Market Insights Today: Stocks rallied and bond yields dropped after Powell declared the disinflationary process had started – 2 February 2023

What’s happening in markets?

Positive reaction to Fed: Risk-on rally in Nasdaq 100 (NAS100.I) and S&P 500 (US500.I)

The Nasdaq 100 reversed its weakness after an ISM manufacturing index print a full point lower to 47.4 during early trading and advanced to finish the session 2.2% higher after the dovish remarks from Fed Chair Powel at the post-FOMC press conference. The S&P500 climbed 1.1% to close at its highest level since August 26, 2022. Powell’s comments raised the market’s hope for rate cuts in the 2nd half of 2023. 10 of the 11 sectors within the S&P 500 gained, led by information technology which advanced by 2.3%.  Energy, falling 1.9%, was the laggard. Advanced Micro Devices (AMD:xnas) jumped 12.7% on a revenue beat and upbeat sales forecasts. Electronic Art tumbled 9.3% on a disappointing business outlook.

Meta Platforms (META:xnas) kicked off major tech earnings with a bang. Perhaps a good sign of what we can expect from Apple, Amazon and Google

Meta shares surged more than 19% in extended hour trading, after announcing a $40 billion boost to its share buyback, as it’s guiding for stronger revenue for Q1 this year, seeing revenue hit $26 to $28.5 billion. Q4 revenue beat expectations, falling to $32.2 billion, vs $31.7 billion expected. The business sees outgoing expenses dropping more than expected to $89-95 billion and lower capital expenditure. Also on the positive, FB’s daily users improved more than the market expected. From a technical perspective Meta shares closed above their 200-day simple moving average. It also appears, a golden cross is forming which could trigger quant trader buying. That’s something to watch, which could trigger more upside.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) dropped as hopes for rate cuts in H2 heightened

The Fed delivered a 25bp rate hike, bringing the Fed Fund target to 4.50%-4.75% as widely anticipated and a statement largely unchanged from the previous one, reiterating that “ongoing increases” in the policy Fed Fund target “ will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive,”  The strong market reactions came from the response to Powell’s dovish comments in the post-meeting press conference. Powell said the Fed “can now say, I think for the first time, that the disinflationary process has started” though he cautioned that “the job is not fully done.”  Powell’s remarks saw the June-Dec 2023 SOFR spread widen to 54.5 bps, fully pricing in 50bps of rate cuts in the 2nd half of 2023 after only one more 25bp hike in March. The yield on the 2-year and the 10-year tumbled 9bps each to 4.11% and 3.42% respectively. The weaker ISM manufacturing and ADP private payrolls but stronger JOLTS job openings data released during the day took a backseat to the FOMC drama.

The Australian share market, the first to the react to the Fed, sees a strong risk on rally

Risk on assets such as tech stock are charging today, with the sector up 2.8% while gold equities are being bid after the gold price rallied 1%. Long-term investors will be watching the tech index, given it’s down 30% from its high. Also consider the overall market, the ASX200 has a PE at 15.2 times. Cheaper than Nasdaq’s 57 times earnings. And S&P500’s earnings multiple of over 19 times. 

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) rallied around 1%

The Hang Seng Index rallied 1.1% and the Hang Seng TECH Index surged 3.4%. Baidu (09888:xhkg) soared 9% on market chatters that the search engine platform was developing an AI-powered chatbot similar to ChatGPT. EV makers outperformed. The largest Chinese EV maker, BYD (01211:xhkg) surged 6.1%, extending gains after Tuesday’s preannouncement of the preliminary Q4 profit range. XPeng (09868:xhkg) surged 10.3% after its subsidiary received license approval for its flying cars. Geely (00175:xhkg) climbed 5.1% as the EV maker is launching its 3^rd model and its Lotus unit went public via SPAC at a USD5.4 billion valuation. Macao casino stocks gained 2% to 5% on a much stronger-than-expected 82.5% growth in gambling revenues to MOP 11.6 billion (USD1.4 billion). In the mainland’s A-share market, ChatGPT concept stocks and EV names also rallied strongly. Non-ferrous metal, computing, and non-bank financials were other outperformers. CSI 300 finished the Wednesday session 0.9% higher.

FX: USD bears back in action

The USD was weaker across the board after the Fed Chair Powell stayed away from pushing back aggressively on the easing priced in by the markets for this year or the loosening of financial conditions. EURUSD broke above the 1.0930 resistance and was trading above 1.1000 in the Asian morning. If ECB maintains its hawkishness today, we could see these gains sustaining. USDJPY slumped back below 128.50 with focus turning to BOJ chief nominees. AUDUSD rose to 0.7150 but USDCAD was choppier as lower oil prices weighed on loonie.

Crude oil (CLG3 & LCOH3) supported after the overnight slump

Oil prices slid over 2% overnight with EIA inventories climbing 4.1 million barrels in the week ended Jan 27, its sixth consecutive weekly build. However, Fed’s dovish outcome came back in focus later, and expectations that demand will continue to run higher as Fed nears an end of its tightening cycle underpinned. OPEC+ recommended keeping crude production unchanged as expected, amid the volatility of Chinese demand and Russian sanctions. WTI futures were back above $77 after touching lows of $75 in the NY session.

Gold (XAUUSD) broke above $1950 on dovish Fed

Gold broke above the resistance at 1950, reaching fresh cycle highs, as the lack of a committal Powell at the FOMC press conference continued to allow market to price in rate cuts for this year. Next on watch will be $1963, the 76.4% retracement of the 2022 correction, following which there is no major level of resistance before the psychologically important $2000 level.

What to consider?

Fed hikes rates by 25bps, hints at a ‘couple more’ rate hikes to come

The Fed hiked rates by 25bps to 4.5-4.75% as expected, with Chair Powell giving mixed and non-committal signals at the press conference. The statement continued to use the phrase "ongoing increases" in the Fed rate being appropriate to signal more rate hikes, and there was also a hint of a “couple” more rate hikes suggesting both March and May meetings could see 25bps rate hikes again. But Powell hinted at disinflationary pressures, and did not push back enough on the easing financial conditions.

US ISM manufacturing shifting the narrative to low growth/high inflation

ISM manufacturing declined for a fifth consecutive month to 47.7 from 48.4, short of the consensus of 48.0. While prices paid lifted to 44.5 (exp. 39.5, prev. 39.4), suggesting upside pressures in inflation sustaining, production and new orders fell to 48.0 (prev. 48.6) and 42.5 (prev. 45.1), respectively. Employment was also softer but still remained above the 50-mark at 50.6 from 50.8 previously. JOLTS job openings in December ramped back up to 11.012mln from the prior 10.44mln, surprising expectations for a fall to 10.25mln and now at their highest level since July. Overall, inflation risks are not going away yet, while growth concerns seems to be settling as well.

Eurozone inflation softens marginally

January headline inflation data in the Eurozone came in softer at 8.5% YoY from 9.2% YoY mostly underpinned by softer energy inflation, which still remains high at 17.2% YoY (vs. 25.5% YoY in December). While the trend seems encouraging, inflation still remains elevated and unlikely to deter the ECB from being any less hawkish at their announcement due today. German inflation print due next week also remains on watch.

Caixin China Manufacturing PMI remained in the contraction territory

Caixin China Manufacturing PMI came in weaker than expected at 49.2 in January (vs consensus: 49.8; Dec: 49.0), the sixth month in the contraction territory. According to the chief economist at Caixin, optimism has improved in the manufacturing sector but both domestic and external demand, and logistics were yet to fully recover. The Caixin reading was weaker that the official National Bureau of Statistics Manufacturing PMI, which bounced back to the expansion territory. The softer Caixin survey may be a result of its larger representation of small and medium-sized private enterprises in the coastal regions, as opposed to the NBS Manufacturing PMI’s higher weight in large state-owned enterprises as well as the difference in the timing of the survey. The Caixin survey was conducted in mid-January, about a week earlier than the NBS survey conducted between January 20 to 25, and therefore the former was likely to be more severely affected by the initial “exit wave” of infection.

President Xi called for moving faster to establish the new development pattern

In the second study session of the Chinese Communist Party’s new Politburo, China’s President Xi called for the country to move faster toward establishing a new development pattern, a concept that he first introduced in April 2020. He emphasized the importance of boosting domestic demand and deepening supply-side structural reform. President Xi also pledged to bring forward the construction of more new infrastructure projects and focus on the real economy and new industrialization. He also called for strengthening the measures against monopoly and unfair competition, as well as guiding and supervising the healthy development of private capital according to the law. The readout from the Politburo meeting mentioned neither “preventing disorderly expansion of private capital” nor “common prosperity”.

Hong Kong Q4 GDP shrank 4.2% from a year ago

The decline of 4.2% in Hong Kong’s Q4 GDP improved on the downward revised -4.6% in Q3 but was much softer than the -2.9% forecasted by economists surveyed by Bloomberg. On a sequential and seasonally adjusted basis, Hong Kong’s GDP growth bounced to flat Q/Q in Q3 from a 2.6% decline in Q3. The growth in goods export plunged to -24.8% Y/Y while goods import slid to 22.8% Y/Y. Gross domestic fixed capital registered a smaller 11.2% Y/Y in Q4, against 14.4% in Q3. Private consumption picked up to +1.7% Y/Y.

Earnings from Apple, Alphabet, and Amazon eyed

The most-watched U.S. corporate earnings this week are from Amazon (AMZN:xnas), Alphabet (GOOGL:xnas), and Apple (AAPL:xnas) which are scheduled to be released today. Amazon has been hard hit by its overinvestment during the pandemic. Things improved in Q3 with accelerating revenue growth but analysts remain skeptical for Q4 expecting only 6% revenue growth Y/Y and adjusted EPS of $0.53 up 10% Y/Y. With the weak outlooks from Intel and Microsoft, there is nervousness in the air ahead of these giant earnings releases. Analysts expect Apple to report the first negative revenue growth rate in three years down 2% Y/Y and a 7% decline Y/Y in EPS. The indications from memory chip manufacturers all indicate a significant slowdown in consumer electronics and it would be weird if Apple could escape those headwinds. Analysts expect Alphabet to report its second straight quarter of negative earnings growth with EPS at $1.32 down 6% Y/Y. Alphabet is the talk of the town due to Microsoft’s $10bn investment in OpenAI and its ChatGPT technology and many are saying is a threat to Google’s search business; in an equity note here, Saxo’s Head of Equity Strategy, Peter Garnry, dives into this discussion and provides our views on the matter.

ECB and Bank of England meetings on the horizon

After the Fed’s tone being interpreted as dovish by the markets, focus turns to ECB and BOE meetings today. The European Central Bank has surpassed its peers in the hawkishness quotient recently, and will likely repeat that this week. A 50bps rate hike is expected, along with the guidance for another 50bps in March which still has the scope to bump up front-end pricing with markets looking at 93bps of rate hikes over the next two meetings. The Bank of England will likely be the trickiest given the indecisive market pricing as well as the scope for a split vote. Read our full preview here.