Markets Today: Choppy markets with a hot US CPI and Fed speak – 15 February 2023

What’s happening in markets?

US equities supported by strong price performance in Tesla and Nvidia

U.S. equities had a choppy session as stocks oscillated between gains and losses following a slower-than-expected deceleration in the CPI prints and hawkish-leaning Fedspeak before the broad benchmark S&P500 settled at nearly flat and the tech-heavy Nasdaq 100 gained 0.7%. Most of the strength in the Nasdaq came from Tesla’s (TSLA:xnas) 7.5% jump and NVIDIA’s (NVDA:xnas) 5.4% rise in share price.

Tesla gained following rival Ford (F:xnys), down 0.9%, halted production and shipments of its F-150 Lightning electric pickup trucks due to an unidentified problem with the battery. Tesla also raised the price of its Model Y by USD1,000 to USD58,990. Consumer discretionary, up 1.2%, was the best-performing sector in the S&P500 and Tesla was the top winner.

Palantir Technologies (PLTR:xnys) soared 21.3% after the data analysis software company reported better-than-expected Q4 earnings and expects to turn profitable for the whole year in 2023. Airbnb (ABNB:xnas) surged 9.2% in extended-hour trading following reported adjusted EPS at USD0.475, beating the USD0.31 consensus estimate and an upbeat outlook on strong travel demand. Coca-cola (KO:xnys) slid 1.7% despite reporting stronger-than-expected revenue growth and inline earnings. The management gave upbeat guidance for revenue growth of 7-8% and EPS growth of 7-9% in spite of continued cost pressure.

US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) bear-flattened as yields on the 2-year jumped 10bps

Growth in the U.S. CPI came at a slower pace but slowed less than what the consensus forecast expected. After choppy initial reactions, selling emerged in the front end, seeing the 2-year yield finish 10bps cheaper at 4.61%. The SOFR June-Dec 2023 spread narrowed by 10bps to -24bps from -33bps, signaling a further reduction in the bet of rate cuts in the second half of 2023. Hawkish-leaning comments from Fed’s Logan and Barkin, plus the departure of Fed Vice-chair Lael Brainard to join the Biden Administration as head of the National Economic Council added fuel to the higher-for-longer narrative. Brainard is perceived to be the “most persuasive policy dove” at the Fed, as the Wall Street Journal’s Nick Timiraos puts it. Yields on the 10-year rose 4bps to 3.74%, paring some of the rises in yield after a large block buying of nearly 20,000 contracts in the 10-year futures. Across the pond, yields on 2-year Gilts jumped 19bps on a hot employment report.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) traded sideways

In a choppy but uneventful session, Hang Seng Index slipped 0.2%. Hong Kong developers recovered from yesterday’s sell-off and bounced by 1%-2%. Sun Hung Kai Properties (00016:xhkg) gained 2.4%; Wharf Real Estate (01997:xhkg) climbed 1.8%. Healthcare names were laggards, with Wuxi Biologics (02269:xhkg) plunging 4% after forecasting 2022 revenues rising 48.4% and profits growing 30%, which failed to meet the high bar of analyst estimates. Alibaba Health Information (00241:xhkg) dropped 2.8%. Tencent (00700:xhkg), down 2.1%, led the internet space lower. Oriental Overseas (00316:xhkg) slipped 2.6% on analyst downgrades citing falling container freight rates.

In A-shares, CSI300 was little changed. Non-ferrous metal stocks outperformed, with North Copper (000737:xsec) up 8.7%, Yunnan Copper (000878:xsec) up 5%, and CMOC (603993:xssc) up 3.3%, leading the charge higher. Household appliances names were among the winners with Zhejiang Meida (002677:xsec) advancing by 10%, hitting the upper price limit.

Australia equities (ASXSP200.I) fall back to January 16 levels, dragged down by Commonwealth Bank’s cautious outlook

Shares in the biggest bank in Australia, the Commonwealth Bank (CBA) sank 5.2% pulling away from record high territory, after reporting half-year results today that paint a cautious tone for banks for the year ahead. CBA’s share price drop pulled back the broad market. CBA's profit results mostly disappointed, although its net interest margin- the main metric analysts look at for banking profitability - came in at 2.1% - on par with expectations. CBA’s cash profit missed expectations with profit up 8.6% YoY to $5.15 billion (vs $5.17 billion Bloomberg consensus), while CBA’s return on equity improved – but also missed market targets. That spooked the market, along with CBA putting aside more capital for bad debts, as higher price pressures continue to hurt consumers, along with falling home prices. 

Even though CBA’s results missed, it announced a $1 billion share buy-back as its headline profit after tax moved to a record, which was supported by a surge in business banking profits. The share buy back should theatrically support CBA's shares over the medium to longer term, coupled with the market expecting 2023 profits to hit another record, with margins to improve.  CBA shares gapped down, wiping out a month of gains - with CBA shares moving into oversold territory. 

FX: Wobbly dollar as yen slips but AUD, GBP gain

A hot inflation data along with Fed officials starting to float the idea of a higher terminal rate saw the dollar being volatile on the day but ended unchanged. Higher yields underpinned as market pricing of the Fed path shifted higher, and that made the yen as the underperformer for the day. USDJPY surged above 133, after Kazuo Ueda being formally nominated as the BOJ chief yesterday and expectations that he won’t be quick with any policy normalization. Meanwhile, AUDUSD was choppy but could not sustain a move above 0.70. GBPUSD also gave up 1.22 despite the strong labor market data questioning the Bank of England’s pause signal, eyes on inflation due today. EURUSD still above 1.0700 with the preliminary readings of the Eurozone Q4 GDP matching 0.1% QoQ and 1.9% YoY forecasts. Lagarde will be on the wires today, and also keep a watch on US retail sales data.

