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US Futures, European Markets Rise After China’s First Rate Cut In 2 Years

US Futures, European Markets Rise After China’s First Rate Cut In 2 Years

US equity futures, European bourses and Asian markets were all broadly higher after China unexpectedly cut official policy rates for the first time since 2020…

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US Futures, European Markets Rise After China's First Rate Cut In 2 Years

US equity futures, European bourses and Asian markets were all broadly higher after China unexpectedly cut official policy rates for the first time since 2020...

... to counter an economic slowdown. A real-estate slump and partial Covid shutdowns are among the challenges for the world’s second-largest economy. The move contrasts with the shift toward tighter monetary policy in the U.S. and elsewhere to contain price pressures.

“The PBOC really has started the New Year in a different position to, let’s say, other global banks and we do expect to see further easing or supportive measures, both monetary-wise as well as from a fiscal stance,” Catherine Yeung, investment director at Fidelity International, said on Bloomberg Television. The Chinese move has prompted speculation that the current round of global central bank tightening will be short lived, which will be good news for high-duration tech stocks.

While the US is closed for MLK Day, US equity futures reversed earlier losses and traded near session highs, up 8 points or 0.2% to 4,662, as the tri-state area found itself covered under several inches of snow.

Europe’s Stoxx 600 Index and U.S. futures rose, while Asian shares closed modestly in the red. The dollar and oil were little changed. 

Even thought cash bond markets are closed, Treasury futs suggested yields had risen above 1.80% to a new multi year high, after yields tumbled Friday on concerns about more hawkish Federal Reserve policy to fight inflation. JPMorgan Chief Executive Officer Jamie Dimon, whose blank plunged after reporting disappointing trading revenues and surging expenses, said Friday the central bank could raise rates as many as seven times and traders are reconsidering an earlier kickoff for the first European Central Bank rate increase in more than a decade. Jamie Dimon will, of course, be dead wrong as he has been wrong about bitcoin.

Despite today's rise in futures, sentiment remains subdued and rallies are sold. The advance of the omicron virus strain, the start of the earnings season and a boom in mergers and acquisitions are also coloring sentiment. Investors are looking for signs that companies can sustain profit growth despite rising risks.

Meanwhile as part of its weekly pep talk (last week, JPM's Marko Kolanovic said it was time to buy the dip, the second week in a row the bank urged clients to do just that), JPMorgan said global company earnings will defy doomsayers and skeptics once again this season and surprise to the upside - a view at odds with recent warnings that inflation, rising rates, supply chain bottlenecks and slowing economic growth will curb companies’ prospects following last year’s blockbuster earnings growth.

Ironically, it was JPMorgan's earnings that sent the Dow sliding on Friday: Wall Street banks kicked off the earnings season with mixed results last week, disappointing investors and tamping down some profit expectations for this year.

“Given the record inflation backdrop and historically tight labor market, investor focus is on margins -- demonstrating pricing power, passing on rising costs to the customer,” Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, wrote in a note.

European equities returning toward session highs after initially fading opening gains in a choppy start to the week. Euro Stoxx 50 gains as much as 0.7%. FTSE 100 and IBEX avoid the early fade seen in other equity indexes. Media, consumer products, tech and miners are the strongest sectors.  Among individual movers on Monday, Unilever Plc shares fell more than 7%, while GlaxoSmithKline Plc rose, as the consumer-products company considers making a higher offer for Glaxo’s consumer unit. Equipment maker BE Semiconductor rose to the highest since the stock’s 1995 listing after Oddo and Deutsche Bank boosted their price targets. In corporate developments, Credit Suisse Group AG’s Chairman Antonio Horta-Osorio was ousted for breaching Covid quarantine rules, throwing the Swiss financial giant into fresh turmoil as it struggles to emerge from a series of scandals.

Here are some of the biggest European movers today:

  • Stadler Rail surges as much as 8%, their best day since March 2020, following a contract win. The announcement of the company’s largest-ever contract marks “another major success,” Vontobel says.
  • Equipment maker BE Semiconductor rises as much as 6.3% to EU88.34 in Amsterdam trading, hitting the highest since the stock’s 1995 listing, after Oddo and Deutsche Bank boosted their price targets.
  • Siltronic declines as much as 11% after the company cast doubt on the planned $5.3b takeover by Taiwan’s GlobalWafers, saying the German Economy Ministry’s feedback so far was opaque and offered no clear resolution on how to win approval for the deal.
  • Ageas falls as much as 12%, the most since April 2020, after Belgium’s Federal Holding and Investment Company (FPIM) acquired a 6.3% stake in the reported takeover target.
  • Darktrace drops as much as 8.1% after the Telegraph reported Shadowfall is shorting the cybersecurity software firm.
  • Maersk slides as much as 6%, adding to Friday’s 4.4% tumble, after Nordea downgraded the Danish shipping firm to hold from buy, saying the exceptional demand situation will normalize in 2023.
  • Credit Suisse falls as much as 2.2% in Zurich after the Swiss bank ousted its chairman, leaving a number of analysts questioning the bank’s leadership.

Earlier in the session, Asian stocks fell as China’s economic data showed a slowdown in growth during the last quarter, with the nation’s central bank cutting a key interest rate for the first time in almost two years. The MSCI Asia Pacific Index dropped as much as 0.4%, slipping for a third session amid a slump in financials and materials. Mainland China’s CSI 300 Index closed up less than 1% after the People’s Bank of China cut two policy interest rates. China’s economy grew 4% in the final quarter of 2021 from a year earlier, a pace slower than during the previous three months. “The market seems to be unimpressed by GDP data and the rate cut because they probably anticipated more policy support,” said Margaret Yang, strategist at DailyFX. “The main concerns remain property and loan curbs, the ‘zero-Covid’ policy and a weak consumer market.” Benchmarks in Vietnam and South Korea were among the biggest decliners in the region. The Kospi lost more than 1% before a retail subscription for LG Energy Solution’s share float, the largest in the country’s history. Tencent and Meituan were among the biggest drags on the MSCI Asia Pacific Index. Asian stocks have outperformed their U.S. and European peers so far this year on cheaper valuations, as well as expectations that the worst of China’s tech clampdown has passed and confidence the region can quell omicron waves with timely social-distancing curbs. Tighter U.S. monetary policy is, however, weighing on regional shares and heavyweight tech stocks.

In FX, the Bloomberg Dollar Spot Index was little changed and the dollar was steady to weaker against all Group-of-10 peers apart from the yen; most currencies were confined in a narrow range with U.S. financial markets shut for a holiday. The euro inched up after testing the $1.14 handle and bund yields rose, led by the long end. Money markets today briefly wagered on 10-basis-points of ECB tightening as soon as September, the first time a move that month has been seen since before the omicron coronavirus variant roiled markets. The Canadian dollar and the Norwegian krone rose as Brent oil traded near the highest intraday level since 2014; the market tightened amid concerns about the impact of omicron eased. Norway’s exports surged to a record last year, helped by higher demand for fossil fuels, fish and metals. The pound was steady, with market focus on labor market and inflation data due later this week. Gilts yields rose by 3-4bps across the curve. The Bank of England is likely to hike its key rate at its next meeting, according to the median of a poll of economists. The yen weakened from the strongest in a month after hawkish comments from Fed officials on Friday spurred buying back of dollars; bonds stayed in a narrow range before a BOJ policy decision Tuesday. Overnight volatility in the yen remains subdued even amid speculation the Bank of Japan could change its view on price risks for the first time since 2014 when it sets policy on Tuesday.

