Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Hot US jobs data and a respite in banking concerns helped equities recover some ground on Friday after heavy selling earlier in the week. Gains in Apple also lifted the indices. Fed pricing however remains unchanged with aggressive rate cuts priced in for the year, which helped Gold to recover from its post-NFP lows. This week’s US CPI will have to be extremely hot to bring any hawkish shifts in expectations. Crude oil firming up after heavy selling last week and OPEC’s monthly report is on watch.
US equity benchmarks rose on Friday with some stability in the banking sentiment as KRE regional banking ETF rose 6% and PacWest surged 82%. Meanwhile, broad-based strength in the US nonfarm payroll report was a relief for the markets. Market’s interpretation of labor data has changed, where last several months of hot data meant Fed could hike further, and that spooked equity markets, but the latest data has been a relief that economic momentum will continue to hold.
Fed member Bullard also maintained his hawkishness, but hinted that he may well tilt towards at a pause amid the banking crisis to err on the side of caution, despite continuing to warn of further rate hikes down the line. Overall, there was little to move the market’s dovish interpretations following last week’s FOMC meeting, and 75-100bps of rate cuts continue to be priced in.
NASDAQ 100 was up over 2% with Apple (AAPL) surging just shy of 5% after a strong earnings report, particularly driven by iPhone sales, in addition to a fresh USD 90bln buyback programme. S&P500 was up 1.9% led by gains in led by gains in banks stocks.
The larger-than-expected add to payrolls and fall in the unemployment rate helped reduce investor fears about an imminent recession and saw yields surging in the front end and the belly. Yields on the 2-year jumped 12bps to 3.91% while the 10-year yield rose 6bps to 3.44%, flattening the 2-10 curve by 6bps to -48.
Hang Seng Index edged up 0.5% and Hang Seng TECH Index gained 1% driven by China property, internet, and EV stocks. In A-shares, real estate names outperformed, followed by financials, and food and beverage. However, the weakness in media, household appliances, telecommunication, and non-ferrous metal stocks weighed on indices, seeing the CSI300 ticking down 0.3%.
Dollar’s spike following the hot NFP report on Friday was short-lived as Fed pricing continued to see no hike in June with cuts still priced through year-end amid the short-term banking uncertainty. USDJPY however rose back above 135 in early Asian hours as Japan traders returned from a 5-day Golden Week holiday in which time JPY gained considerable strength on the back of banking sector risks. BOJ meeting minutes from the March meeting, which was Kuroda’s last meeting, continued to signal a dovish bent. NZDUSD supported at 0.63 after last week’s strength driven by the Q1 jobs data, while AUDUSD is also strong at 0.6750 following the surprise RBA rate hike last week.
Oil opened the week firmer, extending Friday’s gains after short-sellers took charge earlier in the week, bringing Brent crude lower to threaten a break below $70/barrel. Another surge in banking sector risks is spooking credit crunch concerns, weakening the demand outlook. But a recovery is ensuing now as jobs data on Friday has eased concerns of an imminent recession and it appears that the selloff was overdone. WTI futures now testing the $72/barrel mark, while Brent is heading back to $76. OPEC’s monthly report will be on watch this week, due on Thursday, for further demand/supply outlook. Earnings from Saudi Aramco will also be on watch.
Gold got in close sight of its all-time high last week, as a potential Fed pause as well as concerns of a recession underpinned investor demand. However, Friday’s strong jobs report pushed Treasury yields higher, causing gold to drop nearly 2% and test the $2000-mark again before recovering back to $2016 subsequently. The World Gold Council said bullion demand from central banks slowed purchases sharply in the first quarter. China stood out as an active buyer, adding to its gold reserves for a sixth straight month in April, up 260k ounces MoM. Jewellery demand is also expected to pickup as China reopens, and this continues to support further upside for the yellow metal. Silver slumped to $25.20 on Friday before rising back above $25.60.
