Summary: The Fed hiked rates by 25bps as expected and opened the door to a potential pause but dismissed the possibility of rate cuts this year. Treasuries firmed while equities sold off after Chair Powell’s press conference in a risk-off as Chair Powell highlighted tightening bank lending and the risk of a mild recession. China returns from the Golden Week holiday today. In FX, JPY was the strongest while CAD underperformed with a selloff in crude oil extending further. Gold was bid to fresh one-year highs. Today’s focus will be on the ECB meeting and Apple earnings.
S&P 500 declined 0.7% and Nasdaq 100 shed 0.6% after Fed Chair Powel indicated that the Fed was not ready to cut policy rates yet. All 11 sectors in the S&P 500 retreated, led by energy, financials, and materials. Advanced Micro Devices (AMD:xnas) tumbled 9.3% on Q2 guidance below market expectations due to a slowdown in the PC industry. Qualcomm (QCOM:xnas) plunged over 6% in the extended hours following a downbeat outlook guidance.
After a well-telegraphed 25-bp rate hike and the removal of the phrase “additional policy firming may be appropriate” and the implied tightening bias, the initial reactions in the Treasury market were muted. The market subsequently faded Powell’s remark that the Fed was not going to cut rates given the inflation forecasts the Fed and saw yields lower. The coupon curve steepened with the 2-year through the 5-year notes being well-bid. The 2-year yield fell 16 bps to close at 3.80% while the 10-year yield shed 9bps to 3.34%, steepening the 2-10-year curve by 7bps to -47.
The announcement of USD96 billion refunding in total for the 3-year notes, 10-year notes, and 30-year bonds was as expected, The Treasury Department also announced a Treasury securities buyback program would be launched sometime next year. The Treasury has conducted consultation and issued reports over the past several months on its intention to do buybacks, aiming at improving liquidity and market functioning.
Hong Kong equities declined on Wednesday, following overnight weakness in U.S. stocks, while the mainland Chinese stock market remained closed for a holiday. The Hang Seng Index shed 1.2%, and energy stocks retreated as crude oil prices tumbled, leading PetroChina (00857:xhkg) to drop by 4.4%. Macao casino stocks gave back the gains from the previous day and more, with Melco (00200:xhkg) plummeting 6.7% and Sands China (01928:xhkg) shedding 4.9%. The Hang Seng Tech Index declined 1.6%, driven by the weakness in the China internet space and EV stocks.
However, domestic consumption names such as brewers and dairy companies bucked the decline, supported by strong high-frequency data on tourism and consumption in mainland China during the Labor Day holiday. Budweiser Brewing (01876:xhkg) was the best-performing stock within the Hang Seng Index, gaining 2.9%, followed by China Mengniu Dairy (02319:xhkg), up 2.4%, and Haier Smart Home (06690:xhkg), climbing 2.2%. Trading resumes in mainland bourses today.
The US dollar weakness extended into and following the Fed rate decision as Treasury yields plunged with a dovish shift in market’s expectations of the Fed path. The Japanese yen outperformed, with USDJPY below 134.50 from 136+ levels yesterday recovering much of the gains since Friday’s dovish BOJ meeting. ECB meeting in focus today and any dovish bent could mean a big reversal for EURUSD which is getting in close sight of 1.11 for now. GBPUSD also heading up towards 1.26, having reached its highest levels since June 2022. Commodity currencies were the weakest led by CAD as crude oil prices plunged further.
Crude oil prices tumbled another 4% yesterday, with loss in WTI reaching ~10% in the last 5 days. The Fed’s latest rate hike and Chair Powell highlighting risk of a mild recession has added further to demand concerns emanating from slowing global growth and banking sector woes. Another major driver of the recent crude oil market weakness has been a slump in refinery margins across the major refinery hubs in Asia, the US as well as Europe. WTI prices are now below $68/barrel, while Brent is below $72. It appears that risk of a recession will continue to be on the market’s mind for now, and the aggressive rate cuts priced in for this year can also continue to be a source of volatility with Powell guiding for no rate cuts this year. China comes back online today after the Golden Week holiday, and reports of traffic and consumption during the period will be key for the oil market.
Gold prices hit their highest levels since March 2022 as it reached $2062.99 in the Asian open. Even as interest rates were raised further by the Fed last night, hints of a potential pause and market pricing shifting more in favor of additional rate cuts this year brought Treasury yields lower, making it more attractive to hold the precious metal. The 2020 high of $2075 now in focus, and clearing that will bring $2100 on target, but the path for Gold can be much choppier from here if inflation concerns continue to come back.
The Fed raised rates by 25bps to a range between 5-5.25%, as was widely expected, and opened the door to a potential rate pause at the next meeting. The prior language from its statement - “the Committee anticipates that some additional policy firming may be appropriate” was replaced it with this: “the extent to which more firming is needed will depend on economic data.” While Chair Powell hinted at the risk of a mild recession, he also reaffirmed that inflation is still well above its goal and there is a long way to go to bring it down. Market pricing turned dovish, with about 100bps in rate cuts priced for this year from just over 60bps ahead of the meeting despite Powell dismissing the likelihood of rate cuts this year. This could be a potential source of volatility in the coming months, and continues to argue in favour of holding bonds in portfolios.
US ISM services PMI rose to 51.9 from 51.2 in April, marginally above the expected 51.8, which was largely due to a large increase in new orders to 56.1 (prev. 52.2). Employment remained in expansionary territory but fell to 50.8 (prev. 51.3), and prices paid ticked slightly higher to 59.6 (prev. 59.5). Labor market strength was also reaffirmed as April ADP showed jobs increased by 296k, above the expected 148k and March's addition of 142k. Initial claims data due today before the focus shifts to Friday’s non-farm payroll.
China's cultural and tourism industry recovered strongly during the 2023 Labor Day holiday. The Ministry of Culture and Tourism estimated a total of 274 million domestic tourist trips, marking a 70.8% Y/Y increase and a 119.1% recovery compared to before the pandemic in 2019.
Domestic tourism revenue also surged, reaching RMB148.06 billion, up 128.9% YoY and a 100.7% recovery compared to 2019. Key retailers and catering providers reported a sales growth of 18.9% Y/Y, according to the Ministry of Commerce's monitoring of high-frequency data. Sales of petroleum products and automobiles saw a surge of 24.4% and 20.9% respectively. The sales of jewelry and clothing grew by of 22.8% and 18.4% Y/Y, respectively. Communication equipment sales increased by 20.1% Y/Y while home appliances sales increased by 13.9%.
Caixin China manufacturing PMI, which has a larger focus than the official NBS manufacturing PMI on export-oriented small and medium size enterprises in the coastal China is expected to remain at 50.0 in April, flat to the March reading.
The ECB announcement is due today, and consensus is looking for a downshift to a 25bps rate hike while the market is pricing in only slightly higher (29bps). Data this week on inflation remaining firm continues to make a case for another 50bps rate hike, as has also been hinted by several ECB speakers over the last few weeks, but the weakness in Q1 bank lending survey may warrant some caution as it highlights weakening credit demand.
Apple Inc. (AAPL:xnas) is scheduled to unveil its financial results for Q2 FY23, concluding on March 31, after the market's closing today. Analysts' consensus estimates forecast revenue of USD92.6 billion, indicating a YoY decline of 5%, and EBITDA of USD30.2 billion, down from USD32.7 billion reported last year, as input costs remain elevated. The company's premium electronic devices, particularly the iPhone, have been affected adversely by high inflation in key markets, dampening consumer demand. With the share price surging 31% year-to-date, expectations could be inflated, even for Apple. The risk of disappointing guidance for iPhone sales has risen, and we anticipate subdued Mac sales.
Qualcomm guided revenue for fiscal Q3 ending June 2023 in the range from USD8.1 billion to USD8.9 billion, substantially below analysts’ estimate of USD9.25 billion. The downbeat guidance highlight the headwind of the mobile phone industry that faces inventory buildup due to weak demand.
Russia accused Ukraine of attempting to assassinate Russian President Putin via a drone attack, although they were shot down by Russia. Volodymyr Zelenskiy denied Russian allegations, while the US says to take the report with a "shake of salt", and they cannot validate reports. This brings risks of a step-up in conflict, and Deputy Chair of the Russian Security Council Medvedev has said the only response to such action is to eliminate Ukraine President Zelenskiy and his "clique".
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy