Futures Rise On China Reopening, End Of Tech Crackdown As Asia Enters Bull Market
Futures Rise On China Reopening, End Of Tech Crackdown As Asia Enters Bull Market
Futures extended their Friday post payrolls gain on the…
Futures extended their Friday post payrolls gain on the back of Chine reopening optimism coupled with speculation that China's tech crackdown is finally ending - just as we speculated this weekend when reporting on Jack Ma's ceding control of Ant Financial. S&P futures rose 0.4% as of 7:30 am ET while Nasdaq contracts 100 added 0.5%. And while European stocks were mostly in the green, the bulk of overnight action was in Asia where the Hang Seng Tech Index jumped 3.2% Monday, led by Alibaba Group after a top central bank official said the clampdown on the Internet sector was drawing to a close. The broader market also advanced, with a gauge of Chinese equities listed in Hong Kong rising 2%, helping push the MSCI Asia Index up 20% from its October low, setting it up for a bull market. The dollar weakened to a seven month low and oil rallied.
Among premarket movers, Bed Bath & Beyond shares surged as much as 75%, set to rally after losing nearly half of their value in the previous week on bankruptcy worries amid mounting losses, and ahead of the company’s earnings due Tuesday. Coinbase and Riot Platforms led cryptocurrency-exposed stocks higher in premarket trading as Bitcoin rallied to extend gains for a sixth consecutive session — its longest streak in nearly a year. Lululemon dropped after the athletic apparel maker forecast a weaker gross margin. Here are other notable premarket movers:
- Oracle is upgraded to overweight from neutral at Piper Sandler as its cloud transformation takes hold. The brokerage also noted that fiscal 2024 might be a watershed year for the software company, where growth in operating profits and earnings per share could accelerate to more than 10%. Oracle shares are up 1.3%.
- Piper Sandler upgrades Uber to overweight and cuts DoorDash to underweight, recommending a pair-trade between the two as it favors ride-hailing over delivery in 2023. Elsewhere, Jefferies starts DoorDash with an underperform rating, with a buy on Uber. Uber shares rose 2.3%. Dash shares down 4.2%.
- Ally Financial upgraded to neutral from underweight at Piper Sandler, with headwinds seen as now priced into the stock. Shares rise 1.9%.
- Credit Suisse says fertilizer prices are on a downward trajectory in a note double-downgrading Mosaic (MOS) to underperform. Shares fall 1.1%.
- Elf Beauty is downgraded to hold from buy at Jefferies, with broker saying risk-reward is balanced for the cosmetics company against an uncertain macroeconomic backdrop. Shares fall 1.1%.
- Ipsen shares drop after it agreed to acquire Albireo for $42/share in cash plus a contingent value right (CVR) of $10/share related to the U.S. FDA approval of Bylvay in biliary atresia. Albireo shares soar 93%.
- Jefferies sees another year of uncertainty ahead for US bank stocks, in a note upgrading its ratings on Truist (TFC) and First Republic (FRC) and downgrading both Signature Bank (SBNY) and Regions Financial (RF). TFC falls 0.09%. FRC rises 1.2%. SBNY shares fall 0.4%. RF falls 1%.
- KeyBanc trims its natural gas price estimates for 2023 following a relatively mild winter to date and cuts its ratings on Comstock Resources (CRK) and Pioneer Natural Resources (PXD). CRK shares rise 0.8%. PXD rises 1%.
- There is a strong industry backdrop for Harmonic (HLIT), with greater competition in the broadband service market pushing cable multiple-system operators (MSOs) to invest aggressively, Jefferies writes in note that upgrades the stock to buy. Shares rise 1.8%.
- Lanvin Group is rated neutral at Citi, which initiated coverage on the stock noting that the luxury fashion group has solid brands but clear evidence of a turnaround is required to merit a buy call. Shares rise 3.5%.
Markets closed last week solidly in the green, encouraged by Friday's jobs report which showed wage growth slowing, lifting the S&P 500 2.3% to notch its first winning week in over a month. They face another test on Thursday with CPI data that will likely help determine the size of the Federal Reserve’s next interest-rate increase. After the easing in wage inflation, swaps contracts showed investors expect the policy rate to peak at under 5% this cycle, down from 5.06% just before Friday’s jobs report. While traders remain divided about the size of February’s hike, with 32 basis points of tightening priced in, it appears that a quarter-point move is seen as more likely than a half-point increase.
While pressure on the Fed to hike by 50 basis points on Feb. 1 has eased, “policy makers appear to be increasingly frustrated by market-pricing at odds with Fed signaling in terms of both the terminal funds rate and timing of initial rate cut,” BNP Paribas economists led by Carl Riccadonna wrote in a note to clients. “This could tilt their bias toward a more forceful response at the next meeting.”
And while market pessimism is still dominant, analysts at Wells Fargo said Friday’s gains may be more durable than some expect, being “driven by a pro-cyclical post-jobs report reaction — not by risk/short-covering.” This market action “probably creates some positive investor sentiment since long-only’s are making money and short-sellers are faring better than one might expect.”
On the other hand, Morgan Stanley strategists said US equities face much sharper declines than many pessimists expect with the specter of recession likely to compound their biggest annual slump since the global financial crisis. The bank's equity strategist, Michael Wilson, long one of the most vocal bears on US stocks, said while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are still too high and the equity risk premium is at its lowest since the run-up to 2008. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said. At the same time, US stocks have been lagging the rebound in European, Asian and emerging-market peers as American equities trade at a hefty valuation premium.
European markets also started the week amid a generally buoyant mood, as continental bourses opened higher, after posting the best week since March on optimism about China’s reopening, an easing energy crisis and signs of cooling inflation. Europe’s Stoxx 600 Index climbed 0.5%, touching the highest since mid-December with construction, technology and energy leading gains amid optimism over China’s demand for raw materials. On the data front, euro zone unemployment was unchanged in November at 6.5% as expected. Here are some of Europe's biggest movers:
- UCB gains as much as 4.9%, the most in almost 11 months, after the Belgian biopharma company said its 2022 results should come in toward the high end of guidance
- Geberit shares climb as much as 3.5% after Goldman Sachs raised its recommendation on the Swiss manufacturer to neutral from sell, citing reduced risk related to energy prices
- BioArctic rises as much as 29% after Eisai and Biogen’s Alzheimer’s drug Leqembi (lecanemab-irmb) received accelerated approval from the FDA. The treatment originates from BioArctic
- TGS gains as much as 15%, the most intraday since 2020, after a 4Q update that DNB said showed a strong beat on late sales and supportive management comments on order inflow
- SAES Getters shares surge as much as 36%, the most on record, after SAES Group entered an agreement with Resonetics to sell its Nitinol production business for about $900m in cash
- AstraZeneca falls after agreeing to buy US biotech CinCor Pharma for as much as $1.8 billion. Analysts say the acquisition is a good fit for the firm’s existing cardiovascular franchise
- Fresnillo falls as much as 2.5% as RBC Capital Markets downgrades stock to sector perform, as it sees operational momentum widely priced in and expects limited growth in the pipeline
- Frontier Developments shares fall as much as 42%, its biggest intraday decline on record, after the video-game firm said it no longer expects to meet FY23 consensus expectations
- Ambea drops as much as 6.9%, the most since Dec. 23, after the Swedish elder care company saw its target price cut at DNB to SEK52 from SEK73 on continued headwinds due to inflation
- Devolver Digital shares fall as much as 9.5%, dropping to a record low, after downgrading profit expectations for FY22 in a trading update. Goodbody called the update “disappointing.”
Earlier in the session, Asia’s benchmark stock index was on track to enter a bull market, as China’s reopening and a weakening dollar lure investors back to the region. The MSCI Asia Pacific Index climbed as much as 1.9% on Monday, taking its advance from an Oct. 24 low to more than 20%. The Asian benchmark is up 3.7% so far in 2023, beating the S&P 500 Index by about two percentage points. That’s after they both slumped about 19% last year, their worst performance since 2008.
Gauges in Hong Kong, Taiwan and South Korea led gains in the session, while Japan was closed for a holiday. Strategists have predicted a better year for Asian equities after a dismal 2022, especially as stocks in China, which carry the second-highest weighting in the regional gauge after Japan, turned a corner in November following the nation’s shift away from stringent virus curbs. The bull market milestone comes after the MSCI Asia gauge tumbled nearly 40% from a peak in early 2021. The MSCI Emerging Markets Index is on track to enter a bull market after surging more than 20% from its October low, boosted by Chinese stocks after the nation pivoted on its Covid strategy and offered more policy support for the economy.
“The rally has been fast and furious, so it is only natural to expect some profit-taking,” said Charu Chanana, senior strategist at Saxo Capital Markets Pte. “There are also some risks to keep a tap on, such as BOJ’s hawkish shift and company earnings. But that being said, there is still room for Asian markets to outperform global peers in 2023.”
Australian stocks climbed for a fourth day as miners advanced. The S&P/ASX 200 index rose 0.6% to close at 7,151.30, capping four consecutive days of advances. The winning streak is the benchmark’s longest since Nov. 25. The gauge followed Wall Street shares higher after US economic data boosted optimism for slower Fed rate hikes. Miners and energy shares contributed the most to the Australian index’s move. In New Zealand, the S&P/NZX 50 index rose 0.2% to 11,646.45.
In FX, the Bloomberg Dollar Spot Index fell to its lowest level since June as the dollar weakened against all of its Group-of-10 peers apart from the yen. It pared the drop in European hours. NOK, NZD are best performers among G10’s.
- The euro pared gains after rising to $1.07. Bunds and Italian bonds underperformed Treasuries, with the largest losses seen in the belly of curves, while money markets added to peak ECB rate wagers. Focus is also on the EU’s first bond sales of the year
- The pound advanced, while gilts bear flattened. Bank of England Chief Economist Huw Pill comments are due later
- Norway’s krone and the Australian dollar led G-10 gains, with the latter climbing to $0.6947, its highest level in more than four months, supported by China’s reopening. AUD curve bull steepens with 3-year yield ~13bps lower
- Turkey’s lira weakened as investors weighed President Recep Tayyip Erdogan’s signal that general elections will be held in early May, a month earlier than scheduled
In rates, Treasuries were pressured lower with losses led by long-end, continuing Friday’s post-payrolls steepening move amid wave of block trades. US yields are higher by as much as 4bp at long-end, steepening 5s30s, 2s10s spreads by around 2bp; 10-year around 3.595%, cheaper by 3.5bp on day but outperforming bunds in the sector by ~2.5bp. Treasuries took their cue from wider bear-steepening move across core European rates following first EU bond sales of the year. Another heavy IG credit issuance slate is expected this week, which also includes December CPI data Thursday and Fed Chair Powell appearance Tuesday.
In commodities, crude futures advanced, pushing Brent up almost 3.5% to trade near $81.11. Spot gold rises roughly $8 to trade near $1,873/oz while base metals are in the green.
In crypto, Bitcoin is firmer and has managed to surpass and gain a more convincing foothold above USD 17k, after fleeting breaches of the figure in recent sessions, with the 16th Dec USD 17524 peak into play
The only event on today's quiet calendar is the consumer credit print at 3pm ET. There are two Fed speakers on deck as well, Bostic and Daly, speaking shortly after noon.
- S&P 500 futures up 0.4% to 3,932.00
- STOXX Europe 600 up 0.5% to 446.56
- MXAP up 1.7% to 161.51
- MXAPJ up 2.4% to 535.12
- Nikkei up 0.6% to 25,973.85
- Topix up 0.4% to 1,875.76
- Hang Seng Index up 1.9% to 21,388.34
- Shanghai Composite up 0.6% to 3,176.08
- Sensex up 1.4% to 60,752.44
- Australia S&P/ASX 200 up 0.6% to 7,151.33
- Kospi up 2.6% to 2,350.19
- German 10Y yield little changed at 2.27%
- Euro up 0.3% to $1.0677
- Brent Futures up 3.0% to $80.90/bbl
- Brent Futures up 3.0% to $80.89/bbl
- Gold spot up 0.4% to $1,873.06
- U.S. Dollar Index down 0.27% to 103.60
Top Overnight News from Bloomberg
- Central banks aren’t giving up their inflation fight yet with the peak in interest rates still to come in most economies, but pauses will come at some point in 2023 — and perhaps even pivots
- The ECB predicts wage growth — a key indicator of where inflation is headed — will be “very strong” in the coming quarters, strengthening the case for more interest-rate hikes, the institution said Monday in an article to be published in its Economic Bulletin
- UK Prime Minister Rishi Sunak is set for talks with the union leaders directing the wave of strikes that have hobbled the UK since the start of the year, as the threat of more widespread action hangs over the country
- Russian President Vladimir Putin’s plans to squeeze Europe by weaponizing energy look to be fizzling at least for now. Mild weather, a wider array of suppliers and efforts to reduce demand are helping, with gas reserves still nearly full and prices tumbling to pre- war levels
- The SNB expects an annual loss of about 132 billion francs ($143 billion), more than five times the previous record, it said Monday in preliminary results. The largest part of this, 131 billion francs, stems from collapsed valuations of its large pile of holdings in foreign currencies, accrued as a result of decade-long purchases to weaken the franc
- A ship has been refloated after running aground in the Suez Canal and briefly disrupting traffic in the waterway that’s vital for global trade
- Brazil’s capital was recovering early Monday from an insurrection by thousands of supporters of ex-President Jair Bolsonaro who stormed the country’s top government institutions, leaving a trail of destruction and testing the leadership of Luiz Inacio Lula da Silva just a week after he took office
- Chinese officials are considering a record quota for special local government bonds this year and widening the budget deficit target as they ramp up support for the world’s second- largest economy, according to people familiar with the matter
- Japanese Prime Minister Fumio Kishida said careful explanation and communication with markets would be part of consideration on monetary policy, when asked about possible future changes in the Bank of Japan’s ultra-loose policy
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks gained with the MSCI Asia Pacific index on course to enter a bull market as the region took impetus from last Friday’s rally on Wall St. ASX 200 was led higher by strength in the commodity-related sectors and with sentiment also helped by China’s border reopening which JPMorgan predicts could boost Australia’s economy by nearly one percentage point over the next two years, although gains are capped following disappointing building approvals data. KOSPI outperformed with the index and shares in LG Electronics unfazed by the Co.’s softer preliminary Q4 earnings. Hang Seng and Shanghai Comp were supported after China’s border reopening over the weekend added to the hopes of an economic recovery and with Alibaba shares spearheading the advances in Hong Kong after Jack Ma ceded control of affiliate Ant Group.