In rates, Bunds and gilt curves bear steepen; gilts 1-2bps cheaper to bunds across the curve. Peripheral spreads tighten with 5y Italy outperforming. Money markets briefly price in 10bps of tightening by September before fading. Cash USTs stay closed for U.S. holiday but futures suggest the 10Y yield is currrently around 1.82% (see chart above).

In commodities, WTI back off Asia’s best levels to trade near $84, Brent is flat near $86. Spot gold drifts around the middle of Friday’s range close to $1,821/oz. Most base metals are in the red with LME nickel and copper underperforming.

There is nothing on the US economic calendar as the US is closed for MLK Day.

Top Overnight News from Bloomberg

  • China’s central bank cut its key interest rate for the first time in almost two years to help bolster an economy that’s lost momentum because of a property slump and repeated virus outbreaks
  • China’s population crisis continued to worsen in 2021, with the latest birth figures again sliding despite government efforts to encourage families to have more children
  • Boris Johnson faces another bruising week, with his future as U.K. prime minister in the balance amid a furious public backlash over rule-breaking parties at his Downing Street office
  • Governor Haruhiko Kuroda starts his last full year at the helm of Bank of Japan amid hints of public discontent over rising prices that could shape the direction of the central bank after he leaves or even as soon as coming months
  • Emerging-market central banks were the first in the world to raise interest rates from their pandemic lows last year. That proactive tightening is starting to pay off big time in boosting returns from their local bonds
  • As U.S. President Joe Biden’s administration looks to deter Russia from invading Ukraine, doubts are being raised about Germany’s readiness to confront President Vladimir Putin. When Foreign Minister Annalena Baerbock travels to Russia this week, her task will be to demonstrate that any questions over the new Berlin government’s resolve are misplaced

A more detailed look at global markets courtesy of Newqsuawk

Major bourses in Europe have kicked off the week mostly positive (Euro Stoxx 50 +0.5%; Stoxx 600 +0.4%) following a similar handover from the APAC session, which derived some support from Wall Street’s recovery on Friday – with US cash markets closed today for Martin Luther King Day. US futures see a holiday-shortened session but trade with little conviction in early European hours and within narrow parameters, albeit off the worst levels printed overnight. Back to Europe, a divergence is evident between the EUR-bourses (namely the AEX) and the non-EUR indices amid one main factor: Monday M&A which saw GSK (+4.7%) rejecting Unilever’s (-6.8%) GBP 50bln bid for GSK’s Consumer Health unit, with some reports suggesting the latter could up the offer to some GBP 60bln. This in turn jolted the Healthcare sector at the open (GSK accounts for around 9%) whilst the Personal and Household Goods sector is simultaneously pressured (Unilever accounts for around 13.5%) – thus underpinning the FTSE 100 (+0.7%) and the SMI (+0.6%) while the AEX (-0.6%) sits as the regional laggard. Delving deeper into the sectors, Basic Resources resides as one of the top performers as base metals are buoyed by China topping GDP growth expectations. Autos and Oil & Gas sit towards the bottom, with the latter seeing oil prices wane off best levels throughout the morning. In terms of individual movers, Credit Suisse (-1.2%) is weighed on after Chairman Antonio Horta-Osorio resigned with immediate effect after an internal company probe found he had broken the UK's Covid-19 quarantine rules in July. Darktrace (-4.5%) is lower as short-seller ShadowFall criticised the Co's performance, accounting and culture. ShadowFall confirmed that it had placed a bet against Darktrace in October, although the size was not disclosed. Siltronic (-7.0%) slumps as key requirements are still outstanding with regards to Germany's approval of the Co's sale to Taiwan's GlobalWafers. EDF (-2.1%) feels no reprieve as it cut output at its 1.3GW French oil and gas plant amid strikes, whilst the firm was also downgraded at HSBC. Looking at analyst commentary, Credit Suisse said value stocks usually see outperformance as yields rise, and the bank remains overweight Europe, UK and Japan. From a sectorial standpoint, Credit Suisse remains overweight on Financials, Mining, and Construction Materials, whilst the bank suggests it is too early to add tech. The bank suggests that yields in the 2-2.5% region will pose problems for equities as earnings, growth, fund flows and corporate purchases will be impacted.

In FX, the Dollar is waning again and the index is only just holding above 95.000 within a 95.291-035 band by virtue of upside in Usd/Jpy amidst firmer US Treasury yields and a steeper curve in wake of more hawkish Fed rhetoric via Williams as the last official speaker before the pre-January FOMC blackout. Meanwhile, the Yen has failed to glean full benefit from upbeat Japanese data in the form of machinery orders on the eve of the BoJ amidst reports that Tokyo and surrounding areas could be on the brink of entering quasi-emergency status due to the ongoing spread of COVID. However, the headline pair faces resistance above 114.50 via a Fib retracement level (114.58 representing 38.2% of the retreat from 116.35 to 113.48 this month) and 21 DMA (114.86), while nearest support is at the 50 DMA (114.27) and not far from decent option expiry interest (1 bn at 114.20). Note, thinner than average volumes, even for a Monday given MLK Day in the US.

  • CAD/NZD/CHF/EUR/AUD/GBP - While the Yen lags and Greenback flags, firm crude prices are underpinning the Loonie ahead of Canadian manufacturing sales and the BoC’s Business Outlook Survey that will be eyed for any early signs of adverse impact from the Omicron outbreak. Usd/Cad is currently towards the base of a 1.2508-57 range, while Nzd/Usd and Aud/Usd are hovering on 0.6800 and 0.7200 respective handles, but the Kiwi is marginally outperforming the Aussie against the backdrop of weakness in metals and mixed Chinese data. Aud/Nzd has been mostly a fraction under 1.0600 awaiting NZIER consumer sentiment in advance of electronic card retail sales, Aussie jobs and NZ manufacturing PMI later in the week. Elsewhere, the Franc has rebounded from sub-0.9150 and is firmer against the Euro between 1.0445-28 parameters even though weekly Swiss sight deposits indicate more SNB intervention, while Eur/Usd is contained within 1.1400-34 bounds and Cable is meandering from 1.3662-90 in the run up to a trio of top tier UK releases, including employment and earnings, inflation and retail sales.
  • SCANDI/EM - The Nok and Sek are pivoting 10.0000 and 10.3000 vs the Eur without too much reaction to Norway's trade surplus widening significantly to Nok 100+ bn, or Sweden’s mini budget showing Sek 18 bn set aside for pandemic-related measures, but the Cnh and Cny are both maintaining momentum around 6.3500 against the Usd following the aforementioned contrasting Chinese macro releases whereby GDP and IP beat consensus, but retail sales missed, plusPBoC easing via 10 bp reductions in the 1 year MLF and 7 day reverse repo. Conversely, the Rub continues to suffer from geopolitical and diplomatic angst as NATO pledges to reinforce Eastern members of the organisation if Russia decides to attack Ukraine.

In commodities, WTI and Brent front-month futures trade with no conviction but hold onto Friday’s gains, whilst overnight price action saw the latter reach prices last seen in 2014. The complex is underpinned by the mild upside bias across stocks, coupled with reopening vibes, geopolitical risk premia and the inability for some OPEC producers to ramp up output. To elaborate, weekend news flow regarding COVID was more sanguine from Europe, with nations set to ease COVID rules, albeit China’s Beijing city moves the other way amid its zero-COVID policy ahead of the winter Olympics. Geopolitical updates have been abundant, with the Russia/Ukraine situation tensions still heightened, while North Korea launched more projectiles. Further, Emirates News Agency noted three oil tanker explosions in the Al-Musaffah area in Abu Dhabi – potentially via drones emanating from Yemeni Houthis. Finally, reports via Argus Media on Friday suggested "The 19 Opec+ countries participating in the production restraint deal hiked their collective output by just 300k BPD in December, according to Argus' survey.”, suggesting the producers were around 650k BPD below their targets. WTI and Brent remain not far off the USD 84/bbl and USD 86/bbl marks respectively, with eyes on any further measures implemented by large oil consumers (such as the US and China) to reign in prices and avoid a larger knock-on effect on inflation. Elsewhere, spot gold is uneventful and trades around USD 1,820/oz mark – under the USD 1,830/oz resistance zone and above the 21 DMA at USD 1,802/oz. LME copper meanwhile was on a firmer footing following the Chinese GDP metrics overnight but has given up its earlier gains in early European hours with prices inching back towards USD 9,500/t.

DB's Jim Reid concludes the overnight wrap

Hope you had a good weekend. Fog and a very bad back stopped me golfing and I went swimming with the family instead. Two 12 year old boys clattered into me in the pool as they were involved in a horrendously aggressive play fight. I was furious as I got a good whack, and was about to give the man looking after them a piece of my mind, when I realised they were identical twins. My anger immediately turned to sympathy and when the Dad came over to apologise I said that I fully understood. Mine are only 4 and they wrestle, punch, slap, and trip each other up all the time. I thought they'd grow out of this but if these 12 years old boys were anything to go by I'm now very worried.

Talking of fights, it's becoming increasingly clear that 2022 is going to be a year where it's all about the battle between the Fed and financial conditions. After paying lip service to inflation for most of 2021, they have now got the bit between their teeth and in my opinion every meeting after March is live from a policy perspective. So if financial conditions don't tighten then we could have 7 hikes given how far behind the curve the Fed is on inflation. However a more likely outcome is that the Fed will be more measured as consistent rate hikes will probably lead to occasion market wobbles and gaps between the hikes. We will see. The other thing to look out for is a potential 50bps hike along the way and even as the opening gambit in March. This might feel fanciful but remember that since June, the pricing of various Fed Funds and taper/QT landmarks have repeatedly gone from zero to probable in relatively short order.

Our head of global economics Peter Hooper published a "What's in the tails?" piece last night looking at how there is an increasing risk that the Fed may want to move more quickly to neutral and even toward a restrictive monetary policy stance. He outlines what scenarios would need to happen for such an outcome. So while the team keep their 4 rate hikes and QT central view, they are acknowledging the upside risks to this. See the piece here.

After a late and notably bond sell off on Friday, that helped 10yr Treasury yields to end the week at fresh 2-year highs, markets will get some breathing space today with a US holiday and a Fed that are in their blackout period ahead of next week's FOMC.

 

The week has kicked off with China's monthly data dump but the PBOC upstaged this by surprisingly cutting rates on its medium term loans ahead of the GDP release. In the first move since April 2020, the PBOC lowered its one-year medium term lending facility (MLF) rate by 10bps to 2.85% from 2.95% and slashed the seven-day repurchase rate to 2.1% from 2.2%. Additionally, the central bank injected 700 bn yuan ($110 bn) worth of liquidity via the MLF and added 100 billion yuan of liquidity via reverse repos. Separately, data showed Q4 GDP expanded +4.0% y/y beating Bloomberg forecast of 3.3%. However, the rise was more muted in the last three months (+4.9%) as a real estate downturn combined with strict Covid-19 curbs hit activity.

Other economic data showed that industrial production in China jumped by +4.3% in December from a year ago surpassing market expectations of a +3.7% growth. In addition to this, Fixed asset investment for 2021 advanced by +4.9%, topping market expectations for +4.8% rise. However, retail sales missed expectations (+3.8%) with only a +1.7% gain in December from a year earlier, its slowest increase since August 2020.

In early trade today, markets across Asia are off to a cautious start. Japan's Nikkei (+0.84%) is inching higher, recouping losses from the previous two sessions, with the CSI (+0.86%) and Shanghai Composite (+0.59%) trading in positive territory. Elsewhere, the Kospi (-1.34%) and Hang Seng (-0.59%) are losing ground. In other data news, Japan's core machinery orders grew +3.4% in November (+3.8% last month), rising for the second straight month, suggesting a decent private demand-led recovery in the world's third-biggest economy.

In terms of the rest of the week, earnings season will begin to gather some momentum, with 39 S&P 500 companies reporting. Elsewhere the Bank of Japan will be making its latest monetary policy decision tomorrow which is unlikely to see much change now but reputable press reports are suggesting they are ready to become more hawkish in the coming months with a credible Reuters story late last week suggested they are prepared to raise rates before inflation reaches 2%. This is still someway off but if the BoJ can become more hawkish then that says something about the global direction of travel for monetary policy.

Otherwise on the data front, there’ll be further developments on inflation as the UK releases its CPI print for December, with our economist expecting a further rise to +5.3% on a year-on-year basis. If realised, that would be the highest CPI print since March 1992. That’ll also be the last CPI reading ahead of the BoE’s next policy decision on February 3, where our economist is expecting a further 25 basis point hike.

In terms of more details on earnings season, with 39 S&P 500 companies reporting ahead of the two peak weeks, the highlights are Goldman Sachs and BNY Mellon tomorrow, before we hear from UnitedHealth Group, Bank of America, Procter & Gamble, ASML, Morgan Stanley, Charles Schwab, US Bancorp and United Airlines on Wednesday. Finally on Thursday, there’s reports from Netflix, Union Pacific and American Airlines Group. For those interested, DB's asset allocation team have put out a Q4 earnings preview (link here).

Recapping last week now, global sovereign yields drifted lower most of the week after ripping higher to start the year. However a sizable selloff on Friday took us to fresh 2 year yield highs. Equity markets ended the week lower but enjoyed some respite from the otherwise torrid start to the year.

Diving in, there was a chorus of Fed speakers this week ahead of their January FOMC communications blackout. Foremost among them, Chair Powell and Governor Brainard testified before the Senate Banking Committee as part of their hearings for respective (re)nominations as Chair and Vice Chair of the Fed. They set the tone that was broadly echoed by other Governors and regional Presidents over the week: the first rate hike was likely coming in March (in line with our US economists expectations), and QT would be employed sometime in 2022 to fight inflation. We ended the week with a 97% probability of a March hike, the highest this cycle, and 2 full hikes priced by the June FOMC. Our economists are expecting 4 rate hikes this year, in addition to QT beginning, and the market is currently pricing around 3.8 hikes through the year.

The growing consensus around earlier Fed tightening lifted 2yr treasury yields +10.5bps this week, most of it via a +7.4bps increase on Friday. Farther out the curve, 10yr treasury yields were a bit calmer compared to the week before, ending the week +2.2bps higher (+8.0bps Friday) after drifting lower most of the week before a sharp end week sell-off. In Europe, 10yr bunds and gilts fell a modest -0.3bps (+4.4bps Friday) and -2.8bps (+4.5bps Friday) respectively but closed before the last leg of the US bond sell off.

The S&P 500 managed its first consecutive days of increases in 2022 last week, but still fell -0.30% on the week (+0.08% Friday), bringing it -2.17% lower to start the year. European equities were not spared, with the STOXX 600 falling -1.05% (-1.01% Friday), the DAX down -0.40% (-0.93% Friday) and the CAC lower by -1.06% (-0.81% Friday). Higher real 10yr treasury yields have been a big culprit so far, having increased an additional +7.2bps this week (+7.6bps Friday) to -0.70%, their highest level since April. However they were at -0.88bp late on Wednesday so a pretty choppy week. Risk sentiment was also likely impacted by geopolitics. In particular, the talks between US, its NATO allies, and Russia proving less-than-optimal.

Crude oil had another strong week, with Brent increasing +5.77% (+2.41% Friday) and WTI up +6.81% (+2.60% Friday). Oil is once again making a strong bid to be the best performing asset in 2022, with both Brent and WTI up over +10% to start the year. US earnings season kicked off with releases from major financials, JPM, Wells Fargo, and Blackrock. The two banks beat sales and revenue expectations but had below consensus revenues stemming from FICC trading. Blackrock posted higher earnings but lower sales per share than expected.

Turning to data, despite shrinking in Q4, German GDP grew 2.7 percent over 2021, driven by strong government spending, net exports, and investment. Private consumption was stagnant as real disposable income fell with rising prices.

US CPI reached 7.0 percent year-over-year in December, in line with expectations and the highest level since 1982. Core CPI increased 5.5 percent, year-over-year, slightly higher than consensus expectations. Price increases were broad-based across components. US retail sales declined -1.9 percent month-over-month in December, well below consensus expectations, perhaps a reflection of US consumers bringing holiday shopping forward to avoid any supply chain-driven delays.

Tyler Durden Mon, 01/17/2022 - 08:32

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S&P Futures Jump Above 4,000 As Fed Fears Fade

S&P Futures Jump Above 4,000 As Fed Fears Fade

After yesterday’s post-FOMC ramp which sent stocks higher after the Fed’s Minutes were…

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S&P Futures Jump Above 4,000 As Fed Fears Fade

After yesterday's post-FOMC ramp which sent stocks higher after the Fed's Minutes were less hawkish than feared and also hinted at a timeline for the Fed's upcoming pause (and easing), US index futures initially swung between gains and losses on Thursday as investors weighed the "good news" from the Fed against downbeat remarks on the Chinese economy from premier Li who warned that China would struggle to post a positive GDP print this quarter coupled with Apple’s conservative outlook. Eventually, however, bullish sentiment prevailed and even with Tech stocks underperforming following yesterday's disappointing earnings from Nvidia, e-mini futures rose to session highs as of 715am, and traded up 0.6% above 4,000 for the first time since May 18, while Nasdaq 100 futures were up 0.2% after earlier dropping as much as 0.8%. The tech-heavy index is down 27% this year. Treasury yields and the dollar slipped. Fed policy makers indicated their aggressive set of moves could leave them with flexibility to shift gears later if needed.

Investors took some comfort from the Fed minutes that didn’t show an even more aggressive path being mapped to tackle elevated prices, though central banks remain steadfast in their resolve to douse inflation. Still, volatility has spiked as the risk of a US recession, the impact from China’s lockdowns and the war in Ukraine simmer.

While the Fed minutes “provided investors with a temporary relief, today’s mixed price action on stocks mostly shows that major bearish leverages linger,” said Pierre Veyret, a technical analyst at ActivTrades in London. “The war in eastern Europe and concerns about the Chinese economy still add stress to market sentiment,” he wrote in a report. “Investors will want to see evidence of improvements regarding the pressure coming from rising prices.”

“We expect key market drivers to continue to be centered around inflation and how central banks react; global growth concerns and how China gets to grip with its zero-Covid policy; and the geopolitical conflict between Russia and Ukraine,” said Fraser Lundie, head of fixed income for public markets at Federated Hermes Limited. “Positive news flow on any of these market drivers could sharply improve risk sentiment; however, there is a broad range of scenarios that could play out in the meantime.”

In premarket trading, shares in Apple dropped 1.4% after a report said that the tech giant is planning to keep iPhone production flat in 2022, disappointing expectations for a ~10% increase. The company also said it was raising salaries in the US by 10% or more as it faces a tight labor market and unionization efforts. In other premarket moves, Nvidia dropped 5.3% as the biggest US chipmaker by market value gave a disappointing sales forecast. Software company Snowflake slumped 14%, while meme stock GameStop Corp. fell 2.9%. Among gainers, Twitter Inc. jumped 5.2% after billionaire Elon Musk dropped plans to partially fund his purchase of the company with a margin loan tied to his Tesla stake and increased the size of the deal’s equity component to $33.5 billion. Other notable premarket movers include:

  • Shares of Alibaba and Baidu rise following results, sending other US-listed Chinese stocks higher in US premarket trading. Alibaba shares shot up as much as 4.5% after reporting fourth- quarter revenue and earnings that beat analyst expectations.
  • Lululemon’s (LULU US) stock gains 2.4% in premarket trading as Morgan Stanley raised its recommendation to overweight, suggesting that the business can be more resilient through headwinds than what the market is expecting.
  • Macy’s (M US) shares gain 15% in premarket trading after Co. increases its adjusted earnings per share guidance for the full fiscal year
  • Williams-Sonoma (WSM US) shares jumped as much as 9.6% in premarket trading after 1Q sales beat estimates. The retailer was helped by its exposure to more affluent customers, but analysts cautioned that it may be difficult to maintain the sales momentum amid macroeconomic challenges.
  • Nutanix (NTNX US) shares shed about a third of their value in US premarket trading as analysts slashed their price targets on the cloud platform provider after its forecast disappointed.
  • US airline stocks rise in premarket trading on Thursday, after Southwest and JetBlue provided upbeat outlooks for the second-quarter. LUV up 1.5% premarket, after raising its second-quarter operating revenue growth forecast. JBLU up 2% after saying it expects second-quarter revenue at or above high end of previous guidance.
  • Cryptocurrency-tied stocks fall in premarket trading as Bitcoin snaps two days of gains. Coinbase -2.6%; Marathon Digital -2.3%; Riot Blockchain -1.2%. Bitcoin drops 1.9% at 6:11 am in New York, trading at $29,209.88.

It’s time to buy the dip in stocks after a steep global selloff in equity markets, according to Citi strategists. Meanwhile, Fidelity International Chief Executive Officer Anne Richards said the risk of a recession has increased and markets are likely to remain volatile, the latest dire warning on the outlook at the World Economic Forum.

“If inflation gets tame enough over summer, there may not be continued raising of rates,” Carol Pepper, Pepper International chief executive officer, said on Bloomberg TV, adding that investors should look to buy tech stocks after the selloff. “Stagflation, I just don’t think that’s going to happen anymore. I think we are going to be in a situation where inflation will start tapering down and then we will start going into a more normalized market.”

In Europe, the Stoxx Europe 600 Index rose 0.3%, pare some of their earlier gains but remain in the green, led by gains for retail, consumer and energy stocks. IBEX outperforms, adding 0.6%, FTSE MIB is flat but underperforms peers. Retailers, energy and consumer products are the strongest-performing sectors, with energy shares outperforming for the second day as oil climbed amid data that showed a further decrease in US crude and gasoline stockpiles. Here are the most notable European movers:

  • Auto Trader rises as much as 3.5% after its full-year results beat consensus expectations on both top- and bottom-lines.
  • Galp climbs as much as 4.1% as RBC upgrades to outperform, saying the stock might catch up with the rest of the sector after “materially” underperforming peers in recent years.
  • Rightmove rises as much as 1.5% after Shore upgrades to hold from sell, saying the stock has reached an “appropriate” level following a 27% decline this year.
  • FirstGroup soars as much as 16% after the bus and train operator said it received a takeover approach from I Squared Capital Advisors and is currently evaluating the offer.
  • United Utilities declines as much as 8.9% as company reports a fall in adjusted pretax profit. Jefferies says full-year guidance implies a materially-below consensus adjusted net income view.
  • Johnson Matthey falls as much as 7.5% after the company reported results and said it expects operating performance in the current fiscal year to be in the lower half of the consensus range.
  • BT drops as much as 5.7% after the telecom operator said the UK will review French telecom tycoon Patrick Drahi’s increased stake in the company under the National Security and Investment Act.
  • JD Sports drops as much as 12% as the departure of Peter Cowgill as executive chairman is disappointing, according to Shore Capital.

Earlier in the session, Asian stocks were mixed as traders assessed China’s emergency meeting on the economy and Federal Reserve minutes that struck a less hawkish note than markets had expected.  The MSCI Asia Pacific Index was little changed after fluctuating between gains and losses of about 0.6% as technology stocks slid. South Korean stocks dipped after the central bank raised interest rates by 25 basis points as expected. Chinese shares eked out a small advance after a nationwide emergency meeting on Wednesday offered little in terms of additional stimulus. The benchmark CSI 300 Index headed for a weekly drop of more than 2%, despite authorities’ vows to support an economy hit by Covid-19 lockdowns. Investors took some comfort from Fed minutes in which policy makers indicated their aggressive set of moves could leave them with flexibility to shift gears later if needed. Still, Asia’s benchmark headed for a weekly loss amid concerns over China’s lockdowns and the possibility of a US recession.

“The coming months are ripe for a re-pricing of assets across the board with a further shake-down in risk assets as term and credit premia start to feature prominently,” Vishnu Varathan, the head of economics and strategy at Mizuho Bank, wrote in a research note. 

Japanese stocks closed mixed after minutes from the Federal Reserve’s latest policy meeting reassured investors while Premier Li Keqiang made downbeat comments on China’s economy. The Topix rose 0.1% to close at 1,877.58, while the Nikkei declined 0.3% to 26,604.84. Toyota Motor Corp. contributed the most to the Topix gain, increasing 1.9%. Out of 2,171 shares in the index, 1,171 rose and 898 fell, while 102 were unchanged.

In Australia, the S&P/ASX 200 index fell 0.7% to close at 7,105.90 as all sectors tumbled except for technology. Miners contributed the most to the benchmark’s decline. Whitehaven slumped after peer New Hope cut its coal output targets. Appen soared after confirming a takeover approach from Telus and said it’s in talks to improve the terms of the proposal. Appen shares were placed in a trading halt later in the session. In New Zealand, the S&P/NZX 50 index fell 0.6% to 11,102.84.

India’s key stock indexes snapped three sessions of decline to post their first advance this week on recovery in banking and metals shares. The S&P BSE Sensex rose 0.9% to 54,252.53 in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. Both benchmarks posted their biggest single-day gain since May 20 as monthly derivative contracts expired today. All but one of the 19 sector sub-indexes compiled by BSE Ltd. gained.  HDFC Bank and ICICI Bank provided the biggest boosts to the two indexes, rising 3% and 2.2%, respectively. Of the 30 shares in the Sensex, 24 rose and 6 fell. As the quarterly earnings season winds up, among the 45 Nifty companies that have so far reported results, 18 have trailed estimates and 27 met or exceeded expectations. Aluminum firm Hindalco Industries is scheduled to post its numbers later today.

In FX, the Bloomberg Dollar fell 0.3%, edging back toward the lowest level since April 26 touched Tuesday. The yen jumped to an intraday high after the head of the Bank of Japan said policymakers could manage an exit from their decades-long monetary policy, and that U.S. rate rises would not necessarily keep the yen weak. Commodity currencies including the Australian dollar fell as China’s Premier Li Keqiang offered a bleak outlook on domestic growth. The Chinese economy is in some respects faring worse than in 2020 when the pandemic started, he said.

Central banks were busy overnight:

  • Russia’s central bank delivered its third interest-rate reduction in just over a month and said borrowing costs can fall further still, as it looks to stem a rally in the ruble and unwinds the financial defenses in place since the invasion of Ukraine.
  • The Bank of Korea raised its key interest rate on Thursday as newly installed Governor Rhee Chang-yong demonstrated his intention to tackle inflation at his first policy meeting since taking the helm. New Zealand’s central bank has also shown its commitment this week to combat surging prices.

In rates, Treasuries bull-steepen amid similar price action in bunds and many other European markets and gains for US equity index futures. Yields richer by ~3bp across front-end of the curve, steepening 2s10 by ~2bp, 5s30s by ~3bp; 10-year yields rose 2bps to 2.76%, keeps pace with bund while outperforming gilts. 2- and 5-year yields reached lowest levels in more than a month, remain below 50-DMAs. US auction cycle concludes with 7-year note sale, while economic data includes 1Q GDP revision. Bund, Treasury and gilt curves all bull-steepen. Peripheral spreads tighten to Germany with 10y BTP/Bund narrowing 5.1bps to 194.6bps.

The US weekly auction calendar ends with a $42BN 7-year auction today which follows 2- and 5-year sales that produced mixed demand metrics, however both have richened from auction levels. WI 7-year yield at ~2.735% is ~17bp richer than April’s, which tailed by 1.7bp. IG dollar issuance slate includes Bank of Nova Scotia 3Y covered SOFR; issuance so far this week remains short of $20b forecast, is expected to remain subdued until after US Memorial Day.

In commodities,  WTI trades within Wednesday’s range, adding 0.6% to around $111. Spot gold falls roughly $7 to trade around $1,846/oz. Cryptocurrencies decline, Bitcoin drops 2.5% to below $29,000. 

Looking at the day ahead now, and data releases from the US include the second estimate of Q1 GDP, the weekly initial jobless claims, pending home sales for April, and the Kansas City Fed’s manufacturing index for May. Meanwhile in Italy, there’s the consumer confidence index for May. From central banks, we’ll hear from Fed Vice Chair Brainard, the ECB’s Centeno and de Cos, and also get decisions from the Central Bank of Russia and the Central Bank of Turkey. Finally, earnings releases include Costco and Royal Bank of Canada.

Market Snapshot

  • S&P 500 futures little changed at 3,974.25
  • STOXX Europe 600 up 0.2% to 435.16
  • MXAP little changed at 163.17
  • MXAPJ down 0.3% to 529.83
  • Nikkei down 0.3% to 26,604.84
  • Topix little changed at 1,877.58
  • Hang Seng Index down 0.3% to 20,116.20
  • Shanghai Composite up 0.5% to 3,123.11
  • Sensex up 0.4% to 53,975.57
  • Australia S&P/ASX 200 down 0.7% to 7,105.88
  • Kospi down 0.2% to 2,612.45
  • German 10Y yield little changed at 0.90%
  • Euro little changed at $1.0679
  • Brent Futures up 0.5% to $114.55/bbl
  • Gold spot down 0.3% to $1,847.94
  • U.S. Dollar Index little changed at 102.11

Top Overnight News from Bloomberg

  • Federal Reserve officials agreed at their gathering this month that they need to raise interest rates in half-point steps at their next two meetings, continuing an aggressive set of moves that would leave them with flexibility to shift gears later if needed.
  • Russia’s central bank delivered its third interest-rate reduction in just over a month and said borrowing costs can fall further still, halting a rally in the ruble as it unwinds the financial defenses in place since the invasion of Ukraine.
  • China’s trade-weighted yuan fell below 100 for the first time in seven months as Premier Li Keqiang’s bearish comments added to concerns that the economy may miss its growth target by a wide margin this year.
  • Bank of Japan Governor Haruhiko Kuroda said interest rate increases by the Federal Reserve won’t necessarily cause the yen to weaken, saying various factors affect the currency market.

