APAC Strategy Team
Summary: It is a week loaded with central bank decisions with the U.S. Fed’s FOMC on Wednesday front and centre. The money market curve is pricing a total 165 bp hikes in the next 3 FOMCs, June, July and September, with 80% chance of a 75 bp hike in this Wednesday. The EUR money market curve is fully pricing in a 25bp hike in July and a 50bp hike in September by the ECB. The market is expecting the BOJ to keep its loose monetary policy unchanged this Friday. Any modifications of the BOJ’s stance will be a surprise that can shake the bond, currency and equity markets.
FOMC ready for another 50bps rate hike, but can we get 75bps? The Federal Reserve meets this week and a 50bps rate hike is on the table. The red hot CPI print on Friday has however brought Fed tightening calls to a cycle high. This puts the focus on this week’s meeting as a simple 50bps rate hike doesn’t look enough to fight the inflation threat. Either the Fed needs to go for a 75bps now, or provide an extremely hawkish commentary along with a 50bps rate hike, almost cementing another couple of 50bps rate hikes. There’s also a lot more for consideration in terms of Fed’s move to neutral rates and beyond as well as quantitative tightening, and for all that and more, the focus will be squarely on the Fed’s dot plot and economic projections, as well as Chair Powell’s press conference following the meeting.
Bank of England (BOE), Bank of Japan (BOJ) and ECB speakers. A fifth 25bps rate hike is expected from the BOE on Thursday but weakening economic momentum is clouding the expectations around the tightening path going forward. However, recent fiscal measures have eased recession concerns and the labor market remains tight. Meanwhile, the risk of a BOJ move is also increasing with USDJPY nearing fresh record highs after printing 20-year highs last week. The BOJ is having a 2-day monetary policy meeting ending on Friday June 17 and will hold a press conference afterward. A 3-party meeting between Japan’s Ministry of Finance, BoJ and Financial Services Agency on Friday expressed “extreme concern” about the rapid decline in yen against the USD, which suggests a response is well due. Lastly, ECB’s most hawkish member Holzmann is due to speak next week, and we look for more signals of a 50bps move in September. Other ECB speakers like Guidos, Schnabel, Panetta and Knot will also be on the wires.
Downside risks for industrial metals, volatility to continue in grains and oil. With parts of Shanghai back in a lockdown, industrial metals have had a tough last week with copper (HG1) down 4.5%. Now with more signs of central banks hawkishness in the week ahead, there is bound to be a further pickup in concerns of a global slowdown. This means more pressure can be expected in the metals space. In the medium-term however, we believe a tight supply situation along with the demand stemming from an increasing popularity of EVs provides room for further gains. Grain prices and stocks continue to look for more direction from the situation on Ukraine’s exports. OPEC and International Energy Agency issue monthly outlooks, and oil also has the volatility from China’s reopening to consider.
Australian unemployment to plummet to new low, will business and consumer sentiment wane? Business and consumer confidence levels on watch Tuesday and Wednesday; are both to show further signs sentiment is falling and cost pressures are rising. In the NAB Business Confidence read out’s forward orders will be a good indicator to watch, which is tipped to show orders have continued to fall given the trajectory of rate rises and inflationary indicators (oil prices) peaking again. On Thursday June 16; the all-important Australian employment data will be watched like a hawk with monthly unemployment for May tipped to fall to yet another historical low (3.8% consensus expectation, with 25k jobs expected to be added). The RBA sees unemployment falling to 3.5% by 2023. If the numbers are better than expected, expect the AUD to be bid up and for bond yields to rise; as stronger employment gives the RBA ammunition to hike rates more aggressively.
China’s Activity data for May is scheduled to release on Wednesday June 15. The focus will be on retail sales (consensus -7.1%; April -11.1%), industrial production (consensus -1.0%, April -2.9%) and fixed asset investment (consensus: 6.1%, April 6.8%). In May, the number of cities under COVID-related lockdown came down to 16 cities from over 40 cities in April and restrictions were somewhat relaxed in those still being subject to lockdown. May NBS PMI and Caixin PMI indicated some gradual recovery of economic activities from the trough of April. Trade data, passenger car sales and credit data released last week also showed improvements. The activity data this Wednesday is likely to show a similar trend of gradual recovery from April.
Oracle’s cloud earnings to ripen, Adobe revenue to sour? Another indication of tech spending patterns. Both tech giants’ earnings and guidance levels will be on watch, which will give an overall indication as to how much rising costs and a rising US dollar will slowdown earnings following Microsoft’s (MSFT) downgrade to earnings. Oracle (ORCL) is set to release FY4Q22 (ending May 2022) results Monday June 13 after market close. At a business level, we also know Oracle is vying for cloud market share, up against Microsoft (MSFT) and Alphabet’s (GOOGL) Google. But can Oracle’s March cloud revenue continue to rise, along with Microsoft? Oracle’s cloud revenue rose 24% to $2.8 billion in the prior quarter. Overall, consensus expects $1.37 a share profit on sales of $11.62 billion. Later in the week, maker of Photoshop and other creative software Adobe (ADBE) will release quarterly earnings Thursday June 16 after market. The businesses forecasts are not expected to delight as non-discretionary and business marketing spending usually falls as rates rise; especially as Adobe has been suffering increased competition. Consensus expects $3.31 a share profit on sales of $4.35 billion. Also keep in Adobe also competes Salesforce.com (CRM) in marketing and e-commence.
Key economic releases & central bank meetings this week
Monday June 13
Australia Public Holiday
UK Monthly GDP (April)
India CPI (May)
Tuesday June 14
US PPI (May)
Germany ZEW (June)
Germany HICP (May-final)
UK Employment (Jun)
Australia NAB Business Survey (May)
Wednesday June 15
FOMC rate decision
US Retail Sales (May)
Eurozone Industrial Production (Apr)
France HICP (May-final)
Japan Machinery Orders (Apr)
Australia Westpac-MI Consumer Sentiment (Jun)
New Zealand Balance of Payments
China Retail Sales (May)
China Industrial Production (May)
China Fixed Asset Investments (May)
China Surveyed Jobless Rate (May)
Thursday June 16
US Housing Starts (May)
US Building Permits (May)
US Philly Fed Survey (Jun)
Italy HICP (May-final)
UK BOE Rate Decision
Japan Trade (May)
Australia Labour Force Survey (May)
New Zealand GDP (Q1)
Friday June 17
US Industrial Production (May)
Eurozone HICP (May-final)
UK Retail Sales (May)
BOJ Monetary Policy Meeting (end of 2-day meeting; press conference)
Singapore Non-oil Domestic Exports (May)
Malaysia Trade (May)
Key earning releases this week
Monday June 13: Oracle (ORCL)
Tuesday June 14: DiDi Global (DIDI), Sino Biopharmaceutical (01177)
Thursday June 16: Adobe (ADBE), Kroger (KR), Trip.com (TCOM)
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.