Top Asian News
- Chinese President Xi Jinping stressed the importance of remaining committed to advancing reform, exploring new ground and carrying forward the fighting spirit, in a bid to modernize the work of judicial, procuratorial, and public security organs, according to China Economic Net.
- PBoC official Guo Shuqing said China’s growth will return to a normal path as China provides further support to households and companies to help recover following the end of the zero-Covid policy, according to People’s Daily.
- Tens of thousands of travellers began to fly in and out of mainland China on Sunday following the removal of nearly all of China’s border restrictions, according to WSJ.
- China’s health security administration said talks to include Pfizer’s (PFE) Paxlovid in the drug list for basic state health insurance failed due to the Co.’s high quotation for the antiviral medicine, according to Reuters.
- Six Chinese cities set GDP targets for this year ranging from 5.5%-7.0%, according to Securities Daily.
- Japanese PM Kishida said they must choose a successor to BoJ Governor Kuroda best suited for the post at the time when Kuroda’s term ends in April and must discuss with the next BoJ Governor the relationship between the government's and BoJ's policies. Kishida added that the government and BoJ must work closely together and each should play their own roles in achieving sustained price stability, while he noted that the government is ready to respond flexibly using reserves when asked if further steps could be taken to soften the blow on households from rising prices, according to Reuters.
- China reportedly considering a record special debt quota and a wider budget deficit, via Bloomberg; considering a deficit ratio of circa. 3% for the year. New special bond quota of up to CNY 3.8tln.
European bourses are firmer across the board, Euro Stoxx 50 +0.3%, as the constructive APAC tone continues amid a limited European docket. Sectors are primarily in the green, with defensive names lagging somewhat in-fitting with the risk tone.
US futures are in the green, ES +0.4%, in-fitting with the above sentiment ahead of Fed speak and a NY Fed Consumer Expectations survey. Apple's (AAPL) iPhone exports from India have doubled to a record USD 2.5bln, via Bloomberg.
Top European News
- BoE’s Mann said energy price caps could be lifting inflation in other sectors by boosting consumer spending and noted it is unclear what would happen to inflation when caps are removed, according to Bloomberg.
- UK PM Sunak said inflation is not guaranteed to decline this year and that the government will need to be disciplined to ensure inflation is brought down, according to Reuters. In other news, PM Sunak said he was willing to discuss pay increases for nurses in an effort to end strikes as ministers prepare to meet union leaders on Monday, according to FT.
- Czech Central Bank Governor Michl said they expect a significant drop in inflation from spring and are ready to raise rates further if the baseline scenario of a decline in inflation does not materialise, while he added that policy will be strict until inflation begins declining, according to Reuters.
- DXY continues to slip below the 104.00 mark between 103.860-420 parameters towards key technical support and its December low (103.380).
- Action which is benefitting peers across the board ex-JPY, which is suffering amid the easing in USTs/EGBs and a Japanese holiday, with USD/JPY above 132.50.
- Antipodeans are the current outperformers with AUD surpassing 0.69 and Kiwi eclipsing 0.64 vs USD, before waning slightly.
- EUR/USD hit, but failed to breach, 1.07 while Cable is off best but still above 1.21 in a 1.2089-1.2174 range.
- PBoC set USD/CNY mid-point at 6.8265 vs exp. 6.8276 (prev. 6.8912)
- EGBs under pressure and continuing to retreat from Friday's best, with Bunds down by nearly 100 ticks and Gilts similarly dented though managing to retain 102.00 at present
- USTs are similarly softer, though have largely been consolidating towards the APAC trough given the absence of Japanese participants ahead of Fed speak and NY survey, with yields modestly firmer across the curve.
- Crude benchmarks are bid this morning, with WTI Feb and Brent Mar posting upside in excess of 3.0% or USD 2.0/bbl respectively.
- Action has been driven by China’s ongoing reopening and fresh geopolitical headlines, alongside other crude-specific developments (see below).
- Qatar set February marine crude OSP at Oman/Dubai plus USD 0.75/bbl and land crude OSP at Oman/Dubai plus USD 2.10/bbl. In relevant news, Qatar Energy is to sign Ras Laffan Petrochemicals Complex agreements with the project to cost USD 6bln and it created a JV with Chevron Phillips Chemicals of which it owns 70% and Chevron (CVX) owns 30%, according to Reuters.
- Iraq’s Oil Minister said the Karbala oil refinery will begin commercial production in mid-March, according to Reuters.
- US DoE rejected the initial batch of bids from oil companies to resupply a small amount of oil to the SPR in February, according to Reuters.
- Colonial Pipeline said repairs at the Witt Booster Station were completed and Line 3 returned to normal operations as of 17:51 EST on Sunday, according to Reuters.
- China has issued a second batch of 2023 crude oil import quotas to independent refiners totalling 111.82mln/T, via Reuters citing sources.
