Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
Global Market Quick Take: Asia – May 17, 2023
APAC Research
Summary: US retail sales remained firm and some Fed speakers pushed for more rate hikes, but still a risk-off tone prevailed in the markets amid the debt ceiling overhang where a deal remained far-off. China’s downbeat activity data underpinned, and oil prices slumped again despite IEA raising the demand outlook. Gold and copper are also on the way to test key support levels. Japan’s Q1 GDP beat expectations, further boosting potential for outperformance from Japanese equities. Home Depot earnings disappointed and focus turns to Tencent and Siemens today.
What’s happening in markets?
US equities (US500.I and USNAS100.I): mega-cap tech gain amid broad market weakness
S&P 500 extended losses in the last half-an-hour of trading to finish 0.6% lower. Weakness is seen across real estate, energy, utilities, materials, and industrials. Preventing a larger loss in the S&P500 and helping the Nasdaq 100 to close nearly unchanged was once again the outstanding performance of the mega-cap names as Alphabet (GOOGL:xnas), NVidia (NVDA:xnas), and Amazon (AMZN:xnas) advanced 2% or more.
Alphabet gained 2.7% as securities filing showed that Bill Ackman’s Pershing Square Capital built a large stake in the tech giant in Q1. Home Depot (HD:xnys) declined 2.2% after reporting a 4.5% decline in Q1 comparable sales, missing estimates.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): front end sells off on retail sales and Pfizer insurance
The front end to the belly of the curve sold off after hotter-than-expected retail sales excluding auto, gas and building materials. Hawkish comments on rate hikes hike from Fed Mester and Barkin did not help. The 2-year yield surged 7bps to 4.08%. Selling was heavy in SOFR interest rate futures, amid removing the 2023 rate cut expectations somewhat. Weighing on Treasuries was also a USD31 billion 8-part jumbo new issuance deal from Pfizer. The 10-year finished the session with yields 3bps higher to 3.53%. The 2-10-year curve flattened 1.5bps to -54.
Chinese equities (HK50.I & 02846:xhkg): pare early gains after weaker-than-expected activity data
The Hang Seng Index pared early gains to nearly flat and the CSI300 shed 0.5% amid weaker-than-expected growth in China’s industrial production, retail sales, and fixed asset investment. The year-on-year growth was largely due to the low base in April last year when Shanghai and other regions were under lockdown as activities petered out in April sequentially from March levels. The Hang Seng Index initially opened higher, driven by gains in China Internet names, on the back of a strong rally overnight in ADR trading stemming from the news that asset manager Michael Burry had increased his stake in Alibaba (09988:xhkg) and JD.COM (09618:xhkg). JD.COM gained more than 4% while Alibaba’s advance waned and was nearly unchanged. In A-shares, media names led the decline.
Baidu (09888:xhkg) reported Q1 results beating expectations after the Hong Kong market closed, seeing its ADRs (BIDU:xnas) rising 4% (around 4.6% higher than its level at Hong Kong close). Futu (FUTU:xnas) and Up Fintech (Tiger Brokers; TIGR:xnas) plummeted 4.4% and 7.4% respectively as the two brokers were reportedly removing their trading apps from online stores in China.
FX: Dollar firmer even as GBP reverses post-employment losses
The US dollar was higher in the overnight US session, reversing the losses from the European session after GBP made a quick round-trip lower in the aftermath of the dismal UK employment numbers. US economic data remained firm (read below) while some of Fed speakers were hawkish, but the overhang from the debt ceiling talks kept risk sentiment weak. GBPUSD made a quick recover after the employment data disappointment but is back below 1.25 into today’s Asian open. AUDUSD turned back lower from 0.67 after China’s activity data poured water on the reopening rhetoric, and was seen near 0.6650 this morning in Asia. USDJPY rose sharply to 136.68 before paring some of the gains.
Crude oil: back in the red despite IEA’s upbeat demand forecast
The IEA joined the other forecasters in raising the expected oil demand for 2023. The IEA raised their forecast by 0.2m b/d to 2.2m b/d bringing the total to a record 102m b/d. It also expects inventories will deplete by 2mb/d in the second half of the year. But the market seems to remain focused on near-term demand concerns with China April activity data coming in below expectations. US retail sales figures suggested spending is holding up in the face of rising rates and high inflation, but the risks from debt ceiling debate continue to be an overhang. WTI prices slid back towards the key $70-mark while Brent was below $75.
Gold and copper: testing key support levels
While US economic data was firm and Fed speakers remained hawkish, markets have been in a risk-off mode mainly because of the debt ceiling talks and that has seen Treasury yields higher this week. The dollar has also risen and that, together with the downbeat China economic data, is sparking declines in the commodities complex. Copper fell, breaking below $3.70 to test support at $3.60 area, after China’s industrial production saw a decline. German economic data was also weak, with new manufacturing orders falling. Compounding this was rising stockpiles. Readily available copper inventories rose to their highest level since October. Meanwhile, Gold (XAUUSD) saw most of its decline in the US session after the dollar made a recovery, breaking below the key $2000 mark and may be on its way to test the support at $1980.
What to consider?
Debt ceiling talks still in limbo
US House Speaker McCarthy gave mixed comments on the debt ceiling talks. He said they set the stage to carry on further conversations and President Biden agreed to appoint a couple of people from the administration to negotiate directly with his team. McCarthy also said there is a lot of work to do in a short amount of time and that they are still very far apart but added it is possible to get a deal by the end of the week and it is not that difficult to reach an agreement. However, McCarthy later said he is not more optimistic about getting a deal by the end of the week.
US retail sales brings no glaring concerns on consumers
Headline retail sales came in beneath analyst expectations at 0.4% MoM (exp. 0.8%) but pared some of the 0.7% decline seen in March. Although the headline missed, the internals were more encouraging with ex-autos at 0.4% (exp. 0.4%, prev. -0.5%), while the ex-gas and autos rose 0.6%, above the prior -0.5% and expected 0.2%. Meanwhile, the control group, which feeds into GDP data, saw a strong reading at 0.7% MoM, above the 0.4% forecast and prior -0.4%. Discretionary categories such as clothing, electronics and sporting goods were all in the red while spending at restaurants and bars was still strong. While the report showed no signs of immediate concerns on the state of the consumer, there are some shifting consumption patters suggesting caution in consumers as banking concerns and debt ceiling talks underpin. Meanwhile, US industrial production for April rose 0.5%, above the expected 0%, although the March data saw a revision lower to 0% from +0.4% after flatlining in February too.
Weaker than expected consumption data from China in April
China’s April Retail Sales data out overnight were out below expectations, showing a 18.4% YoY gain vs. 21.9% expected and 10.6% in April. The year-ago numbers were heavily impacted by zero-Covid policies. April Industrial Production data was very weak relative to expectations at +5.6% YoY vs. +10.9% expected and April Property Investment slumped to –6.2% YoY vs. -5.7% expected. China’s youth unemployment levels in April rose to a record 20.4% despite the decline in the overall unemployment rate to 5.2%. China’s working population declined by 41 million over the last three years due to retirement and higher unemployment among young workers.
UK employment data disappoints
The UK April Payrolled Employees data dropped a stunning –136k vs. +25k expected and +42k the prior month. This is an out of the blue figure that has taken the market aback and has sterling on the defensive as UK yields are marked slightly lower. The April Jobless claims data also rose, if less dramatically, to a high since early 2021 at +46.7k and vs. +26.5k in March.
Fed speakers remain mixed
A number of Fed speakers were on the wires on Tuesday, and many of them pushed for more rate hikes. Thomas Barkin (non-voter) said he is still not convinced that inflation is defeated and would be "comfortable" with more increases. Loretta Mester (non-voter) said she thinks rates aren't yet sufficiently restrictive. Lorie Logan (voter) was neutral and noted that a slower pace and vouched for a slower pace in light of stability risks. John Williams (voter) was less hawkish, highlighting that the demand and supply in the economy is moving back into a balance as Fed hikes filter through the economy. Clearly, most voters are turning cautious while the other members on the committee still see further interest rate hikes.
Hedge fund titans Druckenmiller and Tepper increase Nvidia stakes
The latest 13F filings from Druckenmiller’s family office showed him adding to his stake in NVidia and Microsoft, while Tepper’s Appaloosa also bought additional NVidia shares and bought Cathie Woods’ ARK Innovation ETF. Many associate NVidia’s recent huge share price revival with the growth of the potential for AI, taking over as a factor and focus for NVidia from the crypto.
Japan Q1 GDP smashes past expectations
Preliminary GDP for the first quarter from Japan smashed expectations with annualized growth of 1.6% QoQ (vs. 0.8% exp and -0.1% prev). Growth was boosted by private consumption which rose 0.6% QoQ (vs. 0.4% exp and 0.2% prev) as well as business spending which was up 0.9% QoQ (vs. -0.3% exp and -0.7% prev). Exports were a drag on growth, reflecting the weakening external demand but the strong domestic pillars could provide another boost to Japanese equities which have seen rising interest lately due to the improvement in corporate governance and the rising inflation.
Home Depot earnings beat but misses in comparable sales
Home Depot reported Q1 non-GAAP net income of USD3.873 billion, beating the consensus estimate USD3.843 billion or USD3.82 per share versus consensus forecast USD3.80. However, investors were disappointed about the 4.5% decline in comparable sales, worse than the estimated -1.7% by analysts. Lower lumber prices and poor weather contributed to the weakness in sales. The management gave a downbeat outlook citing softer demand for big ticket items.
Tencent set to report revenue and earnings growth
Tencent (00700:hksg), reporting on Wednesday, is forecasted to see revenue growth of 7.5% Y/Y, with non-GAAP net income expected to surge by 27%. Growth is expected across online advertising, gaming, and value-added services, with gross, operating, and net profit margins anticipated to expand both Y/Y and sequentially from the previous quarter.
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