fed

Markets rejoice Fed’s in-line outcome, but more pain ahead; and a sigh of relief for the BOJ

Equities 7 minutes to read
Saxo Be Invested
APAC Research

Summary:  Markets rebounded as the Fed caught up with expectations but indicated a slower pace of tightening after the neutral rate is reached. We believe more pain is to come as inflation will likely stay higher-for-longer and there is still room for the Fed to surprise on the hawkish side. Bigger focus this week is the Bank of Japan especially after the markets tested their easy policy strongly yesterday, but the pressure has been somewhat released as bonds recovered today.


What’s happening in markets?

Big picture

Market jitters calm for now, seeing risk come back in; Bond yields fell (but remain at 11-year highs after the 10-year briefly hit 3.48% before paring back) while equities rose as Fed hiked rates by 0.75% as expected. Remember the market likes when things work as expected. So, we think a very short-term relief ninja rally could continue for now, given the next two inflationary monthly reads might be disillusioned calm, but after that caution will kick in again as food price and oil inflation will likely continue to rise up and hit new highs given the energy and food crisis is largely unresolved. For example, IEA yesterday afternoon said there is not enough supply to keep up with demand in 2023. While over in Australia, their electricity trading market suspended spot trading as they can’t get enough energy supply for the grid. So, the big picture remains weak with a lot of risk in the air given inflation will probably rise above the 7% Fed forecasts, and could hit 9%, closer to Saxo’s prediction from last year.

Asia Pacific equities all set to see a day of green

Australia’s ASX200 is higher for the first time in 5 days rallying by 0.4% the back of Wall Street’s upbeat mood. The major theme is that the downbeat stocks and sectors of the year - Real Estate and Tech - are seeing a short-term relief rally, leading the market higher, but it’s going to be short lived as these sectors will probably continue to suffer as the RBA becomes more aggressive and hikes rates more than expected. The biggest risk to Australia right now is that consumer confidence levels are falling, along with business confidence levels, so we remain bearish long term on banks. Lending has been falling for some time now and is going to get stiflingly worse. Consumers are apprehensive to go out and get a mortgage given rates will probably be at over 4%. Okay we have full employment, but who can afford an extra $850 per month in mortgage payments. The average mortgage payment has already doubled in a month. That being said, banks in Australia could see a very short-term rally before heading lower again. Japan’s Nikkei (N225.I) led gains in the region, up 1.9%, following the relief rally from Wall Street as the pace of Fed tightening is likely to ease off after the neutral rate is reached. The Fed caught up with the market expectations, but has left room to tilt dovish down the year. Singapore’s STI (ES3) was also up close to 1% as REITs and banks led the advance.

Hong Kong and mainland China equity markets retraced

After opening higher, Hang Seng Index (HSI.I) and CSI300 (000300.I) fluctuated between gains and losses.  While sentiments towards Chinese equities have improved amid better-than expected headline economic data over the couple of weeks, investors remain cautious about the growth outlook of the Chinese economy, citing persistent weaknesses in the volume data of power, cement and steel.  Shanghai will start doing city-wide mass COVID-testing every weekend.  An online story about a Hong Kong based Chinese financial institution having suffered a huge loss from its investment in Chinse corporate offshore USD bonds was widely circulated in the market yesterday. Despite the post FOMC relief rally in the U.S. equity markets overnight, the Fed’s determination to fight inflation implies tighter global financial conditions and slower economic growth in the coming months.

Iron ore (SCOA, SCON2)

Iron ore is lower for the 5th day, down 2.8% today.

What to consider?

Fed matches up to market expectations

The Federal Reserve hiked rates by 75bps (although Esther George dissented with a vote for 50bps hike) as was expected especially after the hot May CPI and inflation expectations surveys on Friday. The dot plots have all been revised higher by a substantial amount seeing year-end rates at 3.4% (FFR target range of 3.25-3.50%), with increases continuing to a terminal rate of 3.8% in 2023 before rate cuts occur in 2024 back to 3.4%. Rate guidance was key, and suggested that July could be either 75bps or 50bps hike but beyond that, Powell does not expect 75bps hikes to be common. In essence, after we reach neutral (~2.5%), the pace will slow down from there, which means there is still a room for a hawkish surprise from the Fed down the year.

Disappointing ECB emergency meeting

The ECB indicated they will apply flexibility in reinvesting PEPP redemptions. This was expected. In addition, a new tool to manage sovereign spreads is likely to be announced soon. We don’t have many details for the moment. Based on Isabel Schnabel’s recent comments, we can assume it will be some kind of Outright Monetary Transactions programme with light conditionality, for a temporary period of time and with shorter maturities than PEPP (perhaps between two to five years). 

Australia employment beats expectations, giving RBA room to hike rates more than expected next month

Firstly, monthly employment rose by 61k in May vs 25k expected. Unemployment rate was a notch higher at 3.9% vs 3.8% expected. While employment to population is at a record high. Higher employment means higher wage inflation, higher business costs. We think the RBA will probably rise rate by 0.75% at the next meet in July. Why? Well wage price inflation will continue. Australian Minimum wage were risen to 5.2%. And next year more employees will come to market as Childcare subsidy is increased to 90% in July, encouraging parents to return to the workforce. All this comes at a time when energy price inflation for the long term is not fixed with The Australian Energy Market Operator (AEMO) sounded the alarm that it cannot get access to enough electricity supply to keep up with demand. This means, energy inflation is likely to continue. This is why we advocate for investing in larger companies and commodity companies as well... who can sustain higher for longer wage price inflation.... and higher for longer rate hikes.

May U.S. retail sales fade

US retail sales for May came out at -0.3% month-over-month versus expected 0.1% (adjusting for inflation it was out at -1.2%). This is the first drop of the year. Core retail sales (excluding autos, gas) rose 0.1% month-over-month versus expected 0.4% (adjusting for inflation it was out at -0.7%). This is disappointing as it showed that demand destruction is finally happening.

New Zealand Q1 GDP also disappointed

We had New Zealand GDP out this morning, coming in below expectations at 1.2% y/y for Q1 (vs expectations of +2.4%). On a q/q basis, GDP was down 0.2%, although Q2 may rebound as consumption revives on the back of easing restrictions and reopening of borders. With the risk of a recession remaining restrained and inflation likely at about 7% this quarter, RBNZ is likely to continue to tighten.

Japan’s swelling imports to weigh on Q2 growth

Japan’s trade deficit widened to a fresh eight-year high in May as the yen’s slide inflated the cost of imports. The trade deficit increased to 2.38 trillion yen, the most since January 2014, as imports soared 48.9% y/y. Exports rose 15.8% y/y, coming in below expectations of 16.1% gain.

Australia’s energy supply worries

The Australian Energy Market Operator (AEMO) has been asking and directing energy companies and states across Australia to put in more supply to the market, while electricity demand soars with a record cold front sweeping Australia, at a time when electricity prices are at records and likely to rise.

Potential trading and investing ideas to consider?

Oil’s demand/supply imbalance to continue

IEA expects global oil supply likely to struggle to meet the demand, as consumption growth will accelerate with China exiting lockdowns and consumers to face more pain amid refining capacity shortages. Growth in global oil demand is set to accelerate to 2.2mn barrels a day. Non-OPEC+ supplies will expand by 1.9mn a day. World consumption will average 101.6mn barrels a day, surpassing pre-pandemic levels. Unless we see a major recession threatening a decline in consumption levels, it is likely that oil demand/supply imbalance is set to continue into 2023 and upward pressure on prices will stay.

BOJ on the horizon

While the risk of a real policy action from the Bank of Japan has been reduced by the market reaction to the Fed, we cannot completely rule out that markets will continue to test the BOJ’s resolve to keep the yields capped. Longer end futures slumped yesterday and the BOJ had to step in to buy. JGB 10-yr yields also tested the 0.25% limit but are now back a notch lower as global bonds trade higher. USDJPY eased to 133.50 but is now back to 134.50+ levels and more moves in futures can still come in from speculators expecting policy tweaks on Friday.

Chinese tech stocks remain supported

China’s recent easing of tech regulations has meant that tech stocks are being supported higher; with JD and Alibaba up over 11-23% this month and momentum looks to be picking up with stay home economy boredom trade rising. That’s something to consider.

For a global look at markets – tune into our Podcast. 

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.