APAC Strategy Team
Summary: The Fed is set to hike rates on Wednesday with a 0.75% hike baked in, followed by the Bank of England with a 0.5% rise expected the day after, while the Bank of Japan will also meet on Thursday. So, strap in, volatility is ahead, especially as there are a plethora of market holidays to commemorate the Queen. This means market moves this week will be amplified. China’s loan rate will be on watch, as well as key economic updates from the Eurozone, Singapore, Malaysia, and Australia. Meanwhile, inflationary pressures pick up, with wheat prices strongly rebounding on US drought concerns, frost in Latin America, and La Nina headed for Australia. Here’s what traders and investors are watching.
While the markets have fully baked in another 75bps rate hike for the meeting this week, which will take the Fed funds rate to 3-3.25%, some traders are also calling for a full percentage hike of 100bps especially after the hotter-than-expected August CPI. A higher-than-expected inflation print, still-strong labor markets and a general resilience in the US economy continue to provide room to the Fed to stay aggressive, but it will stay difficult for the Fed to signal any more rate hikes than what the market is pricing in with a terminal Fed funds rate now seen at ~4.5%. The dot plot and Chair Powell’s press conference will be key, and volatility is likely to be elevated.
The dollar momentum has extended further last week, and a jump above 3.5% on the US 10-year yield could further boost the USD. The effect of verbal interventions in the yen have faded, but a move in USDJPY towards 145 could spark further concern from the Japanese authorities. EURUSD has also been stuck around parity since the hawkish ECB but risks will be magnified going into the FOMC meeting this week.
Japan has key data on August inflation due Tuesday followed by the Bank of Japan decision a day after the FOMC on Thursday. Consensus estimates for August CPI are touching close to 3% levels, with core higher as well at 1.5% YoY from 1.2% previously. Upside pressures continue to persist from high food and energy prices, while the soft year-ago base also means mobile phone charges are likely to pick up. While it is still hard to expect a pivot from the Bank of Japan this week, given that Governor Kuroda remains focused on achieving wage inflation, the meeting will still likely have key market implications. There will likely be increased voicing of concerns by the authorities on yen weakness, and there is also some chatter around the Bank of Japan bolstering its lending programs to support the private sector as high inflation curbs spending.
The BoE meets on Thursday after last week’s meeting was delayed by a week for Queen Elizabeth II’s funeral. Policymakers are expected to hike rates by another 50bps, which would bring the Bank Rate to 2.25%, although a 75bps hike is still on the table. Beyond September, analysts forecast a 50bps increase in November and 25bps in December, taking the Bank Rate to 3%, where it is expected to stay until October 2023. Also worth highlighting is the “fiscal event” delivered by new Chancellor of the Exchequer Kwasi Kwarteng on Friday. This will be his first statement on how he plans to deliver new Prime Minister Liz Truss' pledge to make the U.K. a low tax economy, which risks stoking inflation in the medium-term. However, short-term plans on energy support package suggests lower inflation to end this year, but that wouldn’t be enough for the BoE to go easy on its inflation fight.
According to a survey conducted by Shanghai Securities News, a number of leading banks in China have recently cut their 3-year deposit rates by 15bps and deposits of other tenors by 10bps. These decreases were in response to the Loan Prime Rates (LPRs) cuts on August 22. With no change to the September Medium-term Lending Facility Rate in September, the LPRs are unlikely to be adjusted this Tuesday.
Volatility to pick up. S&P500 could fall 3-14%
With the Fed set to hike rates on Wednesday, followed by the Bank of England the next day, you can expect market moves in either direction to be magnified as there will be less liquidity in the market given there is a suite of public holidays across the globe for the Queens funeral. So we will be watching the Vix Future: VXU2, VIX Option: VIX:xcbf , And Vix ETF: VIXY:bats. On top of that, Also keep in mind, if the Fed’s hike is more than the 0.75% baked in, the S&P500 may re-test the next support level of 3,764, meaning it could fall 3%. If it breaks below that S&P500 could retest the November 2020 lows of 3,500 which implies the market could fall ~14%. I think we also need to keep in mind, the last time the MACD and RSI were at these levels was ahead of the COVID-19 crash when the S&P500 fell over 30%.
This week is full week of Australian economic news to watch; with the RBA kicking off the releases on Tuesday, handing down the RBA Meeting Minutes from its September interest rate meeting Tuesday. Lending data is released Wednesday from Westpac (which is likely to show lending is further slowing). On Friday the all-important Australian services sector update is released from S&P Global. So, where is our focus? The RBA minutes, which will likely pave out the central bank’s expectations for inflation, which are expected to be increased given the coal price, where Australia gets the majority of its energy from has hit another record high (and coal is not in peak demand season yet). On top of that the RBA will probably allude to La Nina’s threat on Australia. Flooding and heavy rain is headed for Australia for the third year in a row, which is also expected to push up food prices later this year, with some fields likely to be flooded, which will add to global supply shortages.
Eurozone PMIs are likely to dip further into contractionary territory as energy price hikes weigh on spending and business plans. Manufacturing PMIs are likely to ease to 48.7 in September from 49.6 previously, and services are expected to fall to 49.1 from 49.8, according to Bloomberg consensus estimates. A weaker-than-expected number could temper the hawkish ECB bets for the October meeting.
Singapore’s headline inflation likely jumped further above the 7% mark in August from a reading of 7% YoY in July, underpinned by higher food and energy prices globally, higher rents due to under-supply, and demand side pressures from regional reopening and a pickup in tourism. Malaysia’s continued ban on chicken exports is also adding to the food inflation, and further tightening from the Monetary Authority of Singapore at the October meeting remains likely. Meanwhile, Malaysia’s inflation also likely rose further in August from 4.4% YoY in July due to higher commodity prices and weaker ringgit, as well as the strength in consumer demand. Bank Negara Malaysia’s next meeting is only scheduled in November, before which we will have another CPI print out. However, it can be assumed that monetary tightening will likely continue.
It’s not just US dryness and drought concerns affecting crop markets again, but La Nina concerns mount in Australia and are causing wheat prices to pick up, with global wheat supply again likely to shrink. In Central and Southern Plains dryness and drought is affecting winter wheat planning, while periods of showers in the Northern Plains and Canadian Prairies could limit the remaining spring harvest. Meanwhile showers in Brazil are limiting winter wheat harvests, and frost and freezes in Argentina are likely to dampen more developed wheat. However, good news- the most favourable conditions are being seen in Australia for wheat. However, if La Nina is worse than feared it could sever global wheat supply. The wheat price is trading higher today by 1.7%, rising a total of 16% from August. The technical indicators are also suggesting more upside is ahead for wheat. Not good for consumers, or inflation. But opportune for potential traders and investors.
With 30-year fixed rate mortgage interest rates jumping above 6% for the first time in 14 years, since Sept 2008 and home affordability falling to historically lows, investors are concerned about the state of the US housing markets. Results from a leading home builder Lennar (LEN:xnys) this Wednesday after market close will give a good opportunity for investors to gauge the latest market conditions in the US housing market. Analysts, as per the survey by Bloomberg, are estimating revenue growth of 30% Y/Y and 8.3% Y/Y EPS growth in the quarter ending Aug 31, 2022. Investors, however, will focus on the management team's comments and forward guidance.
Monday, Sep 19
Tuesday, Sep 20
Wednesday, Sep 21
Thursday, Sep 22
Friday, Sep 23
Key company earnings releases this week
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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.