Summary: A downbeat session in the US yesterday took the S&P 500 Index back below the pivotal levels that provided resistance on the way up recently. Long US treasury yields rose again on one of the weakest a weak 30-year T-bond auctions in a year. This helped boost the US dollar again and take gold prices to nearly 1,850 overnight, representing a more than 100-dollar consolidation of the rally since last November.
S&P 500 futures failed yesterday to push higher above that important 4,200 level and lost instead altitude closing below the 4,100 level erasing the gains for February. The US 10-year yield also bounced but the moves are not dramatic, and it feels like the market is waiting for the bond market to make up its mind about long-term yields and inflation. Earnings after the close from PayPal and Lyft that both disappointed also helped lower risk sentiment in US equity futures overnight.
The US dollar traded weaker yesterday before firming late in the session as US equities rolled over and posted a weak session, with EURUSD never making a serious challenge of 1.0800 and trading below 1.0725 this morning, while a USDJPY sell-off yesterday quickly aborted on a weak US T-bond auction that sparked a rise in long US yields. This will have USD traders on watch for a follow through higher, which could suggest a proper trending move rathre than a mere consolidation of prior weakness. Elsewhere, an historic day for the Swedish krona yesterday on a powerful broadside to SEK speculators in yesterday’s guidance, but also technical moves to increase liquidity in Sweden’s banking system as noted below.
Crude oil trades lower for a second day after sentiment across markets received a fresh set back on worries about the US economy's ability to withstand additional Fed rate hikes. Overall, it highlights a market that remains rangebound (since November) with current soft fundamentals likely to remain until the second quarter when, despite concerns about further US rate hikes, improved activity in China should brighten the macro-outlook. Brent trades back below its 21-day moving average, currently at $84.90 - in WTI at $78.40 - with a close above needed to attract fresh buying momentum. Next week, apart from US CPI on Tuesday, the market will look out for monthly oil market reports from OPEC and the IEA.
Gold’s attempt this past week to recover from last Friday’s sell-off below support-turned-resistance in the $1900 area received a setback on Thursday when weakness resumed, driving the price down to a $1853 during the Asian trading session. The market had been left vulnerable to further weakness after only managing a small bounce earlier in the week, and with the attention now fully on the prospect for even higher Fed rates to tame inflation, the dollar and Treasury yields have risen to provide some formidable headwind. Furthe weakness carry the risk of an extension towards $1828, the 38.2% retracement of the run up from early November. The main event next week being the US January CPI report on Tuesday.
It has been a confusing week for treasury traders this week, as we saw a very weak 3-year auction on Tuesday followed by a robust 10-year auction Wednesday, only to see one of the weakest 30-year T-bond auctions over the last 12 months yesterday, which saw 30-year benchmark yields reversing back higher and posting a new local high close just shy of 3.75%. The 2-10 portion of the yield curve remains near the extreme of its inversion for the cycle, just below –80 basis points, and near the highest since the early 1980s.
The Riksbank met yesterday and impressed the market with its guidance on further rate hikes and additional plans to accelerate the pace of quantitative tightening from April onwards, with additional offerings of “Riksbank certificates” to encourage a rise in rates and foreign investment in Swedish paper. Two-year Swedish rates jumped 10 basis points on the news, and the QT The new Riksbank Governor, Erik Thedeen, also took aim at currency speculators in the press conference yesterday. Ahead of the meeting, EURSEK had risen above 11.40 at one point, its highest level since 2009, in part on concerns that the Riksbank feared the impact of higher rates on Sweden’s housing market, the bottom dropped out yesterday on the Riksbank developments, taking EURSEK all the way back down to range support near 11.10, one of the most powerful strengthening moves in the krona’s history. This was a watershed moment and likely puts a floor under the krona for now.
