Summary: Market sentiment remains on the defensive ahead of CPI data from the US tomorrow and after recent CPI readings were revised higher. US 2-year treasury yields have surged to their highest since November ahead of that data point and Retail Sales on Wednesday as the market has adjusted Fed expectations for the peak Fed funds rate higher. The US dollar is firm as a safe haven and the JPY has eased back lower.
S&P 500 futures fought back on Friday to close at the 4,100 level which now seems to be a crucial anchor for this index ending last week with significant retreat across growth and high duration equity segments as US 10-year bond yield moved 21 basis points higher. The key price action to watch from here is whether the US bond market will retest the 4% in the US 10-year yield as such a move could lead to a further correction in US equities. Tomorrow’s US January CPI figure is the first test this year of the ‘reacceleration with lower inflation’ narrative which we still find too rosy an outlook by the market.
Hang Seng Index slipped 0.4% on Monday, as shares of Hong Kong local property developers tumbled 2% to 8% across the board dragged by a 13% collapse in Link REIT (00823:xhkg). The largest REIT in Hong Kong that operates shopping centers and real estate retail spaces announced a rights offering for HKD19.3 billion at a 30% discount to its previous close. In A-shares, CSI300 advanced 0.8% led by Chinese white liquor, beverage, and marine equipment.
The US dollar firmed on the ideal supportive backdrop of nervous risk sentiment and higher US treasury yields, as the 2-year yield nears multi-year highs on the market taking Fed expectations higher recently, but also as the 10-year treasury yield has edged to the highest since the opening week of the year. EURUSD fell back below 1.0700 on Friday and GBPUSD is back near 1.2050 after nearly touching 1.2200 last Wednesday. That rising US yield pressure is likely behind the faltering JPY JPY rolling back lower, taking USDJPY back above 132.00 after significant volatility last week when it emerged that the dovish Amamiya would not be the nominee to replace Kuroda at the helm of the BoJ on his exit in April. The market is unsure of the not-yet-fully-official nominee Kazuo Ueda’s policy leanings, other than that he is an academic and not a idealogue.
Oil prices jumped higher on Friday, closing the week with over 8% gains, as Russia said it would lower production in response to western sanctions (read below). The OPEC+ alliance, which Russia is key member, signalled they won’t be increasing output to fill in for the reductions, signalling a tight market may be ahead. WTI rose to $80/barrel and Brent touched close to $87, although some profit taking emerged in early Asian hours on Monday. Oil prices still continue to trade within a range that has prevailed since November. Meanwhile, other supply returned to the market with Tanker loadings of Azeri crude docking at Turkey's Ceyhan terminal.
Gold continues to consolidate near $1860, avoiding closing at a new low on Friday despite pressure from rising US yields. Tomorrow’s US CPI release continues to be on watch to assess if the disinflationary narrative can continue even with a new methodology of calculating. A rhetoric shift in global central banks has been seen last week with more hawkish surprises, and the CPI will be the latest test if that narrative can continue to build. Gold however still getting support from rising US-China tensions. Further weakness carries the risk of an extension towards $1828, the 38.2% retracement of the run up from early November.
The long end of the curve led the sell-off in Treasuries on Friday, with yields on the 10-year jumping 7bps to 3.73% and those on the 20-year climbed 4bps to 4.52%. The University of Michigan consumer sentiment index came at 66.4, above the 65.0 expected and the highest level in 11 months. One-year inflation expectations edged up to 4.2% from 4.0% while the 5-10-year inflation expectations remained unchanged at 2.9% Y/Y. Traders were cautious ahead of the CPI report on Tuesday and the upcoming supply from a 20-year auction this Wednesday.
While the US dollar firmed broadly on Friday, the Canadian dollar was firmer still on strong oil prices and on Canadian jobs data Friday smashing consensus expectations, bringing into question the Bank of Canada’s attempt to guide for a pause in its rate-hiking regime at coming meetings. Not only were payrolls gains very strong at +150k vs. +15k expected, but the unemployment rate remained steady at 5.0% despite a 0.7% surge in the participation rate. USDCAD closed below 1.3350 on Friday after trading above 1.3450 earlier in the session.
Philly Fed President Patrick Harker (voter) said the likelihood of the Fed being able to control inflation without triggering a recession is growing, but stressed that the key rate must get above 5% and stay there to ensure price pressures ease. He also hinted at a “couple” more 25-bps rate hikes being in the pipeline, but said that how far the Fed will need to go above 5% will be determined by the data. He also talked about rate cuts, but dismissed the possibility in 2023. Focus turns to Michelle Bowman who speaks at a banking conference today.
Oil prices reevsred lower overnight after bumper gains on Friday as Russia said it would lower production in response to western sanctions (read below). The OPEC+ alliance, which Russia is key member, signalled they won’t be increasing output to fill in for the reductions, signalling a tight market may be ahead. WTI rose to $80/barrel and Brent touched close to $87, although some profit taking emerged in the Asian session on Monday. Oil prices still continue to trade within a range that has prevailed since November and focus this week will be on US CPI. A sticky inflation print could bring the focus back on demand concerns rather than the supply issues. Meanwhile, other supply returned to the market with Tanker loadings of Azeri crude docking at Turkey's Ceyhan terminal.
U.S. officials said an “unidentified object” has been shot down by its military over Lake Huron. This is the third time in as many days, after earlier downings in Alaska and Canada, and it is the fourth this month to be shot down over North America by a US missile. As debris from these is being evaluated, the Chinese government says it has spotted a mystery object over waters near northern port city Qingdao and it is preparing to shoot it down.
Castellum, a Swedish real estate management company, that is missing on Q4 management income this morning is announcing a $955mn rights issue to bolster its finances as the pressures in the Swedish housing market continues in the first test of the country’s housing market since the Great Financial Crisis in 2008.
Lithium imports both to China and USA are surging this year as car makers ramping up production of EVs. Ford and CATL are reportedly planning to build a $3.5bn mega battery plant in Michigan. Rapidly expanding battery production means that lithium demand is likely to continue to grow, while supply remains limited in the first half of 2023. Saxo’s long-term view on battery metals such as copper, aluminium and lithium is still positive.
US CPI data for October through December has been revised higher, raising market concerns that the Fed will make good on its “higher for longer” guidance that the market has long second guessed, as forward expectations continue to point to an aggressive rate-cutting cycle beginning in late 2023, although recent strong US data has seen the market expectations for peak rates adjusted to above 5.00% and the eventual rate cutting cycle start pushed later into this year. Tomorrow’s January US CPI release will be the first using a new calculation methodology in which weights are adjusted annually rather than every other year and using a new method for calculating new vehicle prices. The month-on-month CPI headline is expected at +0.5% and the ex-Food-and-Energy measure is expected at +0.4%, with YoY figures expected at 6.2%/5.5% vs. 6.5%/5.7% in December. The inflation report will be followed on Wednesday by the January US Retail Sales report, expected to show a strong growth in sales after a weak December.
Today’s earnings focus is SolarEdge and Palantir that both report after the US market close with analysts expecting SolarEdge to report Q4 revenue growth of 59% y/y and EPS of $1.56 up 225% y/y as demand for solar inverters and monitoring systems continue to grow at a healthy pace. Palatir is expected to report Q4 revenue growth of 17% y/y and EBITDA of $86mn up from $-55mn loss a year ago.
1300 – US Fed’s Bowman (Voter) to speak
2200 – New Zealand REINZ House Sales
2330 – Australia Feb. Westpac Consumer Confidence
2350 – Japan Q4 GDP Estimate
0030 – Australia Jan. NAB Business survey
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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
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy