Chinese demand.
Higher Treasury yields continue to weigh on the short-term outlook for Gold, and a test of the key $1900 may be on the way and a break below could bring $1865 support in focus. Long-term Gold bulls will have to wait for clear signs of a peak in interest rates before gains return.
The NY Fed Survey of Consumer Expectations saw median 1yr ahead inflation expectations fall to 3.5% from 4.1%, the lowest since April 2021, while the 3yr and 5yr ahead both dipped to 2.9% from 3.0%. Labor market expectations strengthened, and households’ perceptions about their current financial situations and expectations for the future improved. Meanwhile, WSJ’s Timiraos tweeted that the Cleveland Fed measure of one-year inflation expectations fell to 4.3% in July from 5% in April. This is the lowest level in 2 years.
A strong beat was seen on Japan’s Q2 GDP data this morning. Annualized GDP for Q2 came in at 6.0% QoQ, more than double of the consensus expectation at 2.9% with Q1 also revised higher to 3.7% QoQ from 2.7% previously. But details still lack conviction with contribution from net exports seen higher at 1.8% from -0.3% in Q1. Private consumption growth turned negative in the quarter to come at -0.5% QoQ from 0.6% in the first quarter and business spending was flat from growth of 1.8% last quarter. Notably, GDP deflator, a measure of inflation jumped higher to 3.4% YoY from 2.0% in Q1 and may make a case for some more tweaks from Bank of Japan.
Ailing Chinese developer Country Garden reportedly is talking to bondholders of RMB bonds issued by the Cayman Islands domiciled Country Garden Holdings in the mainland domestic market due this September and seeking to reach an agreement to extend the maturity of the debt by three years. According to the proposal, Country Garden will redeem 2% each in Oct, Nov, and Dec 2023, 10% in Sep 2024, 15% in Sep 2025, 25% in Mar 2026, and the remaining 44% in Sep 2026. This proposal might be a pilot plan paving the way for other Country Garden bonds that mature later to follow.
China’s retail sales are anticipated, according to the Bloomberg survey, to increase to 4% Y/Y in July from 3.1% in June due to a low base last year. This implies, however on a month-on-month annualized basis, retail sales fell 17.2% in July. The recovery in in-person services was likely to be offset by a decline in auto sales.
Industrial production growth in China is expected to tick down to 4.3% Y/Y in July from 4.4% in June. Weak export data released last week and high-frequency data such as steel output tend to suggest potential downside surprises.
The year-to-date growth in fixed asset investment is expected to slow to 3.7% Y/Y from 3.8% as construction PMI was weak in July. The year-to-date growth in property investment is expected to contract further to -8.1% Y/Y from -7.9%.
While the markets continue to embrace the soft landing narrative, Fed’s data-dependent mode has made it extremely sensitive to any incoming data releases. Last week’s data suggested it may be too early to put inflation concerns on a backburner, and this week’s focus will primarily be on growth data as July US retail sales is reported on Tuesday. Bloomberg consensus expects July retail sales to see an uptick and come in at 0.4% MoM from 0.2% previously, while the control measure that feeds into the GDP is seen at 0.5% MoM from 0.6% in June. Headline may be boosted by one-time items such as Amazon Prime Day or July 4 holiday spending as well as higher gasoline prices boosting the value of gasoline station sales. However, retail sales could likely fall towards the end of the year as excess savings of the lower and middle income groups are getting depleted and rising credit risks suggest household financial stress could elevate. Sustained weakness in same store sales growth from Johnson Redbook for July also suggest headwinds to retail sales could be building.
UK’s Q2 GDP surprised to the upside last week, but the markets are still more worried about wage and inflation dynamics to see the end of the tightening cycle draw closer. Labor market data will be out on Tuesday and will likely show some signs of cooling in the labor market, but wage pressures, particularly in the private sector, are unlikely to ease enough to support the case for a pause at the September meeting. Bloomberg consensus expects monthly payrolled employees to decline by 12k in July from -9k in June, while the 3-month weekly earnings could surge to 7.4% YoY for June from 6.9% previously.
The consensus anticipates that Home Depot will announce revenue amounting to USD 42.13 billion, declining 3.8% Y/Y, along with an EPS of USD 4.46, decreasing 11.8% Y/Y. Mortgage rates continue to remain at higher levels. Notably, housing turnover data in the US exhibited a slowdown in recent months. Additionally, retail sales pertaining to building materials, garden equipment, and supplies within dealer stores declined in the month of June. This downward trend was also evident in high-frequency traffic data, showing a decrease in visits to Home Depot. The consensus outlook further predicts a 3.6% drop in Home Depot's same-store sales for the quarter.
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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.