Aussie dollar's 50-day moving average continues to limit downside ahead of AU employment

The Aussie dollar has continued to track sideways for the last 7 trading sessions, with the Aussie dollar against the US - the AUDUSD pair - being supported by its 50-day moving average ahead of Australian employment on Thursday. Despite hotter than expected US CPI, the pair is steady - also supported by the fundaments - metal prices have moved higher, with Copper and Iron Ore prices back at June 2022 levels. The next catalyst will be Thursday’s Australian employment data, if we see more than 20,000 jobs added, then we will be watching the resistance levels, at perhaps 0.7114 for the Aussie. On the downside, if Australian employment is weaker than expected, we will be watching for a potential pullback. Support for the AUDUSD is perhaps at 0.6879. But, over the medium-to-long term, should the USD continue to track lower, commodity prices stay higher and AU exports continue to grow to China, we see the Aussie dollar doing well.

Crude oil (CLH3 & LCOJ3) prices remain pressured

While reports of the US release of crude oil from its strategic reserves continued to nudge oil prices lower, a large stockpile built and inflation concerns also added to a weak demand outlook. WTI dropped below $79/barrel while Brent got close to $85. US private inventories, as reported by API, were up by 10.5 million barrels last week. A hot US CPI printed also raised concerns on the disinflation narrative taking hold, suggesting Fed may have to go for a higher terminal rate and pause there for sometime, which raises concerns on the demand outlook. The slide in oil prices however got some support from the OPEC report, which hinted at a tigher oil market as it nudged up the demand estimate and trimmed its supply outlook. IEA monthly report will be on tap today.

 

What to consider?

US CPI sent confusing signals to the markets, but the cooling isn’t enough

The US January CPI came in at 0.5% MoM, in-line with estimates, while the core CPI was at 0.4% MoM also as expected. December prints were however revised higher with headline up to +0.1% MoM from -0.1% previously, and core up to 0.4% MoM from 0.3% previously. Markets were wobbly on the release, as the YoY prints came in higher-than-expected at 6.4% for the headline (vs. 6.2% exp) and 5.6% for the core (vs. 5.5% exp). However, a key measure that Powell has highlighted earlier – core services ex shelter – cooled to 0.3% in the month from 0.4% previously. Housing contributed the most to the monthly increase in the CPI, but it is a lagged measure.

Meanwhile, disinflation in goods slowed as core goods prices rose +0.1% MoM vs. -0.1% MoM prior. Overall, there wasn’t enough evidence that core inflationary pressures are cooling enough to support calls for the Fed to pivot.

Fed speakers send market pricing for Fed path higher

A chorus of Fed speakers last night talked about the slow pace of disinflation, suggesting the Fed isn’t yet taking comfort in the inflation trends. NY Fed President Williams repeated there is "still a ways to go" to control inflation and the current levels of inflation are far too high. His views on the terminal rate also differed slightly, in December he suggested rates between 5.00-5.50% is reasonable before last week changing the view to 5.00-5.25%. However, he has now seemingly switched back his views of the higher upper bound for the FFR to 5.50% in wake of the January inflation data. Philly Fed’s Patrick Harker noted that how far above 5% the Fed needs to go depends on incoming data, and Tuesday's inflation report shows inflation is not moving down quickly. Dallas President Logan stressed that tightening policy too little is the top risk. All three are voters this year.

Thomas Barkin, a non-voter said it was about as expected and there's going to be a lot more inertia and persistence to inflation than the Fed thought. However he was slightly more dovish saying that if inflation settles, they may not go as far on the terminal but he stressed data dependence. Markets are now pricing in a higher terminal rate of 5.26% in July, and one rate cut has also been driven out of this year’s pricing.

Takeaways and quick reflections from hotter-than-expected CPI 

Shelter costs were a large contributor to US monthly prices moving up - with rent prices up 8.6%, while large price jumps were seen in airfares costs, up 26%. Airlines are not only seeing more passengers, but also increasing their fares - and this is translating to higher earnings expectations and thus stronger share price performance in airline industry stocks. American Airlines shares are up 40% from their lows, while aircraft maker Boeing is up 80% off its lows. Across other inflation categories, other significant price moves were seen in eggs, butter, fuel, gas, lettuce, cereals, and pet food. This reinforces Saxo’s bullish and overweight view on Commodities as we see higher prices for longer. Companies such as Shell trade 32% up from their lows, while agricultural company Deere is up 40% from its lows.

UK employment data points to much firmer than expected labour market

The UK saw a strong surge in Monthly Payrolled Employees of +102k, well north of the +15k expected, while the January Jobless Claims dropped -12.9k and the December claims were revised down to -3.2k vs. +19.7k originally reported. The December employment change registered a gain of 74k vs. 43k expected and the Unemployment rate in December was steady at 3.7%. Weekly earnings ex Bonus were +6.7% YoY in December Vs. 6.5% expected and 6.5% in November. Focus shifts to CPI report due today and another double digit print is expected.

Hong Kong Monetary Authority bought HKD to defend the peg

The Hong Kong Monetary Authority bought HKD14.87 billion (USD1.9 billion) to cap the USDHKD at 7.85, in defence of the SAR’s link-exchange-rate regime for the first time since last November.

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