Summary: The S&P 500 index toyed with pivotal support yesterday around 4,100 without breaking down through it as the market absorbs the fresh surge in treasury yields in the wake of Friday’s strong US jobs report. The US dollar remains well bid, although the JPY came in stronger overnight on hotter than expected wage growth data, while a far more hawkish than expected RBA boosted the Aussie. Fed Chair Powell will sit for an interview late today. Copper and gold meanwhile have seen no follow-through selling following Friday's breakdown.
S&P 500 futures continued to roll over from their weak Friday performance with the 4,100 level almost coming into play, but instead of extending downside momentum the index futures turned around from the lows. This morning S&P 500 futures are trading around the 4,130 level, and if they can close above yesterday’s close it will signal the short-term strength in equities, and if not the 4,100 level is in play again opening the range from the 4,000 level. The VIX Index is well behaved these days and the US 10-year yield is already retreating a bit from the recent surge suggesting a quiet day ahead.
The US dollar remained firm on Fed member Bostic’s comments on a potentially higher peak in the Fed Funds rate supported the US dollar overnight. Market pricing has seen an upward revision to terminal rate to 5-5.25% and Treasury yields continued to surge higher. The Japanese yen, being the most yield sensitive, was weak yesterday on the double-whammy of higher US yields and chatter of a dovish new Governor at the Bank of Japan, but the JPY rose overnight on December wage data showing the strongest rise in wage growth in 25 years. AUDUSD pushed well below 0.6900 but then bounced hard on a far more “hawkish” (less dovish) RBA than expected – see below. EURUSD is stil mired below 1.0750 this morning and GBPUSD avoided a move below 1.2000 as BOE’s Mann noted that the next step in the Bank Rate is still more likely to be another hike than a cut or hold.
Crude oil trades higher for a second day following last week's long-liquidation-driven slump. The turnaround was given further support after Turkey halted around 1m b/d of flows from Northern Iraq to the Ceyhan export terminal following a major earthquake in the region. In addition, Saudi Aramco instead of a cut increased its official selling price for its flagship Arab Light grade to Asia in March, suggesting confidence in the demand outlook. Focus turning to the US where the EIA will publish its monthly Short-term Energy Outlook and later the API its weekly inventory report. Weeks of bigger-than-expected inventory rises in the US has been one of the reasons, together with a slow pickup in demand from China, have been the main reasons why speculators were forced to exit recently established longs. The Brent prompt spread meanwhile has risen to 33 cents, signalling increased tightness. Brent support at $79 and resistance at $84.30.
Gold’s long overdue correction which accelerated on Friday below support-turned-resistance at $1900, did not see any follow-through selling on Monday despite continued dollar and yield strength. The yellow metal remains up 16% from the November low and even a further drop to $1829 would still be categorised as a weak correction within a strong uptrend. So far, it has managed to find support around $1860 as the market awaits comments from Fed chair Powell today at the Economic Club of Washington. Atlanta Fed’s Bostic - a non-voting member this year - meanwhile said the FOMC may have to raise rates by more than expected, thereby supporting the hawkish narrative the bank is trying to convey.
Copper led the base metals sector lower as the impact of the strong US jobs report last week lingered. Spot copper currently trades at a discount in China as stockpiles have continued to rise while a price measuring demand for imports has dropped to a nine-month low. However, while the market awaits the expected pickup in China, supply disruptions in Peru have so far prevented the price from challenging key support in the $3.95 to $4 area. Aluminum briefly spiked after the reports suggesting the US was preparing to slap a 200% tariff on Russian aluminum imports. Russia is the world’s second largest producer of the metal and traditionally has accounted for 10% of US imports. However, imports fell to virtually zero in October last year. As a result, the tariff is expected to have limited impact on supply.
Treasuries extended the post-job report sell-off, seeing yields on the 2-year soaring 18bps to 4.47% and those on the 10-year rising 12bps to 3.64% before easing back slightly. Peak Fed rate expectations for this summer reached as high as 5.15% yesterday, a new high. Hawkish comments from the Fed’s Bostic, ECB officials, and Bank of England officials added additional pressure to the market which was already in motion to decline in price and rise in yields. Atlanta Fed President Bostic (voter 2024) said the strong job report would probably mean that the Fed have to raise rates more than he had projected. Earlier in the day, the weakness in Treasuries started from spill over selling pressure on U.K gilts on hawkish comments from Catherine Mann, external member of the BOE’s Monetary Policy Committee and Huw Phill, chief economist of the BOE, suggest more rate hikes. ECB Governing Council member Robert Holzmann added to the hawkish pushback from central banks, saying “the risk of over-tightening seems dwarfed by the risk of doing too little”. For today, all eyes are on Powell’s scheduled interview.
