A further slowing in growth
US equity investors are certainly looking at the glass half full ahead of Thanksgiving tomorrow with all major equity indices showing decent gains on the day.
Markets are travelling with a spring in their step ahead of the US Thanksgiving holidays. US equities are higher, UST yields are lower with declines led by the belly of the curve while the USD is broadly weaker. Investors have focused their attention on Fed messaging emphasising the likely need to move toward a lower pace of hikes while better than expected company earnings reports also buoyed sentiment. Unsettling covid news from China have taken a back seat while the market awaits news on Russia oil price cap.
Maybe it is just the holiday spirit, but US equity investors are certainly looking at the glass half full ahead of Thanksgiving tomorrow with all major equity indices showing decent gains on the day. As I type both, the S&P 500 and NASDAQ are showing gains over 1% while the Dow is right up there too, up 1.07%. After the rather hawkish remarks from Fed Bullard last week, stressing the message that the Fed Funds rate needed to get to 5-5.25% “at a minimum”, the soundbites from other Fed speakers this week have a slightly less hawkish tone with San Francisco Fed Mary Daly noting the need to be mindful of the lags in the transmission of policy changes, Fed Bostic was quoted saying “only 75-100bps of additional tightening would be warranted” while Fed Mester said she’s open to moderating the size of rate hikes.
Playing to a slower need of Fed hikes narrative, overnight the Richmond Fed Manufacturing Survey came in slightly below expectations, with data confirming the peak inflation narrative. Other regional manufacturing data already released have suggested further contraction in the sector, though the Empire State reading showed some improvement.
Company news have also been supportive of the positive vibes. US retailers are showing resilience with Best Buy share gaining after raising its profit forecast. Shares of Abercrombie & Fitch and American Eagle Outfitters also rose after reporting results that beat estimates. Sticking with US retailer news, Bloomberg notes there is a rising trend of retailers clearing their inventories via a series of sales initiatives, good news for the Fed and its quest to bring inflation to heel.
UST yields have led a move lower in core global bonds yields with UST declines led by the belly of the curve. The 5y tenor is down 9bps to 3.935% relative to levels this time yesterday while the 10y rate is at 3.7578%, 7bps lower. Yield declines in Europe were more subdued with 10y yields down between 1 and 5 bps in France, Germany and the UK. 10y French yields closed -1bp at 2.45% while 10y Gilts were -5bps to 3.14%.
Fed pricing expectations are little changed with 52bps of hikes expected in December and a peak in the funds rate seen just above 5% half-way through next year (5.06% in June-23). Meanwhile in Europe, 59bps of hikes are priced for December, unchanged from Monday with a peak in the deposit rate seen around 2.88% in June next year. Speaking overnight ECB Nagel called for “a robust rate hike next month” while ECB Simkus said a 50bps hike in December looks more likely adding that “We might see another high level of headline inflation for November, but the question is whether the alleviating effects of lower energy prices will kick in and have a dampening effect on inflation soon enough. That’s what’s more important for decision-taking”.
The risk positive moves in equities alongside lower UST yields have played into a weaker USD across the broad with both the DXY ( -0.57%) and BBDXY ( -0.49%) indices lower on the day. NOK has led the gains within G10 pairs (+1.25%) with gains in oil prices (Brent +1.2%, WTI +1.7%) helping along the way. NZD is the second-best performer, up 0.8% to 0.6144. NZD is higher on all the key crosses since this time yesterday as the market positions itself for a hawkish RBNZ policy update this afternoon (see more below).
The AUD is around the middle of the pack, up 0.56% over the past 24 hours and now trading at 0.6642. RBA Governor Lower spoke last night on “Price Stability, the Supply Side and Prosperity”. The speech (7:30 pm Sydney time) didn’t elicit a major AUD reaction, the Governor reiterated the message that further rate hikes should be expected ahead while stressing the Bank is not on a pre-set path and is prepared to revert back to 50bp hikes or pause depending on economic data. NAB sees the RBA hiking rates by 25bps in December, February, and March, taking the cash rate to 3.60%.
Looking at other major currencies, the yen (+0.66% to 141.23), euro (+0.55 to 1.0292) and GBP (+0.54% to 1.1877) have also recorded gains against the USD with the greenback losing some of its safe haven appeal given the improved sentiment evident in the US equity market.
On the positive vibe comment, it is notable that the broader market is not (yet?) taking the Covid news from China as a major setback. The CNY (+0.35%) is also a little bit stronger against the USD, but it has lost a fair bit of ground in recent days, after trading to low of 7.0455 on November 15th , USDCNY now trades at 7.14, halfway from its recent peak around 7.30. CSI 300 index was unchanged overnight but is down 2.5% in the past 5 days.
The rise in Covid infections is challenging Beijing tweaked zero-covid strategy which has a more targeted approach instead of strict and broad lockdowns. There were 27,307 new cases recorded for Monday and the daily stat is now getting very close to the previous record 28,973 reached in April when Shanghai’s outbreak sparked a surge in infections followed by a hard lockdown crimping activity and supply of goods to the world. Authorities are keen to avoid a repeat of that scenario, but they are certainly getting nervous.
We see evidence that China is moving towards a gradual re-opening strategy. In the near term, however, Omicron is highly contagious and, once it has been unleashed in the community, there is a natural unstoppable process of infection. The imposition of new restriction near term undoubtedly will have a negative economic impact, but at least for now the market seem to be focus on the fact that over the medium-term China is looking to gradually move towards a strategy of living with Covid. That said, we think that setbacks are very likely in this process, thus we should expect spikes in market volatility along the way.
Lastly, My BNZ colleague, Jason Wong, notes oil prices have been choppy but stronger, trying to recover recent losses as speculation dies down that OPEC will raise production. The more likely change a word on oil prices is probably in order is a fall in production to re-balance the market, with near-term demand threatening to weaken as China battles against its latest outbreak of COVID19.
Adding to oil price volatility is worth noting too that this morning the WSJ is reporting the US and its allies are looking to agree on a level for a price cap on Russian oil as soon as today. The article also notes officials are discussing setting a cap at around $60 a barrel with the group keen to settle on a plan ahead do the December 5th headline.
Linked to the above, overnight we also had news that Russia’s Gazprom may cut gas flows to Europe next week via its only remaining route in Ukraine. Winter in Europe has not arrived yet and Russia still looks determine to make it an uncomfortable one. A theme to watch.
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