- Iraq February Basrah medium crude OSP to Asia -USD 1.40/bbl vs Oman/Dubai average, via Somo; to Europe at -USD 8.95/bbl vs Dated Brent.
- Spot gold is fairly contained around the mid-point of USD 1864-1880/oz parameters, with the yellow metal deriving some upside from the DXY struggling to attain a positive foothold; next resistance mark is USD 1885/oz from the 9th of May.
- Ukrainian President Zelensky said Ukrainian forces were repelling Russian attacks on Bakhmut in eastern Donbas and were holding position in nearby Soledar under very difficult conditions, according to Reuters.
- Russia’s Defence Ministry said it struck a building in eastern Ukraine which killed more than 600 Ukrainian troops in retaliation for Ukraine’s deadly strike against a Russian barracks, although Ukrainian officials denied there were any casualties and said the strike by Russia only damaged civilian infrastructure, according to Reuters and ITV.
- Russia and Belarus will conduct joint air force drills on January 16th-February 1st, according to the Belarusian Defence Ministry cited by Reuters.
- Russian Kremlin has rejected suggestions from Ukraine that Russian official Kozak is sounding out officials in Europe about a potential peace deal.
- Swedish PM Kristersson said they have fulfilled commitments made to Turkey at the Madrid summit but noted that Turkey is demanding concessions that Stockholm cannot give to approve its application to join NATO, according to FT.
- China's military said it carried out combat drills around Taiwan on Sunday, while Taiwan's Defence Ministry stated 28 Chinese aircraft crossed the Taiwan Strait median line and entered the air defence zone in the past 24 hours. Furthermore, Taiwan's presidential office said it condemns China's recent military drills around Taiwan and that Taiwan's position is very clear whereby it will not escalate conflict nor provoke disputes but added that it will firmly defend its sovereignty and national security, according to Reuters.
- Bitcoin is firmer and has managed to surpass and gain a more convincing foothold above USD 17k, after fleeting breaches of the figure in recent sessions, with the 16th Dec USD 17524 peak into play. Bafin warns of Godfather malware attack on banking/crypto apps.
US Event Calendar
- 15:00: Nov. Consumer Credit, est. $25b, prior $27.1b
Central bank Speakers
- 12:30: Fed’s Bostic Takes Part in Moderated Discussion
- 12:30: Fed’s Daly Interviewed in WSJ Live event
DB's Jim Reid concludes the overnight wrap
I hope your Sunday was more peaceful than mine. I played my first round of golf since back surgery (don't tell my consultant) and got stuck at the golf course afterwards as there was a big police search with helicopters over the area I walk home across. My wife and kids were out in the garden at the time and had to rush in as the copter nearly landed in the adjoining field. So at least they knew I wasn't making up being delayed. Had it not been pouring with rain I would have had time for another 9 by the time I could make it home via a huge detour. To be fair for me there are worst places to be stuck but it was a touch concerning.
That capped the end of a week where if you thought 2023 might start calmer than 2022 then you may have wanted to think again as there was plenty to debate and plenty of big swings in markets and data. In fact, after weak European headline inflation last week and a bad miss for the US Services ISM on Friday it was the best week for 10yr German bunds (-35.8bps) since data on Bloomberg starts around reunification in 1990. This week the main highlights are a speech from Powell in Sweden tomorrow morning, US and China CPI on Thursday, and Q4 US earnings season starting in earnest with 3 big financials on Friday.
Before we go through things in more detail it's worth recapping Friday's US data which resulted in a major shift lower in yields. Payrolls were firm as expected with the headline at +223k and unemployment unexpectedly falling a tenth to 3.5%, the lowest since Neil Armstrong first walked on the moon. As our US economists discuss here though, there were signs of slowing growth in the report with, for example, hours worked (34.3hrs vs. 34.4hrs) and average hourly earnings (+0.3% vs. +0.4%) declining. These factors led US yields lower after the report but the Services ISM dropping from 56.5 to 49.6 was a bit of shocker, especially when the consensus was at 55. There’s a chance the exceptionally cold weather could have artificially depressed the survey but the associated commentary wasn’t great and new orders fells 10.8 points to 45.2 which outside the pandemic is the lowest since the GFC and levels only previously associated with recessions. 2 and 10yr yields fell -21bps and -16bps on the day but around 15-16bps of both moves came after the ISM which shows its impact. Ironically the S&P 500 climbed +2.28% on the day but c.1.75% of this was after this shocker of a print showing that the influence of rates on equities outweighed the economic concerns. Such an equity move couldn't possibly last if this ISM print heralded in a stream of recessionary data. It can only last if the data suggests an environment weak enough to merit the Fed pausing soon with the economy managing a soft landing. Remarkably European PMIs now stand near a record high relative to the US which is part of the reason for preferring European credit given it still trades wide to the US.
