Summary: The FOMC meeting produced a downshift in forward guidance, but avoided pre-committing to a pause in tightening, deferring to incoming data. Alas, the market decided that the backdrop supports the idea of the Fed pausing here cutting rates more than 75 basis points by year-end. Equity markets ended the day lower, perhaps spooked by the ongoing downdraft in bank stocks and concerns for the economic outlook, but rebounded partially in a choppy overnight session. ECB on tap today.
Fed Chair Powell indicated a rake hike pause for now after hiking the policy rate by 25 basis points and the market quickly pushed expectations for the policy rate this year lower post the FOMC event as consensus is still looking for a recession to drive interest rates lower. A recession is based on real economic growth, but if the nominal growth remains high then the Fed may not deliver what the market wants this year, and this will be the ultimate tug of war for the rest of the year. S&P 500 futures declined yesterday, but this morning the index futures are attempting a rebound trading around the 4,109 level which is above yesterday’s close, so the market is locked in the trading range established since early April.
Mainland China returned from the Labor Day holiday and a mixed bag of economic data. Similar to the official NBS manufacturing PMI released earlier, today’s Caixin China manufacturing PMI fell below the expansion-contraction threshold to 49.5. On the other hand, travel and consumption data for the five days during the 5-day holiday period indicated a strong pick-up in consumption. Trading in mainland A-shares was muted and lacked directions, ticking down modestly in the early Asian afternoon. Hong Kong’s Hang Seng rallied around 1%, driven by gains in China insurance companies, banks, and pharmaceuticals.
The US dollar weakness extended following the Fed rate decision as Treasury yields plunged at the front of the yield curve after a choppy reception of the policy statement and Powell press conference. The Japanese yen outperformed, with USDJPY near 134.50 this morning from 136+ levels yesterday recovering much of the gains since Friday’s dovish BOJ meeting. The ECB meeting in focus today and any dovish bent could mean a big reversal for EURUSD which is getting in close sight of 1.11 for now. GBPUSD also heading up towards 1.26, having reached its highest levels since June 2022. Commodity currencies were the weakest led by CAD as crude oil prices plunged further.
Crude oil prices trade higher after initially continuing yesterday’s slump into the Asian session. The combination of no liquidity and algorithmic sell signals briefly saw WTI sink as much as 7.2% to $63.64 before recovering. Whether it was the final capitulation of longs remain to be seen but today’s price action may be crucial to determine where we go next. Brent meanwhile only dropped 1.45% on the opening before recovering to trade higher on the day. The price action this week shows that short sellers are firmly back in control as the macroeconomic outlook continues to challenge expectations that 2H23 will see rising demand. Adding insult to injury, the EIA reported a big drop in gasoline demand while fuel stocks rose.
Gold prices hit their highest levels since March 2022 after reaching $2063 on the Asian open. Even as interest rates were raised further by the Fed last night, and Fed chair Powell poured cold water on expectations for rate cuts, the shift in tone nevertheless managed to buoy the market in anticipation of peak rates now being followed by cuts later this year. The Jun-Dec SOFR futures spread now points to an 83-bps cut this year followed by another 145-bps next year. In addition, raised geopolitical tension after an alleged drone attack on the Kremlin also adding some support. The path for Gold can be much choppier from here if inflation concerns return to challenge the mentioned rate cut expectations. Also in focus, the risk of a technical shooting star candle formation raising the risk of a technical pullback back towards the key $2k area.
After a well-telegraphed 25-bp rate hike and the removal of the phrase “additional policy firming may be appropriate” and the implied tightening bias, the initial reactions in the Treasury market were muted. The market subsequently faded Powell’s remark that the Fed was not going to cut rates given the inflation forecasts the Fed had and saw yields lower. The coupon curve steepened with the 2-year through the 5-year notes being well-bid. The 2-year yield fell 16 bps to close at 3.80% while the 10-year yield shed 9bps to 3.34%, steepening the 2-10-year curve by 7bps to -47.
The announcement of USD96 billion refunding in total for the 3-year notes, 10-year notes, and 30-year bonds was as expected, The Treasury Department also announced a Treasury securities buyback program would be launched sometime next year. The Treasury has conducted consultation and issued reports over the past several months on its intention to do buybacks, aiming at improving liquidity and market functioning.
The Fed raised rates by 25bps to a range between 5-5.25%, as was widely expected, and opened the door to a potential rate pause for now, but adjusted the language to avoid any indication of pre-committing to a course of action. The prior language from its statement - “the Committee anticipates that some additional policy firming may be appropriate” was replaced it with this: “the extent to which more firming is needed will depend on economic data.” While Chair Powell hinted at the risk of a mild recession, he also reaffirmed that inflation is still well above its goal and there is a long way to go to bring it down. Market pricing turned dovish, with almost 80 bps in rate cuts priced for this year from just over 60bps ahead of the meeting despite Powell dismissing the likelihood of rate cuts this year.
A lot of European companies are reporting earnings this morning. Equinor is beating on Q1 net income at $3.5bn vs est. $3.3bn driven by strong margins; the company says Europe is in a good position on gas. AB InBev is reporting Q1 organic EBITDA growth of 14% compared to 5% expected underscoring that consumer staples companies broadly can pass on inflation to consumers. ArcelorMittal reports Q1 EBITDA of $1.8bn vs est. $1.7bn as pricing conditions remain favourable and the steelmaker is still seeing 5% growth in shipments this year compared to 2022. Volkswagen and BMW are both reporting this morning with operating margins beating estimates with Volkswagen indicating likelihood of bullish guidance ahead. Novo Nordisk beats easily on both revenue and net income in Q1 against estimates with all drugs beating except for the highly demanded obesity drug Wegocy which is seen as the biggest growth driver ahead. Revenue growth is currently constrained by production capacity, but Novo Nordisk recently said that capacity should soon increase here in Europe. Maersk beats on Q1 EBIT and maintains guidance on FY EBIT of $2-5bn vs est. $3.3bn. Maersk sees FY container volume of –2.5% to +0.5%. Shell beats on Q1 profits and announces a $4bn buyback programme.
The US ISM services survey rose to 51.9 from 51.2 in April, marginally above the expected 51.8, which was largely due to a large increase in new orders to 56.1 (prev. 52.2). Employment remained in expansionary territory but fell to 50.8 (prev. 51.3), and prices paid ticked slightly higher to 59.6 (prev. 59.5). Labor market strength was also reaffirmed as April ADP showed jobs increased by 296k, above the expected 148k and March's addition of 142k. Initial claims data due today before the focus shifts to Friday’s non-farm payroll.
China's cultural and tourism industry recovered strongly during the 2023 Labor Day holiday. The Ministry of Culture and Tourism estimated a total of 274 million domestic tourist trips, marking a 70.8% Y/Y increase and a 119.1% recovery compared to before the pandemic in 2019. Domestic tourism revenue also surged by 128.9% YoY and just above 2019 levels. Key retailers and catering providers reported a sales growth of 18.9% Y/Y, according to the Ministry of Commerce's monitoring of high-frequency data. Sales of petroleum products and automobiles saw a surge of 24.4% and 20.9% respectively. The sales of jewelry and clothing grew by 22.8% and 18.4% Y/Y, respectively. Communication equipment sales increased by 20.1% Y/Y while home appliances sales increased by 13.9%.
What are we watching next?
The ECB announcement is due today, and consensus is looking for a downshift to a 25bps rate hike while the market is pricing in only slightly higher (29bps). Data this week on inflation remaining firm continues to make a case for another 50bps rate hike, as has also been hinted by several ECB speakers over the last few weeks, but the weakness in Q1 bank lending survey may warrant some caution as it highlights weakening credit demand.
Russia accused Ukraine of attempting to assassinate Russian President Putin via a drone attack, although they were shot down by Russia. Volodymyr Zelenskiy denied Russian allegations, while the US says to take the report with a "shake of salt", and they cannot validate reports. This brings risks of a step-up in conflict, and Deputy Chair of the Russian Security Council Medvedev has said the only response to such action is to eliminate Ukraine President Zelenskiy and his "clique".
EURUSD is pinned at the cycle highs just below 1.1100 this morning ahead of the ECB meeting, which is expected to deliver a 25-basis point hike (a minority of observers expect a 50-bp move, with 29 basis points the current market pricing) followed by guidance for some further tightening. The forward curve prices the ECB to move another one or two hikes higher through the July or September meeting before pausing the tightening cycle. The current rate of QT, started in March, is EUR 15 billion/month, with a review set for June, meaning that it is likely too early for any signaling on QT plans.
Earnings to watch
Today’s US earnings focus is Apple, Booking, Fortinet with all three companies reporting after the US market close. Apple is expected to report FY23 Q2 (ending 31 March) revenue of $92.6bn down 5% y/y and EBITDA of $30.2bn down from $32.7bn a year ago. Booking is expected to Q1 revenue of $3.7bn up 39% y/y and EBITDA of $627mn up from $321mn a year ago as travel activity and future bookings continue to look strong. Fortinet is expected to report revenue of $1.2bn up 26% y/y and EBITDA of $312mn up from $175mn a year ago as the war in Ukraine continues to underpin the demand for cyber security.
0715-0800 – Eurozone Final Apr. Services PMI
0800 – Norway Norges Bank
0900 – Eurozone Mar. PPI
1130 – US Apr. Challenger Job Cuts
1215 – ECB Rate Decision
1230 – Canada Mar. International Merchandise Trade
1230 – US Mar. Trade Balance
1230 – US Weekly Initial Jobless Claims
1400 – Canada Apr. Ivey PMI
1430 – EIA's Weekly Natural Gas Storage Change
1705 – Canada Bank of Canada Governor Macklem to speak
1815 – Canada Bank of Canada Governor Macklem to speak
0130 – Australia RBA Statement on Monetary Policy
0145 – China Apr. Caixin Services PMI
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy