Market Insights Today: Hawkish Bostic puts the focus on Powell – 7 February 2023

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) extended losses, waiting for Powell’s interview and corporate earnings

After the retreat triggered by a staggering employment report last Friday, US equities extended losses in a relatively uneventful day on data and news. Bond yields soared further on Monday and put pressure on stocks. Investors are also cautious about what Fed Chair Powell will say in an interview on Tuesday after the strong job data. Disney, PepsiCo, Uber, and DuPont are reporting this week. Nasdaq 100 dropped 0.9% and S&P 500 slipped 0.6%. Nine of the 11 S&P 500 sectors retreated, led by communication service, information technology, and materials. Tesla (TLSA:xnas) outperformed with a 2.5% gain after the EV giant raised the prices of its Model Y SUV. Dell (DELL:xnys) fell 3% following the computer maker shedding 5% of its workforce citing eroding market conditions. Newmont (NEM:xnys) plunged 4.5% after the gold mining giant make a USD17 billion offer for Australia’s Newcrest Mining (NCM:xasx).

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) jumped further to reprice the Fed’s rate path

Treasuries extended the post-job report sell-off, seeing yields on the 2-year soaring 18bps to 4.47% and those on the 10-year rising 12bps to 3.64%. Hawkish comments from the Fed’s Bostic, ECB officials, and Bank of England officials added additional pressure to the market which was already in motion to decline in price and rise in yields. Atlanta Fed President Bostic said the strong job report would probably mean that the Fed have to raise rates more than he had projected. Earlier in the day, the weakness in Treasuries started from spill over selling pressure on U.K gilts on hawkish comments from Catherine Mann, external member of the BOE’s Monetary Policy Committee and Huw Phill, chief economist of the BOE, suggest more rate hikes. ECB Governing Council member Robert Holzmann added to the hawkish pushback from central banks, saying “the risk of over-tightening seems dwarfed by the risk of doing too little”. Treasury and corporate supply are weighing on markets as well. About USD 13 billion corporate new issues came to the market on Monday and the Treasury is auctioning USD40 billion 3-years on Tuesday, followed by USD35 billion 10 years and USD21 billion 30 years on subsequent days. For today, all eyes are on Powell’s scheduled interview. The market is pricing in a 25-bp hike in March, followed by an about 80% chance for another 25bp hike in May, bring the terminal Fed Fund rate to above 5%. The rate cut expectation was shed further to 38.5bps as implied by the SOFR June-Dec spread.

Australia’s share market earnings are beating US earnings growth, supporting the ASX200 

Amid Australia’s reporting season kicking off, so far average earnings growth from the ASX200 companies are outperforming those in the S&P500. But also, stronger than expected earnings from the ASX200 companies so far have moved the market closer to its record all-time high. The market is under 1% away from trading at its highest level in history, and this is despite commodity prices falling this week amid a higher US dollar. 

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) deeper into consolidation

The Hang Seng Index declined 2% on Monday, extending the benchmark’s retreat from the January 27 high to over 6%. Digital health platforms, mega-cap internet, tech hardware, EV, and Chinese developer names were among the biggest laggards. Alibaba Health (00241:xhkg), plunging 7.2%, was the biggest losers among blue chips, followed by Sunny Optical’s (02382:xhkg) 6.9%. Another i-Phones supplier, AAC (02018) also slipped 4% on signs of weakening demand for iPhones in China. Aluminum product maker China Hongqiao (01278:xhkg) dropped 4.5% after preannouncing a 40% decline in profits in 2022. EV names headed south, falling 2%-5%. HKEX (00388:xhkg) plunged 4.2% despite the Special Administrative Region’s Chief Executive in Saudi Arabia pitching Saudi Aramco to have a second listing in Hong Kong. Renewed geopolitical tension over the Chinese surveillance balloon incident, overall risk-off sentiment spilled over from pricing out some of the rate cut expectations in the U.S., and profit-taking after the sharp rises in the Hong Kong and mainland Chinese stocks weighed on the market. In A-shares, CSI300 dropped 1.3%, with Chinese white liquor one of the worst-performing industries, following reports of PICC Property and Casualty (02328:xhkg) limiting staff liquor consumption at business events. Mainland media speculated it as a sign that the Chinese authorities might do likewise at other large state-owned enterprises. Food and beverage, household appliance, construction materials, and non-bank financials were also laggards. Northbound flows registered a small net selling.