The December wage growth data released overnight blew past estimates, posting a 4.8% gain versus expectations of a rise of 2.5%. This was the strongest rise in wages since 1997 and could allow the Bank of Japan to move more rapidly toward some semblance of normalization after soon outgoing Governor Kuroda long touted wage growth as the key to reviving sustained inflation in the Japanese economy.
After a successful demonstration all over France on 19 January, trade unions are calling for new nationwide strike today against the government’s plan to push back the minimum retirement age to 64 and to accelerate a previous reform, called the Touraine reform, which provides for the extension of the required contribution period to 43 years by 2035. Before Covid, the government also tried to implement a pension reform which caused a massive wave of demonstrations across the countries – there was basically almost no public transport in main cities for weeks. This is still uncertain how long the strike will last. But the trade unions are planning to keep fighting as long as needed. Expect a blockage in several sectors (refineries, metro, rail transport, education). Now, we don’t think the strike will have a noticeable negative impact on GDP growth this quarter. We are confident France will avoid a recession this year – with a GDP growth forecast around 0.6-0.7%. This is not high, but it is better than in many other eurozone countries.
The RBA forecasts slowing spending and economic growth, with unemployment set to rise even as it acknowledged inflation picking up more than expected. Australian 2-year yields jumped 13 basis points from the prior day’s close as the decision was read as hawkish and the peak policy rate this year was revised sharply higher to 3.90% by mid-summer. Still, the RBA sees price rises falling from 6.9% in underlying terms, to 4.75% this year, before ending near the top of its 2-3% target by mid-2025. It sees the jobless rate rising from 3.5% to 3.75% by year-end, and rising to 4.5% by mid-2025, reflecting the lag effect of tightening on corporations. All in all, with the services sector already in contraction, the RBA sees GDP slowing to around 1.5% this and next year as it sees household spending pulling back amid tightening financial conditions, with the post-pandemic spending rush easing.
The European oil and gas major missed on Q4 earnings but remains confident about the near-term future increasing dividends by 10% and planning a further share buyback of $2.75bn. BP is also saying it will grow investments into the energy transition. BP is targeting $16-18bn in capital expenditures for FY23 which is a significant increase from the $12bn in FY22.
The Japanese game console developer announced total Switch unit outlook of 18mn missing estimates of 19mn, but the outlook still reflects a strong underlying growth in the game console. The FY net income outlook is JPY 480bn vs est. JPY 500bn.
Atlanta Fed president Bostic (non-voter) spoke on Bloomberg, noting that jobs data from Friday raises the possibility of a higher peak rate, and his base case is still for two more hikes. Bostic also said the Fed could consider moving back to a 50bps hike if it needed to. Chair Powell will be speaking in Washington on Tuesday (1am SGT on Wednesday for Asia), followed by Barr, Williams, Cook, Kashkari, Waller and Harker over the course of the week.
The Riksbank will meet this Thursday and is expected to hike 50 basis points to bring its policy rate to 3.00%, but is then expected to guide for a more cautious approach of smaller hikes or even a pause on further tightening after the new Riksbank governor Erik Thedeen recently spoke on high inflation and rising interest rates testing the resilience of the Swedish financial system. Yesterday, EURSEK posted its highest level since the heart of the financial crisis back in 2009, making the Riksbank’s task of bringing down inflation a difficult one due to krona weakness, but 2-year EU-Sweden yield spreads have risen to their highest in years on the anticipation that the Riksbank is set to take a relatively more cautious path from here. The Riksbank may add active quantitative tightening (selling holdings rather than merely allowing maturing assets to roll off) to its policy arsenal on Thursday. It looks to be key test for the new Governor and the Swedish krona.
Today’s US earnings focus is Fortinet which is expected to continue its high growth in the cyber security industry with revenue growth expected at 34% y/y and EBITDA margin expected to expand. With higher interest rates there is also a lot of focus on the private equity industry and thus KKR’s outlook is a must watch for understanding the dynamics in risk capital.
Economic calendar highlights for today (times GMT)
0810 – ECB's Klaas Knot to speak
0900 – UK Bank of England’s Ramsden to speak
1000 – ECB's Villeroy to speak
1015 – UK Bank of England’s Pill to speak
1330 – Canada Dec. International Merchandise Trade
1330 – US Dec. Trade Balance
1700 – ECB’s Schnabel to Speak
1700 – US Fed Chair Powell interview
1700 – EIA's Short-term Energy Outlook (STEO)
1730 – Canada Bank of Canada Governor Macklem to speak
2000 – US Dec. Consumer Credit
2130 – API's Weekly Crude and Fuel Stock Report
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy