Summary: A hot US jobs report on Friday brought about a reversal in Fed rate path expectations, but a big part of the move was later reversed. Fed goes into a quiet period, but China reopening optimism is set to gather further momentum this week with easing measures being implemented in Shanghai. This would mean a further bump to metals and energy prices, especially with OPEC+ staying away from a production cut over the weekend and the next meeting only scheduled for February. Key levels on test this week with 3.50% in US 10-year Treasury yields, and USDJPY heading below the 200-day moving average at 134.50.
In spite of a strong non-farm payroll print and a surge in average hourly earnings on Friday which might cause some Fed officials to be wary about the unabated upward wage pressure when they meet on Dec 13 and 14, the major U.S. equity benchmark indices were largely flat and managed to retain the 1-2% gains following Fed Chair Powell’s dovish-leaning remarks on Wednesday. S&P500 and Nasdaq sold off more than 1% at the open but staged an impressive clawback of nearly all the losses when the closing bell rang on Friday. Materials and industrials were the top-performing sectors with the S&P 500 while energy stocks, followed by the information technology space were laggards. PayPal (PYPL:xnas) dropped 4.9%.
When the stronger-than-expected 263,000 growth in nonfarm payrolls and white-hot 5.1% Y/Y increase in November average hourly earnings (October revised up to 4.9% Y/Y from 4.7%) hit the wires, yields surged across the curve with the 2-year yield jumping 18bps to 4.41% and the 10-year yield rose 13bps to 3.63% in a matter of minutes. Bids emerged and yields spent the rest of the session grinding lower. By the time of market close, except for the 2-year yield which was 4bps cheaper at 4.27%, treasury yields were 1bp to 5bps richer, with the 30-year being the best performer. The 10-year yield slid 2bps to 3.49% and the 30-year yield dropped 5bps to 3.55%, hitting the lowest yield levels in nearly 3 months. The strong job and wage data made a further drift down to a 25bp hike in February 2023 less likely (only about 20% probability as money market rates suggest) and kept the 2-year yield from falling. The 2-10-year curve inversion widened 6bps to -78bps.
Hang Seng Index and CSI300 Index consolidated and were modestly lower on Friday after the recent strong rally on signs of further easing of Covid restrictions in mainland China. Online health platform stocks surged. Alibaba Health (00241:xhkg) and JD Health (06618:xhkg) gained more than 9%, and Ping An Healthcare and Technology (01833:xhkg) jumped 15.4%. Profit-taking selling weighed on Chinese property developers, with leading names, such as Longfor (00960:xhkg) and Country Garden (02007:xhkg) dropping around 4%. More cities rolled out support policies to the property sector. In addition, after the market close, China reportedly told the country’s top state-owned banks to provide offshore financing to help property developers in repaying offshore debts. Overnight in New York hours, the Nasdaq Golden dragon China Index caught a bid, surging 5.4%, and Hang Seng Index Futures gained more than 2%.
The USD index got a bump higher after the stronger-than-expected jobs report on Friday which suggested that it might not be easy for the Fed to pause or pivot, but gains were reversed later and the index closed back at 104.50. NZDUSD was however a notch weaker this morning staying below 0.64 with AUDNZD testing 1.06 support ahead of RBA meeting tomorrow. USDJPY is testing a critical support level of 134.30 with lower US yields and some BOJ officials hinting at a policy review soon (read below). EURUSD looking stretched above 1.05.
As cities in China relaxing Covid restrictions across the country and the spread between US treasury and Chinese government bond yields narrowing, the USDCNH dropped below 7.0, the first time since September, to 6.9852.
After strong gains in crude oil last week, some softness was seen at the end of the week after speculation of no production cut from OPEC mounted. WTI traded back to $80/barrel from $83 levels mid-week on China’s reopening optimism, while Brent retreated from $90 levels to sub-86. The Sunday OPEC meeting did come out with an unchanged output decision, as expected, while the EU’s price cap on Russian oil was also fixed at $60. This week will be key to watch further China reopening and any signs of a retaliation from Russia on the price cap. European gas prices also continue to pick up as falling weather boosts heating demand, and expectations are for a colder-than-expected winter.
The supportive factors for precious metals continue to line up – China’s reopening, lower US yields and a weaker dollar. This helped gold run higher to test a break above the key $1800 level for the first time since August. Meanwhile, Silver’s impressive November rally has extended into December with the price breaking above $22.25 – a 50% retracement of the March to September selloff – and on route to the next level of resistance at $23.35. Other metals such as Copper and Iron Ore also charged with China now reopening Shanghai, while the risk of a policy error by the Fed continues to run high.
The benchmark index, the ASX200 is already trading at a seven-month high and could get a fresh kick this week as the iron ore (SCOA) price is back above $100 for the first time since August on optimism China could increase demand. The iron ore price has moved up 38% from its October low, so if we continue to see easing of restrictions in China, you might except this rally to continue and benefit forward earnings of BHP, Rio, Fortescue and Champion iron.
The nonfarm payroll (NFP) data came out stronger-than-expected on Friday, with US employers added 263,000 jobs in November, less than October's upwardly revised 284,000 but well short of the turning point Fed officials seek in their battle against inflation. The unemployment rate was maintained at 3.7% while the wages were very hot: M/M rose 0.6% (exp. 0.3%) and Y/Y rose 5.1% (exp. 4.6%). After a few weeks where markets have been taking the slowdown in the pace of rate hikes by the Fed positively, this report was a reminder that rate hikes will still continue well into 2023. WSJ's Fed Whisperer Timiraos said the report keeps the Fed on track to raise interest rates by 50bps at its meeting in two weeks and underscores the risk that officials will raise rates above 5% in the first half of next year.
Caixin China PMI Services is scheduled to release on Monday. The consensus estimate from the Bloomberg survey is 48.0 for November, shrinking deeper into the contractionary territory from 48.4 in October. The lockdown and pandemic control restrictions during the best part of November when the survey took place weighed on economic activities, especially services. Investors will tend to look beyond this number and focus on the scope and pace of the easing of the pandemic restriction undergoing in China.
Cities in China, one after one, announced to ease pandemic control restrictions including removing the requirement to show negative PCR test results when taking public transportation. Shanghai and Hangzhou joined the others on Sunday and announced that the cities no longer require negative PCR test results to enter public venues or taking public transportation.
On Monday, Shanghai and Hangzhou scrapped PCR testing to enter public venues including on public transport and to enter parks. Shanghai and Hangzhou joined other top-tier cities, Beijing, Shenzhen and Guangzhou in relaxing curbs after mass protests took place against China’s stringent policies last week. In equites, focus will be on markets being forwarding looking and hoping of a potential turnaround in consumption, especially cities with easing restrictions.
New BOJ board member Naoki Tamura urged a policy review, in his conversation with Bloomberg, saying that it would be appropriate for the central bank to conduct a review at the right time – soon or a little later depending on what happens to prices. The yen rose on speculation an assessment flagging policy change may come before Haruhiko Kuroda steps down in the spring.
The OPEC+ group decided to keep the current production levels unchanged, as the crude oil prices started to show some tentative signs of a recovery after China’s continued commitment to ease its Zero covid policies. Still, a 2mb/d cut was announced in October, and the full effect of that is yet to be seen. Furthermore, there is volatility expected due to the EU sanctions and a G7 price cap on Russian crude which will go into effect this week, and further changes in China’s zero covid policy are also set to continue. The group’s next meeting is not scheduled until February.
The EU nations have agreed to cap the price of Russian seaborne oil at $60/barrel, with a motive to diminish Russia’s revenues, paving the way for a wider deal with the G7 countries. This price cap is to go in effect on December 5, and represents a discount of ~$27 to the current price for Brent crude, but Urals has been trading at a discount of about $23 in recent days. However the risk of setting a price cap too low is that Russia could slash its output, which would roil markets. It will be important to watch for Russia’s reaction this week, after Putin has repeatedly said that they will not supply oil to countries that implement the price cap.
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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