Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: A slew of Fed speakers remained hawkish on Monday, with Bullard saying that markets were under-pricing the risk of a more aggressive Fed This added to the risk-off tone from the protests in China ahead of the focus turning to an array of key US data due in the week. The US Dollar found a fresh bid into the US close, while the yen is being supported by safe haven demand and shifting tone from BOJ officials. Sharp swings in oil prices as well amid demand weakness concerns being reversed by hopes of an OPEC+ production cut, as the cartel meets over the coming weekend.
U.S. equities slid on the outbreak of protests against Covid lockdowns across large cities in China and hawkish comments from Fed officials. Nasdaq 100 dropped 1.4% and the S&P500 lost 1.5%. The selloff was board-based as all 11 sectors of the S&P500 declined on Monday. Energy and materials stocks took a hit as oil and other commodity prices retreated. Apple (AAPL:xnas) fell 2.6% as the iPhone maker could fact a production shortfall of as many as 6 million handsets as a result of the labour unrest in the Foxconn factory in Zhengzhou.
U.S. treasuries caught a risk-off bid in Asian hours as the Covid protests in China triggered buying in safe-haven assets. The gains were pared when New York came with the St. Louis Fed President Bullard saying that the Fed is “is going to need to keep restrictive policy…to continue through -- as least through – next year.” The 10-year finished unchanged at 3.68%.
Mainland China and Hong Kong stock markets retreated as investors were wary about the surge in daily new Covid cases across China and the outburst of anti-strict-control protests in several mega cities, including Beijing and Shanghai. The cut in reserve requirement ratio by the central bank on Friday evening did not give the market much of a boost. Hang Seng Index declined 1.6% and CSI 300 lost 1.1%. The China internet space fell 2%-4% except for Meituan (03690:xhkg) which gained 2% on strong Q3 results reported last Friday. Macao casino stocks bucked the trend and rallied following the Macao SAR Government’s announcement to renew casino licenses with all incumbent operators. Wynn Macau (01128:xhkg) jumped nearly 15%. Stocks of the Chinese catering chains listed in Hong Kong gained some market speculation of earlier exit from the dynamic zero-Covid policy due to the now hard-to-contained outbreaks of inflection across the country. Haidilao (06862:xhkg) surged 6.8%. Buying on Hang Seng Index futures emerged in overnight trading in New Your hours and saw the futures contract jump 1.2% and the Nasdaq Golden Dragon China Index rise 2.8%.
Choppy moves in the US dollar on Monday amid risk off and volatility in the US yields. But hawkish Fed speak, with Williams and Bullard both hinting at higher rates than the September dot plot, supported a final leg higher in the USD in the late US session. EURUSD touched highs of 1.0500 but reversed all of the day’s gains later with focus on inflation numbers due tomorrow. USDJPY also touched lows of 137.50 before reversing but a clear shift in tone in BOJ officials is being seen in the last few weeks keeping the BOJ pivot narrative alive into early 2023 before Kuroda or just after Kuroda retires. Kuroda referred to wage gains as being supportive of more stable levels of inflation which gave the yen a boost on Monday.
Crude oil prices made a sharp u-turn on Monday after dipping lower earlier in the session on concerns from protests in China which delayed the hopes of a reopening further and a hawkish commentary from Fed speakers (read below). WTI futures fell to lows of $74/barrel while Brent was down to $81. However, losses were reversed later as OPEC+ delegates said deeper production cuts could be an option when they meet this weekend. OPEC+ is scheduled to meet this Sunday to review its current production plan. At the last meeting it cut output quotas by 2mb/d. Saudi Energy Minister Prince Abdulaziz bin Salman said that OPEC+ was ready to intervene with further supply reductions if it was required to balance supply and demand. Meanwhile, European talks on a price cap have stalled.
James Bullard (2022 voter) said markets are underestimating the chances that the FOMC will need to be more aggressive next year, adding tightening may go into 2024. He also said that rates will need to be kept at a sufficiently high level all through 2023 and into 2024 even if the Fed reaches restrictive territory by Q1 2023. John Williams (voter) said "there's still more work to do" to get inflation down. He also hinted at “modestly higher” path of interest rates than what he voted for in September, sending another signal that December’s dot plot could see an upward revision, while also hinting at rate cuts in 2024. He provided some clear forecasts: unemployment rate rising from 3.7% to 4.5%-5.0% by late 2023; inflation declining to 5.0-5.5% by the end of 2022 and 3.0-3.5% by late 2023; modest economic growth this year and in 2023. The central bank isn't near a pause, Loretta Mester (2022 voter) told the FT. Richmond Fed President Barkin also spoke about higher-for-longer rates, despite moving slower
BlockFi Inc. filed for Chapter 11 bankruptcy, the latest crypto-industry operator to seek court protection in the wake of FTX’s collapse. It sold $239 million of crypto ahead of its filing.
ECB President Lagarde repeated her previous comments that the ECB will raise rates further but nothing on how much further, and on how fast they need to go. She said the bank will be data-dependent, adding the ECB may need to move into restrictive territory. She also said that she will be surprised if inflation in the Eurozone (due to be reported on Wednesday 30/11) peaked last month. Even if the November print cools slightly, most likely driven by lower energy costs, there is a possibility that inflation will likely remain high in the coming months as winter months progress and cost of living gets worse.
Dallas Fed manufacturing index came in less bad than expected at -14.4 for November, but the underlying metrics indicated a softening in labor markets. 16% of the factories surveyed indicated net layoffs in November, up from 9% previously, and comments suggested more layoffs may be coming as the backlog and holiday season get over. While it may still be early to see any significant signs of softening in Friday’s jobs report, the jobs data remains key to monitor to see if consumers may be vulnerable to a faster-than-expected pullback in spending.
Reports suggested that the protests in China and the unrest around Apple’s largest manufacturing hub for its iPhone could lead to a production shortfall of close to 6mn iPhone Pro units this year, roughly about 7% of all iPhones scheduled to be delivered this quarter. Apple shares fell 2.6% on Monday on these reports.
Pinduoduo, after a strong beat in the prior quarter, surpassed again analyst estimates and delivered a strong Q3 beat. The Chinese eCommerce platform’s revenues grew 65% Y/Y, outperforming its peers, for example, Alibaba”s 3% and JD.COM’s 11% revenue growth in Q3. Adjusted operating margin came in at 34.6% vs 33.5% in Q2. 2022 , and 15.2% in Q3 last year. Adjust EPS of RMB 7.33 was much higher than the RMB4.75 consensus. Bilibili ((09626:xhkg) is scheduled to report today.
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