Summary: Markets trade nervously ahead of the FOMC meeting this week, as a minority consider it likely that last week’s hotter-than-expected US August CPI data could see the Fed hiking 100 basis points at Wednesday’s FOMC meeting, driving further painful USD strength. Other notable central bank meetings this week include the Bank of Japan, Swiss National Bank, Norges Bank and Bank of England meetings, all on Thursday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equities were lower on Friday but managed to stage a pullback in the later part of the trading session with S&P 500 closing at 3,890. Sentiment remains weak this morning with US equity futures trading lower and Friday’s low in S&P 500 futures at the 3,853 level is the key critical downside level to watch. Financial conditions are still tightening, VIX curve is flattening, and the US 10-year yield is trending higher pointing to weaker equities ahead., The next big level in S&P 500 futures is the 3,800 level. This week the key event risk for US equities is naturally the FOMC meeting which will provide another tightening of policy rates and potentially a hawkish tilt on the guidance due to the latest inflation figures in the US.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Hang Seng Index dropped nearly 1%, dragged by technology stocks, with Hang Seng Tech Index (HSTECH.I) declining 2%, Alibaba (09988:xhkg) falling 3.3%, Tencent (00700:xhkg) down 1%. EV makers underperformed, with NIO (0986), Li Auto (02015:xhkg), and Xpeng (09868:xhkg) declining 4% to 6%. Following the news that the Hong Kong Government is reviewing and considering plans to end the hotel quarantine requirements for inbound travellers, tourism and retail stocks rallied, Cathay Pacific Airways (00293:xhkg) up nearly 2%, travel agent EGL surging 11.5%, Chow Tai Fook Jewellery (01929:xhkg) rising 6.6%. CSI 300 was little charged, with coal, and beverage names outperforming.
USD traders mull FOMC meeting this Wednesday
The US dollar has remained rangebound in most pairs ahead of this Wednesday’s FOMC meeting, but did break higher recently versus GBP, CAD, and NZD. Whether the Fed hikes 100 basis points (a minority looking for this after the hot CPI print for August last week) may prove less important than the Fed’s guidance on its forecasted “terminal rate” in the quarterly refresh of its accompanying “dot plot” forecasts for the Fed rate and as the market reads the tone of the statement and draws conclusions from the latest economic projections. The June PCE inflation forecasts, for example, still see 2023 inflation falling back to 2.7% and 2024 inflation to 2.3%. That latter forecast has only been raised 0.2% from the year-earlier level, suggesting that the Fed still sees the inflationary threat as something that its current path of tightening will make a transitory phenomenon.
Gold remains below $1680 and may struggle ahead of Wednesday’s FOMC rate decision given its potential impact on the dollar and Treasury yield as well as its impact on the terminal rate, currently priced around 4.5% by next March. Speculators flipped their gold position to a net short in the week to September 13 and it highlights the upside risk should the price manage to break above the twice rejected support-turned-resistance level at $1680. Strong short covering from speculators in silver, supported by copper market tightness, has seen its relative value as seen through the XAUXAG ratio rise to a three-month high. Below $1854, last week's low in gold, the market may target the 50% retracement of the 2018 to 2020 rally at $1618.
Crude oil (CLV2 & LCOX2)
Crude oil remains rangebound with Brent continuing to find support ahead of $90 and WTI around $84.50. Prices are being supported by the reopening of Chengdu in Sichuan, boosting the outlook for demand. Overall, however, the potential negative impact on demand from a global economic slowdown will not go away, and the market will be watching central bank decisions from the US to Europe and Asia and their overall impact on the dollar. Production from the OPEC+ alliance fell 3.6 million barrels/day short of its target level in August according to delegates and with Russia’s production at risk of falling by 1.9 million barrels per day once the EU embargo starts in December, the risk to supply remains equally high and price supportive.
US Treasuries (TLT, IEF)
US treasury yields trade near the cycle highs ahead of the FOMC meeting on Wednesday, with focus on the 10-year benchmark at 2.50%, the cycle high from June and on guidance from the Fed, as a minority are looking for a 100 basis point hike this week, while the terminal rate for next spring has risen almost to 4.50% recently, up more than 100 basis points from early August.
What is going on?
Dreadful UK retail sales in August
There is no other word to qualify the latest retail sales report in the UK. Retail sales (important to note: UK Retail Sales are reported in volume, not price) contracted by minus 5.4 % year-over-year versus expected minus 4.2 %. Excluding fuel bills, it was out at minus 5 %. Just for the sake of comparison, UK retail sales fell 3.8 % year-over-year at the worst point of the Global Financial Crisis. High inflationary pressures coupled with the upcoming recession will certainly pose a serious challenge to the Bank of England (BoE). The market participants expect the central bank will hike rates by at least 50 basis points later this week (a stronger hike of 75 basis points is possible on cards). But we wonder how long the tightening cycle can last in the UK given the rapid deterioration of the situation on the growth front. On a flip note, the EZ CPI for August was confirmed at 9.1 % year-over-year. This is painfully high. Expect the ECB to hike interest rates by at least 50 basis points at its October meeting. In her last appearance last Friday, ECB president Christine Lagarde did not give much clue about the pace of the tightening cycle in the eurozone. She only mentioned that “hikes should send a signal that we’ll meet price goals”.
US University of Michigan survey remains optimistic
The preliminary September University of Michigan sentiment survey saw the headline rise to 59.5 from 58.5, just short of the expected 60, but nonetheless marking a fourth consecutive rise. Notably, the rise in forward expectations was starker than in current conditions, with the former also coming in above consensus expectations. Also, key were the inflation expectations, which echoed what was seen in the Fed surveys last week. The 1yr slowed to 4.6% from 4.8% and the 5yr expectations slowed to 2.8% from 2.9%.
EU recommends withholding EUR 7.5B from Hungary on rule of law violations
The specific accusation is one of corruption in Hungary’s awarding of public contracts. The amount of budget funds to be withheld represents some one-third of the budget for Hungary during the current 7-year budget period. A majority of EU member states will have to approve the recommendation for the funds to be withheld. Hungary has scrambled recently to address the EU’s concerns, with new laws to be debated next week as the country has until November 19 to make changes and inform the commission.
What are we watching next?
Japan’s CPI and central bank decision to signal concerns on yen weakness
Japan has key data on August inflation due Tuesday followed by the Bank of Japan decision a day after the FOMC on Thursday. Consensus estimates for August CPI are touching close to 3% levels, with core higher as well at 1.5% YoY from 1.2% previously. Upside pressures continue to persist from high food and energy prices, while the soft year-ago base also means mobile phone charges are likely to pick up. While it is still hard to expect a pivot from the Bank of Japan this week, given that Governor Kuroda remains focused on achieving wage inflation, the meeting will still likely have key market implications.
Raft of central bank meetings this week
It isn’t just FOMC week, we also have a bevy of other central banks up with rate decisions this week, including Sweden’s Riksbank tomorrow, which is expected to hike 75 basis points to take the policy rate to 1.50%. The FOMC meets Wednesday, followed by a historic Thursday in which the Bank of Japan, Norges Bank of Norway, Swiss National Bank and Bank of England meet among G-10 currencies, with the Central Bank of Turkey and South Africa’s Reserve Bank also meeting that day. Of those, only Turkey and Japan are expected to keep rates unchanged, with all others looking to continue tightening policy.
Porsche IPO set for €70-75bn valuation
The Porsche brand is set to be spun out from the Volkswagen group on September 29, with 12.5% of the shares to be floated. VW shareholders will be awarded a special dividend on half of the proceeds from the IPO, with the remaining half targeted for investing in the transition to EVs. The IPO comes with a greenshoe option of 10-15% dilution.
Earnings calendar this week
This week our earnings focus is on Lennar on Wednesday as US homebuilders are facing multiple headwinds from still elevated materials prices and rapidly rising interest rates impacting forward demand. Later during this week, we will watch Carnival earnings as forward outlook on cruise demand is a good indicator of the impact on consumption from tighter financial conditions.
- Today: AutoZone
- Tuesday: Haleon
- Wednesday: Lennar, Trip.com, General Mills
- Thursday: Costco Wholesale, Accenture, FactSet Research Systems, Darden Restaurants
- Friday: Carnival
Economic calendar highlights for today (times GMT)
- 0800 – Switzerland Swiss National Bank Sight Deposits
- 0900 – ECB’s Guindos to speak
- 1200 – ECB's De Cos to speak
- 1245 – ECB's Villeroy to speak
- 1400 – US Sep. NAHB Housing Market Index
- 2330 – Japan Aug. National CPI
- 0115 – China Rate Announcement
- 0130 – Australia RBA Minutes of Sep. Policy Meeting
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