Equities dropped further this week, earnings reports are mixed and economic data is supporting the higher-for-longer interest rate scenario. Investors are focusing on the corporate earnings of mega-tech names.
Fund Flow: 10Y and 30Y traded at a higher range this week. Global fund flow data showed that the demand for long-duration bonds has increased and has begun to outpace the demand for short-duration bonds. Money market funds, which invest in short-term assets, recorded USD 29 billion inflow this week.
Economic Data: GDP in the US beat expectations in Q3 (actual 4.9% vs expected 4.5%). It is the strongest quarter since the pandemic reopening. The personal consumption expenditures (PCE) price index in September was reported as expected, which also supports the rate pause in Nov meeting.
China’s Boost: An additional RMB 1 trillion of central government issuance is approved unexpectedly, supporting infrastructure investments in the areas that are impacted by natural disasters. The ratio of fiscal deficit to GDP is increased to 3.8%, which is higher than the 3% upper limit.
Bank of Japan: The Governor of the Bank of Japan (BoJ) said policy management will shift from “behind the curve” to “data dependent”. BoJ will abandon yield curve control in Q4 2024, and the abandonment of negative interest rate policy will be in 2025 or later.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
UBS: Earnings of mega-tech companies were mixed. Alphabet and Amazon dropped 9.6% and 5.6% respectively, while Microsoft and Meta increased 3.1% and 3% after earnings released. Overall, 80% of reported companies in the S&P500 beat earning expectations. However, it may be at the expense of Q4 earnings growth.
Standard Chartered: Equities will probably be rangebound in the coming quarter because of the seasonality and capped bond yields. We recommend focusing on US and Japan equities with a diversified approach to Asia ex-Japan markets.
Morgan Stanley: The investment grade (IG) corporate bond performance is mainly driven by the balance sheet health and low locked-in financing costs. In equities, there is a concentration on mega-cap companies. In bonds, there is a concentration on IG issuers with strong balance sheets and favorable interest expenses.
Nomura: In China, we expect one more rate cut in the rest of 2023, even after 2 rounds of RRR cut and rate cut early this year. In the US, we expect the Fed has reached the terminal rate and is likely to keep rates on hold due to the continuing disinflation.
Morgan Stanley: Higher rate implies higher deficits in the US. The debt pile is reaching an all-time high of USD 33 trillion. Interest costs increase rapidly, suggesting that there is higher budget deficit pressure, which may not be an intended consequence of the Fed’s inflation fight.
Barclays: The Chinese government may set an ambitious 5% growth target for 2024, supported by the rare midyear budget deficit and the president's first visit to the People’s Bank of China. We expect more monetary easing policies to accommodate the deficit.
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