Head of FX Strategy
Summary: US equities continued to surge on Friday despite BOJ’s hawkish flexibility sending some concerns on global liquidity drainage. However, yen bears also returned as USDJPY dipped to 138. US PCE continued to add to disinflation trends, and crude oil rallied. China stocks closed in gains of over 4% for the week and more stimulus announcements are expected today.
US stock indices continued higher last week after Fed’s dovish message, with NASDAQ 100 outperforming as it closed higher by 1.8% on Friday while S&P 500 was up 1% and Dow up 0.5%. Slowing inflation trends were confirmed again by the PCE data on Friday, while earnings season also continued to hold up the sentiment.
Intel led a rally in chip stocks as it was up 6.6% after the company reported Q2 results and offered a more positive-than-expected outlook for this quarter. Chip stocks surged and gains also continued in Big tech. Ford was down over 3% despite strong results, with its EV-takeup being slower than expected.
CSI300 was up 2.3% on Friday and HK stocks gained 1.4% with both closing in gains over 4% for the week as signs of stimulus from Chinese authorities have underpinned positive sentiment. More stimulus measures are expected today, and this could support the China and HK equities further. Alibaba and Baidu were up 5%, and KraneShares CSI China Internet ETF (KWEB) climbed ~7%, while the Invesco Golden Dragon China ETF (PGJ) was up ~6%.
Significant volatility was seen in the JPY on Friday as markets digested the Bank of Japan’s decision to maintain policy but adding some flexibility. USDJPY dipped to lows of 138.07 but yen bears bought into the dip and pair returned to 141 handle later in NY. AUD continued to underperform, sliding below 0.67 with focus turning to China PMIs and stimulus announcements scheduled today. EURUSD recovered above 1.10 after a dovish turn in ECB last week as GBPUSD also rose above 1.28 to end the week.
Tightening supply added to the improved economic backdrop to push crude oil prices higher. WTI rose above $80/barrel while Brent was close to $85. Focus will turn to China announcements today and the US jobs report later in the week.
The PCE inflation data, which is the Fed’s preferred inflation measure, was out on Friday and continued to point towards easing inflation. Core PCE printed 0.2%, in line with expectations, and cooling from 0.3%, while the annual measure eased to 4.1% from 4.6%, beneath expectations of 4.2%. Headline PCE rose 0.2% M/M (exp. 0.2%, prev. 0.1%) with the Y/Y rising 3.0% (exp. 3.0%, prev. 3.8%). There is still a lot more data to digest ahead of the next Fed meeting, but so far market remains complacent and expects the Fed to have reached an end of its tightening cycle. Employment Costs Index for Q2 rose 1.0%, less than the expected 1.1% and the prior 1.2%, which was the lowest Q/Q growth since Q2 2021, while it grew 4.5% Y/Y against +4.8% in Q1.
BoJ kept its policy settings unchanged, as expected with the Bank Rate held at -0.10% and YCC parameters maintained to target 10yr JGB yields around 0%, but it will guide yield curve control more flexibly with its daily fixed-rate purchases of 10yr JGBs at a rate of 1.0% (prev. 0.5%). This essentially means the +/- 50bps band for the 10yr JGB target will now be used as a reference point in market operations, allowing for greater flexibility. This means that the actual yield could occasionally move outside of this range. Meanwhile, the Outlook Report saw an upgrade to the FY23 Core CPI forecast to above the BoJ’s 2% inflation target. For a more detailed read on the BOJ move and what it means for the yen, go to Redmond Wong’s article here.
China's State Council Information Office has said that Li Chunlin, vice chairman of the National Development and Reform Commission, and officials from the Ministry of Industry and Information Technology, the Ministry of Commerce and the State Administration for Market Regulation will hold a press conference at 3pm Beijing time. More measures to boost consumption are likely.
Official PMIs will be released in China today, and investors will be watching to assess if stimulus announcements so far are starting to have any impact on activity levels. Manufacturing PMI is expected to remain unchanged and in contraction at 49, while services is expected to come in at 53 from June’s 53.2. A good result on PMIs will be a boost for the view of demand recovery but, it's a two-edged sword as it'll weigh on the potential form stimulus, at the margin.
Ukraine kicked off a long-awaited thrust in its counteroffensive with an armored assault on Russian fortifications in the south. It was reported that drones hit two Moscow office towers and prompted the temporary closure of an airport. Saudi Arabia will host talks with Ukraine, some of its key backers, and nations including India and Brazil early next month, the WSJ reported.
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Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
