Summary: Markets have charged higher again, seemingly confident that today’s US December CPI data won’t provide any pushback against this rally, which is pulling up into the psychologically important 4,000 area in the US S&P 500 Index. Elsewhere, the USD remains on its back foot on hopes for a soft CPI print, while EURCHF has suddenly pulled above parity for the first time in over six months in a delayed reaction to ECB hawkishness. Oil jumped.
S&P 500 futures extended momentum all the way up to the falling 200-day moving average closing at 3,990 and in early trading this morning the index futures are hovering around the 200-day moving average. This average was hit back in mid-December before US equities were weighed down by hawkish central bank comments and sold off into New Year. Today’s US December CPI report is naturally the key report to watch today as the previous three inflation reports have caused significant volatility over the release. If the market gets it lower inflation print then S&P 500 futures might push above 4,000 and even all the way up to 4,050.
After making a new six-month high this morning, Hang Seng Index reversed and pared gains. Profit-taking weighed on recent policy beneficiaries, such as mainland Chinese property developers, domestic consumption names, mega-cap internet stocks, and Macao casino operators. Shares of EV makers bucked the market trend of retracement to advance, led by BYD (01211:xhkg) up 5.7%. FIT Hong Teng (06088:xhkg), a subsidiary of Foxconn, soared 23% on speculation that the company might replace GoerTek (002241:xsec) to assemble AirPods for Apple. In A-shares, defense, aerospace, auto industrial equipment and wind power outperformed as the domestic consumption space retraced. As of writing, Hang Seng Index and CSI300 edged up around 0.3%.
The greenback remains on its back foot coming into today’s US December CPI release, with market players likely very unclear around the reaction function (more on that below in What’s Next?) to in-line or even soft data today. EURUSD etched marginal new highs above 1.0760 yesterday, but clearly faces a test over today’s data and may have been driven yesterday by flows in EURCHF, which suddenly bursts out of its range and traded well above parity – likely on the hawkish ECB outlook finally sending the pair over the edge. ECB’s De Cos said he sees “significant” rate hikes at the upcoming meetings, while ECB’s Holzmann soft-pedaled the message on QT, saying he was very cautious on moving too fast. USDJPY dipped on the news flow overnight as described below, and many other USD pairs are still within recent ranges, if toward important USD support in places, especially AUDUSD.
Crude oil prices rallied strongly on Wednesday with the improved outlook for Chinese demand and the softer dollar driving a fifth day of gains. Chinese buyers have become active in the physical market, with Unipec snapping up about 3-4mbbl of US crude for March and April in recent days. This comes following news that China had issued a fresh batch of import quotas as it reopens following years of COVID-19 restrictions. Supply was supported by a huge 19m barrels build in US inventories, the biggest since Feb 2021, but it could not dampen the positive price sentiment as higher inventories was expected after the late December cold blast reduced exports while temporarily shutting down some refineries. Fresh momentum was seen in both WTI and Brent after breaking their 21-day moving averages, now offering support at $76.35 and $81.65 respectively.
Gold’s price action and gains during the past week has in our opinion showed us the correct direction for 2023, but while the direction is correct, we believe the timing could be wrong, and with momentum showing signs of slowing ahead of key resistance around $1900, and a potential weaker-than-forecast US CPI print today having been priced in, the risk of correction has risen. Pent-up demand in China ahead of the Lunar New Year may soon fade, while India’s demand may slow as traders adapt to the higher price level. In addition, we have yet to see demand for ETF’s, often used by long-term focused investors, spring back to life with total holdings still hovering around a near two-year low at 2923 tons. The next major hurdle for gold being $1896, the 61.8% retracement of the 2022 correction, with support around $1865 followed by $1826, the 21-day moving average.
The US 10-year yield dropped back toward 3.50% support overnight after falling some 7-basis point yesterday, supported in part by a solid US 10-year auction, with bidding metrics sharply improving relative to the prior couple of weak auctions. The 2-10 year yield slope inverted back toward –70 basis points. Treasuries may find additional support if today’s December US CPI report proves softer than expected.
Economic surprises are improving significantly in the eurozone. The consensus forecasts a drop in GDP of minus 0.1% this year. Based on hard data, this seems excessively conservative. It is bound to be revised up, in our view. The German economy is especially very resilient. While gas consumption has collapsed by double digits, industry output has remained largely flat. This is a remarkable achievement. Based on the latest data on industrial production (for the month of November), it looks like there will be no recession in German industry in Q4. However, the year 2023 will be challenging in the eurozone: credit stress is on the rise (this is the first time in a decade we start the year with European IG credit yield above the 4 % level), and the market will need to absorb about 700bn euros of liquidity due to the ECB quantitative tightening.
