Weekly Market Update: UK government policy reversal not enough to comfort markets gripped by inflation
Fri, 14 Oct 04:15 PM EST/09:15 PM GMT
Stocks remained heavy coming into the week as last Friday’s strong September jobs report kept the door wide open for further Fed tightening. Volatility rose, foreshadowing wild trading to come in the aftermath of Thursday’s CPI release. Worries surrounding the UK Gilt markets festered. On Tuesday, the UK 10-year Gilt hit a fresh 14-year high above 4.5% after the BOE once again affirmed plans to end its emergency bond-buying program on Friday. The BOE was subsequently forced to step in again by widening its emergency bond-buying operations, but Governor Bailey drew the line in the sand when he called on UK pension funds to right-size LDI exposure before the opportunity closes. Speculation also continued to swirl that PM Truss would ultimately be forced to backtrack on some of the key promises of Chancellor Kwerteng’s mini budget. Separately, the Japanese Yen hit fresh 24-year lows against the dollar after the BOJ Governor Kuroda reiterated they will continue easing in Japan despite the starkly divergent monetary policy relative to the US and Europe. By Wednesday, US stock markets were riding a 6 day losing streak after PPI data topped expectations ahead of the CPI numbers on Thursday.
The September CPI report wasn’t pretty, but really shouldn’t have surprised anyone, and the markets more than shrugged it off. Core CPI posted another gain of 0.6% m/m, topping estimates and climbed to the highest annual pace since 1982, notching a 6.6% reading. The composition of the inflation increase offered no immediate reason to hope for a quick reversal. Much of the upside disappointment was due to shelter costs, which continue to accelerate, posting the largest monthly gain since 1990. The hot CPI print cemented expectations that the Fed will hike by 75 bps in November and tipped futures odds in favor of another 75 bps in December, boosting the market’s expectation for the terminal rate to top out north of 4.8% in 2023. Nevertheless, after opening lower with the S&P testing 3500, stocks roared back with an eye popping classic bear market rally on significant volumes. S&P futures had nearly a 200 point swing from the morning’s lows in what mostly attributed to short covering and oversold options positioning.
Friday saw another 100+ point swing in the futures, but this time to the downside. Follow though momentum into the NY open faded alongside another chorus of Fed officials emphatically reiterating financial conditions need to tighten further and stay there in order to bring inflation down. University of Michigan data offered no reprieve on the inflation front after 1-year inflation expectations rose sharply above consensus. UK Gilt markets remained in focus after PM Truss dismissed Chancellor Kwarteng and, as speculated, backtracked on key measures of the unsettling mini budget announcement. The Pound remained under pressure and UK yields rose in the aftermath of her press conference, suggesting the situation is far from resolved with the BOE backstop now gone and QT set to commence at the end of the month. WTI crude prices dropped 3% into week’s end, perhaps helped in part by some marginally softer rhetoric from Putin towards Ukraine. The US dollar remained bid while Treasury yields drifted back towards cycle highs with the 2-year back above 4.5% and the 10-year retesting 4%. For the week, the S&P lost 1.5%, the DJIA gained 1.2%, and the Nasdaq dropped dropped 3.1%.
In corporate news this week, a wide variety of consumer companies touted better than expected quarterly results. PepsiCo shares popped as the company reported strong Q3 numbers and raised fiscal year guidance, saying that global business momentum remains strong. Luxury goods maker LVMH beat quarterly revenue expectations and expressed confidence that current growth will continue. American Airlines lifted off from recent lows after raising its Q3 guidance ahead of next week’s earnings release, though rival Delta reported earnings and revenue a bit below forecast. Financial services firms started the new earnings season off on a positive note, with Wells Fargo and Citigroup beating estimates handily. JP Morgan also reported better than expected results for Q3 even after CEO Dimon warned earlier in the week that the US economy will likely slip into an actual recession within the next nine months. Apple took a deeper step into the fintech market with the launch of a new high-yield savings account for Apple Card from Goldman Sachs. The woes in the chip sector continued to pile up as a report said Intel plans thousands of layoffs, including 20% of sales and marketing staff, amid the slowdown in PC sales. And in M&A news, Kroger proposed creating a grocery giant via a $24.6B merger with Alberstons, a merger that may face significant regulatory scrutiny.
