Market is expecting more rate hikes after the higher-than-consensus CPI data. Futures have priced in 100% odds of at least a 75bps hike, and the odds for a 100bps hike increased to more than 25%. Sharp sell-off in equities after the inflation report was released and the declines extended to Friday, resulting in the worst week of S&P500 since June. Investors realize that inflation is not going away, and it is too soon to talk about the pivot of monetary policy. For precious metals, the continuous aggressive tightening leads to a higher real interest rate, which is bad for gold. There is no surprise that gold sold off hard in the last couple of days. For Treasury, the message of “inflation has not peaked yet” is backing up the high yield will remain.
SPR: WTI fell to almost $81 last week, kissing the lowest level since January. The White House is planning to start replenishing the SPR when the price hit $80, and that put a floor in the market. Traders would consider there is a buyer at $80 and it is safe to buy there.
European Energy: European governments fork out more than $140 billion to help shield businesses and households from surging energy costs which may lead to insolvencies and recession. In response to the high electricity prices, governments in Europe already working on a series of solutions, including capping consumer electricity prices and offering guarantees and credit to electricity providers with collapsing risk.
Home Loan: The mortgage rate in the US rose above 6%, which has not happened since 2008. It is more than double the level in the previous year. The mortgage rate in the housing sector is sensitive to the change in Fed’s rate changes, and the Fed has been lifting the rate aggressively. It will make houses less affordable and hurt the real economy.
Russia-China: President Xi met Putin for the first time after the invasion. Investors are worried about this action may trigger a potential sanction from the US to China. Although there is no concrete military support from China, they are looking to expand economic cooperation in Russia as a counterweight to western countries.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
UBS: Global healthcare sector is offering attractive growth in the long term with a defensive quality profile at a reasonable price. Consumer staples are also recommended as it is historically well positioned for the period of economic slowdown. It tends to outperform the market when leading indicators weaken, such as ISM.
HSBC: Shanghai Composite Index ended down 3.5% this week despite the advanced real-estate stock and hopes of more policy support. The PBoC kept the 1Y MLF rate unchanged as expected, draining the liquidity from the banking system.
Morgan Stanley: Stock does not look attractive versus comparable corporate debt. The earnings yield of S&P500 and 10Y BBB grade corporate bonds are both above 5%, while stock is considered riskier. In the previous decade, the spread between stock yield and corporate bond yield is 150bps on average, which is the stock risk over credit risk. However, the spread is now negative. HSBC: Treasuries yield rose and the curve continued to flatten as there has been a re-pricing of the short rate path and the corporate bond issuance pipeline is picking up. Treasury yields of 2Y, 10Y, and 30Y rose 7bps, 5bps, and 1bps respectively.
Morgan Stanley: US economic growth is persisted to be relatively better than other countries. In Europe, the energy crisis is worsening and the likelihood of imminent recession is rising. China remains stuck in its self-inflicted wounds, including the zero-COVID policy, overleveraged real-estate sector, and crackdowns on tech firms’ capital raising.
J.P. Morgan: Investors are wondering whether the job vacancies can drop from record high without a significant lift in unemployment. Although the Fed plans to ease wage pressures by cooling down the job market, there might be a decrease in job matching efficiency in the post-pandemic era. The scarce labor in certain regions and industries could elevate wage growth and deteriorate profit in those sectors.
Nomura: The forecast of a rate hike for the next meeting has raised from 75bps to 100bps. The fed has to accelerate its tightening policy in order to cool down inflation and overheating job market. The recession in the US is likely to start next quarter.
Morgan Stanley: US dollar up 14% YTD, driven by the speed of rate hikes and relative strength of the US economy. Volatility in currency is high, and absolute valuations are at extremes. Although the strong dollar helps to alleviate inflation, it threatens corporate earnings because of the deterioration in competitiveness and foreign profit translation. Assets in the US become less attractive as the current positions held by foreign investors are vulnerable to repatriation.
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