FX: Dollar’s post-NFP strength extends further with focus turning to Powell

After a hotter-than-expected US jobs report on Friday, Fed member Bostic’s comments on a potentially higher peak in the Fed Funds rate supported the US dollar overnight. Market pricing has seen an upward revision to terminal rate to 5-5.25% and Treasury yields continued to surge higher. The Japanese yen, being the most yield sensitive, suffered a double-whammy of higher US yields and chatter of a dovish new Governor at the Bank of Japan. USDJPY stayed close to 132.50 after jumping higher from sub-129 levels on Friday. AUDUSD pushed below 0.69 ahead of the RBA meeting (read preview below) while NZDUSD is still testing the 0.6300 handle. EURUSD plunged further to sub-1.0750 but GBP supported at 1.2000 as BOE’s Mann noted that the next step in the Bank Rate is still more likely to be another hike than a cut or hold.

Crude oil (CLG3 & LCOH3) prices whipsawed

A risk-off tone in the market following Friday’s US jobs report and hawkish comments from Fed’s Bostic saw oil prices slump lower earlier in the US session. Prices turned around later however as risks of supply disruptions rose after a catastrophic earthquake in Turkey has halted oil flow to the Ceyhan export terminal, which ships more than 1mb/d. Meanwhile, Saudi Aramco increased most prices for its flagship Arab Light grade against expectations of a cut, suggesting confidence in the demand outlook. WTI prices dipped towards $72 before a recovery to $74.50/barrel while Brent was up to $81/barrel, still far from resistance at $84.30.

Gold (XAUUSD) strength continues to hold up despite a stronger dollar

Gold prices saw a correction to drop back below $1900 after the hot US jobs report on Friday after the speedy run higher in the last several weeks. Stronger dollar and higher yields overnight again with hawkish comments from Fed’s Bostic continue to suggest there could be more downside for Gold in the near-term, but the $1870 support has continued to hold. This morning again, Gold is still testing that level, and if it continues to hold, it would send a signal about a weak correction within a strong uptrend. Next level of support at $1845 followed by $1828. Fed Chair Powell’s comments in the day ahead will be on watch.

Copper awaiting Chinese demand recovery

Copper led the base metals sector lower as the impact of the strong US jobs report last week lingered. However supply disruptions in Peru have helped to hold the key $4 support for now, and all eyes are on the pickup in activity in China. Aluminium briefly spiked after the reports suggesting the US was preparing to slap a 200% tariff on Russian aluminium. Russia is the world’s second largest producer of the metal and traditionally has accounted for 10% of US imports. However, imports fell to virtually zero in October last year. As a result, the tariff is expected to have limited impact on supply.

What to consider?

Hawkish remarks from Fed’s Bostic; Chair Powell due to speak today

Atlanta Fed president Bostic (non-voter) spoke on Bloomberg, noting that jobs data from Friday raises the possibility of a higher peak rate, and his base case is still for two more hikes. Bostic also said the Fed could consider moving back to a 50bps hike if it needed to. Chair Powell will be speaking in Washington on Tuesday (1am SGT on Wednesday for Asia), followed by Barr, Williams, Cook, Kashkari, Waller and Harker over the course of the week.

