Market Insights Today: Powell adds little new information – 8 February 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): Short-term strength is still intact

On Tuesday the S&P 500 rallied 1.3% in a choppy session to close at 4,164, regaining some short-term strength. Traders absorbed Powell's remarks (for details of his comments, please read below) and took stocks to rebound and close near the day high. So, we’re seeing the technical indicators (the MACD and RSI) behaving - supporting short-term strength, as the VIX Index is too. The advance in the S&P500 was led by energy, communication services, and information technology. Nasdaq rose 2.1% to 12,728, driven by strong gains in mega-cap names such as Microsoft (MSFT:xnas) up 4.2% and Alphabet (GOOGL:xnas) up 4.6%. Take-Twe Interactive (TTWO:xnas) jumped 7.9% after the game software company announced cost-cutting. Du Pont (DD:xnys) surged 7.5% following earnings and margins beat analyst estimates. Royal Caribbean Cruises (RCL:xnys) rose 7.2% on upbeat guidance, citing “a record-breaking Wave season”.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) edged up on Powell’s comments and a weak auction

Fed Chair Powell’s comments made at the much anticipated moderated discussion before the Economic Club of Washington, D.C. were less hawkish than feared. He started by repeating that the disinflation process had begun and his remarks saw yields on the front end tumbling 10bps with the 2-year down to as low as 4.38 and the curve bull steepened. The fall in yields quickly reversed after Powell said that last Friday’s payroll report was “certainly strong-stronger than anyone I know expected” and that inflation “will go away quickly and painlessly” is not the Fed’s base case and the Fed has to “do more rate increases”.  More selling came after a weak 3-year action that was awarded 4bps cheaper than the market at the time of the auction, and the bid-to-cover ratio dropped to 2.33 from 2.84 last time. The corporate supply of around USD15 billion of new issues, including USD11 billion from Intel also weighed on the market. The 2-year pared almost all its early gains to settle 1bp richer at 4.46% while yields on the 10-year rose 3bps to 3.67%.

Australian equites (ASXSP200.I); short term pressure as RBA hikes by 25bps to 3.35% guiding for more hikes in “months ahead”

ASX200 futures suggest the market will rally 0.46%, and likely erase yesterday’s 0.5% fall. But short-term pressure has built up by the RBA indicating more hikes are needed. Coal prices are down 36% and picked up this week almost 7% after the Australia Energy Market Operator said coal supply and gas supply in Australia is short and will stay short till 2026, so we think the RBA could make upward revisions to underlying inflation forecasts on Friday, despite the Bank keeping its headline CPI, unemployment and activity forecasts broadly unchanged. For investors, this means volatility in the ASX200 could pick up on Friday - financials and insurers could be supported with the RBA seeing more hikes ahead. The services sector is already in contraction, yet the RBA sees GDP slowing to around 1.5% this and next year, expecting household spending to pull back amid tightening financial conditions, as the post-pandemic spending rush has eased. This means, consumer discretionary stocks likely face headwinds. On the flip side, the energy sector is being supported.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) in thin trading; ChatGPT names soared

After climbing as much as 1.4% in the morning, Hang Seng Index retraced to close near the day low, inching up 0.4% from Monday. The trading volume was light. The Hang Seng TECH index outperformed and closed 1.2% higher, led by a 15.3% jump in Baidu (09888”xhkg) on confirmation from the company that it is working on a ChatGPT-like product. The three Chinese state-owned oil giants advanced, led by CNOOC (00883:xhkg) up 2.2%. In A-shares, ChatGPT names continued to outperform. Household appliances, media, environmental, and real estate names gained. CSI300 registered a modest 0.2% gain in a choppy and low-volume session. Northbound flows were net selling of RMB3 billion, being outflow for the third day in a row.

FX: Yen strength returned as Powell adds little new information

Dollar was choppy as Powell initially reiterated his remarks from last week but later made a comment that the Fed could more if the data stays hot. Still, market pricing of the Fed’s path was little changed, and dollar ended the day broadly lower against all G10 currencies. The Japanese yen recouped come strength despite somewhat higher Treasury yields, with USDJPY falling as low as 130.49 before bouncing back higher to 131.50. AUDUSD, although still waiting for the upturn is Chinese demand, was supported by the RBA’s guidance to hike more. AUDUSD above 0.6960 in early Asian hours, with AUDNZD moving above 1.1000 to near 3-month highs. EURUSD was a laggard as it took a look below 1.07 before bouncing back to 1.0720+ levels subsequently.

Crude oil (CLH3 & LCOJ3) prices rise on demand outlook and supply concerns

WTI prices jumped 4% and Brent was up 3% after Powell stayed away from turning significantly more hawkish after the bumper jobs report last Friday. Meanwhile, demand outlook continues to improve as signaled by Saudi Aramco’s price increases, and API also suggested a draw in US crude stocks. API reported US crude stockpiles declined by 2.2mm barrels last week, compared to expectations of a 2.5mm barrels increase. Both OPEC and EIA have been upbeat on China’s demand recovery as well. The market shrugged off reports that flows through the 1mb/d Ceyhan oil terminal in Turkey will resume shortly, and supply side issues remained in focus as well. The Energy Information Administration lowered its forecast for US crude oil production in 2024.

Gold (XAUUSD) strength continues to hold up despite a stronger dollar

Gold continues to remain supported around the $1860 level despite another increase in US yields overnight. Buying by central banks remains buoyant, with China raising its gold reserves for a third straight month in January, up 6.9% MoM. The momentum below $1900 appears to be lacking, suggesting the move remains a correction in the larger bullish trend. Eyes on next supports at $1845 and $1828.

What to consider?

Powell’s balanced narrative unable to spur market caution; Kashkari sees terminal rate at 5.4%

Fed Chair Powell’s message last night was only marginally more hawkish compared to last week’s Fed meeting, giving markets enough reasons to continue to give more emphasis to data. Powell qualified his ‘disinflationary’ remark from last week’s Fed meeting by saying it is at a very early stage, and only in the goods sector. He was surprised by the strength of the jobs report, and said that the Fed probably needs to hike rates further and they have still not reached a sufficiently restrictive level. Powell expects 2023 to be a year of a significant decline in inflation, but it will certainly take into next year to get down close to 2% - in fitting with the December SEP's. Market’s pricing of the Fed rate path saw no material change following Powell’s comments. Meanwhile, Fed member Kashkari (voter) was more hawkish saying if he had to pick a rate forecast, would not lower it from his Dec SEP forecast of 5.4% but rates may have to be held at a higher level for longer. He added that markets are more confident than he is about inflation falling.

Weak German industrial production, CPI due today

Germany’s industrial production for December saw a steeper fall than expected, coming in at -3.1% MoM (vs. est -0.8%) while the November print was revised higher to +0.4%. After a technical delay last week, Germany’s inflation prints for January will be released today. Spain and France printed higher-than-expected CPI for the month, while the region-wide printed was softer last week. This suggests Germany’s inflation likely eased due to energy price increases being more subdued than previously expected. Meanwhile, adjustments in the CPI basket could also likely result in a softer print. Bloomberg consensus expects 10.0% YoY from 9.6% YoY in December, with the MoM print also turning positive at 1.3% from -1.2% previously.

Walt Disney to report earnings

The entertainment giant Disney is expected to report revenue growth of 7% Y/Y and EPS of $0.76 up 21% Y/Y and a lot of focus will be on Nelson Peltz, the activist investor that has gone into the company, and his quest for higher streaming profitability and potentially changing the asset portfolio of Disney. 

Saxo launches in Q1 2023 quarterly outlook: The Models are Broken

Saxo’s quarterly outlook released argues that the economic models and assumptions of how market cycles are supposed to work are broken. We explore how this may affect both equities and commodities, as well inflation being higher-for-longer and how could it impact forex and crypto. Read the outlook here.

For what is ahead at markets this week – Read/listen to our Saxo Spotlight.