A more detailed breakdown of global markets courtesy of Newsquawk

Asia-Pac stocks were indecisive as risk appetite waned despite the positive handover from Wall St where the major indices extended on gains post-FOMC minutes after the risk event passed and contained no hawkish surprises. ASX 200 failed to hold on to opening gains as weakness in mining names, consumer stocks and defensives overshadowed the advances in tech and financials, while capex data was mixed with the headline private capital expenditure at a surprise contraction for Q1. Nikkei 225 faded early gains but downside was stemmed with Japan set to reopen to tourists on June 6th. Hang Seng and Shanghai Comp were mixed with early pressure after Premier Li warned the economy was worse in some aspects than in 2020 when the pandemic began, although he stated that China will unveil detailed implementation rules for a pro-growth policy package before the end of the month, while the PBoC issued a notice to promote credit lending to small firms and the MoF announced cash subsidies to Chinese airlines.

Top Asian News

  • PBoC issued a notice to promote credit lending to small firms and is to boost financial institutions' confidence to lend to small firms, according to Reuters.
  • BoK raised its base rate by 25bps to 1.75%, as expected, via unanimous decision. BoK raised its 2022 inflation forecast to 4.5% from 3.1% and raised its 2023 forecast to 2.9% from 2.0%, while it sees GDP growth of 2.7% this year and 2.4% next year. BoK said consumer price inflation is to remain high in the 5% range for some time and sees it as warranted to conduct monetary policy with more focus on inflation, according to Reuters.
  • Morgan Stanley has lowered China's 2022 GDP estimate to 3.2% from 4.2%.
  • CSPC Drops After Earnings, Covid Impact to Weigh: Street Wrap
  • China Builder Greenland’s Near-Term Bonds Set for Record Drops
  • Debt Is Top Priority for Diokno as New Philippine Finance Chief

European bourses are firmer across the board, Euro Stoxx 50 +0.7%, but remain within initial ranges in what has been a relatively contained session with much of northern-Europe away. Stateside, US futures are relatively contained, ES +0.2%, with newsflow thin and on familiar themes following yesterday's minutes and before PCE on Friday.  Apple (AAPL) is reportedly planning on having a 220mln (exp. ~240mln) iPhone production target for 2022, via Bloomberg. -1.4% in  the pre-market. Baidu Inc (BIDU) Q1 2022 (CNY): non-GAAP EPS 11.22 (exp. 5.39), Revenue 28.4bln (exp. 27.82bln). +4.5% in the pre-market. UK CMA is assessing whether Google's (GOOG) practises in parts of advertisement technology may distort competition.

Top European News

  • UK Chancellor Sunak's package today is likely to top GBP 30bln, according to sources via The Times; Chancellor will confirm that the package will be funded in part by windfall tax on oil & gas firms likely to come into effect in the autumn. Subsequently, UK Gov't sources are downplaying the idea that the overall support package is worth GBP 30bln, via Times' Swinford; told it is a very big intervention.
  • UK car production declined 11.3% Y/Y to 60,554 units in April, according to the SMMT.
  • British Bus Firm FirstGroup Gets Takeover Bid from I Squared
  • Citi Strategists Say Buy the Dip in Stocks on ‘Healthy’ Returns
  • The Reasons to Worry Just Keep Piling Up for Davos Executives
  • UK Unveils Plan to Boost Aviation Industry, Passenger Rights
  • Pakistan Mulls Gas Import Deal With Countries Including Russia

FX

  • Dollar drifts post FOMC minutes that reaffirm guidance for 50bp hikes in June and July, but nothing more aggressive, DXY slips into lower range around 102.00 vs 102.450 midweek peak.
  • Yen outperforms after BoJ Governor Kuroda outlines exit strategy via a combination of tightening and balance sheet reduction, when the time comes; USD/JPY closer to 126.50 than 127.50 where 1.13bln option expiries start and end at 127.60.
  • Rest of G10, bar Swedish Crown rangebound ahead of US data, with Loonie looking for independent direction via Canadian retail sales, USD/CAD inside 1.2850-00; Cable surpassing 1.2600 following reports that the cost of living package from UK Chancellor Sunak could top GBP 30bln.
  • Lira hits new YTD low before CBRT and Rouble weaker following top end of range 300bp cut from CBR.
  • Yuan halts retreat from recovery peaks ahead of key technical level, 6.7800 for USD/CNH.

Fixed Income

  • Debt wanes after early rebound on Ascension Day lifted Bunds beyond technical resistance levels to 154.74 vs 153.57 low.
  • Gilts fall from grace between 119.17-118.19 parameters amidst concerns that a large UK cost of living support package could leave funding shortfall.
  • US Treasuries remain firm, but off peaks for the 10 year T-note at 120-31 ahead of GDP, IJC, Pending Home Sales and 7 year supply.

Commodities

  • Crude benchmarks inch higher in relatively quiet newsflow as familiar themes dominate; though reports that EU officials are considering splitting the oil embargo has drawn attention.
  • Currently WTI and Brent lie in proximity to USD 111/bbl and USD 115/bbl respectively; within USD 1.50/bbl ranges.
  • Russian Deputy PM Novak expects 2022 oil output 480-500mln/T (prev. 524mln/T YY), via Ria.
  • Spot gold is similarly contained around the USD 1850/oz mark, though its parameters are modestly more pronounced at circa. USD 13/oz

Central Banks

  • CBR (May, Emergency Meeting): Key Rate 11.00% (exp. ~11.00/12.00%, prev. 14.00%); holds open the prospect of further reductions at upcoming meetings.
  • BoJ's Kuroda says, when exiting easy policy, they will likely combine rate hike and balance sheet reduction through specific means, timing to be dependent on developments at that point; FOMC rate hike may not necessarily result in a weaker JPY or outflows of funds from Japan if it affects US stock prices, via Reuters.

US Event Calendar

  • 08:30: 1Q PCE Core QoQ, est. 5.2%, prior 5.2%
  • 08:30: 1Q Personal Consumption, est. 2.8%, prior 2.7%
  • 08:30: May Continuing Claims, est. 1.31m, prior 1.32m
  • 08:30: 1Q GDP Price Index, est. 8.0%, prior 8.0%
  • 08:30: May Initial Jobless Claims, est. 215,000, prior 218,000
  • 08:30: 1Q GDP Annualized QoQ, est. -1.3%, prior -1.4%
  • 10:00: April Pending Home Sales YoY, est. -8.0%, prior -8.9%
  • 10:00: April Pending Home Sales (MoM), est. -2.0%, prior -1.2%
  • 11:00: May Kansas City Fed Manf. Activity, est. 18, prior 25

DB's Jim Reid concludes the overnight wrap

A reminder that our latest monthly survey is now live, where we try to ask questions that aren’t easy to derive from market pricing. This time we ask if you think the Fed would be willing to push the economy into recession in order to get inflation back to target. We also ask whether you think there are still bubbles in markets and whether equities have bottomed out yet. And there’s another on which is the best asset class to hedge against inflation. The more people that fill it in the more useful so all help from readers is very welcome. The link is here.

For markets it’s been a relatively quiet session over the last 24 hours compared to the recent bout of cross-asset volatility. The main event was the release of the May FOMC minutes, which had the potential to upend that calm given the amount of policy parameters currently being debated by the Fed. But in reality they came and went without much fanfare, and failed to inject much life into afternoon markets or the debate around the near-term path of policy. As far as what they did say, they confirmed the line from the meeting itself that the FOMC is ready to move the policy to a neutral position to fight the current inflationary scourge, with agreement that 50bp hikes were appropriate at the next couple of meetings. That rapid move to neutral would leave the Fed well-positioned to judge the outlook and appropriate next steps for policy by the end of the year, and markets were relieved by the lack of further hawkishness, with the S&P 500 extending its modest gains following the release to end the day up +0.95%.

As the Chair said at the meeting, and has been echoed by other Fed officials since, the minutes noted that the hawkish shift in Fed communications have already had a noticeable effect on financial conditions, with Fed staff pointing out that “conditions had tightened by historically large amounts since the beginning of the year.” Meanwhile on QT, which the Fed outlined their plans for at the May meeting, the minutes expressed some trepidation about market liquidity and potential “unanticipated effects on financial market conditions” as a result, but did not offer potential remedies.

With the minutes not living up to hawkish fears alongside growing concerns about a potential recession, investors continued to dial back the likelihood of more aggressive tightening, with Fed funds futures moving the rate priced in by the December meeting to 2.64%, which is the lowest in nearly a month and down from its peak of 2.88% on May 3. So we’ve taken out nearly a full 25bp hike by now, which is the biggest reversal in monetary policy expectations this year since Russia’s invasion of Ukraine began. That decline came ahead of the minutes and also saw markets pare back the chances of two consecutive +50bp hikes, with the amount of hikes priced over the next two meetings falling under 100bps for only the second time since the May FOMC. Yields on 10yr Treasuries held fairly steady, only coming down -0.5bps to 2.745%.

Ahead of the Fed minutes, markets had already been on track to record a steady performance, and the S&P 500 (+0.95%) extended its existing gains in the US afternoon. That now brings the index’s gains for the week as a whole to +1.98%, so leaving it on track to end a run of 7 consecutive weekly declines, assuming it can hold onto that over the next 48 hours, and futures this morning are only down -0.13%. That said, we’ve seen plenty of volatility in recent weeks, and after 3 days so far this is the first week in over two months where the S&P hasn’t seen a fall of more than -1% in a single session, so let’s see what today and tomorrow bring. In terms of the specific moves yesterday, it was a fairly broad advance, but consumer discretionary stocks (+2.78%) and other cyclical industries led the way, with defensives instead seeing a much more muted performance. Tech stocks outperformed, and the NASDAQ (+1.51%) came off its 18-month low, as did the FANG+ index (+1.99%).

Over in Europe, equities also recorded a decent advance, with the STOXX 600 gaining +0.63%, whilst bonds continued to rally as well, with yields on 10yr bunds (-1.5bps) OATs (-1.5bps) and BTPs (-2.7bps) all moving lower. These gains for sovereign bonds have come as investors have grown increasingly relaxed about inflation in recent weeks, with the 10yr German breakeven falling a further -4.2bps to 2.23% yesterday, its lowest level since early March and down from a peak of 2.98% at the start of May. Bear in mind that the speed of the decline in the German 10yr breakeven over the last 3-4 weeks has been faster than that seen during the initial wave of the Covid pandemic, so a big shift in inflation expectations for the decade ahead in a short space of time that’s reversed the bulk of the move higher following Russia’s invasion of Ukraine. Nor is that simply concentrated over the next few years, since the 5y5y forward inflation swaps for the Euro Area looking at inflation over the five years starting in five years’ time has come down from aa peak of 2.49% earlier this month to 2.07% by the close last night, so almost back to the ECB’s target. To be fair there’s been a similar move lower in US breakevens too, and this morning the 10yr US breakeven is down to a 3-month low of 2.56%.

That decline in inflation expectations has come as investors have ratcheted up their expectations about future ECB tightening. Yesterday, the amount of tightening priced in by the July meeting ticked up a further +0.2bps to 32.7bps, its highest to date, and implying some chance that they’ll move by more than just 25bps. We heard from a number of additional speakers too over the last 24 hours, including Vice President de Guindos who said in a Bloomberg interview that the schedule for rate hikes outlined by President Lagarde was “very sensible”, and that the question of larger hikes would “depend on the outlook”.

Overnight in Asia, equities are fluctuating this morning after China’s Premier Li Keqiang struck a downbeat note on the economy yesterday. Indeed, he said that the difficulties facing the Chinese economy “to a certain extent are greater than when the epidemic hit us severely in 2020”. As a reminder, our own economist’s forecasts for GDP growth this year are at +3.3%, which if realised would be the slowest in 46 years apart from 2020 when Covid first took off. Against that backdrop, there’s been a fairly muted performance, and whilst the Shanghai Composite (+0.65%) and the CSI 300 (+0.60%) have pared back initial losses to move higher on the day, the Hang Seng (-0.13%) has lost ground and the Nikkei (+0.07%) is only just in positive territory. We’ve also seen the Kospi (-0.08%) give up its initial gains overnight after the Bank of Korea moved to hike interest rates once again, with a 25bp rise in their policy rate to 1.75%, in line with expectations. That came as they raised their inflation forecasts, now expecting CPI this year at 4.5%, up from 3.1% previously. At the same time they also slashed their growth forecast to 2.7%, down from 3.0% previously.

There wasn’t much in the way of data yesterday, though we did get the preliminary reading for US durable goods orders in April. They grew by +0.4% (vs. +0.6% expected), although the previous month was revised down to +0.6% (vs. +1.1% previously). Core capital goods orders were also up +0.3% (vs. +0.5% expected).

To the day ahead now, and data releases from the US include the second estimate of Q1 GDP, the weekly initial jobless claims, pending home sales for April, and the Kansas City Fed’s manufacturing index for May. Meanwhile in Italy, there’s the consumer confidence index for May. From central banks, we’ll hear from Fed Vice Chair Brainard, the ECB’s Centeno and de Cos, and also get decisions from the Central Bank of Russia and the Central Bank of Turkey. Finally, earnings releases include Costco and Royal Bank of Canada.

Tyler Durden Thu, 05/26/2022 - 07:50

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Weekly investment update – Weaker economic outlook weighs on markets

Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing…

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Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing on earnings. Real bond yields, whose rise triggered the recent drop in equity markets, have fallen as investors price a higher probability of a recession.   

Yields of US Treasury bonds have slipped since reaching around 3.12% in early May (see Exhibit 1). The rally has been driven by fears of a global recession due to poor economic data, strong inflation numbers, aggressive talk from central bankers and concerns over the consequences of Covid in China.

Recent data that contributed to the bond market’s unease about the prospects for the US economy includes: 

  • The Richmond Federal Reserve Manufacturing survey, which fell to its lowest since 2020 at -9.
  • The monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York fell to -11.6, with the shipment measure falling at its fastest pace since the start of the pandemic two years ago.
  • The Federal Reserve Bank of Philadelphia’s May business index dropped 15 points to 2.6, with the six-month outlook falling to its lowest since December 2008 (though the underlying details were better than the headline number).
  • Existing and new home sales dropped for a third month, to its lowest since 2020, held back by lean inventory, rising prices and higher mortgage rates. 

Taken together, the various regional Federal Reserve surveys suggest that the ISM Report for Business may come in at around 53, above 50 so still clearly in expansion territory for the US economy, but down noticeably from the upper 50s/lows 60s readings to which markets have become accustomed.

US equities still weak

US equities have remained weak as the down move continues for its seventh week.

It has been apparent that, in contrast to the start of the year when rising real bond yields were undermining equity markets, it is now fears of falling earnings due to a weaker economy that are weighing on stocks.

The last week has seen, in accordance with the risk-off regime, more buying-the-dip and selling-the-rally. There has also been a rotation out of growth and cyclicals into value and defensives (healthcare, real estate, utilities and staples).

European markets under the cosh

Bearish sentiment is prevalent in Europe, too, with investors cutting exposures to European equities.

There was another outflow in the week to 18 May, taking the total to 14 weeks of outflows in a row. Cyclicals, in particular, saw strong outflows, led by the materials, financials and energy sectors.

