Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: The U.S. Core PCE came in slightly softer than expected. November U.S. ISM Manufacturing Index dropped by 1.2 percentage points to 49.0, entering the contractionary territory. Treasury yields fell across the curve, with the 10-year yield falling to 3.50%. Yen gained 2% on lower U.S. yields and a BOJ board member called for a review of Japan’s monetary policy. Mores encouraging signs coming out of China pointing to the prospect of further easing of Covid restrictions.
U.S. stocks fluctuated between modest gains and losses and finished the session nearly flat. Investors were weighing the decline in bond yields resulting from the softer Core PCE prints and the ISM Manufacturing Index entering into the contractionary territory and the concerns about a contraction in manufacturing activities. Eight of the 11 sectors within the S&P 500 were lower with the exception of communication services, healthcare, and information technology which registered modest gains. Salesforce (CRM: xnys) dropped 8% after the enterprise software maker reported an earnings miss, a weak outlook, and CEO resigning. Dollar General (DG:xnys) shed 7.5% on disappointing results and an outlook cut. Snowflake (SNOW:xnys) gained 7.8% on an earnings beat. Netflix (NFLX:xnas) gained 3.7% on news that the company is expanding a program to seek comments from preview audiences.
A softer core PCE at 0.219% M/M (vs consensus 0.3%; Sept: 0.463% and 4.984% Y/Y in October (vs consensus 5.0%; Sep 5.182%), together with the slide of the ISM Manufacturing Index to 49.0 triggered buying in treasuries. The 2-year yield dropped 8bps to 4.23% and the 10-year yield was 10bps richer, closing at 3.50%. The long-end outperformed as the 30-year yield fell 14bps to 3.60%. Fed Governor Michelle Bowman echoed Powell’s “somewhat higher” rhetoric as she said that “expectation would be that we ould have a slightly higher rate than I had anticipated in September”.
Hang Seng Index climbed 0.8% and CSI300 Index gained 1.1% following the less-hawkish-than-feared speech from the U.S. Fed Chair Powell overnight and China’s Vice-Premier Sun Chunlan, who is in charge of containing the spread of Covid-19, acknowledged in a pandemic control export workshop that the Omicron variant is less deadly. China is reportedly instructing local authorities to get 90% of the population over 80 years old vaccinated in two months. Caixin China PMI Manufacturing came in at 49.4 in November, above the consensus estimate of 48.9 and October’s 49.2. EV maker XPeng (09868:xhkg) jumped 12.8%. See our update here on a brighter outlook for A shares in 2023, supported by the trend of credit impulse.
The Japanese Yen gained almost 2% to 135.30 versus the dollar as U.S. bond yields fell on a less hawkish Powell and Naoki Tamura, a Bank of Japan board member said that “it would be appropriate to conduct a review at the right time, including the momentary policy framework and inflation target”.
The U.S. Core PCE decelerated more than expected to 0.219% M/M (vs consensus 0.3%; Sept: 0.463% revised), and 4.984% Y/Y in October (vs consensus 5.0%; Sep 5.182%). The Core Services Prices excluding Housing Services sub-index, which Fed Chair Powell highlighted as the “most important category for understanding the future evolution of core inflation” in his speech at the Brookings Institution on Wednesday, moderated to 0.33% M/M in October, down from 0.48% M/M in Sep. Headline PCE came in at 0.3% M/M (consensus: 0.4%; Sep 0.3%) and 6.0% Y/Y (consensus 6.0%; Sep: 6.3% revised).
The November ISM Manufacturing Index dropped by 1.2 percentage points to 49.0 (vs consensus 49.7; Oct 50.2) and entered the contractionary territory. It was the lowest since May 2020. The weakness was broad-based with new orders falling to 47.2, order backlogs dropping to 40.0, employment down to 48.4, and prices paid sliding to 43.0.
The U.S. Labor Bureau of Statistics is scheduled to release the November job data on Friday. According to the Bloomberg survey of economists, the median forecasts are looking for a 200,000 increase in non-farm payrolls, down from 262,000 in October, and an unchanged unemployment rate at 3.7%. Average hourly earnings are excepted to come in at 0.3% M/M (vs Oct 0.4%) or 4.6% Y/Y (vs Oct: 4.7%)
For our look ahead at markets this week – Read/listen to our Saxo Spotlight.
For a global look at markets – tune into our Podcast.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)