Summary: US consumer inflation expectations stirred up investor concerns about the likelihood of more aggressive rate hikes including tabling the possibility of a 75bp hike not only in November but also in December. Bond yields rose and stocks sold off. USDJPY edged closer to test 150. China’s President Xi, signals no change to its strict Covid-zero policy sending commodity prices lower. Meanwhile, Australians to mull out AUD$9.6 billion of likely infrastructure project stimulus.
The US equity market gave back nearly almost of the Thursday’s gains with the S&P 500 closing 2.4% lower on Friday and down 1.5% over the week, while the Nasdaq 100 erased all off Thursday’s rally after closing 3.1% lower on Friday, and 3.2% down on the week. It comes as Investors came to grips with stronger than expected CPI data that was released last week, while the University of Michigan’s survey showed inflation expectations are increasing, which added to the market fear in the board indices. The survey which the Fed watches closely, showed consumers believe inflation will rise in the near and longer-term. The rise of US 10-year treasury yield to above 4% also added to market woes, while the oil price fell 3.9% to $85.61, along with other commodities. All 11 sectors in the S&P500 fell with Consumer Discretionary, Energy, and Materials falling the most.
Tesla (TSLA:xnas) was one of the worst performers in mega caps on Friday, falling 7.6% to its lowest level in 16 months, $204.99. Amazon (AMZN:nyas) followed 5% lower. Morgan Stanley (MS:xnys) dropped 4.8% after reporting Q3 EPS missing estimates on weaker trading revenues. Kroger (KG:xnys) tumbled 7.3% after the company agreed to pay USD24.6 billion for Albertsons (ACI:xnys), to create a grocery chain with almost 5,000 stores in the US. On the upside; JPMorgan Chase (JPM:xnys), rose almost 2% after reporting better than expected Q3 results (beating estimates on EPS, net interest income, fixed income, currencies, commodity trading, and investment banking revenue, while missing on equity trading). US Bancorp (USB:xnas) rallied 2.4% after the Federal Reserve had approved US Bancorp taking over MUFG Union Bank. Delta Air (DAL:xnas) rose 2.3% after kicking off major US airline earnings with a bang, reporting revenue of almost $14 billion, which beat FactSet consensus projections of $12.9 billion, and was also up from $12.6 billion in 2019. For the fourth quarter, Delta sees revenue being up 5-9% from 2019.
Treasury yields rose from 4 to 8bps across the curve following unexpectedly large increases in the 1-year and 5-10-year inflation expectations to 5.1% Y/Y and 2.9% Y/Y respectively in the preliminary results from the University of Michigan consumer survey in October. Traders also took notes of the 16bps and 23 bps spikes in 10-year and 30-year U.K. gilt yields respectively as the Bank of England ended its temporary bond purchase programme, and sold U.S. treasuries. U.S. treasury 2-year yields climbed 4bps to 4.50% and the 10-year yields gained 7bps to 4.02%, attempting once again to stay above the psychologically important 4% handle. The money market curve has priced in a 75bp hike with almost certainty at the Nov 2 FOMC meeting and some possibility of a 75bp hike at the December 14 meeting.
The futures are suggesting a negative day of trade for the ASX200 on Monday, indicating a 1.5% fall. Commodity stocks will face pressure after oil prices falling 4%, gold lost 1.7%, while wheat fell 3.6% and Copper closed slightly lower, along with iron ore plunging back to $92.55 (which is its lowest level in a month). Elsewhere, there could be a sentiment boost in infrastructure related stocks with the Australia budget to be announced next week and set to include AUD$9.6 of infrastructure projects (according to AAP). So it could be worth watching stocks like Lendlease (LLC), CIMIC (CIM), Macquarie (MQG), as well as Adbri (ABC), as well as road and highway companies Transurban (TCL) and Atala Arteria (ALX). Other stocks to watch include Stockland (SGP) and Endeavour (EDV) which report quarterly sales and revenue.
