Markets Today: Hot US PCE brings 2yr yields to fresh highs – 27 February 2023

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) tumbled as expectations of the Fed rate path shifted

The white-hot Personal Consumption Price Indices released on Friday weighed on U.S. equities as investors increased rate hike expectations to 25 basis points each in the March, May, and June FOMC meetings as well as the expectation for rate cuts in the second half of 2023 almost completely vanished. The S&P 500 lost 1.1% and the Nasdaq 100 plunged 1.7%, bringing the weekly losses of the two benchmark indices to 2.9% and 3.8% respectively. Nine of the 11 sectors of the S&P 500 declined on Friday, with the rate-sensitive real estate sector and information technology sector, each down 1.8%, leading the charge lower.

Autodesk, a leading computer-assisted design software firm tumbled 12.9% on releasing downbeat Q1 earnings guidance below analyst estimates and was the biggest loser in the S&P500 and Nasdaq 100 on Friday. Boeing (BA:xnys) lost 4.8%, following the aircraft manufacturing giant halted deliveries of the 787 Dreamliner jets due to documentation problems. Live Nation Entertainment (LYV:xnys) plunged 10% amid concerns over the COVID reopening play having peaked and increases in regulatory scrutiny.

Farfetch (FTCH:xnys), an online luxury apparel product retailer, jumped 11% following an upbeat outlook for 2023. Farfetch is one of the constituent stocks in Saxo’s newly released Luxury Goods theme basket.

US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) extended a five-week losing streak

Treasuries tumbled in price, rising in yields after the stronger-than-expected PCE reports which registered strong upticks in January (including upward revisions of December data). Powell’s favoured measure, PCE Services less Housing jumped to 4.6% Y/Y in January from 4.3% Y/Y in December. The market has moved to completely price in at least a 25bp hike each at the March, May, and June FOMC meeting plus about a 25% chance that the hike in March is 50bps, bringing the terminal rate to 5.4. SOFR Jun-Dec 2023 spread narrowed 11bps to -11.5bps, eliminating expectations for rate cuts in the second half of 2023. Yields on the 2-year surged 12bps on Friday or 20bps over the week to 4.81%, the highest level since 2007. Yields on the 10-year climbed 7bps on Friday or 13bps over the week to 3.94%

Hong Kong’s Hang Seng (HIG3) lost nearly 12% from January highs

Hong Kong's Hang Seng Index declined 1.7% bringing the 4^th weekly loss in a row to 3.4% or nearly 12% from its intraday high on 27 January. China Internet names reported quarterly results generally in line with market consensus estimates but investors tended to trim positions as sentiment was dampened by resurge of tension between the U.S. and China over Russia and Ukraine and the lack of substantive recovery in the Chinese economy aside from credit expansion and survey data. During the week, JD.com (09618xhkg) was down 15%, Alibaba (09988:xhkg) down 9.5%, and Meituan (03690:xhkg) down 6.8%, as concerns about competition heating up among eCommerce platforms. Alibaba announced results beating estimates but the shares of the eCommerce giant plunged 4.6% on Friday following management comments on the need to increase investments to stay competitive in the year ahead.

On Friday, NetEase (09999:xhkg) plunged 11.2%, following an earnings miss dragged down by recognition of royalty fees on expiration of game licence. Techtronic (00669:xhkg) bounced 4.4% but was still down more than 22% over the week on an alleged overstatement of earnings by capitalizing expenses. The auto space was sold, led by a 9.1% decline in Great Wall Motor (02333:xhkg).

Baidu (09888:xhkg) slid 6% in the Hong Kong bourse while A-share ChatGPT concept names rallied in mainland bourses. Digital China (000034:xsec) advanced by 6.8%. CSI300 slid 1% on Friday but managed to finish the week 0.7% higher and stay above its 50 and 200-day moving averages. Financial, food and beverage, and new energy vehicle stocks led the charge lower on Friday while defense and computing names bucked the decline.

Australian equities (ASXSP200.I) are continuing their short term down trend

That said, stocks benefiting from the economic reopening are up the most this year, including Flight Centre, Eagers Automative which are trading up over 20% this year.

In terms of the ASX200 sectors- the Consumer Discretionary sector is up the most, up 8%, YTD, followed by the Information Technology sector up 6%. While the Mining (Materials) and Finanical sectors have been pulling back, which is pressuring the market. Some investors were spooked by weaker than expected results from BHP and RIO last year, while big banks such as CBA are allocating more capital for the year ahead - for bad debts provisions, as consumers are felling the pinch of higher interest rates.

All in all, the ASX200 is continuing its short term downtrend/correction amid the RBA’s more hawkish tone. For the technical levels to watch, read our Technical Analyst, Kim Cramer Larsson’s note.

Australia’s oil and gas giant - Woodside Energy (WDS) reported results today; delivering profits that more than trebled in 2022 - with bottom line profits up 228% - fuelled by the oil and gas price rallies, but also as it acquired BHP’s oil and gas business. Woodside reported a larger final dividend with of US$1.44 a share, up from US$1.05 a share at the same time last year. Its full year pay-out stands at US$4.8 billion thanks to cash flows surging. This sets the tone for energy companies for 2023. Keep in mind at Saxo, we expect the oil price to stay around $80 this quarter and move up to $90 next quarter.

FX: Japanese yen at YTD lows, GBP in focus with Brexit talks

The dollar strength was back in focus as PCE data on Friday in the US continued to push upwards the repricing of the Fed’s path. With 2year yields surging to their fresh highs, along with BOJ governor nominee Kazuo Ueda’s continued push for a loose monetary policy coming against market’s hawkish expectations, saw the Japanese yen plunge to its lowest levels this year. USDJPY now back top testing 136.50 and Ueda’s testimony in the upper house will be in focus today.

Also worth watch will be AUDUSD which plunged in close sights of 0.67 with risk sentiment and commodity prices taking a beating. UK PM Sunak is making headlines with reports saying that he may have won big concessions in the looming Brexit deal, with reports suggesting that an agreement between the UK and European Union on Northern Ireland appears to be very close. UK PM Sunak and EU head Ursula Von Der Leyen will hold talks mid-day on Monday. There are being described as 'final talks'. This will be followed by a news conference and Sunak’s statement to the parliament. GBPUSD dropped below 1.20 with the 200DMA at 1.1928 in focus.

Crude oil (CLJ3 & LCOJ3) reversed higher on Friday

Crude oil prices jumped back higher recording gains of 1.2% on Friday, and extended gains in the Asian morning hours amid reports of further supply disruptions as Poland’s largest oil company unexpectedly stopped receiving oil via Russia’s Druzhba pipeline. Still, unconvincing signs of a pickup in demand from China so far continues to keep oil prices range-bound, and focus this week will be on geopolitics as well as China’s PMIs. WTI futures are now back above $76/barrel after taking a look below $74 last week, while Brent is above $83.

Copper broke the $4 support

With the US PCE data further aggravating concerns on Fed’s rate hike path and bringing the 2-year yields to fresh highs, base metals plummeted. Copper prices plunged below the key $4 support to $3.95, closing Friday with a weekly loss of 4%. Incongruent signs of a pickup in Chinese demand also continue to underpin, and the PMI reports this week will be key to signal whether activity levels are picking up. However, with supply potentially struggling to keep up with demand, we view the current weakness as temporary and part of the general loss of confidence that has hit markets this month.

Gold (XAUUSD) breaks support but losses still contained

Higher US dollar in the aftermath of hot US data and higher yields has weighed on the yellow metal. Gold prices broke below the $1820 support to lows of $1809 bringing the key 1800 level in focus. Risk remains of a further weakness towards $1788 followed by the 200DMA at $1776 amid a tough macro environment. US ISM PMIs in focus this week, along with more Fed speakers, as a guide to high how interest rates could go. Silver (XAGUSD) fell harder, down 2.5% on Friday and closing with a weekly loss of 4.5%, breaking below the 200DMA at $21.

What to consider?

Hot US PCE brings terminal rate expectations up to 5.4%

The PCE deflator for January came in hotter-than-expected, and together with upward revisions to the previous month’s prints these sent a strong hawkish signal to the markets reinforcing the Fed’s higher-for-longer message. Core PCE rose 4.7% Y/Y, accelerating from the upwardly revised 4.6% and above the expected 4.3%. The M/M rose 0.6%, hotter than the expected and upwardly revised prior of 0.4%. This brought an upward repricing of the Fed path, with increasing calls for 50bps at the March meeting and the terminal rate now priced in at 5.4% and only one rate cut being priced in for this year from three previously.

US consumer confidence also rose in February to its highest in a year, with University of Michigan sentiment accelerating to 67 from 66.4 in January. Personal incomes grew 0.6% MoM in January, a notch below expectations but consumer spending was higher-than-expected at 1.8% due to low savings rates and increased use of consumer credit. Resilient spending, along with sustained wage growth, means Fed could continue to find it tough to bring inflation back to its 2% target.

Fed members continue to remain cautious on the path of inflation

Fed voter Jefferson spoke about labor market strength on Friday, saying that ongoing imbalance between supply/demand for labour suggests high inflation may come down only slowly and said the argument that policymakers should accept that disinflation will be costly is well-reasoned. Bullard (non-voter) was on the wires again as well, and reaffirmed the need to move quickly to shield credibility. Collins, also a non-voter, said that recent US data affirms the case for more rate hikes. Mester (non-voter) said the Fed has to do "a little more" on rate hikes saying the new inflation data affirms the case for more rate hikes to get inflation back to target.

BOJ Ueda’s upper house testimony on tap today

After Friday’s testimony in the lower house of the parliament, Bank of Japan governor nominee Kazuo Ueda now moves to the upper house today. His initial policy stance appeared to be confirming continuity of the current ultra-easy monetary policy in Japan, coming against market’s hawkish expectations. This saw the yen plunge 1.3% on Friday against the USD and being the weakest currency on the G10 board. Today markets will be looking at more hints on what tweaks may be considered by Ueda and lack of further color could mean more weakness in the yen, especially with global yields surging to new highs.

Geopolitics remains in focus with China’s peace proposal talks

After threats from US about making public the information on China supplying weapons to Russia, China came up with a 12-point peace proposal on Friday to be a neutral mediator in the Russia-Ukraine conflict. Reports suggested that China’s proposal took a clear anti-West stance, condemning NATO extension and sanctions against Russia, but Ukrainian President Volodymyr Zelensky has signaled he's open to China's new ceasefire plan and meeting President Xi. How these events turn this week will be key to watch, especially US comments and support to Ukraine if it was to accept China as a mediator.

China’s Q4 Report on the Execution of Monetary Policy emphasized stability and signalled not to induce excessive investment, debts, and bubbles

China’s central bank, the People’s Bank of China, said in its Q4 Report on the Execution of Monetary Policy that the primary objective of countercyclical monetary policy was to smooth the volatility in aggregate demand so as to avoid the destructive effects of excessive fluctuations of aggregate demand on the factors of production and the wealth of the society. The report emphasizes that the force of monetary policy must be stable and not bring about excessive liquidity that induces excessive investment, a surge in debts, and asset bubbles. In support of the real economy, the Q4 Report emphasizes stability and sustainability of credit growth but omits the stronger wording of “more forceful” and “increases of credit support” that were in the Q3 Report. China may be sending a signal to lower the expectations of the market on monetary easing.