Industrial metals are pausing ahead of today’s CPI print and after having marched higher on positive signals from China on Zero Covid and policy stimulus. An apparent peak in infections follow the sudden dropping of COVID-19 restrictions has raised the prospect of an earlier than expected jump in industrial activity. Pent up consumer demand is likely to add to the clamour for metals. Aluminium, copper and iron ore, all rose to new highs on Wednesday. Iron ore (SCOF3) could be potentially ripe for a reversal, given China’s warning on tightening the supervision on iron ore pricing on Friday to crack down on speculators. Meanwhile, Copper’s year-to-date gain of 9% to near $4.20 has also been fast and could see scope for a correction, but the sharply improved technical outlook and limited investor positioning may continue to provide some support in the short term.
The Bank of Japan meets next Wednesday and may be set to guide for further policy tweaks after a regional Bank of Japan report released overnight . In other news in Japan, the Yomiuri newspaper reported that the BoJ will review the side effects of its policy at next week’s meeting and a quarterly Bank of Japan report raised its assessment of the economy in four of Japan’s nine regions, noting that in “there were many cases where companies were increasing winter bonus payments, or plan to hike wages.” Also JPY-supportive, preliminary data from Japan’s Ministry of Finance suggest that Japan’s life insurers sold a record amount of foreign bonds last month.
CPI in China rose to 1.8% y/y in December from 1.6% in November, in line with expectations. The rise was due to a low base and on CPI was unchanged m/m. Excluding food and energy, core CPI came in at 0.7% y/y in December, edging up slightly from 0.6% y/y in November. The change in PPI however rebounded less than expected to -0.7% y/y versus -0.1% expected and -1.3% y/y in November.
The world’s largest foundry of semiconductors beat on net income in Q4 driven by gross margin at 62.2% vs est. 60.1%. TSMC says company to face margin headwinds in 2023 with revenue growth slowing down. CAPEX in 2023 is expected at $32-36bn vs est. $35bn against $36bn in 2022. The company is considering a second manufacturing plant in Japan and a new automotive chips plant in Europe. It has also expanded its 28nm production in China and is planning to mass produce its new 2nm in 2025 in its facilities in Taiwan.
The parent company behind the Japanese fashion retailer Uniqlo reports Q1 operating income of JPY 117bn vs est. JPY140bn but maintains its outlook for profit and revenue growth amid its commitment from yesterday to raise wages up to 40% for its Japanese retail workers.
When the price of capital goes up the demand on homes often goes down, and this is exactly what KB Home is experiencing. The US homebuilder reported Q4 EPS of $2.47 vs est. $2.86, but it was the FY23 outlook of revenue between $5bn and $6bn missing the consensus of $6bn in revenue, but with new orders down 80% more profit warnings could come during the year.
The Bloomberg Grains Index, rangebound for the past six month has opened a new trading year with a loss of 3.5% primarily driven by lower wheat prices on ample supply from the Black Sea region, will receive some fundamental input later today when the US Department of Agriculture releases its monthly supply and demand report. Market estimates point to a trimming of the global corn and soybeans inventories, while wheat is expected to show a small rise. US inventories, meanwhile, is expected to rise across the board driven by weakness in Chinese demand and strong competition from overseas supplies, in part due to the dollar. Also focus on Argentina where an ongoing drought may drive a 6% reduction in the country's soy and corn output.
The latest CPI data out of the US is the next important test for global markets, which seem confident that the Fed will not only halt its policy tightening soon after perhaps 50 basis points of further tightening but will even cut rates cuts by year-end. The US CPI releases have triggered considerable volatility in recent months, and the November CPI release on December 13 ullustrates the potentially treacherous reaction pattern to this data points, as softer than expected inflation levels reported saw risk asset jump aggressively as US treasury yields eased, only for the equity market move to get erased within hours and the US yields to bottom out on the following day. Consensus expectations for today’s CPI print are for a fall in the month-on-month headline data of –0.1% and a rise for the year-on-year at 6.5% versus +7.1% in November. The core, ex Food and Energy number is expected to rise +0.3% MoM and +5.7% YoY vs. +6.0% YoY in November and a peak rate of 6.6% last September.
The Q4 earnings season kicks off tomorrow with banking earnings from Bank of America, JPMorgan Chase, and Citigroup with consensus expecting earnings to continue contracting among US banks before coming back to growth in 2023. The key uncertainty is credit quality in 2023 as it is linked to the degree of a recession or maybe no recession at all in the US economy. With higher interest rates level expectations are that banking revenue will slowly begin to accelerate and if high interest rates persist for an extended period, the longer-term growth for banks could be quite attractive. In addition, US banks have extended credit at the fastest pace in 2022 since the year leading up to the Great Financial Crisis. Overall, the Q4 earnings season is likely going to see an extension of value and tangible companies performing better than intangible-driven companies.
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