2023.09.11 Weekly Notes

SPX to 4k?

No change of view so just briefly expanding on last week’s points and the narrative shift-thesis.

The US services sector and a resilient labour market has been the big reason for markets to be optimistic about a soft/no-landing, but as highlighted last week — limited capacity of household spending going forward while labour market trends point to loosening and easing wage growth, it should be a matter of time before service-based consumption begins wane, that in turn causes labour markets to soften further, and so on.

“Recession is the most likely scenario since there’s much uncertainty about what would be the interest rate at which the economy could grow without triggering inflation, making it hard for the Fed to get it “exactly right.” Because of that, the Fed is more likely to err on the side of excessive tightening, making a soft landing the “lucky” scenario.

And as policy is likely to stay restrictive as the consumer slowdown begins, I’m inclined to agree with Deutsche Bank that a Fed policy error and therefore Recession is more than likely.

I therefore see almost all news as being paradoxically all bad news given how long inflation has remained elevated (i.e. that inflation pressures have become deeply entrenched).

Especially so if inflation continues to be sticky as economy slows.

Over the past month or so, I’ve been charting out a course for SPX to return to the 4100 area essentially under the idea the May-June-July rally would be undone as we approach a more challenging Q4 and 2024 for corporate earnings. Once seeing the momentum in economic data beginning to turn in August, I upped my conviction of the narrative shift away from no-landing ‘Growth’ to slowdown under restrictive-for-longer conditions.

In view of SPX undoing the rally back to 4100, — if SPX at 3500 October’22 lows was pricing in a hard-landing and fully priced for a no-landing at 4600 July’23 high, then I think 4100 should be more than reasonable the more the market leans towards 50/50 recession chances.

How it started, and how I think it’s probably going to go.

To conclude, this matrix from BNPP for tactical cross-asset allocations sums things up very well:

TACTICAL VIEWS

My core view this week is centred around the prospects of CPI reacceleration giving the Fed a lot of think about and likely to keep them on the reluctantly-hawkish-for-longer side.

My current book is short NDX DAX WTI GOLD, and short EURUSD CADJPY in FX. As highlighted over many weeks, short EURAUD remains one of my most favoured fx trades but have stayed out more recently as it has not be aligning with my broader market views.

NEWSFLOW

MARKETS

• Fear of Stock Market Dive Creeps Back as Hedging Costs Climb — Options skew hedging against big fall in SPY ETF inches higher (BBG). S&P 500 snaps 3-day losing streak Friday, suffers first weekly decline in three (CNBC), Europe stocks close slightly higher, snap longest losing streak since 2018 (CNBC). China’s renminbi hits 16-year low after exports tumble in August (FT). Yuan ends domestic session at weakest since 2007 as outflow pressure builds — growing yield gap with other major economies, particularly the United States, has also put fresh pressure on the yuan and a number of other emerging currencies (RTS). CIBC Sees Mispriced Fed Bets Boosting ‘Higher for Longer’ Dollar — Strategists see euro, loonie 2% weaker by end of year, Wall Street upping dollar forecasts as strength persists (BBG). Dollar to stay bright this year before fading in 2024 Reuters poll of analysts shows — 81% majority of analysts, 43 of 53 said the risk to their dollar outlook was to the upside (RTS). Aussie Seen Rebounding from 2023 Trough on China Stimulus Hopes — Funds’ net short Aussie dollar position hits a record high, Strategists forecast currency will end this year at 66 cents (BBG).
• The Fed Is Getting More Hopeful It Can Avoid a US Recession (BBG). Fed’s Collins and Waller says policymakers can ‘proceed cautiously’ on future rate hikes (CNBC). Federal Reserve officials back rate rise pause in September — Hawkish Dallas president says another skip ‘would be appropriate’ as US inflation cools (FT). An Important Shift in Fed Officials’ Rate Stance Is Under Way — Central bank is likely to pause rate increases in September, then take a harder look at whether more are needed (WSJ). Bond Traders Brace for Risk Inflation Will Fuel Rate-Hike Bets — Roughly even odds put on another rate increase in November (BBG).
• Global money market funds attract biggest weekly inflows in three months — amid concerns over slowing growth in China and Europe as well as uncertainty regarding the Federal Reserve’s interest rate outlook (RTS). ETF Traders Are Pouring Cash Into EM’s Non-China Growth Engines — ETF traders have yanked cash from China-heavy strategies, Active funds that track India, Brazil attract fresh capital (BBG).
• China Bans iPhone Use for Government Officials at Work — Restrictions are the latest step in Beijing’s campaign to reduce reliance on overseas technology (WSJ). China workers reveal extent of iPhone curbs — ‘We were told not to bring any Apple products’: US tech group loses $200bn in share value this week (FT). Apple’s China Dependency Spooks Investors After Ban — The iPhone maker has overcome several crises in China, but being dragged into a geopolitical fight could be its toughest yet (WSJ). US to check on chips used in Huawei’s ‘Made in China’ smartphone — Mate 60 Pro sells out in China as public celebrate reports of domestic chip breakthrough despite years of sanctions (FT). Japan seeks revival as a semiconductor powerhouse — New joint venture aims to reduce reliance on Taiwanese chips but faces tough challenges. There was a feeling of national pride in Japan as the biggest participants in the semiconductor industry from ASML to Applied Materials to Lam Research gathered on the northern island of Hokkaido when construction for the country’s new chip plant kicked off last week (FT).
• US, EU Agree on Mideast-India Rail and Shipping Corridor at G-20 — Project comes as China builds influence across the region, This is more than just an infrastructure project, US says (BBG). G20 statement drops reference to Russia aggression ‘against’ Ukraine — Joint language does not condemn Moscow’s invasion after China refused to repeat critical wording (FT).
• Extreme Heat Fast Becoming a Threat to Global Fuel Security — Hot weather creating ‘huge problems’ for refineries: Trafigura, Impact is magnified by under-investment and aging facilities (BBG). Oil Price Resurgence Has Further to Run After the Saudis Turn the Screw (BBG). Food Prices Resume Decline Despite Lingering Supply Threats — United Nations’ food-price index has fallen 8% this year, Gauge is at a two-year low, but food security risks remain (BBG). Russia to return to grain deal once all Moscow’s conditions met, Lavrov says (RTS). Bee Killing Mite’s Rapid Spread Could Cost Australia Billions (BBG).

AMERICAS

• US services sector picked up in August, along with prices — ISM non-manufacturing PMI rose to 54.5 last month, highest reading since February up from 52.7 in July, new orders firming and businesses paying higher prices for inputs — potential signs of still-elevated inflation pressures (RTS). When will consumers stop buying more stuff? It’s a key question for the stock market in the week ahead (MarketWatch). US household debt: Americans whip out the plastic as pandemic-era savings disappear (FT). Kroger Says Supermarket Sales Are Under Pressure as Shoppers Pull Back — Consumers scrutinize spending as inflation eases; Kroger agrees to sell stores to C&S as it pursues Albertsons deal (WSJ). Taylor Swift is single-handedly giving a boost to hotel industry revenue — Bernstein: Revenue generated per room was higher in cities in the months Swift visited them compared with the national average and the same months a year ago. Hotels around the globe could feel a similar lift with her international tour (CNBC).
• US Household Net Worth Jumps to Record on Stocks, Home Prices (BBG). US Housing Affordability Remains at a Record Low, NAR Says — Higher mortgage rates offset slight drop in median home price, Income needed to qualify for a mortgage rose to record in July (BBG). The Fall in Home Prices May Already Be Over — Quick recovery in prices suggests housing downturn could be shorter, shallower than expected. After declining on a year-over-year basis for five consecutive months — the longest run of declines in 11 years — U.S. home prices rose in July (WSJ).
• U.S. layoff evidence remains scant; labor costs ease — New claims for jobless benefits at lowest since February — 4th straight weekly decline, Continued claims drop to lowest since mid-July, Productivity increased by most since 2020 in 2nd qtr (RTS). The Job Market Boom Is Over. Here’s Why and What It Means — pandemic-driven hiring frenzy is ending, cooling demand for workers could help achieve a soft landing — lower inflation without a recession (WSJ).
• Bank of Canada holds rates but says further hikes possible (RTS). Bank of Canada says interest rates may not be high enough — In a speech to the chamber of commerce in Calgary, Alberta, Macklem said one possible reason for inflation staying above target was that it might be taking longer for rates to work, but the other possibility “is that monetary policy is not yet restrictive enough to restore price stability. And unfortunately, the longer we wait, the harder it’s likely to be to reduce inflation” (RTS).
• Canada gains more jobs than expected in August, wage growth accelerates — Canada’s economy added almost three times the number of jobs expected in August and wage growth accelerated, data showed on Friday, a sign of underlying strength despite high interest rates (RTS).

EUROPE

• UK businesses’ inflation and wage expectations ease in August — Bank of England survey provides some relief for policymakers ahead of interest rate decision (FT). UK Rents to Rise 25% by 2026 as Landlords Pass On Mortgage Costs — BOE hikes affecting rents more than home values, Hamptons says, Housing market is under pressure from spike in mortgage prices (BBG). London Room Rental Costs Top £1,000 a Month for the First Time — Data from SpareRoom shows a growing crisis for tenants, BOE is concerned about impact of rate rises on least wealthy (BBG). UK living standards predicted to stay squeezed up to election — Think-tank says higher wages will be offset by rising taxes and mortgage payments (FT).
• UK housebuilding falls sharply in August — High interest rates weigh on residential construction but commercial activity continues to expand, PMI survey finds (FT). Eurozone housebuilding declines at fastest pace since start of pandemic — Soaring borrowing rates suppress demand for new mortgages and reduce house prices while construction costs jump (FT). Housing Shortages Turn Rental Apartments Into a Scarce Commodity Across Europe (BBG).
• ECB must accept forecasting limitations to restore trust, says Christine Lagarde — Difficulty of predicting inflation and growth after big shocks needs to be conveyed with ‘humility’, warns central bank chief (FT). Italy agrees ‘anti-inflation pact’ to counter soaring cost of staple goods — Producers and retailers to hold prices for selected food products and household essentials for three months (FT). Poland prepares pre-election rate cut despite double digit inflation — Signals from central bank raise concerns of ‘premature’ cut to borrowing costs for political reasons (FT).

ASIA

• China’s August services activity slows amid sluggish demand — Caixin/S&P Global services PMI dropped to 51.8 in August from 54.1 in July, lowest since December when COVID-19 confined many consumers to their homes. Although both the official and the Caixin manufacturing PMIs beat market expectations and showed an increase from July to August, softening services activity still weighs on the economy amid sluggish demand and a property downturn (RTS). China’s deflation pressures ease as consumer prices rise — August CPI edges into positive territory, but producer index continues to fall (FT).
• Xi’s Tight Control Hampers Stronger Response to China’s Slowdown — While officials become more worried about growth, they can’t act without top leader’s approval (WSJ). China stirs hope in property market with latest stimulus plan (FT). Janet Yellen says China has ‘policy space’ to boost its economy — “We see China’s growth as slowing over time,” Yellen told reporters. “That said, China has quite a bit of policy space to address these challenges, so we’re monitoring the situation” (FT).
• BYD, China’s Tesla, Is Coming for the World — EV maker is about to become an export juggernaut and a threat to the world’s largest automakers (WSJ).
• South Korea’s inflation quickens above forecast, keeping policymakers on watch — South Korea’s annual consumer inflation accelerated to 3.4% in August while the month-on-month rate was the fastest since early 2017. On a monthly basis, CPI rose 1.0% in August, after gaining 0.1% in the prior month beating economists’ median forecast for a 0.3% rise (RTS).
• Japan cuts Q2 GDP on weak spending, wages slide — Q2 GDP revised to annualised 4.8% rise vs preliminary 6.0%, Capex revised to 1.0% fall vs preliminary flat growth, Real wages fall for 16th straight month in July, Data highlights Japan’s exposure to external risks (RTS). Bank of Japan policymaker calls for keeping ultra-easy policy, sets high bar on exit — BOJ board member Nakagawa: Risks to price outlook balanced, Hard to say when Japan can sustainably hit BOJ’s price goal, Wage-hike cycle needed for BOJ to end negative rate, Remarks put Nakagawa at dovish spectrum among nine-member board (RTS). Inflation worries fuel Japanese rush to buy gold — Retail price hits record high above ¥10,000 per gram as household attitudes to risk shift after years of deflation (FT).

That’s it for this week —

skipping the usual chart run today as I’m exhausted from losing both my mobile phones today leaving me with a tonne of issues like 2-step verifications, most of which I do from my foreign phone, nightmare!!