Japan’s nominal wage growth records highest growth in 26 years

Japan reported a stronger-than-expected wage growth for December, with labor cash earnings of 4.8% YoY coming in above 2.5% YoY expected and prior revised higher to 1.9% YoY as well. This was the highest since 1997, and could potentially fuel speculation again that the Bank of Japan could consider shifting policy after the new Governor is appointed in April. Real cash earnings growth also turned positive, coming in at 0.1% YoY from -2.5% YoY previously and -1.5% YoY expected.

RBA meeting ahead; a 25bps hike is likely to 3.35%, while some economists predict a 40bps hike

The latest RBA indicators have been hot; surging Australian inflation, hotter than expected retail sales numbers, slowing employment (although unemployment is near five decade lows, at 3.5%), yet other metrics such as building approvals are soaring - seeing one of their biggest jumps in a decade. Meanwhile the RBA is contending with signs of a slowing economy; with the services sector in contractionary phase and retail spending falling. Still the RBA is likely to continue to hike rates to the highest in over a decade. A 25-bp hike is expected by most today. However guidance is key, as the market is now pricing the RBA for another ~37 bps of tightening, into a peak in either June or July, and then cutting in September. We’re watching AUDUSD and EURAUD with the AUD having nose-dived as commodity prices fell from their highs, while the USD gathers strength, with the dollar index breaking above 103 for the first time since early January. If the RBA hikes more than expected, a knee-jerk rally up the Aussie dollar is likely.

US plans a 200% tariff on Russian Aluminium; yet prices continue to fall on a higher US dollar

President Biden has yet to give the go-ahead, however it’s being reported the White House was mulling an outright ban. The 200% tariff is expected to have a limited impact on prices given Russia accounts for 6% of global aluminium. Aluminum prices held losses, largely pressured by a higher US dollar. In the US, Alcoa and Century Aluminum shares fell. In Australia keep an eye on Rio Tinto and Alumina. Investors may like to consider prices are paring back from their highs amid a higher US dollar, yet concerns linger that supply cannot keep up with demand for high purity aluminium. The same applies to most metals. There are risks of a further pull back in commodity pricing should the US dollar continue to run up, however, the market will likely once again focus back on fundamentals. So keep an eye on the US dollar.

Outlook from European industrial giant Siemens to watch

Siemens, one of Europe’s largest industrial companies, is expected to show revenue growth of 11% y/y and unchanged operating income compared to a year ago as cost pressures remain a key challenge for Siemens. Last quarter the order book and net new orders looked healthy, so the question is whether this will flow through into the outlook for 2023.

Gold companies are in focus. World’s two largest gold miners are in talks to combine

In case you missed it, the US-listed gold miner Newmont is attempting to acquire Australia’s gold mining giant, Newcrest in a bid that values the gold miner at $17bn. If the deal goes through it will reunite the two gold miners after being separated for over quarter of a century. It will also be the world’s biggest takeover of 2023. Overnight the Canadian listed Newcrest jumped 14%, ASX listed Newcrest shares jumped 9% yesterday. Importantly, the takeover offer reflects the world’s increasing appetitive for gold, given gold generally outperforms equites when the Fed pauses rate hikes. Among retail investors, many have been increasing their exposure to gold companies ahead of central banks easing.

Nationwide strike in France today

After a successful demonstration all over France on 19 January, trade unions are calling for new nationwide strike today against the government’s plan to push back the minimum retirement age to 64 and to accelerate a previous reform, called the Touraine reform, which provides for the extension of the required contribution period to 43 years by 2035. Before Covid, the government also tried to implement a pension reform which caused a massive wave of demonstrations across the countries – there was basically almost no public transport in main cities for weeks. This is still uncertain how long the strike will last. But the trade unions are planning to keep fighting as long as needed. Expect a blockage in several sectors (refineries, metro, rail transport, education). At the moment, we don’t think the strike will have a noticeable negative impact on GDP growth this quarter. We are confident France will avoid a recession this year – with a GDP growth forecast around 0.6-0.7%. This is not high but it is better than in many other eurozone countries.

For what is ahead at markets this week – Read/listen to our Saxo Spotlight.