A fuller review of the week for assets (a significant one to start the year) can be found at the end as usual. Let's move on to this week now and start with the US CPI print for December on Thursday which will be the pivotal data point in January. In terms of the MoM rate, the headline CPI is expected at -0.15% at DB (consensus 0.0% vs. +0.10% previously) with core CPI expected at +0.22% at DB (+0.3% consensus vs. +0.20% previously). In terms of YoY, headline is expected to drop from 7.1% to 6.3% at DB (6.5% consensus) with core falling from 6% to 5.6% (5.7% consensus).
Another inflation-related data point will come from the University of Michigan survey on Friday, where the gauge of consumer inflation expectations will be in focus. Other US data releases will include consumer credit (DB forecast +$30.5B vs +$27.1 in October) today and the NFIB small business optimism index on Tuesday.
Central bank speakers will also be in the spotlight with appearances from Fed Chair Powell and BoE Governor Bailey at the Riksbank's International Symposium on Central Bank Independence tomorrow. We will also hear from a number of other Fed and ECB speakers throughout the week (see day by day calendar for the list).
In Europe, key data releases will include industrial production and trade data in Germany, France and the Eurozone. Over in the UK, all eyes will be on the monthly GDP report for November on Friday. Elsewhere, retail sales (Wednesday) figures will be published in Italy along with the unemployment rate (today) for November. Over in China, the CPI and the PPI on Thursday will be the standout.
Turning to earnings now and some of the largest American banks including JPMorgan, Citi and BofA will kick off the earnings season on Friday. We will also hear from BlackRock and UnitedHealth that day. The day before all eyes will be on results from TSMC as concerns over supply-demand dynamics and US-China tensions continue to weigh on the sector, with the Philadelphia semiconductor index down -35% in 2022.
Asian equity markets are continuing their buoyant start to the year overnight and carried on where Wall Street left off it on Friday night. As I type, the KOSPI (+2.33%) is the strongest performer across the region with the Hang Seng (+1.60%), the CSI (+0.67%) and the Shanghai Composite (+0.54%) also edging higher amid receding risk-off sentiment after Hong Kong and China resumed quarantine-free travel over the weekend thereby marking the end of the Covid Zero policy. Elsewhere, markets in Japan are closed for a holiday. Futures on the S&P 500 (+0.36%), the NASDAQ 100 (+0.54%) and the DAX (+0.75%) are trading higher as well. Crude oil prices are also higher with Brent futures (+1.18%) at $79.50/bbl and WTI (+1.25%) at $74.69/bbl as we go to print.
Early morning data showed that Australia’s building approvals (-9.0% m/m) dropped further in November compared to a downwardly revised -5.6% decline in October.
In the US, the House Republican leadership standoff came to an end over the weekend after Republican Kevin McCarthy was elected as speaker after 14 failed attempts following days of gruelling negotiations.
Recapping last week now, and markets put in a strong start to 2023 as signs of economic weakness and declining inflationary pressures raised hopes that central banks wouldn’t be as aggressive as feared on hiking rates. In particular, the aforementioned ISM services index on Friday created a major bond and equity rally to end the week. However ominously it means December was the first month since May 2020 that both the ISM US services and manufacturing components were in contractionary territory.
On the back of ISM and payrolls, investors immediately moved to price in a less aggressive pace of rate hikes from the Federal Reserve. For instance, futures pricing for the end-2023 rate came down by -10.3bps over the week (-19.0bps on Friday) to 4.48%. That was a big catalyst for risk assets, with the S&P 500 surging +2.28% on Friday, which brought the index back into positive territory for the week at +1.45%. It also led to a massive decline in Treasury yields, with the 10yr down -31.7bps over the week (-16.0bps Friday) to 3.558%.
Over in Europe there was a similarly optimistic picture, aided by the news on Friday from the flash Euro Area CPI release. That showed headline inflation falling to +9.2% in December (vs. +9.5% expected), although core inflation did hit a record high of +5.2%. This backdrop meant equities and bonds surged across the continent, with the STOXX 600 up +4.60% (+1.16% Friday) to mark its strongest weekly performance since March. At the same time, 10yr bund yields fell -35.8bps (-10.5bps Friday), marking their largest weekly decline in records going back to German reunification in 1990.
Let's see what week 2 of 2023 brings
Lower mortgage rates fueling existing home sales
To understand why we had such a beat in sales, you only need to go back to Nov. 9, when mortgage rates started to fall from 7.37% to 5.99%.
Existing home sales had a huge beat of estimates on Tuesday. This wasn’t shocking for people who follow how I track housing data. To understand why we had such a beat in sales, you only need to go back to Nov. 9, when mortgage rates started to fall from 7.37% to 5.99%.
During November, December and January, purchase application data trended positive, meaning we had many weeks of better-looking data. The weekly growth in purchase application data during those months stabilized housing sales to a historically low level.
For many years I have talked about how rare it is that existing home sales trend below 4 million. That is why the historic collapse in demand in 2022 was one for the record books. We understood why sales collapsed during COVID-19. However, that was primarily due to behavior changes, which meant sales were poised to return higher once behavior returned to normal.
In 2022, it was all about affordability as mortgage rates had a historical rise. Many people just didn’t want to sell their homes and move with a much higher total cost for housing, while first-time homebuyers had to deal with affordability issues.
Even though mortgage rates were falling in November and December, positive purchase application data takes 30-90 days to hit the sales data. So, as sales collapsed from 6.5 million to 4 million in the monthly sales data, it set a low bar for sales to grow. This is something I talked about yesterday on CNBC, to take this home sale in context to what happened before it.
Because housing data and all economics are so violent lately, we created the weekly Housing Market Tracker, which is designed to look forward, not backward.
From NAR: Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – vaulted 14.5% from January to a seasonally adjusted annual rate of 4.58 million in February. Year-over-year, sales fell 22.6% (down from 5.92 million in February 2022).
As we can see in the chart above, the bounce is very noticeable, but this is different than the COVID-19 lows and massive rebound in sales. Mortgage rates spiked from 5.99% to 7.10% this year, and that produced one month of negative forward-looking purchase application data, which takes about 30-90 days to hit the sales data.
So this report is too old and slow, but if you follow the tracker, you’re not slow. This is the wild housing action I have talked about for some time and why the Housing Market Tracker becomes helpful in understanding this data.
The last two weeks have had positive purchase application data as mortgage rates fell from 7.10% down to 6.55%; tomorrow, we will see if we can make a third positive week. One thing to remember about purchase application data since Nov. 9, 2022 is that it’s had a lot more positive data than harmful data.
However, the one-month decline in purchase application data did bring us back to levels last seen in 1995 recently. So, the bar is so low we can trip over.
One of the reasons I took off the savagely unhealthy housing market label was that the days on the market are now above 30 days. I am not endorsing, nor will I ever, a housing market that has days on the market at teenager levels. A teenager level means one of two bad things are happening:
1. We have a massive credit boom in housing which will blow up in time because demand is booming, similar to the run-up in the housing bubble years.
2. We simply don’t have enough products for homebuyers, creating forced bidding in a low-inventory environment.
Guess which one we had post 2020? Look at the purchase application data above — we never had a credit boom. Look at the Inventory data below. Even with the collapse in home sales and the first real rebound, total active listings are still below 1 million.
From NAR: Total housing inventory registered at the end of February was 980,000 units, identical to January & up 15.3% from one year ago (850,000). Unsold inventory sits at a 2.6-month supply at the current sales pace, down 10.3% from January but up from 1.7 months in February ’22. #NAREHS
However, with that said, the one data line that I love, love, love, the days on the market, is over 30 days again, and no longer a teenager like last year, when the housing market was savagely unhealthy.
From NAR: First-time buyers were responsible for 27% of sales in January; Individual investors purchased 18% of homes; All-cash sales accounted for 28% of transactions; Distressed sales represented 2% of sales; Properties typically remained on the market for 34 days.
Today’s existing home sales report was good: we saw a bounce in sales, as to be expected, and the days on the market are still over 30 days. When the Federal Reserve talks about a housing reset, they’re saying they did not like the bidding wars they saw last year, so the fact that price growth looks nothing like it was a year ago is a good thing.
Also, the days on market are on a level they might feel more comfortable in. And, in this report, we saw no signs of forced selling. I’ve always believed we would never see the forced selling we saw from 2005-2008, which was the worst part of the housing bubble crash years. The Federal Reserve also believes this to be the case because of the better credit standards we have in place since 2010.
Case in point, the MBA‘s recent forbearance data shows that instead of forbearance skyrocketing higher, it’s collapsed. Remember, if you see a forbearance crash bro, hug them, they need it.
Today’s existing home sales report is backward looking as purchase application data did take a hit this year when mortgage rates spiked up to 7.10%. We all can agree now that even with a massive collapse in sales, the inventory data didn’t explode higher like many have predicted for over a decade now.
I have stressed that to understand the housing market, you need to understand how credit channels work post-2010. The 2005 bankruptcy reform laws and 2010 QM laws changed the landscape for housing economics in a way that even today I don’t believe people understand.
However, the housing market took its biggest shot ever in terms of affordability in 2022 and so far in 2023, and the American homeowner didn’t panic once. Even though this data is old, it shows the solid footing homeowners in America have, and how badly wrong the extremely bearish people in this country were about the state of the financial condition of the American homeowner.bankruptcy covid-19 federal reserve home sales mortgage rates housing market
SVB contagion: Australia purportedly asks banks to report on crypto
Australia’s prudential regulator has purportedly told banks to improve reporting on crypto assets and provide daily updates.
Australia’s prudential regulator has purportedly told banks to improve reporting on crypto assets and provide daily updates.
Australia’s prudential regulator has purportedly asked local banks to report on cryptocurrency transactions amid the ongoing contagion of Silicon Valley Bank’s (SVB) collapse.
The Australian Prudential Regulation Authority (APRA) has started requesting banks to declare their exposures to startups and crypto-related companies, the Australian Financial Review reported on March 21.
The regulator has ordered banks to improve their reporting on crypto assets and provide daily updates to the APRA, the Financial Review notes, citing three people familiar with the matter. The agency is aiming to obtain more information and insight into banking exposures into crypto as well as associated risks, the sources said.
The new measures are apparently part of the APRA’s increased supervision of the banking sector in the aftermath of recent massive collapses in the global banking system. On March 19, UBS Group agreed to buy its ailing competitor Credit Suisse for $3.2 billion after the latter collapsed over the weekend. The takeover became one of the latest failures in the banking industry following the collapses of SVB and Silvergate.
Barrenjoey analyst Jonathan Mott reportedly told clients in a note that the situation “remains stable” for Australian banks but warned confidence could be quickly disrupted, putting pressure on bank margins.
Related: Silvergate, SBV collapse ‘definitely good’ for Bitcoin, Trezor exec says
“Our channel checks indicate deposits are not being withdrawn from smaller institutions in any size, and capital and liquidity buffers are strong,” Mott said, adding:
“But this is a crisis of confidence and credit spreads and cost of capital will continue to rise. At a minimum, this will add to the margin pressure the banks are facing, while credit quality will continue to deteriorate.”
The news comes soon after the Australian Banking Association launched a cost of living inquiry to study the impact of the COVID-19 pandemic and geopolitical tensions on Australians. The inquiry followed an analysis of the rising inflation suggesting that more than 186 banks in the United States are at risk of a similar shutdown if depositors decide to withdraw all funds.cryptocurrency bitcoin crypto pandemic covid-19 crypto
Delta Move Is Bad News For Southwest, United Airlines Passengers
Passengers won’t be happy about this, but there’s nothing they can do about it.
Passengers won't be happy about this, but there's nothing they can do about it.
Airfare prices move up and down based on two major things -- passenger demand and the cost of actually flying the plane. In recent months, with covid rules and mask mandates a thing of the past, demand has been very heavy.
Domestic air travel traffic for 2022 rose 10.9% compared to the prior year. The nation's air traffic in 2022 was at 79.6% of the full-year 2019 level. December 2022 domestic traffic was up 2.6% over the year-earlier period and was at 79.9% of December 2019 traffic, according to The International Air Transport Association (IATA).
“The industry left 2022 in far stronger shape than it entered, as most governments lifted COVID-19 travel restrictions during the year and people took advantage of the restoration of their freedom to travel. This momentum is expected to continue in the New Year,” said IATA Director General Willie Walsh.
And, while that's not a full recovery to 2019 levels, overall capacity has also not recovered. Total airline seats available actually sits "around 18% below the 2019 level," according to a report from industry analyst OAG.
So, basically, the drop in passengers equals the drop in capacity meaning that planes are flying full. That's one half of the equation that keeps airfare prices high and the second one looks bad for anyone planning to fly in the coming years.
Airlines Face One Key Rising Cost
While airlines face some variable costs like fuel, they also must account for fixed costs when setting airfares. Personnel are a major piece of that and the pandemic has accelerated a pilot shortage. That has given the unions that represent pilots the upper hand when it comes to making deals with the airlines.
The first domino in that process fell when Delta Airlines (DAL) - Get Free Report pilots agreed to a contract in early March that gave them an immediate 18% increase with a total of a 34% raise over the four-year term of the deal.
"The Delta contract is now the industry standard, and we expect United to also offer their pilots a similar contract," investment analyst Helane Becker of Cowen wrote in a March 10 commentary, Travel Weekly reported.
US airfare prices have been climbing. They were 8.3% above pre-pandemic levels in February, according to Consumer Price Index, but they're actually below historical highs.
Southwest and United Airlines Pilots Are Next
Airlines have very little negotiating power when it comes to pilots. You can't fly a plane without pilots and the overall shortage of qualified people to fill those roles means that, within reason, United (UAL) - Get Free Report and Southwest Airlines (LUV) - Get Free Report, both of which are negotiating new deals with their pilot unions, more or less have to equal (or improve on) the Delta deal.
The actual specifics don't matter much to consumers, but the takeaway is that the cost of hiring pilots is about to go up in a very meaningful way at both United and Southwest. That will create a situation where all major U.S. airlines have a higher cost basis going forward.
Lower fuel prices could offset that somewhat, but raises are not going to be unique to pilots. Southwest also has to make a deal with its flight attendants and, although they don't have the same leverage as the pilots, they have taken a hard line.
The union, which represents Southwest’s 18,000 flight attendants, has been working without a contract for four years. It shared a statement on its Facebook page detailing its position Feb. 20.
"TWU Local 556 believes strongly in making this airline successful and is working to ensure this company we love isn’t run into the ground by leadership more concerned about shareholders than about workers and customers. Management’s methodology of choosing profits at the expense of the operation and its workforce has to change, because the flying public is also tired of the empty apologies that flight attendants have endured for years."
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