Month: December 2022

While initial jobless claims dipped last week (from 241k to 225k), Challenger Job Cuts exploded higher, jumping 416.5% YoY (up 127% in November)…

Source: Bloomberg

This is the biggest jump since the COVID lockdown crisis:

“The Tech sector has announced the most job cuts this year by far. While other industries are cutting jobs at a slower pace, hiring appears to have slowed as well,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

This year’s tech cuts are 535% higher than the 12,761 cuts announced through the same period in 2021. Job cuts announced in the East 6,762; Midwest 7,883; West 58,497; South 3,693

More symptomatic of a weakening consumer, holiday hiring plans are down notably this year…

Source: Bloomberg

Finally, Continuing Jobless Claims rose to 1.608mm, their highest since Feb 2022…

Source: Bloomberg

The decline in initial jobless claims was mainly due to distortions from seasonal factors, which had signaled a decrease of 37k from the previous week. Instead, seasonally unadjusted claims declined by 51k, pushing seasonally adjusted figures down by 16k.

It appears Powell’s tightening policy is starting to have an effect on the labor market.

Via SchiffGold.com,

Federal Reserve Chairman Jerome Powell all but confirmed a soft pivot by the central bank in its inflation fight on Wednesday, while trying to maintain a hawkish demeanor.

The markets appear to be buying the pivot, but they are ignoring Powell’s “tough guy” spin.

In a speech at the Brookings Institution, Powell said it was time to “moderate” the pace of rate hikes.

It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

This was widely construed to signal that the central bank would only raise rates by 50 basis points instead of 75 at the next meeting. While still a significant bump up in rates, it indicates that the Fed is ready to slow its roll on the inflation fight.

Powell also channeled messaging from the November FOMC meeting that left some wiggle room for a slowdown in hiking or even a pause with language about monetary policy “lags” and “cumulative” effects.

“The full effects of our rapid tightening so far are yet to be felt,” Powell said in his speech.

Cutting rates is not something we want to do soon. So, that’s why we’re slowing down.”

But the Fed chair tempered talk about moderating the pace of rate hikes in familiar hawkish rhetoric. He said that rates will likely go higher than originally anticipated and stay elevated for longer.

The timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time.”

Powell emphasized that “history cautions strongly against prematurely loosening policy” and he insisted, “we will stay the course until the job is done.”

The markets were bouyed by the prospect of a rate hike slowdown, but they basically ignored Powell’s attempt to spin it as hawkish. It’s clear investors think the Fed is about finished tightening, regardless of what Powell says. After the speech, the dollar tanked, and stocks rallied, along with gold and silver. The Dow closed up over 700 points and the NASDAQ rose over 484 points.

In a tweet, Peter Schiff said the markets aren’t buying what Powell is selling.

Today he was as hawkish as ever, but the dollar tanked, and gold & stocks rallied. Powell’s resolve to fight inflation is contingent on a soft landing. Not only will the economy crash, it’ll be another financial crisis.”

Investors are no longer buying what #Powell is selling. Today he was as hawkish as ever, but the #dollar tanked, and #gold & #stocks rallied. Powell’s resolve to fight #inflation is contingent on a soft landing. Not only will the #economy crash, it’ll be another financial crisis.

— Peter Schiff (@PeterSchiff) November 30, 2022

The economic data indicates the US economy is already in a recession. The air is hissing out of the housing bubble the Fed blew up in the wake of the pandemic. Consumer confidence is tanking. The economy can’t withstand these relatively high interest rates. The entire US economy is predicated on easy money. With the Fed taking that punch bowl away, it’s only a matter of time before something significant breaks in the economy and it becomes impossible to deny the economy is in trouble.

If history is any indication, the central bank will go back to rate cuts and quantitative easing to rescue the economy – inflation be damned.

Schiff has been saying the Fed will do a hard pivot and abandon the inflation fight when the economic downturn becomes undeniable — this despite the fact that the Fed isn’t actually making any headway in the battle with rising prices.

Even if the Fed continues to hike rates, it’ll never catch up to an inflation curve this it is miles behind. Because, as I’ve been saying, the only real way to fight inflation is a two-pronged attack, which would include positive real interest rates … and we need cooperation from the US government. We need to see cuts in government spending, something that’s not going to happen. In fact, government spending is going to continue to increase, and so will the deficits that are making that spending possible.”

With the soft pivot firmly underway, the Fed can now plausibly end the inflation fight completely and go back to propping up the sagging economy. Schiff made this point after the CPI data for October came in cooler than expected.

Because the Fed now has a plausible excuse, the markets are buying stocks, and they’re buying bonds, and they’re dumping dollars, and they’re buying gold. But the reality of this report means that the Fed is in the process of pivoting even though it’s not even close to winning its fight against inflation. And it’s ultimately going to do a hard pivot even as the inflation rate accelerates and makes new highs, because the recession that we are already in is going to get much worse.”

Among The Fed’s favorite inflation indicators – it has apparently got many and picks and chooses as it pleases – is the Core PCE Deflator. Both the headline and core deflators dropped from September’s levels (+6.0% vs +6.3% prior and +5.0% vs +5.2% prior respectively)…

Source: Bloomberg

Of course, while this will be greeted with euphoria – ‘peak inflation’ – we do note that it is still the highest levels since 1983…

Source: Bloomberg

Americans’ income and spending were both expected to rise once again in October and they did with incomes rising 0.8% MoM (double expectations) – the biggest jump since Oct 2021. Spending also accelerated, rising 0.8% MoM (as expected)…

Source: Bloomberg

Adjusted for inflation, real personal spending rose 0.5% MoM – the biggest jump since Jan 2022…

Source: Bloomberg

But on a YoY basis, real personal spending rose 1.78% – the weakest rise since Feb 2021…

Source: Bloomberg

Finally, against all that, Americans’ savings rate plunged to just 2.3% of disposable income – the lowest since July 2005…

Source: Bloomberg

Reflecting on Powell’s comments, this de minimus drop in PCE Deflator does nothing to alter the path of Fed rates and the fact that the savings rate is nearing record lows suggests the consumer is on the brink of capitulation.

Via Rabobank,

After the pandemic of 2020-21, this year has proved to be another year of major setbacks.

The war in Ukraine, the European energy crisis, rising climate concerns and massive inflation followed by central banks hiking rates aggressively.

But for many there is always a glass half-full-take to these crises, especially as we enter the final month of year, known for its Christmas rallies.

So forget about winter and a recovery of demand in China pushing up commodity prices (iron ore has rallied 25% since end-October); forget about the energy-earthquake’s aftershocks still ripping through supply-chains; and forget about the cost-of-living crisis faced by many households.

Fed Chair Powell’s appearance at the Brookings Institution was one of the key elements that underpinned yesterday’s upbeat mood on US equity markets. It gave rise to hopes that IF the Fed slows down the pace of its rate hikes, it may also end up at a lower terminal rate. So rather than slowing down the car in order to get further (because of better fuel efficiency), the thinking appears to be that the Fed may stop along the way to enjoy the scenery. 2y Treasury yields fell more than 16bps, the 5y note even more than 18bps.

So what did Powell say? Well, actually, not much he hasn’t said before, as our own Fed watcher Philip Marey also concludes here. It was a repeat performance in which the Fed chair said that inflation is still “far too high”, adding that one downward surprise does provide little comfort against a backdrop of a string of upside surprises in recent years. Despite “substantial progress”, ongoing increases in rates will be appropriate and the Fed still sees reason to reach for a terminal rate that is somewhat higher than thought in September. Key to get inflation back down, according to Powell, is an improvement in demand-supply imbalances in the labor market. And this requires a slower pace of growth for a sustained period, as some of these imbalances are due to structurally lower labor supply. Restoring price stability will likely require a restrictive level of rates for some time and history cautions strongly against prematurely loosening policy. But given lags in the response of the economy and inflation to monetary policy, it now does make sense to moderate the pace of rate increases going forward. In our view, that is still consistent with a 50bp hike in December, a terminal rate in the neighborhood of 5% and no pivot in 2023. But for the market it was enough to raise their half filled glasses.

Slightly under the radar of many observers, meanwhile, was the passage of a bill in the US House of Representatives that should avert nationwide freight rail strikes. The legislation has been the result of an intervention by President Biden in order to impose a labor agreement reached earlier this year by rail companies and unions but which had not been endorsed by workers in four of twelve unions. The bill, which comes with a separate bill on improved sick-leave provisions still needs to pass the Senate and that second bill may face difficulties in getting through the Senate. As Biden noted yesterday, “Without action this week, disruptions to our auto supply chains, our ability to move food to tables, and our ability to remove hazardous waste from gasoline refineries will begin […] The Senate must move quickly and send a bill to my desk for my signature immediately.” Should the Senate approve the first bill, a crippling strike in the freight rail sector will be derailed, albeit with grudging faces on some workers.

The third element stoking risk appetite was increasing evidence that China is creeping towards a less-stringent Covid-regime. “As the Omicron variant becomes less pathogenic, more people get vaccinated and our experience in Covid prevention accumulates, our fight against the pandemic is at a new stage and it comes with new tasks,” Vice Premier Sun Chunlan was quoted as saying in a meeting with the National Health Commission yesterday. Bloomberg notes that not using the specific “dynamic Covid Zero” term by its name probably wasn’t accidental. Our take is that the ‘refining’ of the zero-Covid strategy can be seen as a cautious and very gradual approach towards a new way of dealing with the virus. Having said that, we still expect that Covid will continue to force cities into intermittent lockdowns for at least until the next plenary session of parliament in March 2023 and possibly for the whole of 2023. However, the recent protests in China have ostensibly been putting additional pressure on the government to speed up the process of relaxation of the current strict Covid rules (although one could also argue that the current policy allows China to keep a tighter control). Indeed, an acute or near term significant change of zero-Covid would almost certainly lead to chaos in China’s healthcare system, amongst others. In our view, we would first need to see significantly higher protection/vaccination levels amongst the elderly and more stockpiles of medicines and equipment before the government will decide to fully open up the economy again.

But, perhaps more importantly, IF that happens, global demand is likely to receive a significant boost. To give one example: whilst Eurozone exports to China have basically stabilized over the last 18 months (after rising quite sharply during 2020 and early 2021), imports have skyrocketed. A reversal of that trend would surely add to the challenges that monetary policy is facing in the Eurozone. So whilst the assessment by markets of developments discussed above is unequivocally positive, it fails the consistency test.

But, hey, it’s December!

Day ahead

As Macron is on a 3-day state visit to the US, European Council chairman Charles Michel is on a one-day hop to China to talk to President Xi Jinping. The Council’s official press release state that this follows the Council’s “strategic discussion on the European Union’s relations with China […] Against the backdrop of a tense geopolitical and economic environment, the visit is a timely opportunity for both EU and China to engage. The EU and Chinese leaders will discuss global challenges as well as subjects of common interest.”

Snippets from the talks suggest that Michel brought up the war in the Ukraine, drawing the comment from Xi that “Solving the Ukraine crisis through political means is in the best interest of Europa and the common interest of all countries in Eurasia” and that it is “necessary to avoid escalation and expansion of the crisis.” To some extent this is a repeat of the message that followed German Chancellor Scholz’ visit last month.

Michel was also said to have raised the issue of the increasing difficulties being faced by European investors and companies active in China, which for the latter appears to have been a good opportunity to call for a “finalizing of the Comprehensive Investment Agreement” that was suspended by European Parliament in May 2021 after China imposed sanctions on several high-profile members of the European Parliament and several other European officials.

Could that these two topics be tied into each other or become a quid pro quo (in other words, China putting more pressure on Russia in exchange for improved economic ties with the EU)? Well, that remains to be seen, as over the past years the relationship between the EU and China has steadily cooled; since March 2019 the EU sees China as a ‘systemic rival’ and Member States have raised their scrutiny levels of contacts and transactions. It is quite unlikely that this visit will lead to a major breakthrough as such, but the benefit of keeping communication lines open is probably something that both sides would agree on.

At a live-streamed event on Wednesday evening, Elon Musk announced that Neuralink Corp’s coin-sized brain chip could be implanted in human heads for clinical trials within the next six months. 

“We want to be extremely careful and certain that it will work well before putting a device into a human, but we’ve submitted, I think, most of our paperwork to the FDA, and probably in about six months, we should be able to upload Neuralink in a human,” Musk said during the event at the company’s headquarters in Fremont, California. 

We are now confident that the Neuralink device is ready for humans, so timing is a function of working through the FDA approval process

— Elon Musk (@elonmusk) December 1, 2022

Neuralink’s brain-computer interface (BCI) is a small chip implanted in a human’s head to allow a person suffering from a debilitating condition, such as the aftereffects of a stroke or amyotrophic lateral sclerosis (ALS), to communicate with their thoughts. 

Previously, Musk had promised human trials would begin in 2020, then 2022, and now the target appears sometime in the first half of 2023. He also revealed two other BCIs that could one day be attached to the spinal cord and restore movement in someone with paralysis. 

 “As miraculous as that may sound, we are confident that it is possible to restore full-body functionality to someone who has a severed spinal cord,” the billionaire co-founder said. 

One of the presentation’s highlights was a video of a monkey “telepathically typing” on a screen with a BCI implant. 

“To be clear, he’s not actually using a keyboard … He’s moving the cursor with his mind to the highlighted key. Now technically, he can’t actually spell. So I don’t wanna oversell this thing, because that’s the next version.”

Monkey plays pong with his mind using Neuralink pic.twitter.com/pAwP791b0S

— Whole Mars Catalog (@WholeMarsBlog) December 1, 2022

BCI technology has been studied in academia for decades. Last year, European research announced a person who has ALS had regained his ability to communicate after a brain chip was installed in his head. And Brown University recently said, “using a brain-computer interface, a clinical trial participant was able to create text on a computer at a rate of 90 characters per minute just by thinking about the movements involved in writing by hand.”

Musk’s entry into the space in 2016 has spurred increased investments via venture capitalists into startups pushing this cyborg technology forward. 

Authored by Ven Ram, Bloomberg cross-asset strategist,

Treasury yields are signaling mounting concern that the US labor market is close to breaking. That may spur investors to seek comfort in duration.

Yields on 10- and 30-year Treasuries slumped below the lower end of the Federal Reserve’s benchmark rate this month for the first time in the current economic cycle. That occurrence — a dipstick of fear in the market — has traditionally presaged a shrinking labor market in data going back more than five decades.

The Fear Gauge suggests that the Fed won’t be successful in engineering a soft landing of the economy as it seeks to align demand in line with supply.

US employers increased their payrolls by 200,000 in November, continuing an unbroken stretch of expansion since 2020, according to the median forecast of economists before data due later this week.

The negative spread illustrates how investors are already making a beeline for duration, keeping long-dated Treasuries bid. That suggests the Bloomberg Treasury Index may recoup some of the record losses it has suffered this year.

Specifically, 10-year Treasury yields, currently around 3.70%, will find it hard to push emphatically above 4.34% — the highest level since the global financial crisis that we saw as recently as last month — unless the Fed’s terminal rate is way higher than current market expectations of circa 5%.

The outlook for long-dated Treasuries may present a stark contrast with that for the front end.

Two-year Treasury yields are bound to face upward pressure as the Fed continues to raise rates toward the terminal rate.

The Fed will find itself caught between a rock and a hard place should the labor market crumble while inflation stays well above its target.

Indeed, given how tight the labor market has been in recent months even though the economy has lost considerable momentum, there is a possibility that it may yet defy historical antecedents, imposing a limitation on the analysis.

In turn, that could mean the Fed may be able to persist longer with its tightening, sending long-dated yields higher yet again, though at this stage of the economic narrative that seems to be a tail risk rather than the base case.

All told, Treasury 10-year yields have surged about 220 basis points so far in 2022, headed for their worst year on record in Bloomberg data going back five decades. Should the Fed’s quest for a soft landing prove elusive, they may get some respite in the months to come.

Global stocks climbed and the dollar slipped to a three-month low this morning amid early signs of a softer stance on Covid restrictions from China and after Federal Reserve Chair Jerome Powell confirmed that the pace of interest rate hikes was set to slow. S&P futures were little changed, pausing a rally that added $1.1 trillion to the market value of S&P 500 companies. Nasdaq contracts dropped 0.2% following sharp gains in the previous session. 

Markets elsewhere continued to ride high, with Europe’s Stoxx 600 benchmark up more than 0.5% and a range of regional indexes on the cusp of bull-market territory, having gained almost 20% from lows hit in September. A gauge of global shares touched a three-month high. Sentiment got an extra boost after China’s top official in charge of the fight against the coronavirus, Vice Premier Sun Chunlan, said the response was entering a new phase, with the omicron variant weakening and more Chinese getting vaccinated. Beijing also indicated some Covid patients could isolate at home.

The benchmark US index surged to its highest in more than 11 weeks Wednesday, while the Dow confirmed a technical bull market, as Fed Chair Jerome Powell signaled the central bank will slow the pace of interest-rate increases this month. His comments likely cement expectations for the Fed to raise interest rates by 50 basis points when they meet Dec. 13-14, following four straight 75 basis-point moves. The S&P 500 closed above its 200-day moving average for the first time since April on Wednesday.

Still, Powell also stressed that borrowing costs will need to keep rising and remain restrictive for some time to beat inflation, and market strategists warned that uncertainty remains high about the impact of a dovish tilt in policy on inflation and economic growth.

“Stepping back, Powell again reiterated that inflation is too high, flagged the likelihood of higher-for-longer funds rate and warned again against risk of prematurely loosening policy,” said Mark Taylor, a sales trader at Mirabaud Securities. “Slowdown = further tightening, but that isn’t the seasonal concern heading into the final three trading weeks of the year.”

In premarket trading, Salesforce Inc. dropped, after the software company gave an outlook that analysts say reflects a weaker economic environment. Snowflake Inc. also slid on weaker-than-expected revenue outlook. Meanwhile, US-listed Chinese stocks pulled back after their record monthly rally in November. Here are some of the biggest premarket movers this morning:

• US-listed Chinese stocks decline in premarket trading Thursday, after the Nasdaq Golden Dragon China Index gained 42% in November, its best month on record. Alibaba -2.6%, Baidu -0.5%.
• Splunk shares jumped as much as 9.4% in US premarket trading after the software company boosted its revenue guidance for the full year, with analysts positive that demand is holding up despite the macroeconomic backdrop. Brokers did note that Splunk tempered its outlook for cloud revenue, showing that customers could be delaying cloud migration
• Salesforce Inc. shares are down 6.4% in premarket trading, after the software company gave an outlook that analysts say reflects a weaker economic environment. Analysts were also surprised by the exit of co-CEO Bret Taylor, as he became the latest potential successor to leave the company.
• G-III Apparel shares sank as much as 27% in US premarket trading, with the DKNY brand owner set for its worst day since March 2020 after cutting guidance for the full year and saying that its licensing agreements with Calvin Klein and Tommy Hilfiger brands, owned by PVH, will expire in the next five years. .
• Okta shares jump 15% in premarket trading, after the software company gave a fourth- quarter forecast that was stronger than expected. Analysts noted that the results were much better than feared with the company executing sales more effectively, even against a tougher macro backdrop.
• Snowflake slides 6.2% in premarket trading after the software company gave an outlook for product revenue that was weaker than expected. Economic headwinds are pressuring the 4Q outlook, according to analysts, who remain bullish on the company’s longer-term prospects.
• Elastic shares fell 17% in US postmarket trading after the company lowered its revenue forecast for the current fiscal year. The guidance cut and the lack of visibility into FY24 are likely to weigh on investor confidence, analysts said.
• PVH Corp. gained 9.4% in extended trading after the parent company of Calvin Klein and Tommy Hilfiger increased its adjusted earnings per share view for the year. It also expects annual revenue to come in at the top end of its previous guidance range.
• Victoria’s Secret fell in extended trading after issuing an earnings-per-share forecast for the fourth quarter that trailed the average analyst estimate at the midpoint of the range. The retailer also reported a steeper-than-expected decline in third- quarter comparable sales.

Confirming that he has the absolutely worst market timing, literally minutes before one of the biggest market meltups in weeks, JPM’s Marko Kolanovic warned turned even more bearish after being ultra bullish all year, and said that the S&P 500 will likely re-test this year’s lows in the first half of 2023, implying a decline of about 12% from current levels against the backdrop of a mild recession and Federal Reserve rate hikes. Finally catching up with most strategists, JPMorgan also now expects a pivot in the Fed’s hawkish policy to fuel a stock recovery in the second half of next year. The bank’s target of 4,200 for end-2023 leaves an upside of about 3% from here on; it also means that the S&P will likely close far higher in keeping with JPM’s historical error.

The founder of bankrupt cryptocurrency exchange FTX Sam Bankman-Fried denied trying a perpetrate a fraud, while mystery still surrounds missing billions at the firm. More key economic indicators are expected today, with data on consumer spending, unemployment and manufacturing all due this morning.

The buoyant mood knocked the dollar lower against its Group-of-10 counterparts for the third straight day, while Treasury 10-year yields stayed just off two-month lows hit in the wake of Powell’s comments. The yen advanced more than 1% and the euro touched a five-month peak. “There is no one-way bet any more on dollar strength,” said Sarah Hewin, senior economist at Standard Chartered in London. “We had a good signal about a pivot from Powell, so the market has dialed back its expectations on peak rates.”

Focus will now shift to how economic growth will fare in coming quarters. US activity gauges have painted a mixed third-quarter picture, with Wednesday’s daa showing job openings down in October, while Friday’s jobs report is currently forecast to show employers added 200,000 workers to payrolls in November. Later in the day, investors will get to parse the latest US core PCE print — one of the Fed’s favored inflation gauges.

“The market’s wanting to see whether PCE inflation for November aligns with the soft CPI numbers,” analysts at Mizuho wrote, referring to below-forecast inflation data that kicked off the equity rally in November. There are signs that cooling growth is affecting corporate earnings, especially in the tech sector. Tech shares led losses in US premarket trading, with software maker Salesforce down sharply after an earnings outlook that appeared to reflect a weaker economic environment.

In Europe, the Stoxx 50 rose 0.3% as the  prospect of a smaller Fed hike boosts risk appetite. IBEX outperforms, adding 0.8%, CAC 40 is flat but underperforms peers. Real estate, tech and financial services are the strongest-performing sectors. European tech stocks leap in early Thursday trading, following rallies in US peers on Wednesday after Federal Reserve Chair Jerome Powell signaled a slowdown in the pace of interest-rate hikes. Chip stocks surge, with ASML climbing as much as +4.3%, and ASM International +6.5%. Shares in the Swiss lender decline for a 13th straight session, marking their longest run of losses since at least 1989, after JPMorgan cuts earnings estimates and its price target for the Swiss bank following a decline in the wealth unit’s assets under management, and with a material loss expected for 4Q.  Here are some other notable European movers:

• Shop Apotheke and Zur Rose gain after Germany’s health minister was reported to have said the country’s digital e-prescriptions program, identified as a major trigger for both firms, should be in place by mid-2023. Shop Apotheke climbs as much as 11% and Zur Rose rises as much as 11%
• Heineken shares rise as much as 3% after confirming its outlook and highlighting higher cost-savings for next year. UBS says Heineken reiterated its commitment to deliver superior growth, well balanced between volume and price mix.
• International Distributions Services gains as much as 5.6% after Exane starts coverage at outperform, writing in note that the Royal Mail owner has levers available to ease concerns over the long term.
• Credit Suisse shares drop as much as 5.5% after JPMorgan cuts earnings estimates and its price target for the Swiss lender following a decline in the wealth unit’s assets under management, and with a material loss expected for 4Q. Shares in the Swiss lender decline for a 13th straight session, marking their longest run of losses since at least 1989.
• RBC says it would take an “incrementally cautious” view on mining stocks heading into 2023, in a note downgrading its rating on Anglo American and Boliden to sector perform. Anglo falls as much as 2.8%, Boliden as much as 2.2%. Also, Glencore falls as much 1.5%
• Pearson, Thomson Reuters and Wolters Kluwer are cut at Exane as the broker says the elevated valuation multiples don’t reflect the expectations of increasing cost inflation and operating margin pressure in 2023. Pearson falls as much as 4%.

Earlier in the session, equities in Asia extended gains after their best monthly rally in 24 years, as concerns eased over China’s Covid measures and the Federal Reserve’s tightening. After capping a 15% gain November, the MSCI Asia Pacific Index jumped as much as 2.5% Thursday, inching closer toward a bull market. Gauges in China, Japan and Taiwan led gains –although Hong Kong’s measures pared — as a top Chinese official said efforts to combat the virus are entering a new phase with the omicron variant weakening and vaccination rates rising. Investors may look past China’s near-term economic slump “as long as there are positive signs of China’s reopening,” David Chao, global market strategist for Asia Pacific ex-Japan at Invesco, wrote in a note. Traders will watch whether China’s central bank will ease further in December, he added. Regional equities also got a boost from a weaker dollar, after Fed Chair Jerome Powell said that the pace of rate increases may moderate in December. The comments came as ADP Research Institute data showed hiring at US firms cooled last month and wage gains moderated.  Asian stocks have battled back as the shift in the Fed’s policy stance and China’s reopening appeared to materialize and foreign funds piled into emerging markets. The exuberance may be on shaky ground, however, as the outlook for global growth dims into next year

Japanese equities rose, following US peers higher after Fed chair Jerome Powell signaled a slower pace of interest rate hikes. Gains were limited by the yen’s surge against the dollar. The Topix rose by less than a point to close at 1,986.46, while the Nikkei advanced 0.9% to 28,226.08. The Japanese currency advanced more than 1% against the greenback. Out of 2,165 stocks in the index, 714 rose and 1,348 fell, while 103 were unchanged. “Fed Chairman Powell’s remarks were within the market’s expectations, which provided a sense of security,” said Hitoshi Asaoka, strategist at Asset Management One

Australia’s he S&P/ASX 200 index rose 1% to close at 7,354.40, the highest since May 5, after China appeared to soften its Covid stance and Federal Reserve Chair Jerome Powell signaled a slowdown in the pace of interest-rate hikes. Nine of the 11 sector gauges advanced, with mining and real estate shares rallying most.  In New Zealand, the S&P/NZX 50 index rose 0.9% to close at 11,654.56, extending gains for a third day

In FX, the Bloomberg dollar spot index falls 0.5%. CAD and CHF are the weakest performers in G-10 FX, JPY and NZD outperform. BRL (1.8%), KRW (1.5%) lead gains in EMFX. The Dollar Spot Index fell for a third day as the greenback weakened against all of its Group-of-10 peers apart from the Canadian dollar. 

• The euro rose to trade at around $1.0450 after briefly giving up gains in early European session. Money managers are amping up bets the dollar will continue to fall. Investors scurried to European and UK debt, following a similar rush for US Treasuries after Federal Reserve Jerome Powell signaled the pace of monetary policy tightening may slow as soon as this month
• The Swiss franc underperformed most Group- of-10 peers. Switzerland’s consumer prices rose 3% from a year earlier
• Japan’s yen and Korea’s won spearheaded a surge in Asian currencies. The Japanese currency rose by as much as 1.3% to 135.84 per dollar; demand at a 10-year bond auction jumped to the highest since 2005
• Australian and New Zealand dollars extended Powell-driven gains, boosted by the signs that China is moving further away from its Covid-Zero mandate. Bonds rose

In rates, Treasuries twist-flattened modestly, as the 2-year yield rose by 2bps and the 30-year yield well by a similar amount. After plunging on Wednesday, the 10Y TSY yield dipped further, and was last trading just below 3.60%. Peripheral spreads are mixed to Germany; Italy tightens, Spain tightens and Portugal widens.

In commodities, oil rose on Thursday supported by investor wariness that OPEC+ may cut supply further at its meeting on Sunday and as easing COVID curbs in China raised hopes about higher demand in the world’s top crude importer. Crude gained further support, and the U.S. dollar weakened, after the Federal Reserve Chair opened the door to a slowdown in the pace of rate hikes. Dollar weakness makes oil cheaper for other currency holders and tends to support risk assets.  “Oil is finding support on investor optimism that OPEC+ will deliver further cuts in production when they meet,” said Ehsan Khoman, analyst at MUFG Bank, in a report. Brent crude was up 44 cents, or 0.5%, to $87.41 a barrel by 0918 GMT, while U.S. West Texas Intermediate crude futures added 55 cents, or 0.7%, to $81.10.

“Barring any negative surprise during Sunday’s virtual OPEC+ talks and assuming a healthy compromise on the Russian oil price cap before the EU sanctions kick in on Monday it is tempting to audaciously conclude that the bottom has been found,” said Tamas Varga of oil broker PVM. “Inflation has not been defeated but its negative economic impact has probably been mitigated.”

Most base metals trade in the green; LME tin rises 1%, outperforming peers. LME lead lags, dropping 0.8%. Spot gold rises roughly $11 to trade near $1,780/oz. Base metals are firmer across the board following the recent China optimism and Dollar-induced boost, with 3M LME copper briefly topping the USD 8,300/t mark.

Sam Bankman-Fried said the FTX US platform is fully funded and he believes withdrawals could be opened, while he denied committing fraud and said that FTX had huge management failures.

To the day ahead now, and data releases include the global manufacturing PMIs for November, German retail sales for October, the Euro Area unemployment rate for October, the US weekly initial jobless claims, personal income and personal spending for October, and the ISM manufacturing for November. Otherwise, central bank speakers include the Fed’s Logan, Bowman and Barr, as well as the ECB’s Lane.

Market Snapshot

• S&P 500 futures down 0.1% to 4,076.50
• STOXX Europe 600 up 0.6% to 442.83
• MXAP up 1.6% to 158.96
• MXAPJ up 1.3% to 515.72
• Nikkei up 0.9% to 28,226.08
• Topix little changed at 1,986.46
• Hang Seng Index up 0.7% to 18,736.44
• Shanghai Composite up 0.4% to 3,165.47
• Sensex up 0.3% to 63,296.21
• Australia S&P/ASX 200 up 1.0% to 7,354.42
• Kospi up 0.3% to 2,479.84
• German 10Y yield little changed at 1.86%
• Euro up 0.3% to $1.0435
• Brent Futures up 0.5% to $87.42/bbl
• Gold spot up 0.5% to $1,777.38
• U.S. Dollar Index down 0.36% to 105.57

Central bank speakers

• 09:15: NY Fed’s Dianne Dobbeck Speaks at FT Banking Summit
• 09:20: Fed’s Logan Speaks at Dallas Breakfast Event
• 09:30: Fed’s Bowman Speaks at Strategy Forum
• 15:00: Fed’s Barr Discusses Bank Capital

Top Overnight News from Bloomberg

• A rush by Japan’s life insurers to protect themselves against a stronger yen may have the paradoxical effect of accelerating gains in the currency
• The yuan is closing in on a key milestone as hints of a China reopening fuel a burst of buying, but some analysts say the rally may soon pause
• ECB Governing Council member Yannis Stournaras said further hikes in borrowing costs should be gradual, following the most aggressive bout of monetary tightening since the euro was introduced
• UK house prices are falling more sharply than expected after a jump in borrowing costs quelled demand, Nationwide Building Society said. The mortgage lender said home prices fell 1.4% in November. That was the second decline in as many months and the fastest drop since June 2020
• Even one of the strongest easing advocates on the BOJ’s board said that a shift in Japan’s long-held deflationary price norms is beginning to materialize, although he didn’t hint at any policy change soon
• BOJ Board Member Asahi Noguchi says that monetary easing needs to be continued persistently to help improve a labor market that remains below its pre-pandemic level
• Wednesday’s Treasury rally may have been more about month- end positioning, according to market participants

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks took impetus from the strong rally on Wall Street after Fed Chair Powell’s speech which signalled the Fed is ready to slow the pace of rate increases as soon as the December meeting, with sentiment in the region also helped by China reopening optimism and with Chinese Caixin PMI data not as bad as feared. ASX 200 was firmer with outperformance in the mining industry amid the heightened global risk appetite and as participants shrugged off the mixed-to-softer domestic data releases. Nikkei 225 was boosted at the open after Japanese firms’ recurring profits hit a record for Q3 although the index moved off its highs after hitting resistance just shy of the 28,500 level. Hang Seng and Shanghai Comp advanced after several large Chinese cities relaxed some COVID controls and Vice Premier Sun Chunlan noted that the country’s fight against the virus is entering a new phase, while the latest Caixin Manufacturing PMI data topped forecasts although remained in contraction territory.

Top Asian News

• Beijing is to allow some low-risk COVID patients to home isolate which represents a major COVID policy shift, while COVID protests and stretched infrastructure were said to have led to the change, according to Bloomberg.
• China is to release supplementary COVID-19 measures in the coming days, via Reuters citing sources; to allow positive cases to quarantine at home with conditions, to allow close contacts of positive cases to quarantine at home with conditions. Step up antigen testing for COVID, reduce the frequency of mass testing and regular PCR tests.
• Chinese Vice Premier says weakening pathogenicity of Omicron has created conditions to improve COVID prevention measures, via State Media.
• Beijing City reports 2,126 new local COVID cases (prev. 2,378) during 15 hours to 3pm on Thursday.
• BoJ Board Member Noguchi said the BoJ must maintain monetary easing and keep interest rates at low levels now as achievement of the 2% inflation target remains uncertain. Noguchi noted that they cannot say that Japan has stably and sustainably achieved the BoJ’s 2% inflation target, while he added that consumer inflation is likely to fall back below 2% once cost-push factors dissipate.

European equities benefited at the cash-open from the post-Powell surge in US stocks. Fresh macro drivers for Europe have been lacking thus far and therefore some of the enthusiasm at the cash open has scaled back somewhat. Sectors in Europe are mostly firmer with Tech stocks following suit to the strong showing during US hours yesterday, whilst Real Estate names are also posting solid gains. To the downside, Autos, Consumer Products and Energy names are the only sectors in the red. US futures are flat/softer as markets pause for breath following yesterday’s impressive rally which took the ES to just shy of the 4.1k mark. JPMorgan lowers its 2023 S&P 500 EPS forecast to USD 205 (prev. 225); sees the index at 4,200 by end-2023; expects the S&P 500 to re-test its 2022 lows (at around 3,577) in H1 2023

Top European News

• German Ifo says companies are hiring despite the upcoming winter recession, employment barometer increased to 99.6 for November (prev. 97.8). First increase after five consecutive declines.
• Germany’s VDMA says Engineering Orders in Oct -12% Y/Y (Domestic -13%; Foreign -11%); Aug-Oct Orders -4% Y/Y (Domestic -8%; Foreign -2%).
• ECB’s Stournaras says inflationary pressures will ease, as such advocates the ECB takes greater account of the risk of an economic crisis in monetary policy, via Handelsblatt.
• ECB’s Enria says the new risk environment warrants some adjustments to supervisory approach; supervisors will closely scrutinise capital planning and challenge management actions to ensure an appropriate level of conservatism.

FX

• The Dollar index remains suppressed in the post-Powell aftermath of dovishly-received remarks from the Fed Chair, with today’s base at 105.30 matching the lows set on the 15th and 28th of November.
• Most G10s are firmer against the USD but to varying degrees.
• The JPY has been the greatest beneficiary of the Powell-induced narrowing in the Fed-BoJ differential and as US yields sold off yesterday.
• The Loonie stands as the underperformer with no clear reason aside from a breather from the Dollar and crude-induced gains yesterday and in the run-up to the Canadian jobs report tomorrow.
• South Africa President Ramaphosa is reportedly considering resigning over the farm scandal, according to Bloomberg.
• PBoC set USD/CNY mid-point at 7.1225 vs exp. 7.1231 (prev. 7.1769)

Fixed Income

• EGBs are bid across the board as participants react to the commentary from Chair Powell on Wednesday; as such, ECB pricing has tilted towards 50bp, Chief Economist Lane speaks later.
• USTs have continued to climb with yields lower across the curve and particularly at the long-end given Powell stressing they do not want to overtighten and ahead of key data including October’s PCE.
• The European morning has digested a substantial amount of supply with over EUR 11bln taken down between France, Spain and the UK; overall, the issuance was well received and marks the last outings for France and Spain this year

Commodities

• WTI Jan and Brent Feb futures are somewhat choppy with the initial upside paring back in recent trade despite a distinct lack of news flow and a steady Dollar at the time.
• Spot gold benefits from the decline in the Dollar as the yellow metal extends on gains above USD 1,775/oz as it sets its sight on the 200 DMA at USD 1,796.07/oz ahead of USD 1,800/oz.
• Base metals are firmer across the board following the recent China optimism and Dollar-induced boost, with 3M LME copper briefly topping the USD 8,300/t mark.
• OPEC November oil output fell 710k BPD from October to 29.10mln BPD after the OPEC+ production cut decision, while quota-bound members complied with 163% of pledged cuts in November, according to a Reuters OPEC survey.

Crypto

• Sam Bankman-Fried said the FTX US platform is fully funded and he believes withdrawals could be opened, while he denied committing fraud and said that FTX had huge management failures.

Geopolitics

• US is considering a dramatic expansion in the training the US military provides to Ukraine including instructing as many as 2,500 Ukrainian soldiers a month in a US base in Germany, according to CNN citing sources.
• Chinese President Xi told European Council President Michel that China will continue to strengthen strategic coordination with the EU and hopes EU will establish an objective and correct perception of China. Xi added that China and EU should strengthen macroeconomic policy coordination and complementary advantages and jointly create new growth engines, and should jointly ensure the safety, stability, and reliability of industrial supply chains. Xi said China will remain open to European companies and hope EU can provide a fair and transparent business environment for Chinese firms, according to Bloomberg.
• Russian Foreign Minister Lavrov says a channel for negotiations has been established between the Russian and US special forces, via Reuters.
• US Defence Secretary Austin informed his Turkish counterpart of his strong opposition to a new Turkish military operation in Syria, according to Reuters.
• US lawmakers are poised to back as much as USD 10bln to bolster Taiwan’s defences against growing tensions and threats from China as part of a compromise annual defence authorisation bill, according to Bloomberg.
• Japanese Chief Cabinet Secretary Matsuno said they informed China and Russia through diplomatic channels of severe concerns regarding frequent joint air force activities around Japan, while they are closely monitoring increasing military cooperation between China and Russia with concern, according to Reuters.

US Event Calendar

• 07:30: Nov. Challenger Job Cuts YoY, prior 48.3%
• 08:30: Nov. Initial Jobless Claims, est. 235,000, prior 240,000
  • Nov. Continuing Claims, est. 1.57m, prior 1.55m
• 08:30: Oct. Personal Spending, est. 0.8%, prior 0.6%
  • Real Personal Spending, est. 0.5%, prior 0.3%
  • Personal Income, est. 0.4%, prior 0.4%
  • PCE Deflator MoM, est. 0.4%, prior 0.3%; PCE Core Deflator MoM, est. 0.3%, prior 0.5%
  • PCE Deflator YoY, est. 6.0%, prior 6.2%; PCE Core Deflator YoY, est. 5.0%, prior 5.1%
• 09:45: Nov. S&P Global US Manufacturing PM, est. 47.6, prior 47.6
• 10:00: Oct. Construction Spending MoM, est. -0.2%, prior 0.2%
• 10:00: Nov. ISM New Orders, est. 48.5, prior 49.2
  • ISM Employment, est. 50.0, prior 50.0
  • ISM Prices Paid, est. 45.9, prior 46.6
  • ISM Manufacturing, est. 49.7, prior 50.2

DB’s Jim Reid concludes the overnight wrap

Welcome to December. Since it’s the start of a new month, our usual performance review of financial assets over the last month will be out shortly. November was a very strong month for markets across several asset classes, which makes a change from what we’ve been used to this year. Indeed, the Hang Seng index has just seen its strongest monthly performance since October 1998. However, at the other end of the leaderboard the US dollar has just put in its worst monthly performance in over a decade. Full report in your inboxes soon.

That general optimism through November carried into the final day of the month yesterday, with markets surging thanks to a speech from Fed Chair Powell. He confirmed that “the time for moderating the pace of rate increases may come as soon as the December meeting”, which cemented expectations that the Fed will move away from the 75bp hikes they’ve pursued at the last four meetings in favour of a slower 50bp pace. Furthermore, he said in the Q&A after the speech that “my colleagues and I do not want to overtighten”, which acknowledged some of the concerns that the Fed may end up going too far, particularly given monetary policy operates with time lags. In turn, risk assets surged on the back of Powell’s remarks, with the S&P 500 moving out of negative territory beforehand to end the day up +3.09%.

To be fair, Powell did make some more hawkish points during his speech, but when he did it was generally in line with comments we’d already heard before. For instance, he said that the “ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting”, but this was in line with his language from the November FOMC press conference. Separately, he said that restoring price stability would likely “require holding policy at a restrictive level for some time”, but again this mirrored his remarks at the Jackson Hole speech back in August. So the incremental news was in a slightly more dovish direction.

As a result of the speech, investors moderated their views on the likely pace of rate hikes over the months ahead, with terminal rate pricing down from 5.01% the previous day to 4.92% by the close yesterday. In the meantime, the rate priced for end-2023 came down by an even larger -21.3bps on the day to 4.43%. That prompted a substantial fall in Treasury yields across the curve, with the 10yr yield down -13.9bps on the day to 3.61%, whilst the more policy-sensitive 2yr yield was down -16.3bps to 4.31%. For equities the reaction was buoyant as well, with the S&P 500 up +3.09% on the day to its highest level since mid-September. The advance was incredibly broad-based, but was led by the more cyclical sectors, with the NASDAQ (+4.41%) and the FANG+ Index (+7.33%) seeing even larger gains.

Ahead of Powell’s speech, the latest US data releases painted a mixed picture on the state of the economy. First, the number of job openings in October fell to 10.334m (vs. 10.25m expected), a sign that labour demand was continuing to decline. That meant that the number of job openings per unemployment fell to 1.71 in October, which is the lowest since November 2021. Furthermore, the quits rate of those voluntarily leaving their job (which is correlated with wage growth) fell back to 2.6% in October, and that’s the lowest it’s been since May 2021. From the Fed’s perspective it’s a positive sign in that inflationary pressures from the labour market might be abating, but this is still a very tight labour market compared to the pre-pandemic world of 2019.

Earlier in the day, we also had some more negative data on the growth side, since the MNI Chicago PMI for November fell back to just 37.2 (vs. 47.0 expected). Apart from the pandemic months of April and May 2020, that’s the worst reading for that measure since early 2009, back when the economy was just beginning to emerge from the global financial crisis. In addition, we got the ADP’s report of private payrolls ahead of tomorrow’s jobs report, which showed the slowest monthly growth since January 2021, at just +127k in November (vs. +200k expected). So that echoes the more negative readings we’ve already had from the flash PMIs for November last week. One small piece of good news came from the more backward-looking data for Q3, with the second estimate of GDP revised upwards to show growth at an annualised +2.9% (vs. 2.6% previous estimate).

Over in Europe, we had some better news on the data side, since the flash estimate for Euro Area CPI fell to +10.0% in November, which was beneath the +10.4% reading expected, and down from a record +10.6% in October. It was also the first time in over a year that Euro Area inflation had slowed relative to the previous months, and the downside surprise will offer some support to the more dovish voices at the ECB ahead of their meeting in just a couple of weeks’ time. Nevertheless, our European economists still expect inflation to remain elevated through next year, and their forecasts show it remaining at more than double the ECB’s 2% target throughout 2023, only falling to 4.8% by December 2023. Some of the details from yesterday’s release were also a bit less promising than the headline, with core CPI holding steady at a record +5.0%.

Investor expectations for the ECB were little changed in response to the release, having already reacted to the downside surprises in the country-specific releases on Tuesday. In fact sovereign bond yields actually moved higher across the continent, as they had in the US prior to Fed Chair Powell’s speech, and yields on 10yr bunds (+0.9bps), OATs (+1.3bps) and BTPs (+5.3bps) all moved higher on the day. Equities also put in a pretty strong performance, although they closed ahead of the subsequent bounce in the US, leaving the STOXX up +0.63%.

Overnight in Asia, the optimism from the US has continued and equity markets are rallying across the region. Chinese equities are leading the outperformance, with the Hang Seng (+1.36%), the CSI 300 (+1.31%) and the Shanghai Composite (+0.66%) all seeing solid gains. Those moves have also been supported by comments from China’s Vice Premier Sun Chunlan, who said that “As the omicron variant becomes less pathogenic, more people get vaccinated and our experience in Covid prevention accumulates, our fight against the pandemic is at a new stage and it comes with new tasks”. That was seen by investors as another signal that China could be inching away from the zero Covid strategy. Elsewhere in the region, equities are also trading in positive territory, with the Nikkei (+1.13%) and the KOSPI (+0.28) advancing. In addition, US and European equity futures are pointing to further gains ahead, with those on the S&P 500 up +0.20% this morning.

In terms of yesterday’s other data, German unemployment rose by +17k in November (vs. +13.5k expected), which took the unemployment rate up to 5.6%. Over in the US, the latest data on pending home sales showed a 5th consecutive monthly decline in October, which takes them to their lowest level in over a decade if you exclude the pandemic month of April 2020.

To the day ahead now, and data releases include the global manufacturing PMIs for November, German retail sales for October, the Euro Area unemployment rate for October, the US weekly initial jobless claims, personal income and personal spending for October, and the ISM manufacturing for November. Otherwise, central bank speakers include the Fed’s Logan, Bowman and Barr, as well as the ECB’s Lane.