Financial Markets Today: Quick Take – December 13, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

US equity markets rebounded yesterday even as US treasury yields edged higher on the day, as traders nervously recall the heavy volatility around the US CPI releases of recent months, particularly the October CPI release on November 10, which saw an explosion higher in US equities of over 5% on the day after softer-than-expected numbers. Today’s release is complicated by the upcoming FOMC meeting tomorrow. The key downside area for the S&P 500 Index remains 3900-10 the cash index, with the equivalent area around 11,430 in the Nasdaq 100 Index. A sharp rise in the VIX yesterday despite the positive session suggests traders are scrambling to protect themselves with short-term options over the key event risks of the coming couple of days, which aggravates the volatility risk further.

Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg)

Hang Seng Index advanced 0.4% after Hong Kong lifted all travel restrictions for visitors arriving the city and relaxed the QR code scanning requirements for residents.  Local Hong Kong catering and retailer stocks surged 5% to 12%. In A-shares, the CSI300 index was little changed. Lodging, tourism and catering stocks outperformed.

FX: USDJPY teased 138 ahead of US CPI release

The US dollar was mostly sideways ahead of the big flow of key data and central bank meetings later in the week, but a run-up in US treasury yields and higher oil prices yesterday drove a weaker JPY across the board again, with USDJPY nearly reaching 138.00 before pulling back slightly. The US dollar is set to key off the US CPI release today. EURUSD remained capped below the key 1.06 handle, where a break above, for example, on soft data and an indifferent FOMC meeting on Wednesday, possibly opening the doors to 1.08.

Crude oil (CLF3 & LCOG3)

Crude oil trades higher for a second day after last week's heavy losses on demand concerns. Prices were underpinned by further easing of China’s restrictions despite concerns earlier in the week from a rapid surge in cases. Despite reports that the Keystone pipeline was being partially reopened, it remains completely shut on Monday which suggests a potential drop in storage levels at Cushing, Oklahoma, the WTI delivery hub. The market awaits news from Russia on whether it will make good on its threat to cut supply to price cap supporters, while the focus will also turn to US CPI today and the FOMC decision tomorrow, as well as monthly oil market reports from OPEC today and IEA Wednesday. First level of resistance in Brent at $80.50 and $75 in WTI.

Gold (XAUUSD) and silver (XAGUSD) await CPI report

Both metals trade steady while awaiting today’s key US CPI print and tomorrow’s FOMC meeting. Having been rejected on a couple of occasions above $1800, the outcome of these will likely determine whether the metal will break higher to signal a strong start to 2023 or whether investors will book some profit ahead of the quiet period before year-end. In such a case, the current strength of the market will be tested with focus on support at $1765 and not least $1735. Silver meanwhile trades near an eight-month high with half an eye on copper as the potential driver for additional strength.

US 10-year treasury benchmark rebounds further (TLT:xnas, IEF:xnas, SHY:xnas)

In a thin-volume session ahead of the CPI report on Tuesday and the FOMC on Wednesday, yields on Treasuries closed the day higher, with the US 10-year benchmark closing 4 bps up to 3.61% and nearly 10 bps above intraday lows. The auction of USD 32B of 10-year notes, awarded at 3.625%, 3.7bps cheaper than at the time of the auction, was the worst since 2009.  The one, three, and five years ahead consumers’ inflation expectations in the New York Fed’s Consumer Expectations Survey fell to 5.2%, 3%, and 2.3% in November from 5.7%, 3.1%, and 2.4% respectively in October.

What is going on?

Stronger UK GDP growth but clouded energy outlook, expect more volatility

Some respite was seen in UK’s growth trajectory as October GDP rose 0.5% M/M after being down 0.6% M/M last month’s due to the holiday for Queen’s funeral and a period of national mourning. However, the UK may already be in a recession and the outlook remains clouded which suggests there isn’t enough reason for the Bank of England to consider anything more than a 50bps rate hike this week. Energy debate continues to run hot and create volatility in gas prices, after weaker wind generation led to talks of refiring the reserve coal plants, but the request was cancelled later Monday as wind generation rose. The situation continues to highlight the vulnerability of the energy infrastructure due to lack of baseload, and a bigger test probably lies ahead in 2023.

NY Fed consumer expectations survey shows slowing inflation, but...

NY Fed’s Survey of Consumer Expectations indicated that respondents see one-year inflation running at a 5.2% pace, down 0.7 percentage point from the October reading. Expectations 3yrs ahead fell to 3.0% from 3.1% and expectations 5yrs ahead fell to 2.3% from 2.4%. However, it is worth noting that inflation expectations remain above the Fed’s 2% target and unemployment and wage data was reportedly steady.

Corn (ZCH3) advances following biggest clear-out of longs since 2019

 Corn futures in Chicago trade higher for a third day, as dry and hot weather conditions in Argentina, an important Southern Hemisphere producer, stresses the crop. In addition, the USDA on Friday cut the global supply outlook for corn due to a smaller crop in Ukraine, and from where supply could slow after Russian attacks on energy infrastructure have affected cargo loading at the Black Sea ports. Renewed support for corn emerged just after money managers in the week to December 6 sliced their corn net long by 37% to 120k lots, lowest since Sept 2020 and biggest one-week reduction since March 2019.

Novozymes shares in focus following acquisition news

Yesterday should have been a celebration day for Novozymes shareholders according to management as the enzymes manufacturer announced a $12.3bn acquisition of food flavouring manufacturer Chr. Hansen. However, Novozymes shares traded down 15% so the shares will be in focus this morning. The main question is whether regulators will allow the two companies to merge given their respective size and possible market power in the food ingredients business.

What are we watching next?

US November CPI to likely to trigger considerable volatility

Last month’s softer US CPI report was a turning point in the markets and inflation expectations have turned markedly lower since then. Consensus is looking for another softer report in November, with the headline rate expected at 7.3% YoY, 0.3% MoM (from 7.7% YoY, 0.4% MoM in October) while the core, ex-Food & Energy reading is expected to show a steady rise of 6.1% YoY and 0.3% MoM (from 6.3% YoY, 0.3% MoM in October). While a case can be made for further disinflationary pressures, given lower energy prices, easing supply constraints and holiday discounts to clear excess inventory levels, the PPI report on Friday indicated that goods inflation could return in the months to come and wage inflation also remains strong. Easing financial conditions and China’s reopening can be the other key factors to watch, which could potentially bring another leg higher in inflation especially if there is premature easing from the Fed. Shelter inflation will once again be key to watch, which means clear signs of inflation peeking out will continue to remain elusive.

Several central bank meetings this week

The U.S. Federal Reserve (Wednesday), the Bank of England (Thursday) and the European Central Bank (Thursday) are expected to hike interest rates by 50 basis points each this week. Less than two weeks ago, Fed Chairman Jerome Powell said a December rate-hike slowdown is likely. But the hawkish tone should remain based on the latest Non Farm Payroll and Producer Prices reports which indicated that inflation remains high and broad-based. In the eurozone, this is a done-deal that the central bank will hike rates by 50 basis points. Pay attention to the updated economic forecasts (Is a recession the new baseline for 2023?) and to any indication regarding the expected quantitative tightening process. In the United Kingdom, the money market overwhelmingly believes (78%) that the Bank of England will hike its rate by 50 basis points to 3.5% this week. Only a minority (22%) foresees a larger increase, to 3.75%.

Earnings to watch

This is a quiet period in the earnings season, though a couple of interesting names are reporting this week, with former high-flyer Adobe up on Thursday. Adobe has something to prove as the US software company has seen a negative share price reaction on its past five earnings releases. Trip.com, China's leading online travel agency, reports on Wednesday and investors will judge the result on the company's outlook for Q4 and ideally 2023 as China's reopening is raising the expected travel demand in China for 2023. Read more here.

• Tuesday: DiDi Global
• Wednesday: Lennar, Trip.com, Nordson, Inditex
• Thursday: Adobe
• Friday: Accenture, Darden Restaurants

Economic calendar highlights for today (times GMT)

1000 – Germany Dec. ZEW Survey

1030 – UK Bank of England Financial Stability Report

1100 – US Nov. NFIB Small Business Optimism

1330 – US Nov. CPI

2230 – Australia RBA Governor Lowe to Speak

2350 – Japan Q4 Tankan Survey

0005 – New Zealand RBNZ Governor Orr before Parliamentary Committee

2130 – API's Weekly Crude and Fuel Stock Report