Our multi-asset team are inclined to reduce exposure to equity markets given the deterioration in the outlook.

European economy resists

Economic activity indicators have fallen so far in May, but remain above 50. Activity edged up in the manufacturing sector despite the fallout from the Ukraine war and supply chain disruptions that have intensified with China’s coronavirus lockdowns.

Although factories continue to report widespread supply constraints and diminished demand for goods amid elevated price pressures, the eurozone economy is being boosted by pent-up demand for services as pandemic-related restrictions are wound down.

While purchasing manager indices are still pointing to growth, it may be that these surveys understate the shock to activity, while sentiment surveys likely overstate the shock. Markets are increasingly tilting towards anticipation of a contraction in the coming quarters.

Higher food prices

Restrictions on the export of Ukrainian cereals continue and risks increasing food insecurity as the UN World Food Programme has highlighted.

As much of Russian and Ukrainian wheat goes to poorer nations, hunger could be a critical risk, driving up political instability.

The risk of further rises in food prices will be a key driver of inflation, particularly in emerging markets, the worst-case scenario being that the situation worsens significantly.

Moreover, lower fertiliser supply will have a greater impact on the next few months’ harvests, while the pass-through of costlier logistics and input prices is likely to drive food prices even higher.

Coming up…

Minutes of the meeting of the US Federal Open Markets Committee on 3-4 May will be published later on Wednesday.

However, market conditions have soured appreciably since the Fed’s first 50bp rate rise, so some of the language in the minutes pertaining to financial risks and market conditions will be outdated.

Instead, the three major focus points for market participants will likely be: 

  • Policymakers’ views on the conditions which could lead to a shift down, back to a pace of raising rates by 25bp at each FOMC meeting;
  • Any hints as to how far and for how long policymakers intend to push policy rates into restrictive territory;
  • Guidance shaping expectations for the next Summary of Economic Projections — aka the dot plot — due to be released at the June meeting. 

Forthcoming economic data  

US personal income and spending data for April should give investors an insight into the US consumer’s behaviour: Are they tightening the purse strings? The report may also show the Fed’s preferred inflation gauge (core PCE deflator) starting to decelerate.

Perhaps equally important, the report should shed light on how consumers are responding to the current high inflation environment, indicating how wages are performing relative to inflation and how aggressively consumers are tapping into the USD 2.5 trillion of accumulated savings from the pandemic period.

Disclaimer

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Andrew Craig. The post Weekly investment update – Weaker economic outlook weighs on markets appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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China Will Struggle To Reach Positive GDP This Quarter Premier Says, Warning Economy “To Some Degree” Worse Than 2020

China Will Struggle To Reach Positive GDP This Quarter Premier Says, Warning Economy "To Some Degree" Worse Than 2020

Over the weekend, we…

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China Will Struggle To Reach Positive GDP This Quarter Premier Says, Warning Economy "To Some Degree" Worse Than 2020

Over the weekend, we quoted Goldman's head of hedge fund sales Tony Pasquariello who had some very choice words for China, saying its economy was so bad, "it’s simply eye-popping (witness the worst IP print on record)", and prompted Goldman's sellside research desk to cut its expectation for 2022 Chinese GDP growth to just 4%, which ex-2020 would be the slowest growth rate since 1990! For the sake of balance, Pasquariello noted that Shanghai was set to reopen on June 1st which could be a potential upside catalyst at a time when foreign investors have largely written away Chinese equities.

Fast forward to today when we find that Pasquariello's hedging was not necessary, because on Wednesday, China's Premier Li Keqiang held a teleconference this afternoon under the topic of "stabilizing economic growth" with provincial, city-level and county-level local government officials across the country in which he had some very dismal comments about the current state of China's economy.

As Goldman notes, "while there are not many new measures being announced from this conference, the nature and scale of this conference is quite unusual. Chinese policymakers are in greater urgency to support the economy after the very weak activity growth in April, anemic recovery month-to-date in May, and continued increases in unemployment rates."

Specifically, premier Li said China’s economy is worse off to a “certain extent” than 2020 when the pandemic first emerged, urging efforts to reduce the unemployment rate which as we noted recently has soared to the highest level since the covid crash.

“Economic indicators in China have fallen significantly, and difficulties in some aspects and to a certain extent are greater than when the epidemic hit us severely in 2020,” Li said Wednesday following a meeting with local authorities, state-owned companies and financial firms to discuss how to stabilize the economy, Bloomberg reported.

China’s premier also said the world’s second-largest economy would struggle to record positive growth in the current quarter, urging officials to help companies resume production after Covid-19 lockdowns, according to the FT.

“We will try to make sure the economy grows in the second quarter,” Li said, according to a transcript that the Financial Times verified with three people briefed on the premier’s remarks. “This is not a high target and a far cry from our 5.5 per cent goal. But we have to do so.”

The last time China’s growth entered negative territory was when output plunged 6.9 per cent year on year in the first quarter of 2020 after the coronavirus pandemic ended an era of uninterrupted growth dating back more than 30 years.

The comments by Li Keqiang, to tens of thousands of officials on an internal videocast on Wednesday, underscore the difficulties President Xi Jinping’s administration will have in reaching its annual growth target of 5.5% while also battling Omicron outbreaks.

Concerned that the unemployment rate is approaching levels where the dreaded "social unrest" becomes a possibility, the premier urged officials to make sure the unemployment rate falls and the economy “operates in a reasonable range” in the second quarter of this year, state media cited him as saying. Earlier in May, Li warned of a “complicated and grave” employment situation after the nation’s surveyed jobless rate climbed to 6.1% in April, the highest since February 2020, and sent the yuan plunging to the lowest level since late 2020.

Today's meeting was the latest in a series of urgent calls by Li (who is quitting his job next March) to shore up the economy, which has come under enormous pressure from Covid outbreaks and lockdowns in recent months, threatening the government's growth target of about 5.5%. President Xi's stubborn commitment to Covid Zero means China is guaranteed to miss that goal this year: Economists now forecast gross domestic product growth will hit just 4.5%, according to a new Bloomberg survey, with Goldman predicting GDP will rise just 4.0% as noted above.

In hopes of offsetting some of the gloom and doom unleashed by Beijing's flawed covid policies, Li indicated that China will try to reduce the impact of its strict Zero-Covid policy on the economy. “At the same time as controlling the epidemic, we must complete the task of economic development,” he said.

Li also stressed implementation of current support policies, and said more detailed implementation measures would be issued by the end of this month. Somewhat bizarrely, he said that economic data for the second quarter would be released “accurately”, hinting that prior Chinese data was - gasp - inaccurate? Perish the thought.

As Bloomberg reported earlier this week, China's State Council outlined 33 support measures on Monday to help businesses struggling to cope with the lockdowns, including extra tax rebates, relief on social insurance payments and loans, and additional funding for aviation and rail construction. Local governments were told to spend most of the proceeds from special bonds -- used mainly for infrastructure -- by the end of August. Judging by the lack of market reaction, investors saw right through this latest mostly verbal attempt to prop up confidence in the country ahead of the 20th Party Congress later this year, where Xi's fate will be determine (amid some rumors that his political career may be cut short if China's economy does not stabilize).

The central bank and banking regulator also held a meeting with major financial institutions on Monday to urge them to boost loans.
Li met with local authorities in April, when Shanghai was in the middle of a lockdown, telling them to “add a sense of urgency” as they rolled out policy. During a trip to Yunnan province last week, he said they should “act decisively” to support growth. Of course, when banks artificially inject loans into an economy where there is no loan demand, what you end up getting is just another bubble.

Tyler Durden Wed, 05/25/2022 - 11:25

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