Headline jobs rose by 253k, above expectations of 180k and also above the prior 165k which was revised down from the initial 236k. Unemployment rate fell to 3.4% despite an expected uptick to 3.6% from 3.5% while the participation rate was unchanged at 62.6%. The wages components were also hot, the M/M rose by 0.5%, above expected and prior 0.3%, with the Y/Y rising 4.4%, above expected and prior 4.2%, and the March data was revised up to 4.3%. Market’s interpretation of labor data has changed, where last several months of hot data meant Fed could hike further, the latest data has been a relief that economic momentum will continue to hold. Markets are still expecting Fed to pause and cut rates aggressively in H2, and this week’s CPI release will be the next key test for that.
Amid reports of a restrictions on short selling, regional bank stocks regained some ground on Friday after heavy selling earlier in the week. The KBW Bank Index was up 5% and PacWest stock was up 82%. Volatility however means confidence remains fragile and banks runs are likely continuing. Money market inflows have risen by over $100bn in the last two weeks, suggesting that deposits from banks are being withdrawn at a rapid pace. Today, the US Senior Loan Officer Survey will be released, and it may show that credit conditions are tightening, suggesting 2-year yields could plunge lower.
Non-voter James Bullard said in an event in Minneapolis he thought the 25bps hike this week was a good step, but there is a lot of inflation in the economy. He also added that he feels policy is at the low end of the restrictive zone, but not yet clear it is restrictive enough to get on a downward inflation path. Bullard remains one of the most hawkish members on the committee, but he also said that he is ready to be data-dependent, with an open mind on whether to pause or hike at the June meeting as he probably wants to err on the side of caution amid banking woes. But, he said he does think the Fed will ultimately have to grind higher on rates.
In the annual shareholder meeting over the weekend, Warren Buffett’s Berkshire Hathaway disclosed that it has sold shares worth $13.3bn in the first quarter and bought stocks for a fraction of that figure. he company’s cash pile has risen by $2bn since the start of this year to $130.6bn, its highest level since the end of 2021. Buffet was somewhat cautious about the economic momentum in the US, and said he expected earnings to decline at the majority of its businesses this year. On Apple, he said it was one of the better businesses they own, and also disclosed that they won’t be making an offer for full control of Occidental Petroleum. Meanwhile, Buffett continued to highlight opportunities in Japan, while being cautious of US-China tensions. Berkshire revealed last month it had increased its stakes in Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co and Sumitomo Corp to 7.4%, and Buffett said his company might buy more but the stakes won’t go above 9%.
The Japanese yen has been strong last week after a slump following the last Bank of Japan meeting. The sharp slump in US yields brought USDJPY back to the 134 handle from ~138 levels a week ago. Japanese traders return on Monday after a 5-day Golden Week holiday and may be reviewing their portfolios in light of the significant yield/yen move. The fate of yen in the coming week remains in the hands of the US banking stress, but Tuesday also brings Japan’s wage data which is a key focal point for the new BOJ governor Ueda to confirm inflation stickiness. Nominal cash earnings are expected to strengthen by 1.0% YoY in March from a downward revised 0.8% in February even as real cash earnings remain negative due to the impact of inflation. A stronger-than-expected print can again ramp up expectations of a policy tweak from the BOJ, aggravating yen strength.
The Fed has signalled a data-dependent mode in its rate hike cycle last week, which could well mean a pause at the next meeting. Market has continued to price in aggressive rate cuts for this year despite Chair Powell’s comments clarifying that rate cuts won’t happen this year. Market surely knows something, and the answer may well lie in the banking crisis. With fears of more regional banks falling victim to the rapid rise in interest rates over the last 1.5 years, inflation concerns have taken a backseat. What also offers comfort is that inflation is cooling with the commodity prices turning lower and a high year-ago base being lapped. Still, it is worth noting that supply chain issues persist and the strength in the labor market is continuing to support the services side of the economy strongly. This means the cooling in inflation, in itself, doesn’t provide enough comfort for now for the Fed to take its foot off the pedal. The US April CPI print is due to be released on May 10. Bloomberg consensus expects core CPI at 5.4% YoY/0.3% MoM from 5.6% YoY/0.4% MoM previously.
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