SUN 10/9 (RU) Russian govt spokesperson Peskov: It is wrong to consider the terrorist attack on the Crimean bridge as a reason for the possible use of nuclear weapons according to Russian doctrine MON 10/10 (UR) Telegram channels circulating reports on 'massive explosions' near centers of Ukraine capital Kyiv and several biggest cities Dnipro, Lviv, Zhytomyr (RU) Belarus President Lukashenko: Belarus and Russia to form a joint regional grouping of troops; The process of formation of this group has been going on for two days; NATO and a number of European countries are considering options for possible aggression against Belarus (CN) China's PBOC and ECB said to renew Euro-Chinese yuan swap agreement worth CNY350B - press (UK) Treasury Select Committee Head: Govt to bring forward medium-term fiscal plan OBR forecast to Oct 31st from Nov 23rd (CN) Shanghai requires arrivals to take 3 COVID tests within 3 days - press (UR) During today's Russian massive missile attacks on regional centers in Ukraine, visa office of the German embassy in Kyiv was reportedly hit - German press (RU) Russia Pres Putin: Reiterates Ukraine is behind Crimea bridge attack; Ukraine conducted 3 attacks on Russian Kursk nuclear plant and also tried to blow up Turkstream gas pipeline (RU) Russia Dep Chair of Security Council Medvedev (former Pres): Strikes on Ukraine today were the first episode and there will be more; Russia must work to dismantle Ukraine's political regime DPW.DE Reports prelim Q3 EBIT €2.04B v €2.00Be; B2C volumes has improved in Q3; To raise FY22 outlook on Q3 earnings release on Nov 8th WHO fears Monkeypox variant, Clade I virus, circulating in the Democratic Republic of the Congo could go global Adobe forecasts US holiday season online $209.7B, up 2.5% y/y, the slowest growth since 2012; Cyber Monday forecast >$11B PPG Reports prelim Q3 5-7% below low-end of prior $1.75-2.00 outlook (implies $1.63-1.66) v $1.82e; Sees Q4 segment earnings growth 20% with soft demand conditions in Europe, China expected to continue into Q4 (DE) Germany govt supports joint EU debt to provide loans to address energy crisis - press (DE) German Government Member reportedly rejects earlier report that Germany backs joint EU debt for loans to ease energy crisis - press JPM CEO Dimon: ‘This is serious’; Warns US likely to tip into recession in 6 to 9 months - CNBC QGEN Reportedly Bio-Rad in talks to merge with Qiagen in a potential $10B+ deal - press (US) Track maintenance workers said to have rejected labor deal with freight railroads backed by the Biden Administration - press LEG Cuts FY22 outlook due to lower volumes; Saw home furniture demand softened significantly in the last few months TUES 10/11 (UK) BOE: To widen scope of of daily Gilt purchases; to purchase index-linked GILTS during Oct 11-14th; Will allocate £5B to index-linked bond purchases (FR) France Fin Min Le Maire: Negotiations need to begin in the refinery strike; otherwise the govt will intervene; Priority remains to restart EDF nuclear reactors as soon as possible (CN) According to SCMP piece, China gives clearest sign yet it will stick with zero-Covid policy as Communist Party mouthpiece newspaper People’s Daily called for confidence and patience in China with the zero-Covid strategy - press KLAC Said to stop some sales and services to China, including to China-based customers such as South Korea's SK Hynix and chip plants owned by Intel to comply with US export curbs - press (JP) Japan 10-year JGB bond fails to trade for the 3rd straight session (1st time since 1999) (RU) Russia Foreign Min Lavrov: We are willing to listen to any suggestions on possible peace talks; If US proposes Putin-Biden meeting at a forthcoming G20 meeting, we will consider it BAC (US) BoA institute find Sep total payments +10% y/y, however evidence of housing market slowdown emerges AAL Raises Q3 Rev +13% (prior +10-12%), TRASM +25% (prior +20-24%), CASM +14% (prior +12-14%) - filing (SA) White House spokesperson Kirby: Pres Biden is re-evaluating relationship with Saudi Arabia after OPEC+ output cut NLY Reports book value/shr $19.85-20.05 at Sep v $23.59 in June; Estimates cash and agency MBS liquidity position at $4.1B (US) Dept of Labor releases proposal to force companies to reclassify independent contractors as employees *IMF WORLD ECONOMIC OUTLOOK (WEO): CUTS 2023 WORLD OUTLOOK, WARNS 'WORST IS YET TO COME'; CUTS 2023 GDP OUTLOOKS FOR EURO AREA, UK, CHINA, LATAM (UR) NATO Sec Gen Stoltenberg: NATO will hold planned nuclear deterrence exercises next week; What we saw yesterday is a sign of Russian weakness because Russia is not making advances on the battlefield (US) NY Fed Survey of Consumer Expectations: Sept one year ahead expected inflation 5.4% v 5.7% m/m (lowest since Sept 2021) MC.FR Reports Q3 Rev €19.8B v €19.1Be; Confident in continuation of current growth (US) Fed's Mester (FOMC voter): Reiterates does not expect Fed to lower rates in 2023; Yet to make any progress on inflation (UK) Bank of England (BOE) Gov Bailey: See serious risk to financial stability in the UK; Reiterates intervention in GILT markets will be temporary, BOE will be out by the end of the week - Washington event (US) Fed's Mester (FOMC voter): Fed should stick to balance sheet runoff plan; Need to do more, inflation has not slowed; Fed officials aligned on where policy needs to go INTC Said to plan thousands of jobs cuts due to PC slowdown; To focus on sales and marketing, but cuts said to be company-wide; Layoffs could be announced as early as in Oct - press WEDS 10/12 PHIA.NL Reports prelim Q3 Rev €4.3B v €4.53Be; Sees prolonged supply chain disruptions and a worsening macro-environment; To record €1.3B goodwill impairment charge (CN) China's Communist Party mouthpiece newspaper People’s Daily endorses zero-Covid policy for 3rd straight day; Notes it's impossible to win Covid battle by lying flat and China will stick with zero-Covid strategy to avoid huge losses arising from losing control of the epidemic *(UK) AUG MONTHLY GDP M/M: -0.3% V 0.0%E; GDP 3M/3M: -0.3% V -0.2%E *(UK) AUG INDUSTRIAL PRODUCTION M/M: -1.8% V -0.1%E; Y/Y: -5.2% V +0.6%E (PL) Polish energy firm Pern detects a leak and depressurization in one line of the Druzhba oil pipeline (4-8% of total EU capacity) from Russia to Germany; Pumping of oil through the Polish line was immediately halted; Notes cause of the incident is unknown at this time *(UK) BOE SPOKESPERSON: REITERATES STANCE THAT TEMPORARY GILT BOND-BUYING SCHEME STILL TO END ON FRI, OCT 14TH (UR) IAEA chief Grossi: Zaporizhzhia Nuclear Power Station has lost all of its external power for the second time in five days; Again relying on diesel generators (UR) According to Ukraine energy firm Energoatom, Russia side does not allow convoy with diesel fuel to access Zaporizhzhia Nuclear Power Station which was again cut from external power for the second time in five days (JP) Japan 10-year JGB bond fails to trade for the 4th straight session (1st time since 1999) PEP Reports Q3 $1.97 v $1.85e, Rev $22.0B v $20.9Be; Raises FY22 outlook; Notes global business momentum remains strong (RU) Russia Pres Putin: Global economy is in acute crisis; Reiterates Ukrainian Special Services behind attack on Crimea bridge; It is possible to repair Nord Stream, but only if it will work - Russia Energy Week comments (UK) PM Truss: The last thing we need is a general election; NO plans to cut public spending - House of Commons comments BAS.DE Reports prelim Q3 Net €909M* v €1.11Be, adj EBIT €1.35B v €1.31Be, Rev €21.9B v €21.1Be; Initiates cost savings play through 2024 (JP) Bank of Japan (BOJ) Gov Kuroda: BOJ will continue easing to hit inflation target of 2% in stable and sustainable manner (EU) ECB’s Knot (Netherlands, hawk): Need at least two more significant ECB rate hikes; Reiterates Council view that rates are way below neutral; must end accommodation phase *(US) SEPT PPI FINAL DEMAND M/M: 0.4% V 0.2%E; Y/Y: 8.5% V 8.4%E CABK.ES Reportedly proposes sector-wide freeze in variable mortgage costs - press (US) Reportedly White House considering ban on Russian aluminum - press (US) Association of American Railroads weekly rail traffic report for week ending Oct 8th: 494K total units, -2.4% y/y (EU) ECB policymakers said to near deal to modify TLTRO rules that could reduce potential banking profits by tens of billions; Decision may come at Oct 27th meeting - press (JP) Japan Sept PPI (CGPI) M/M: 0.7% v 0.3%e; Y/Y: 9.7% v 8.9%e THURS 10/13 2330.TW Reports Q3 (NT$) Net 280.9B v 156.3B y/y (v 265.6Be); Op 310.3B v 171.0B y/y; Rev 613.1B v 414.7B y/y; Cuts FY22 Capex outlook *(DE) GERMANY SEPT FINAL CPI M/M: 1.9% V 1.9%E; Y/Y: 10.0% V 10.0%E GSK.UK GSK's older adult respiratory syncytial virus (RSV) vaccine candidate shows 94.1% reduction in severe RSV disease and overall vaccine efficacy of 82.6% in pivotal trial; Regulatory submissions based on the phase III data are anticipated in H2 2022 2330.TW CEO: Cuts FY22 Capex $36.0B (prior lower-end of $40-44B); Affirms FY22 Rev outlook; Face challenges from rising inflationary costs in 2023; Expects 2023 to be a growth year for TSMC (CN) China senior health advisor official Liang: Dynamic zero-Covid policy in the past three years has proven to be effective, feasible and scientific; China must continue with zero-Covid policy (NO) Norway's natural gas processing plant Nyhamna reportedly has been evacuated; Norwegian police responding to 'unclear situation'; Norway gas system operator Gassco notes gas transport and production are not disturbed - Norwegian press IEA Monthly Oil Report (OMR): EU yet to replace more than half of pre-war Russian oil imports (UR) EU Foreign Policy Chief Borrell: Nuclear attack against Ukraine will trigger not a retaliatory nuclear, but a powerful military response (BE) ECB's Wunsch (Belgium, hawk): Rate seen around 2% by end-2022; would not be surprised if rates went above 3.0% - CNBC interview BLK Reports Q3 $9.55 v $7.93e, Rev $4.31B v $4.41Be DAL Reports Q3 $1.51 adj v $1.56e, Rev $14.0B v $14.2Be; Working toward full network restoration by summer 2023 (UK) PM Spokesman Blain: UK tax position has not changed; PM Truss has full confidence in the OBR's ability to forecast accurately FAST Reports Q3 $0.50 v $0.48e, Rev $1.80B v $1.79Be; Did not take any broad pricing actions in Q3 RLMD Reports top-line results from Phase 3 RELIANCE III trial for REL-1017 as a monotherapy for treatment of major depressive disorder; Paradoxical results observed in certain study sites, where placebo dramatically outperformed REL-1017; RELIANCE I and II Adjunctive MDD trials continue to advance (UK) Sky News reports that some UK govt officials discussing which part of mini budget might be dropped *(US) SEPT CPI M/M: 0.4% V 0.2%E; Y/Y: 8.2% V 8.1%E (annual pace records 3rd straight decline); Core CPI Y/Y highest since 1982 Redfin: Asking rents rise 9% y/y in Sep, slowest growth since August 2021 (RU) Kremlin spokesperson: The goals of the 'special operation' in Ukraine are unchanged, but they can be achieved through negotiations - Russian press (LT) ECB's Simkus (Lithuania): Favors 75 basis point hike this month along with discussion around TLTRO requirements; Do not see financial instability (US) Atlanta Fed Sep Sticky-CPI annualized 8.5% v 7.7% m/m, core 8.3% v 7.5% m/m (40-year high) *(US) DOE CRUDE: +9.9M V +1ME; GASOLINE: +2.0M V -1ME; DISTILLATE: -4.9M V -1.5ME AAPL Announces new high-yield savings account for Apple Card from Goldman Sachs *(US) TREASURY $18B 30-YEAR BOND REOPENING DRAWS 3.930% V 3.511% PRIOR; BID TO COVER 2.39 V 2.42 PRIOR AND 2.35 OVER LAST 8 REOPENINGS (Highest yield since 2011) *(SG) SINGAPORE Q3 ADVANCED GDP Q/Q: 1.5% V 0.7%E; Y/Y: 4.4% V 3.5%E *(CN) CHINA SEPT CPI M/M: 0.3% V 0.4%E; Y/Y: 2.8% V 2.9%E [fastest annual pace since Apr 2020] FRI 10/14 IDS.UK Trading update: prelim H1 adj Op -£219M v +£235M y/y; Could cut up to 6,000 jobs by Aug 2023; Urges CWU to immediately call off planned strike; All options remain open, including separation of the two companies (RU) Reports circulating that a NOTAM** notice was issued for large parts of Russia's Kara Sea for Oct 17-22nd (US) Pres Biden to sign an executive order on Oct 14th pushing federal officials to drive prescription drug costs down - press (UK) CHANCELLOR OF THE EXCHEQUER (FIN MIN) KWARTENG CONFIRMS TO STEP DOWN - TWEET JPM Reports Q3 $3.12* v $2.97e, Managed Rev $33.5B v $32.3Be; Expects to reach current target CET1 ratio of 13% in Q1 2023; Hopes to resume buybacks early 2023 JPM Raises FY22 NII $61.5B (prior $58B+) v $44.5B y/y; Adj expense $77B (prior $77B) v $71B y/y - earnings slides ACI Confirms to be acquired by Kroger for $34.10/shr in cash plus special dividend of ~$6.85/shr valued at EV of $24.6B; To establish subsidiary (SpinCo) as standalone company prior to merger closure (RU) Russia Pres Putin: No need for massive strikes on Ukraine now, No plans for additional mobilization in Russia C Reports Q3 $1.63 v $1.55e, Rev $18.5B v $18.4Be (UK) PM Truss: Confirms will keep corporation tax rise to 25% (from 19%), Clear that parts of the mini-budget went too far (US) SEPT ADVANCE RETAIL SALES M/M: 0.0% V 0.2%E; RETAIL SALES (EX-AUTO) M/M: +0.1% V -0.1%E (US) OCT PRELIMINARY UNIVERSITY OF MICHIGAN CONFIDENCE: 59.8 V 58.8E; 1 year inflation expectations 5.1% v 4.6%e
(US) Fed's Daly (non-voter): The latest CPI was very disappointing but not surprising, 4.5-5% most likely top FED funds rate, will hold there