Stocks in Hong Kong and mainland China rallied, with Hang Seng Index gaining 1.2% and CSI300 surging 2.4%. The dramatic turnaround in the U.S. equity on Thursday helped set a more optimistic tone at the open. To add to the positive sentiment was the softer-than-expected Chinese CPI and PPI data released this morning showing inflation grew at a benign 0.6% Y/Y in September once the volatile food and energy prices were excluded. It fuels the anticipation of more room for the Chinese authorities to roll out stimulus measures. In addition, remarks in the speeches delivered by the People’s Bank of China Governor Yi Gang and China’s Finance Minister Liu Kun in a G20 meeting pledged credit expansion and pro-growth policies. Recently beaten-down China property names rallied, with CIFI (00884:xhkg) rising 9.6%, Guangzhou R&F (02777:xhkg) up 4.1%, Longfor (00960:xhkg) 3% higher. HSBC (00005:xhkg) and Standard Chartered (02888:xhkg) gained 4.5-4.6%, both being boosted by the strong rally in the pound sterling in anticipation of the U.K. Truss government changing course in some of the planned tax cuts. Pharmaceutical names outperformed in both the Hong Kong and mainland bourses. Wuxi Biologics (02269:xhkg) surged 8.6% and Sino Biopharm (01177:xhkg) gained 6.5%.
The US dollar gained across the board on higher bond yields and a larger probability of 75bp hike at both the November and December FOMC meetings. USDJPY soared to nearly 149, its highest level since 1990, and came very close to test 150. Without any concerted action from other countries, traders expect that Japanese authorities’ lone intervention will not be able to turn around the depreciating Yen. The Pound Sterling traded steady, after giving back most of its gain from the day before after the Bank of England ended its emergency bond purchase programme. Plus, the sacking of Kwarteng as UK Chancellor and the watering down of the mini-budget also failed to calm traders’ minds. And lastly, being most sensitive to global growth slowing and China’s zero covid being maintained, the AUD and NZD appear to be the most pressure G10 currencies against the dollar.
The dim prospect of global growth, rising interest rates, and China’s adherence to the dynamic Zero-Covid policy weighed on oil prices. WTI crude plunged 4% to US$85.61 on Friday. The International Energy Agency (IEA) said in its monthly energy market report, “with unrelenting inflationary pressures and interest rate increases taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession.”
September retail sales were flat versus August, weaker than expectations (consensus: +0.2%). Retail sales ex Auto rose 0.1% M/M, better than the 0.1% decline expected. This batch of data did not incur much market reaction. The fanfare last Friday was from the stronger-than-expected inflation expectations in the University of Michigan consumer survey. For the coming year, the preliminary results from the October survey indicate that U.S consumers are expecting inflation at 5.1% Y/Y, much stronger than the consensus estimate of 4.6% and September’s 4.7%. As an indication of long-term inflation expectations, the 5-10-year inflation expectation in the survey came in at 2.9% Y/Y in October, above the consensus estimate of 2.8% and September’s 2.7%.
JPMorganChase (JPM:xnys) reported EPS of US$3.12, beating the consensus of US$2.90, on better-than-expected net interest income, fixed income and investment banking revenue despite seeing a fall in equity trading revenue. Meanwhile JPMorgan’s Common Equity Tier-1 (CET1) capital adequacy ratio improved by 30bps Q/Q to 12.5%. As for Citigroup (C:xnys), its Q3 EPS also beat expectations thanks ot stronger net interest income, with EPS coming in a US$1.63, vs US$1.45 consensus, Citigroup’s CET1 rose by 30bps Q/Q to 12.2%. As for Morgan Stanley (MS:xnys), it reported EPS of US$1.47, below consensus of US$1.51 with trading revenues coming in weaker than expected taking a toll, while its investment banking revenue beat expectations. And lastly, Wells Fargo’s (WFC:xnys) results also missed expectations with Q3 EPS hitting US$0.85, which was shy of consensus, US$1.09.
General Secretary Xi Jinping made a speech to present the Work Report of the 19th Central Committee to the 20th National Congress. In the speech, he reiterated the current policies of the new development paradigm, common prosperity, dual circulation, holistic national security concept, and dynamic Zero-Covid. As we remarked in a recent note, General Secretary Xi is set to continue the key policy priorities that he launched over the past 10 years into the five years ahead. Investors hoping for major shifts in economic policies in China or the Chinese authorities ditching the dynamic Zero-Covid strategy after the 20th National Congress will most likely be disappointed.
China’s CPI came in at +2.8% Y/Y (vs consensus +2.9%; August +2.5%) and the core CPI (excluding food and energy) growth slowed to +0.6% Y/Y from +0.8% in August. The rise in the headline CPI was driven by a 36% Y/Y increase in pork prices and increases in most other food prices as well in September. The deceleration in the PPI to +0.9% Y/Y (vs consensus +1.0%) from +2.3% in August was driven by weaknesses in energy, mining, and raw materials as well as declines in prices in the oil and gas process, ferrous metal processing, and non-ferrous metal processing industries. The CPI and PPI overall point to sluggish demand in China.
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy