Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Market sentiment continued to deteriorate late last week on geopolitical concerns and despite the Bank of England’s intervention helping to at least temporarily stabilize global sovereign bond markets after their aggravated slide of late. The week ahead features a busy economic calendar from the US, capped by Friday’s September jobs report as markets wonder whether the US labor market will allow the Fed any chance to change its hawkish tune.
S&P 500 futures pushed below the 3,600 level this morning, which is obviously a major level to watch and indicates that the equity market is still facing headwinds. The latest risk sources adding to the negative sentiment are talks about Credit Suisse and their financial strength, and then macro indicators in Asia continuing to weaken against estimates. On a positive note, the US 10-year yield has stabilised around the 3.75% level which is critical for stabilisation in the equity market. Our medium-term outlook continues to be negative on equities driven by higher rates for longer and structurally higher inflation being priced in by the market over time.
The US dollar found support as US treasury yields bottomed out and recovered on Friday. An interesting test for the USD here if treasury yields continue to churn sideways or lower and yet risk sentiment remains on the defensive. Is the USD still a safe haven without the constant turning of the screws from treasury yields that have been a key factor in the huge upswing in the greenback this year? Key levels for the USD include the 145.00 area tested overnight in USDJPY (the Bank of Japan intervened above this level previously) for resistance and 0.9900 resistance/USD support in EURUSD. A busy data week for the US this week as well – a strong September jobs report on Friday could continue to support the dollar.
Sterling made a bid at a full reversal of its enormous slide last week, but the jury is still out on whether the currency has put in a major low A major sentiment shift to the upside might require the Truss government to go or at least to roll back some of the measures that helped to trigger the currency’s slide (although pension fund hedging was a significant factor in the lock-up in the UK’s gilt market that brought both the chaotic slide and the Bank of England’s emergency response.) EURGBP focus on the 0.8700-0.8750 area that was the former top of the longer term range, and GBPUSD focus on 1.1200-1.1250 if sterling continues to attempt a recovery. The Bank of England is priced to hike 122 bps at its November 3 meeting, down from over 150 bps at times last week.
Gold holds above Friday’s low at $1660, supported by geopolitical and financial risks and a cooling of the recent dollar and yield surge. At this stage the main buyer is likely to be money managers reducing short bets on COMEX gold. In the week to September 27, the net short held by these speculators jumped 25% to a near four-year high. Focus now being the critical resistance zone into 1,678-1,690 that is the departure point for this latest bear market move.
Crude oil trades higher ahead of Wednesday’s OPEC+ meeting in Vienna as the alliance is considering a production cut of more than 1 million barrels to support prices following a 25% slump during Q3-22. Both WTI and Brent, however, trade up by less than 3% with the decision by no means final while the impact of such a move would be smaller than the headline number suggests as several producers, including Russia, produces below their target. Relative to the current quotas, only a handful of producers led by Saudi Arabia would be able to deliver the cuts without losing additional market share relative to the quota system in place. In addition, the group also need to consider the impact of a Russian embargo starting in December and the US pausing its sales from Strategic Reserves as well as the Biden administration asking gasoline producers to curb overseas sales. Weighing on prices are the potential for more fuel exports from China after it issued its biggest fuel-export quota for this and potentially the next quarter.
US treasury yields rebounded from local lows for the week on Friday, suggesting that very weak risk sentiment elsewhere is not yet seeing significant interest in treasuries as a safe haven – although at least rising yields aren’t the primary driver of weak risk sentiment at the moment. The upside focus remains to on the 4.00% area highs for the US 10-year treasury yield benchmark from last week and to the downside on the 3.50% prior high from June. Important macro data points from the US include the ISM surveys today and Wednesday and the Friday US September jobs report.
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%).
The FRA-OIS spread is rising rapidly indicating that the risk priced by the market in the overall banking sector is deteriorating and thus the banking sector is in focus by investors this week.
The EV-maker reports 343,830 cars delivered in Q3 against estimates of 358,000 which the EV-maker says is due to logistical obstacles, but other consumer companies have faced headwinds due to elevated energy costs so it would be natural to expect Tesla’s delivery figures being hit by the current cost-of-living and energy crisis.
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 %. What is clearly worrying is the 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.
On Friday, the Norges Bank said it would raise the level of daily foreign FX purchases to $400 million in October as it transfers revenues from its energy exports into the enormous sovereign wealth fund. NOK sold off sharply on the news on Friday, with EURNOK rising to a new high for 2022 above 10.60.
The former left-populist president Lula polled strongly at 48%, but not over the 50% margin required to avoid a run-off. Incumbent president Jair Bolsonaro received 43% of the vote. Observers are watching the election with some level of unease on fears of election interference or lack of acceptance of the results from Bolsonaro. USDBRL trades near the highs since January, just below 5.50.
On Friday, the USDA published its Quarterly Stocks and wheat production reports, and the result drove Corn (ZCZ2) higher after the stocks came in lower than analysts had forecast while soybean slumped in response to higher-than-expected stocks. December wheat (ZWZ2) jumped 2.8% with stocks in line but production in all categories falling short of expectations, reducing all wheat production levels to 1650 million bushels, some 8% below 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 agriculture commodities may continue to be challenged.
Just days after the NordStream pipelines blew up, Gazprom announced it was halting supplies to Italy via Austria due to a contractual dispute. Last week the newly elected Italian PM said she stood with Ukraine. While flows through Ukraine, the only remaining major pipeline bringing gas straight to Europe is operating as normal, it highlights an increased risk that Russia eventually may cut all of its supply. A situation the European market should be able to cope with given the current level of stocks and increased flows from Norway and LNG. Italy meanwhile has already sourced sufficient alternative supplies of gas from North Africa to make up for any shortfalls this winter if Russia were to cut off supplies.
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 y/y. 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.
Due later today, 7ISM 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.
The market is leaning for a 50 basis point move that would take the rate to 2.85%, though a strong minority are looking for a smaller move as Governor Lowe had previously signalled that the pace of rate hikes is likely to slow from here after four consecutive rate hikes of the magnitude of 50bps. The RBA is seen as not wanting to clamp down on financial conditions. A significant risk for the Australia economy is that 60% of mortgages in the country are based on floating rates, with the short yield in Australia now at the highest level in over a decade, when they were close to record lows just over a year ago.
Japan’s inflationary pressures are likely to continue to surge amid higher global prices of food and electricity, as well as on the 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.
After recent polls suggest that the Conservative party has its weakest popular support since the 1990’s, the Truss government is in a fight for its very survival. A Conservative Party conference is ongoing and will end on Wednesday with a closing speech from PM Truss. Chancellor Kwarteng, meanwhile, has been out battling to defend his policy moves, but breaking news this morning suggests that the government may be set to reverse its move to cut taxes for the highest earners. We should get some clarity on that today with a speech from Kwarteng. The only glue holding the fractious Conservative party together is the knowledge that early elections (not required until early 2025) would see the party losing power for the first time since 2010.
The earnings season officially starts next week with the first group of US financials reporting but in the meantime a few earnings are worth watching this week. Biogen reports Q3 earnings (ending 30 September) tomorrow with analysts expecting revenue growth of -11% y/y and EBITDA at $847mn down from $959mn a year ago. While the current financial performance of Biogen is volatile and weak the recent news about its breakthrough in Alzheimer’s with a drug that can slow down the disease is what analysts will focus on in terms of gauging the outlook. On Wednesday, Tesco is in focus as the UK largest grocery retailer is at the center of the current food inflation and insights from Tesco will be valuable from a macro point of view.
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