US natural gas futures (NGH3) only managed a temporary rise on Thursday after the EIA said inventories had declined by 217 billion cubic feet (bcf) last week. This the first above average weekly storage draw this year left total stocks some 5.2% above the long-term average, and despite trading near a two-year low the upside potential remains limited amid robust production, up 6% y/y, and gas demand down y/y by the same percentage. In addition, forecasts are now pointing to much warmer-than-normal weather through February 18 across Central and Eastern states.
The German sports clothing maker released yesterday after the market close a shockingly bad outlook. The decision to not sell Yeezy inventory will have an adverse impact on the underlying operating profit which could hit €700mn loss in 2023 with €500mn impact coming from Yeezy items. Adidas also sees €200mn in one-off costs in 2023. Revenue in constant currency terms is expected to decline up to high-single-digit. The shocking revelation is that the majority of Adidas operating profit came from one partnership and design series.
The US-based payment company missed on volume in Q4 against estimates but delivered EPS $1.24 vs est. $1.20 in addition to announcing that the CEO Dan Schulman is stepping down by year-end. The Q1 outlook on EPS was $1.08-1.10 vs est. $1.06 and Q1 revenue growth of 7.5% y/y at current spot rates in the currencies.
In the RBA’s quarterly economic forecasts and policy outlook (known as the Statement of Monetary Policy) released today in Australia, the Bank increased its “trimmed mean” CPI forecast from 3.8% to 4.3%. The increase was largely driven by sticky consumer durable goods inflation and services inflation. The RBA also upgraded labour costs projections, forecasting wages to rise 4.25% this year versus 3.9% previously. RBA continues to forecast that longer term inflation will ease to within the Bank’s target. Market pricing now suggests the RBA will hike another 75 basis points through the July meeting before a likely pause.
Initial jobless claims rose to 196k from 183k, and above the expected 190k. Continued claims also surpassed expectations and printed 1.688mln (exp. 1.68mln), above the prior 1.650mln. While there is a pick-up in claims, it must be noted that it comes from a low level and continues to signal a tight labour market.
Banxico surprised markets with a 50-bp rate hike once again, taking the policy rate to 11.00% and signalled another, smaller hike at the next meeting. Expectations were for a smaller 25-bp hike, followed by a pause. This appears to be in line with what we have seen from RBA and Reserve Bank of India this month, suggesting broad inflation pressures continue to challenge central banks that were hoping to signal a pause.
As noted above, the S&P 500 Index broke below the pivotal 4,100 area that was an important resistance line on the way up, suggesting the risk of further consolidation lower from a technical perspective. A more significant level to the downside could be the 200-day moving average coming in near 3,945 on the cash Index, considerably lower, while the Nasdaq 100 Index eyes the important 12,300-12,100 area. What could turn sentiment lower? The most likely source of immediate concern would be any further rise in Treasury yields, but an interesting test awaits the market with next Tuesday’s CPI release, which will be the first release after an overhaul of the calculation methodology, which some argue could engineer a sharper than expected drop.
The name of Kazuo Ueda, an economist and former member of the Bank of Japan’s deliberation committee, was not among the names considered most likely to replace current governor Kuroda on his exit in early April. The first move in the JPY was higher on the announcement.
The earnings calendar is light today with Enbridge, Canada-based energy distributor, being the most interesting to watch. Analysts expect Enbridge to report revenue growth of 3% y/y and EPS of $0.73 down 5% y/y. Next week, the earnings calendar will provide plenty of interesting releases with the three most important releases being Deere, Schneider Electric, and Airbnb.
Next week’s earnings:
1300 – Poland National Bank releases meeting minutes
1330 – Canada Jan. Net Change in Employment / Unemployment Rate
1400 – UK Bank of England Chief Economist Huw Pill to speak
1400 – ECB’s Schabel in live Q&A on Twitter
1500 – US Feb. Preliminary University of Michigan Sentiment
1730 – US Fed’s Waller (Voter) to speak at Crypto conference
2100 – US Fed’s Harker (Voter 2023) to speak
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy