Weekly Market Update (August 14, 2022)
Equities pullback early last week due to the disappointments in earnings, especially in the semiconductors sector. US equity indices rebounded sharply because of the CPI result showing the inflation situation could be easing and the global consumer demand will be higher. The bond market also indicates that investors' sentiment about the recession might have already bottomed.
Fed: Owing to the lower-than-expected CPI and PPI, market believes that Fed could moderate its pace of tightening. The probability of a 75bps hike in September has declined from 80% to 40%, implied by the bond market. 50bps is the new consensus, which would be the first slowdown of tightening.
PPI: The gauge of producer prices fell for the first time last month since 2020 April. It dropped 0.5% from a month earlier while economists were expecting a 0.2% up. Similar to CPI the day before, the decline is mostly contributed by the easing in energy prices.
Rent Crisis: Rental growth is the highest in more than 30 years. High interest rates are driving rents higher as more people switch from buying to renting. Interest rates are sticking around 5%. Potential buyers are waiting for the rates and prices to go down.
Energy Disaster: Electricity prices in Europe hit record. Heatwaves have intensified the demand, while the wildfires in France and the drying up Rhine River in German (vital waterways) have added to supply disruption. Natural gas supply dwindled due to the Russian supply cuts. Also, more than half of the nuclear fleet is closed for maintenance in France.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Historically, equity markets in the US usually rally significantly after half-year following the bottom of the bear market, especially for the small caps.
HSBC: US equities rallied right after the cooler inflation signal, but then reverse and ended little changed. Investors lost impetus in stocks like mega tech and growth stocks, while there was a significant jump in treasury yields.
Morgan Stanley: There is a strong correlation between the unemployment rate and the job vacancy rate. There is a phenomenon that the labor supply becomes more constrained as more people leave the workforce, implying that there is a modest effect on unemployment given the lower demand for labour. Wage is expected to grow further, consistent with stagflation.
J.P. Morgan: Job growth in cyclical sectors has accelerated, including manufacturing and construction. Employees are having substantial bargaining power, supported by the strong rise in wages for all workers with an upward revision in recent months.
Goldman Sachs: Risks are more balanced from the levels these days albeit with more volatility came in the risky assets. A series of factors are contributing to the uncertainties in the markets, including the elevated inflation level, decelerating growth in GDP, and tight labor market.
Morgan Stanley: Bonds are a sensible relative portfolio hedge with a widening spread and terminal value is more reasonable reflected by the long-term rates. However, the risk of execution remains high given tightening ahead causing even higher inflation.
HSBC: US treasury yield rose, stemming from the long-end curve selloff and soft auction result of 30Y debt. Investors expect rate hikes to continue despite signs of inflation cooling.
HSBC: Oil prices jumped because of the high expectation of oil demand growth. Manufacturers and power generators are expected to switch their fuel to oil due to the soaring natural gas prices.
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