Summary: Equity markets managed to keep an even keel yesterday, with a lack of direction in US equity markets continuing well into its third week. Late yesterday, the minutes from the last FOMC meeting offered the latest pushback against market expectations for rate cuts as soon as year-end, while gold and especially the JPY eased back lower from their recent strength on treasury yields halting their slide. Tomorrow’s US jobs report for December offers the next test for global markets.
The US equity market once again chopped back and forth yesterday as the action has been bottled up in a range in the S&P 500 for nearly three weeks. The market may be waiting for the next batch of US data and the impact on treasury yields for choosing a direction, with tomorrow’s batch of data the next important hurdle for markets. The technical focus for S&P 500 traders is the range low and the 61.8% Fibonacci retracement near 3,780 for the March futures contract. For Nasdaq 100 trader, the cycle low near 10, 750 and the nominal intraday lows from last October a bit lower still are the key focus. Ironically, strong US economy data may be the most negative for equity markets in the short run if yields jump.
Hang Seng Index climbed more than 1% and CSI300 surged nearly 2% as China continue to roll out additional reopening measures and supports to the economy. On Thursday, China announced the much-anticipated gradual reopening of the border between Hong Kong and the mainland starting from January 8, 2023. Internet platform giants Alibaba (09988:xhkg) and Meituan (03690:xhkg), China restaurant chain Haidilao (06862:xhg), beer brewers China Resources Beer (00291:xhkg) and Budweiser (01876:xhkg) were among the top gainers within the Hang Seng Index. In A-shares, baijiu (Chinese white liquor) surged in anticipation of rebound in consumption. Electric equipment, household electronic appliances, and logistics stocks also outperformed.
The US dollar found a modicum of support yesterday as treasury yields stabilized and as the Fed delivered the expected message in its latest set of meeting minutes – a pushback against market expectations for the Fed to cut rates as soon as this year. The next important step for the USD will be on tomorrow’s December jobs report and next Thursday’s December CPI release. USDJPY bounced well above 132.00 after its recent test below 130.00 on signs that the yen’s recent surge may need more support from new developments (a larger drop in global yields in particular) after resetting from 150.00+ in USDJPY terms. The Chinese yuan continued its resurgence on hopes for a boost to Chinese growth on the other side of the current Covid trauma, with USDCNH testing its 200-day moving average near 6.87 for the first time since April.
Crude oil found a bid on Wednesday following a two-day tumble of more than 9% tumble on China demand and global growth worries. The bounce has so far primarily been driven by short covering while also signalling an end to selling from funds who bought the market aggressively ahead of yearend. For now, a surge in Covid-19 cases across China is clouding the near-term demand outlook, overshadowing optimism and delaying the timing of when commodity consumption in the world’s top importer will eventually rebound. The API reported a 3.3-million-barrel increase in US crude stocks with gasoline stocks also rising while distillates dropped. The EIA will release its weekly report later today.
Gold’s run of gains extended to a fourth day on Wednesday but after touching $1865 some two-way actions emerged potentially signalling traders have started to book profit. Gold, silver and platinum have been favoured by traders during the first days of trading, with momentum from last year being carried over. Driven by recession and stock market valuation risks, an eventual peak in central bank rates combined with the prospect of a weaker dollar and inflation not returning to the expected sub-3% level by yearend. It is worth remembering that traders' conviction at the beginning of a new year always tends to be low for fear of catching the wrong move. At the same time, however, the fear of missing out can also drive a rapid build-up in positioning which subsequently can be left exposed should a change in direction occur. Focus on Friday’s US job report with resistance at $1865 & $1878 while the current strong uptrend may not be challenged unless the price breaks below $1800
Europe’s gas prices have fallen by more than 50% during the past month and on Wednesday the Dutch TTF futures contract closed at €65/MWH ($20/MMBtu), the lowest since October 2021. The slump has been driven by a combination of mild weather and at times strong production from renewables as well as reduced industrial consumption resulting in an unusual seasonal increase in inventories. Gas held in storage across Europe is currently 164 TWh above the five-year average and close to a full month of peak winter withdrawals. With LNG imports still strong and demand down by more than 10% the continent has now ended up in a situation, unthinkable just a couple of few months ago, where prices need to stay low in order to divert LNG shipments away from Europe in order not to overwhelm storage facilities.
