Summary: The strength in Alphabet lifted Nasdaq 100 to a new high in a mixed session. The cooler U.S. PPI and initial jobless claims and continuous deposit flights in regional banks reinforced the case for a Fed pause. Adding to investors’ concerns about the global economy and weakness in commodities was disinflation and deceleration in credit growth in China.
In a mixed session, the S&P500 Index edged down 0.2% despite cooler PPI data. Nasdaq 100, however, managed to climb 0.3%, extending gains to reach its highest level this year. The strength of the rally in the Nasdaq was narrow and largely driven by a 4.3% advance in the share price of Alphabet (GOOGL:xnas). Alphabet also helped communication services stand out as the best performing sector within the S&P500 on Thursday, despite Disney (DIS:xnys) tumbling 8.7% on a decline in subscribers.
SPDR S&P Regional Banking ETF (KRE:arcx) extended losses, failing 2.4%. PacWest (PACW:xnas) tumbled 22.7% after the regional lender said deposits had decreased by 9.5% in a week, signalling the woes in the regional banking industry is far from over (see below for more).
The softer-than-expected PPI and initial jobless claims saw yields lower across the curve but the 2-year pared most of its gains (in price) ending just 1bp lower in yield at 3.90%. Conversely, the long ends of the curve, spanning from the 10-year notes to the 30-year bonds outperformed, recording a 6bp decline in yields. The uptick in demand for long-dated Treasuries was spurred by a strong 30-year auction that awarded at 1.5bps richer than the level of the when-issue at the time of auction deadline. Additionally, the bid-to-cover ratio for the auction was a healthy 2.4 times, signalling significant investor appetite.
The Hang Seng Index managed to offset early losses to conclude a volatile trading session, albeit with a marginal 0.1% decline. Market participants were offloading equities due to concerns over weak CPI and PPI figures in China for April, which indicate sluggish momentum in the aggregate demand following the tapering of pent-up demand for in-person services. However, the index recovered during afternoon trading, thanks to the surging performance of Alibaba (09988:xhkg), which recorded a 3.1% upswing. This followed Softbank's disclosure that it had utilized all the Alibaba shares in its selling program through derivatives, thereby alleviating the supply overhang worries that had been weighing on the e-commerce behemoth's share price.
Meanwhile, the Hang Seng TECH Index posted gains of 1.3%, bolstered by robust performances from Alibaba and EV stocks. Li Auto (02015:xhkg) was the top performer, surging by 17.1% after reporting a 96% YoY revenue rise in Q1.
In A-shares, the CSI300 Index declined by 0.2%, driven by weakness in communication, oil and gas, defence, and computing. However, the media and new energy spaces advanced.
Despite cooler economic data in the US and refuelling of banking sector concerns, the US dollar rose higher on Thursday across the G10 board. GBPUSD was wobbly immediately after the Bank of England’s rate hike but continued to slide subsequently to test 1.25 as the hawkish message was not firm. EURUSD also dropped to test 1.09. AUDUSD and NZDUSD had more to give after recent gains, and were down to key levels of 0.67 and 0.62 respectively. USDJPY however stayed close to 134.50 as lower Treasury yields underpinned the yen.
Weak demand concerns continue to pile up for the crude oil market, with US economic data on cooling inflation and labor market conditions further igniting slowdown concerns and China’s inflation and credit data also pouring water on the China demand surge hopes. WTI prices dipped below $71/barrel while Brent was below $75. There were however some reports that underpinned oil prices later. US energy secretary, Jennifer Granholm, said the government aims to purchase oil to refill the Strategic Petroleum Reserve after a congressionally mandated drawdown ends in June. OPEC increased its outlook for China’s oil demand by 50kb/d, bringing total demand growth to 800kb/d in 2023. It expects world oil demand in 2023 will rise by 2.33mb/d. Also, Fed rate cut expectations continue to pick up but if these remain at the risk of being pushed out later then that could create more demand pressures for crude oil.
Copper fell to its lowest level in seven months on rising concerns over the health of China’s economy. After weaker-than-expected PMIs at the start of the month, the CPI data and credit data yesterday was also weak (read below) further weighing on the metal prices. Copper futures broke below key support of $3.80/lb for the first time in four months, thereby supporting fresh selling by momentum-based funds. The next key level of support will be -$3.6680/lb, the 61.8% retracement which is now being tested. While short-term pressure is apparent, copper remains the king of green metals and lack of a resilient supply means prices will remain underpinned in the medium/long term.
