2023.05.01 Weekly Note
Back to my usual desk from my 5wk trip and must say, it’s refreshing to take a long break from the screens. Markets are showing a lot of confidence that the FED cycle is coming to an end and that US authorities will backstop any liquidity runs on US banks. But with cuts being priced in and stocks rallying (particularly large cap growth/duration stocks) over the past 6wks, that imv, sets a fairly high bar for further continuation.
Broad view for the week is leaning towards a pump and dump scenario — look for further continuation in the risk rally on current momentum and chart setup. But as debt ceiling volatility looms approaching summer and broader market struggling to keep up with mega-caps driving the rally, I deem the odds very high for Powell/NFP to mark the local top in the back end of the week.
NEWSFLOW
MAREKTS
- Stock Market Calm Rekindles Debate Over Fed Tightening — surprising strength in jobs and consumer spending, robust earnings reports from key companies and data showing overall inflation has cooled suppressed market swings, but below the surface, Fed’s balance sheet might be insulating Wall Street from the effects of interest-rate policy (WSJ). Jerome Powell Could Face More Opposition as Fed Choices Get Tougher — Powell has achieved a near-perfect consensus as the Federal Reserve raised interest rates aggressively. Now, with the hiking campaign drawing to a close, that agreement is going to be a lot tougher to maintain (BBG). The Fed Has No Good Options. The Risk of a Misstep Is Growing — The Federal Reserve is struggling to cool inflation further without damaging the economy. The easy part is over (Barrons). Signs Are Mounting That a Debt Crunch is Looming — Funding crunch complicates the Fed’s decision-making next week, Lending is shrinking and the money supply is contracting (BBG).
- Equity Bulls Count on Fed-Cycle Math That Worked For Decades — History has shown that buying stocks at the end of a hiking cycle has proven to be a winning strategy in relatively low-inflationary environments like in the 1990s. But in the wake of inflationary pressures in the 1970s and beyond, stocks fell in the three months after every last hike. Morgan Stanley’s Wilson Says Hawkish Fed Surprise to Roil Stocks — Wilson says hawkish message could lead to repricing of cuts, End of hiking cycle not likely to usher rally: GS’s Kostin (BBG). Bond Volatility Has Busted the 60/40 Portfolio’s Safety Valve — For it to work, ideally the correlation between the two assets should be negative and bond volatility should be low — or at least lower than equities. Both theories are being put to the test (BBG).
- The banking crisis is having a slow-burn impact on the economy (CNBC). JPMorgan, PNC Bidding for First Republic as Part of FDIC Takeover — Seizure and sale of the distressed lender could come as soon as this weekend (WSJ). First Republic Insiders Sold Stock in Months Before Slide — Regulatory filings show the sales from January through early March, at an average sale price of $129.76. The most recent sale, on March 6, was four days before Silicon Valley Bank collapsed (Barrons). JPMorgan to acquire First Republic’s deposits as US regulators step in — FDIC announces US’s second-largest bank failure after working through night (FT).
- Ocean Container Lines Push a Rebound in Trans-Pacific Shipping Prices — A jump in rates is adding urgency, and higher costs, to planning for the peak importing season (WSJ).
US
- Rise in US labour costs and inflation strengthen case for Fed rate rise - Employment cost index rose 1.2% in first quarter signalling persistent price pressures (FT). Key inflation gauge for the Fed rose 0.3% in March as expected (CNBC). U.S. GDP rose at a 1.1% pace in the first quarter as signs build that the economy is slowing (CNBC). Americans are saving far less than normal in 2023 — The U.S. personal savings rate was hovering around 4.6% in February, which was below a decadeslong average of roughly 8.9%; Economists note that this dip in the savings rate is occurring as inflation continues and wage growth slows (CNBC).
- Earnings Beats Aren’t Lifting Stocks [ex-Megas] Much. That’s Not Great a Great Sign (Barrons). Better-Than-Feared Start to Earnings Season — Stock reaction muted as pre-season rally lifts bar for gains, Big Tech results upbeat so far, but outlook could darken (BBG). Top cloud providers Amazon, Microsoft and Google face ongoing spending cuts by clients — Earnings reports last week from Amazon, Google and Microsoft showed that clients are still looking for ways to trim their spending, Year-over-year growth at Amazon Web Services slowed to 16% from 20% in the fourth quarter (CNBC). The Building Boom Is Prolonging Market Pain Undermining Bets The Fed Will Soon Pivot — Construction spending and employment have risen to new records this year, boosted by government outlays for infrastructure, a domestic manufacturing renaissance and a wave of apartment building that got off to a slow start during the pandemic when prices for building materials. Construction companies with jobs ranging from airport overhauls to bathroom renovations say they have enough work booked to maintain payrolls — for years in some cases. Even home builders, who slowed down last year when rates began to rise, are ramping up into spring (WSJ). What Home Depot’s billion-dollar pay raise may help prove about workers — Home Depot’s decision this year to invest $1 billion in employee wages even as sales are slowing in a weakening consumer economy took some Wall Street analysts by surprise. Across retail, pay has been going up, with Walmart and Target boosting minimum wages. It’s hard to draw a straight line from the cost of labor to sales, profits and market share, but in the midst of a still-tight labor market and persistent inflation, more corporate leaders are betting paying more will pay off (CNBC).
- Republicans Effectively Voted to Raise Taxes. They’re Fine With That — House GOP backed repealing clean-energy tax credits without offsetting tax cuts (WSJ). Kevin McCarthy Shores Up GOP Lines as Debt-Ceiling Battle Looms — House Republicans say the passage of the bill means the Democratic-controlled Senate and President Biden are the ones standing in the way of preventing a default (WSJ).
EUROPE
- Euro zone economy ekes out 0.1% growth in first quarter, misses expectations as Germany stagnates (CNBC). IMF warns of ‘disorderly’ house price corrections in Europe as interest rates move higher (CNBC).
- ECB Hikes This Week Hinges on One Data-Packed Morning — All eyes on Tuesday’s inflation and bank-lending reports, Officials are choosing between a 25 or 50 basis-point increase (BBG). IMF’s Kammer: Further ECB tightening is required to defeat inflation (CNBC).
- Brits need to accept they are now poorer, Bank of England chief economist says (CNBC).
- Xi Jinping urges Volodymyr Zelenskyy to negotiate with Moscow — Telephone call marks first conversation between presidents of China and Ukraine since Russia’s full-scale invasion last year (FT). Victory Elusive for Russians in Grinding Battle in Ukraine’s East — Months after Russia dialed up its offensive in the eastern Donetsk region, the Kremlin is still searching for something to call a victory (WSJ). The sanctions net around Russia is tightening — but there is scope to do more — Too many countries are at best ambivalent and at worst profiting from helping the Kremlin evade sanctions (FT).
APAC
- Bank of Japan drops part of forward guidance on rates and starts policy review — Yen weakens to lowest point in six weeks after new governor Kazuo Ueda’s first meeting (FT). Bank of Japan sticks to negative rates while announcing policy review at Ueda’s first meeting (CNBC). Bank of Japan had ‘lots of reasons’ to keep monetary policy unchanged, says Moody’s (CNBC). Goldman, Bank of America Slightly Push Back Call for BOJ Move — base-case forecast for the central bank to adjust its yield curve control program in July, after previously seeing it coming in June, according to their reports. They expect the BOJ to switch its yield target from the 10 year to 5 year (BBG). Yen Bulls Are Pushing Back Bets on BOJ Tailwind to the Summer (BBG).
- Chinese factory activity declines in April on weak global consumption — Services and construction still show expansion, indicating uneven recovery across post-Covid economy (FT). China’s Home Sales by Top Developers Rise for a Third Month (BBG). China Locks Information on the Country Inside a Black Box — Restrictions on Wind database and other information channels add to campaign to curb foreign influence (WSJ). Tesla rival BYD’s profit soars more than 400% in first quarter (FT).
- Samsung faces weakest quarter since 2009 as memory chip market in ‘worst slump in decades’ (CNBC).
- Australian Home Prices Rise for Second Straight Month in Sign of Market Stabilization (BBG).
EQUITIES
World equity indices reflecting the strong bounce back in US and European equities…
Emerging markets lagging behind…
The 2-month rally in US equities has been driven by large-cap growth which makes the broader market vulnerable to a hawkish Lagarde and Powell later this week.
COMMODITIES
Commodity prices have been softening coming into May except for precious metals which have been consolidating since mid-Apr highs.
I am particularly interested in the short side of PM’s this week as recession fears and imminent cuts priced may be too premature at this stage. Also with Powell and Lagarde in mind this week and the risk of hawkish repricing in STIRs, I see risks skewed towards higher real rates
Silver is looking particularly bullish but unable to sustain this moves above the 25 handle would signal weakness; Gold has been leaning heavy on this consolidation and looks ready to break either way — I favour downside on the expectation of higher real yields on Lagarde and Powell.
RATES
Yields were lower last week which has surely given support to the rally in large cap tech stocks.
Real yields have been steadily rising since the beginning of April on resilient economic data and softening inflation. After the late April dip, is is on the bounce again.
CURRENCIES
G8FX index charts are showing support for further risk on moves particularly in the commodity dollars — CAD turn bar, NZD full reversal of prior week’s selling, and AUD producing a strong recovery today.
Meanwhile USD has been attempting to break higher but continuous failure to build and sustain any moves has carved out a slowly ascending price action which typically resolves in a flush.
My focus in FX this week long AUDUSD NZDUSD to start the week, and the reverse if Lagarde and Powell pulls on the rug and US equities convince of topping out. Though USD seems to be the cleanest way to express the risk-on/off than JPY atm, I do have cross-JPY shorts on my radar too such as AUDJPY GBPJPY EURJPY.
Good luck out there and have great week trading!