The Chicago wheat contract has lost more than 5% during the first trading days to trade near a one-month low. Forced lower by an abundance of low-price wheat from Russia and Ukraine providing stiff competition to U.S. exporters where production has been hit by drought, and recently, by severe cold. Russia, the world's largest wheat exporter, look set to double its exports to a record 21.3 million tons for the first half of 2023. This following a record grain crop of 151.0 million tons last year, including 102.7 million tons of wheat. In addition to strong Russian shipments, European Union soft-wheat exports are running about 6% higher than a year earlier, and Australia’s top shipper loaded a monthly record 2.18 million tons of grain in December.
US Treasury yields arrested their descent yesterday after the 10-year benchmark hit 3.66%, rising a few basis points. At the short end of the curve, yield pulled back slightly higher as well, perhaps lifted at the margin by a strong JOLTS survey for November and the ISM Manufacturing survey showing a stronger employment sub-index. The price action was little affected by the FOMC minutes release, which saw the Fed continuing its pushback against market expectations for easing as soon as year-end. Tomorrow’s US data, including the December jobs report and ISM Services Index, offer the next test for the treasury market.
Inflation is cooling down in several eurozone countries. France is the last example. In December, the EU-harmonized CPI rose 6.7 % year-over-year versus expected 7.3 %. On a monthly basis, inflation decreased 0.1 % versus expected +0.4 %. This is positive, of course. But it will likely not be sufficient for monetary policy to shift out of tightening mode just yet. There is a high risk that inflation will increase again in Spring/Summer this year due to higher energy prices. This could be fueled by a deficit in the oil market due to OPEC+ cuts and EU ban on Russian oil and difficulties filling gas inventories for next year in the EU. Therefore, it is too early to believe the peak in inflation is effectively behind us in the eurozone.
FOMC participants worried that the downshift from a 75bp hike to a 50-hike would be interpreted by the market as the signal of a pivot and warned that “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability”. Nonetheless, the minutes showed that “many” participants argued for balancing two risks: the risk “insufficiently restrictive monetary policy could cause inflation to remain above the Committee’s target for longer than anticipated” and the other risk of “the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity”. That points to a data-dependent risk management approach going forward. Separately, Minneapolis Fed President Kashkari said in an article that he saw rate hikes “at least at the next few meetings”, leading to a terminal rate of 5.25-5.50%.
A clear sign that higher interest rates are impacting the UK housing market, approvals plunged to 46.1k in November, a stunning drop from 59k in October and for wider perspective, a sign of very weak activity relative to the average of well over 60k approvals per month in the years before the pandemic outbreak.
This was more than previously expected as the company over-expanded its warehouse and logistics infrastructure after the wild increase in demand from pandemic-era stimulus. Shares rose some 1.7% after hours yesterday.
The narrow Republican majority in the House after the mid-term elections last November means that nearly all Republicans must agree on a candidate, with a small cabal of Trumpist-leaning Republicans continuing to block the candidacy of Keven McCarthy, who failed three more votes yesterday in his effort to become the next Speaker of the House. This issue could gain considerable importance for the debt ceiling issue in the US if a more confrontational figure acceptable to the GOP extremists is eventually found.
Today we will get the latest weekly US jobless claims number as this data series has yet to show material weakening in the US labour market, market bets of Fed cuts by year-end notwithstanding. The December ADP Private Payrolls data is also up today, with that data series showing a rather persistent decline in payrolls growth since Q2 of last year. It is expected at +150k after +127k in November. Tomorrow’s calendar is important as the Fed has clearly expressed the most uncertainty on the inflationary pressures from the employment-intensive services side of the economy. This could make the market sensitive to strong surprises in the Nonfarm payrolls change number (expected around +200k, with considerable recent attention on the divergence in this survey relative to the far weaker household survey used to calculate the overall unemployment rate) and average hourly earnings. Ninety minutes after the jobs data, we’ll have a look at the December ISM Services survey after November saw a surprising improvement in the survey to 56.5 after the cycle low of 54.4 in October.
The earnings calendar is light in the first week of the new year, but in a couple of weeks the first Q4 earnings releases will begin to be released. The Q4 earnings season will continue its focus on margin pressures related to input costs on employees and raw materials including energy. Today’s earnings focus is Walgreens Boots Alliance (WBA) and Conagra Brands, with WBA expected to -3% revenue growth y/y for the quarter that ended on 30 November adding to the series of quarters with negative revenue growth. Conagra Brands is expected to deliver 7% revenue growth y/y for the quarter that ended on 30 November as the manufacturer of packaged foods is able to pass on inflation to its customers.
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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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Head of Fixed Income Strategy
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Head of Commodity Strategy