US producer prices in April rose 0.2% M/M, less than the expected 0.3% rise, while the prior month was revised to a 0.4% decline from an initial 0.5% decline. The Y/Y figure fell to 2.3% from 2.7%, coming in softer than the 2.4% expected. Core PPI rose 0.2% M/M, as expected and reversing last month's 0.1% decline, with core services rising to 0.4% from 0.2% while core goods were more contained at 0.2%. Core PPI rose 3.2% Y/Y, beneath the expected 3.3% rise and down from the prior 3.4%.
Meanwhile, weekly US initial jobless claims prints at 264k vs. 245k expected and 4-week average (as of last week) of 239k. It is the highest reading since October of 2021, and again supports the case for a Fed pause, although remaining not enough to support the aggressive rate cut pricing. Markets continue to price in about 100bps of rate cuts from the Fed until the January 2024 meeting.
The Bank of England hiked rates by 25bps to 4.50% on Thursday, via a 7-2 vote split. Once again, Tenreyro and Dhingra voted for an unchanged rate and there were no dissenters for a rate cut for now. The MPC stayed away from signalling a pause for the June meeting. Near-term inflation forecasts were adjusted higher to 5% for 2023 from 4% previously but inflation in 2025 is seen materially below the MPC's 2% target at just 1%. Growth projections were also revised higher, with recession forecast removed. Market is currently pricing an over 70% probability of a rate hike in June with terminal rate seen at 4.81% and persistent wage and inflation data can bring market pricing to add another hike as well.
Regional bank fears re-ignited on Thursday after PacWest Bancorp announced it saw deposit losses in early May of roughly 9.5% after noting it is exploring all strategic options. Western Alliance also sold off on the news pre-market, but recovered later after it announced total deposits are up $600mn since May 2 to ~$49.4bn as of Tuesday May 9. Banking sector confidence remains fragile and prone to further deterioration if deposit concerns continue. Elsewhere, FDIC proposed a special fee on larger banks to recoup losses incurred by SVB and Signature Bank failures, The fee will be based on the amount of uninsured deposits at each bank, and would set an annual special assessment rate of 12.5bps on a bank's uninsured deposits as of December 2022.
The White House said it has postponed a meeting on debt ceiling negotiations between Biden and GOP leaders that was scheduled for Friday to allow staff-level talks to continue. After Tuesday’s meeting brought no progress in talks, another postponement could bring additional bond volatility. While the White House reportedly viewed the delay as a positive development, adding that staff meetings were going well and it was not yet time for the principal leaders to come back together, Republicans disagreed and Kevin McCarthy said that he does not think there is enough progress for leaders to get back together. Concerns are also starting to rise about the Treasury’s cash balance which is down to half since the start of the month, standing now at $155bn, and on pace to hit Janet Yellen’s X-date of June 1. For more insights into how the debt ceiling issue could play out, see here.
Inflation in China softened further in April, with headline CPI growth slowed to 0.1% Y/Y (vs consensus 0.3%; March: 0.7%). Weakness was in both food prices and non-food items. Core CPI remained at 0.7% Y/Y in April, the same as in the previous month. While prices remained strong in services, weak demand for durable goods weighed on consumer prices. PPI decelerated further to a year-on-year decline of 3.6% (Consensus: 3.3%; -2.5% in March) with notable weakness in commodities prices.
New aggregate financing fell to RMB 1,220 billion in April form RMB 5,380 billion in March, well below RMB2,000 billion expected. The year-on-year growth of outstanding aggregate financing stayed at 10% due to the low base last April. New RMB loans fell to RMB 719 billion in April from RMB3,890 billion in March. Both new loans to the corporate sector and the household sector were weak. The new medium to long-term loans to households (largely mortgages) was negative in April.
JD.COM (09618:xhkg) reported Q1 revenues of USD35.38 billion, above estimate of USD34.64 billion and EPS of USD0.69 beating consensus of USD0.50. The management said Q2 business was looking better than Q1. JD.COM’s ADR gained 7.2%.
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy