The post-payrolls slump in US stocks and global markets was set to deepen on Monday amid jitters around the Fed's policy outlook and an escalation of tensions between Washington and Beijing. Nasdaq 100 futures were down 1.2% as of 745 a.m. ET while S&P 500 futures fell 0.6%, both well off session lows, as investors watched developments between the US and China over a suspected spy balloon, with pressure mounting on President Joe Biden to retaliate with new export controls on sensitive technology, setting back a recent improvement in US-China relations.
Japanese stocks climbed and the yen weakened after the Nikkei reported that the government had approached Bank of Japan Deputy Governor Masayoshi Amamiya about succeeding Haruhiko Kuroda as head of the central bank. While the Japanese government refuted the report, investors assume a greater likelihood of the current ultra-easy monetary policy enduring if one of its architects succeeds Kuroda. The Stoxx Europe 600 index dropped more than 1% after closing Friday in a bull market, with the technology and real estate sectors leading the retreat. 10Y TSY yields jumped as high as 3.60% while the dollar climbed for a third day, hitting a 4 week high after a gauge of its strength rose more than 1% Friday, oil drifted modestly higher after a massive earthquake in Turkey halted oil pipeline flows to the Ceyhan export terminal.
US-listed Chinese stocks were on track to fall for a third session, after Washington’s move to shoot down an alleged surveillance balloon from China spurred new tensions between the two countries. The US sent divers to salvage what they believe is spy equipment from the Chinese balloon off the coast of South Carolina, with pressure mounting on President Joe Biden to hit back at Beijing with new export control measures.
Among the biggest premarket movers, Newmont Mining dropped after it offered to buy Australia’s Newcrest Mining in a $17 billion deal that would strengthen the US mining powerhouse’s position in copper and gold. Datadog shares are in focus after KeyBanc Capital Markets downgraded the stock to sector weight from overweight. At the same time, the brokerage upgraded Splunk Inc. to overweight from sector weight. Here are some other notable premarket movers:
US stocks declined on Friday as a laughably strong jobs report fanned fears that the Fed could keep interest rates higher for longer. Still, the drop wasn’t sufficient to wipe out weekly gains in the S&P 500 as investors clung to optimism that the central bank’s policy meeting signaled it was preparing to soften its stance on policy over the next few months. The benchmark index has now gained nearly 8% so far this year, but market strategists warned the rally may have gone too far.
“Central bankers did sound less hawkish last week, but they will remain data dependent, only ending rate hikes when economic data provides compelling evidence that inflation is returning to target,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “In our view, markets have moved too quickly to price in this pivot.”
Goldman strategists also capitulated on the recent market meltup, lifting their 3-month S&P price target from 3,600 to 4,000 but also said they see limited upside for stocks from hereon amid pressure from higher valuations, elevated interest rates and a lackluster corporate earnings outlook. Morgan Stanley’s Michael Wilson broadly shares that view, while JPMorgan Chase & Co. strategists said international markets continue to screen as “much more interesting” than the US. In short: banks remain largely bearish which is why stocks will keep rising.
“The state of the employment sector is a significant factor in the Federal Reserve’s decision-making process, and thus the number has certainly provided investors with another factor to consider when predicting the course of the Fed’s movements over the next couple of months,” economists at Rand Merchant Bank in Johannesburg wrote in a note.
Elsewhere, more than 1,000 people have been killed in Turkey and neighboring Syria after the countries were hit by some of the most powerful quakes in the Middle East in decades. Turkey’s lira held steady against the dollar, while the country’s benchmark stock index dropped, with the Istanbul exchange suspending short selling as part of measures to limit wider market fallout.
European stocks also started the week on the back foot: the Stoxx 600 is down 1.1% with real estate, tech and retailers the worst-performing sectors. Here are some of the most notable premarket movers:
Earlier in the session, Asian stocks also fell as concerns over US-China geopolitical tensions fueled risk-off sentiment in the region, with traders also mulling the prospect of further interest rate hikes by the Federal Reserve. The MSCI Asia Pacific Index dropped as much as 1.6%, the most in over seven weeks, dragged by technology shares. Stocks in China and Hong Kong were among the worst performers after the US shot down an alleged Chinese spy balloon off the South Carolina, raising the risk of retaliation from Beijing. Also weighing on sentiment was an unexpectedly strong US jobs report, seen as giving the Federal Reserve room to remain aggressive in its fight against inflation. Investor optimism had risen recently on signs of a moderation in Fed rate hikes as well as China’s post-pandemic reopening.
“Admittedly, a reassessment of geopolitical and policy risks will almost certainly be forced upon markets, taking some air out of stretched ‘pivot’ and China cheer,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank Ltd. Japanese shares bucked the region’s losses on Monday, as the yen weakened after a report that Masayoshi Amamiya was approached by the government to lead the Bank of Japan, fueling hopes of continued easy-money policy.
Japanese stocks gained after the Nikkei reported that Masayoshi Amamiya was approached by the government for the role of Bank of Japan governor, a report which however was promptly denied by Japanese authorities. Investors expect a greater likelihood of Haruhiko Kuroda’s ultra-easy monetary policy being extended under Amamiya than with other candidates. “Since Amamiya was the most dovish candidate, this is positive news for the Japanese stock market,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “Share prices are likely to swing upward until the official announcement this Friday, and that might be the climax for stocks.” The Japanese currency fell as much as 1% Monday to around the 132.50 per dollar level, its lowest in three weeks. Shares of automakers and property firms climbed while banks and other financials fell. Yen Retreats After Report Amamiya Approached to Become BOJ Chief The Topix rose 0.5% to close at 1,979.22, while the Nikkei advanced 0.7% to 27,693.65. Mitsubishi Corp. contributed the most to the Topix gain, increasing 7.8%. Out of 2,164 stocks in the index, 1,416 rose and 640 fell, while 108 were unchanged.
Australian stocks declined: the S&P/ASX 200 index fell 0.3% to close at 7,539.00, weighed by losses in real estate shares and banks. Meanwhile, Newcrest Mining closed 9% higher after Australia’s biggest gold miner received an indicative takeover proposal from US-based Newmont Corp. Markets in New Zealand were closed for a public holiday.
Stocks in India declined as most Asian markets slipped amid concerns over US-China geopolitical tensions. The rout in Adani Group’s shares eased as four of ten companies advanced after Billionaire Gautam Adani and his family prepaid $1.11b worth of borrowings backed by shares. The move comes amid the conglomerate’s attempts to allay investor fears and stem a stock rout that has wiped of about $118 billion of stock value. The S&P BSE Sensex fell 0.6% to 60,506.90 in Mumbai, while the NSE Nifty 50 Index declined 0.5%. Ten out of BSE Ltd.’s 20 sector sub-gauges advanced while the rest fell. Metals and utility companies were the worst performers. Telecom stocks were higher after India agreed to convert $2b of Vodafone Idea’s dues into equity. The Reserve Bank of India’s three-day policy meeting commenced Monday. The central bank will release its rate decision Wednesday morning, with majority analysts expecting a 25-bps rate hike to curb inflation. Infosys contributed the most to the Sensex’s decline, decreasing 1.8%. Out of 30 shares in the Sensex index, 21 fell and nine rose
In FX, the Bloomberg Dollar Spot Index rose 0.4% to its highest level in nearly four weeks as the greenback strengthened against all its Group-of-10 peers apart from the Swiss franc; the Japanese Yen is the weakest among the G-10 currencies amid speculation over the next BoJ Governor.
In rates, treasuries extended Friday’s jobs-report selloff with yields climbing a further 5bp to 10bp across the curve over Asia, early London sessions as central bankers reinforce hawkish message and tightening premium is added into swaps. The Treasury curve bear-flattened as front-end yields added up to 12 bps with 10Y yields rising 8bps to 3.60%. US curve bear-flattens with front-end and belly of the curve cheaper up to 10bp on the day while long-end yields rise 4.5bp; 2s10s and 5s30s spreads are tighter by ~2bp and ~5bp. In 10-year sector gilts lag, underperforming by 9bp vs Treasuries, bunds by 2bp. Gilts extended declines after hawkish remarks from BoE policymaker Mann. UK two-year yields are up 15bps. In the US, the dollar issuance slate includes three dollar deals; projections for the week range between $30b and $35b as most companies emerge from their self-imposed earnings blackout periods. US auctions resume Tuesday with $40b 3- year notes, followed by 10- and 30-year sales Wednesday and Thursday.
In commodities, oil climbed after Turkey halted flows to the Ceyhan export terminal on the Mediterranean coast as a precaution in response to the devastating earthquakes in the region Monday. Crude futures are higher with WTI rising 0.6% to trade near $73.80. Spot gold rises roughly 0.4% to trade near $1,873.
There is no macro data on the calendar today.
Market Snapshot
Top Overnight News from Bloomberg
A more detailed look at global markets courtesy of Newsquawk
APAC stocks began the week mostly on the back foot after last Friday’s losses in the US where a blowout jobs report spurred hawkish rate bets and was seen to boost the Fed’s resolve of lifting rates further to above 5%. ASX 200 was subdued heading into tomorrow’s RBA decision and after a jump in the MI Inflation Gauge added to the inflationary narrative, although the downside was limited after quarterly Retail Sales data printed not as bad as feared and amid M&A prospects with Newmont making a USD 16.9bln offer for Newcrest Mining. Nikkei 225 outperformed after a report that Japan’s government sounded out BoJ's Amamiya about becoming the next BoJ Governor with Amamiya seen as more dovish compared to other candidates and was also a key architect in many of the BoJ’s policies including QQE with YCC, although the report was later refuted by a senior government official. Hang Seng and Shanghai Comp. were lower with Hong Kong pressured by losses in tech, healthcare and property, while risk sentiment was also clouded by tensions after the US shot down China’s spy balloon.
Top Asian News
European bourses are lower across the board, Euro Stoxx 50 -1.5%, as Friday's post-NFP price action continues to reverberate. Stateside, futures are similarly pressured ES -1.0% given the hawkish repricing, as such the tech-laden/yield-sensitive NQ -1.3% is lagging.
Top European News
Central Banks
FX
Fixed Income
Commodities
Geopolitical
US Event Calendar
DB's Jim Reid concludes the overnight wrap
The week after payrolls is usually quiet for data. All I can say is thank goodness for that as it'll take until next month's release to decipher Friday's report. We'll have a first stab at it below but before we do, we'll quickly outline the highlights of the week ahead.
Given the blockbuster payrolls print, Fed Chair Powell's speech at the Economic Club of Washington tomorrow could be the highlight. The release valve post the blackout period will mean we have a mini deluge of other Fed speakers too including Vice Chair of Supervision Barr (tomorrow), New York Fed President Williams, Fed Governor Cook, Minneapolis President Kashkari and Fed Governor Waller (all Wednesday). Their comments on the payroll report will be devoured and it'll be interesting if they, and especially Powell, decide to slightly firm up the hawkish spin and be more explicit on a terminal rate above 5%. We continue to think we'll get that, but the market has been increasingly pricing a pause after March and cuts by year-end. To be fair, Friday saw terminal edge back above 5% (climbing +12.5bps to 5.025% on the day) with December 2023 contracts up +23bps to 4.58%. This week's Fedspeak on financial conditions will also be interesting as the relaxed attitude of Powell to them at the FOMC presser encouraged a big dovish market reaction. Much of this was reversed on Friday but the sensitivities to such comments remain high. There's plenty of other central bank speak this week. See it in the day-by-day calendar at the end.
In terms of data, it's certainly a second-tier week ahead. The delayed German CPI report on Thursday might be one of the highlights. It was delayed due to technical issues around base year changes. Given the payrolls revisions, that does make one a little nervous (in either direction), but we will see. In the US, the UoM consumer sentiment survey (Friday) and the usual inflation expectations will be a focus as usual. Elsewhere, UK GDP numbers on Friday will be a highlight after the IMF last week suggested they would be one of the 2023 developed world growth laggards.
Over in Asia, key macro indicators include China's CPI and PPI reports on Friday, with median Bloomberg estimates pointing to readings of 2.2% YoY (vs 1.8% in December) and -0.5% YoY (vs -0.7% in December), respectively.
Earnings season continues in the background. Just under half of S&P 500 firms have now reported with results from Disney, Uber (Wednesday) and PayPal (Thursday) among the key ones for the large cap index this week. Private capital managers will also be in the spotlight with KKR (Tuesday), Brookfield (Wednesday) and Apollo (Thursday) releasing results throughout the week. European Big Oil heavyweights also report including BP (tomorrow) and Total (Wednesday). Consumer-driven names including Chipotle, Royal Caribbean (tomorrow), PepsiCo and L'Oreal (Thursday) report with other notable earnings releases including Activision Blizzard (today), AstraZeneca and Siemens (Thursday).
Now that's out of the way, let's go back to an astonishing payrolls report where the annual revisions caused chaos amongst the economist community. Indeed, our economists noted (here) that the benchmark revisions have increased 2022 nonfarm payrolls by 586k. In addition, hours worked were revised up by a tenth to 34.6 and average hourly earnings (AHEs) revised up by 20bps (12-month average). The upshot is that the year-over-year growth rate of the payroll proxy for nominal income growth as of December 2022 was revised up by 80bps (to 7.3%) relative to what was previously reported prior to the benchmark revision.
If an extra 586k jobs in 2022 wasn't enough, January saw both headline (517k vs. 260k last month) and private (443k vs. 269k) payrolls exceed consensus estimates. Unemployment fell a tenth to 3.4% to fresh 53-year lows, and the labour force participation rate edged up a tenth to 62.4%. Elsewhere, AHEs (+0.3% vs. +0.4%) was largely in line with expectations but weekly hours worked surprisingly rose 0.3 hours to 34.7hrs. Our economists also highlighted that the combination of strong job gains, a surge in hours worked and a still-sturdy increase in AHEs meant that the year-over-year growth rate of the payroll proxy for nominal income (particularly the compensation component) increased by 120bps to 8.5% -- nearly 200bps above what they had previously imagined. In trying to explain the bumper January, some have looked at the seasonal adjustment. Normally January is a big month for seasonal layoffs and these get accounted for in the seasonal adjustments. However, in January 2023 lay-offs were 300-400k less than usual. This is no smoking gun but shows the huge seasonals that take place in January. But make no mistake, the other parts of the report - past and present - were strong so it's more to try to assess whether it was as strong as appears.
Asian equity markets are trading lower after the print. As I type, the Hang Seng (-2.31%) is leading losses across the region with the CSI (-1.67%), the Shanghai Composite (-1.01%) and the KOSPI (-1.02%) also falling sharply on renewed risk aversion. Adding to the downbeat mood are geopolitical concerns after the Chinese spy balloon was shot down by the US (more on this below). Elsewhere, the Nikkei (+0.76%) is bucking the trend in early trade as the Japanese yen initially weakened over -1% against the dollar, after a report indicated that the BOJ’s Deputy Governor Masayoshi Amamiya has been approached to potentially take over the role as the next Governor once Haruhiko Kuroda’s term ends on April 8. He is seen as dovish and thus prompting the reaction. The story has been denied and the Yen has halved its losses but the market will likely think that there is no smoke without fire. Outside of Asia, US stock futures are printing fresh losses with contracts tied to the S&P 500 (-0.31%) and NASDAQ 100 (-0.37%) edging lower. Meanwhile, yields on 10yr USTs (+2.04 bps) are trading at 3.55% as we go to press.
Looking ahead, the diplomatic tensions over the Chinese balloon entering US air space will be worth watching this week. The US shot it down over a weekend that was supposed to mark a thawing of diplomatic relations between the countries, with Secretary of State Antony Blinken visiting China, the first such visit in four years. This was postponed last week and an originally conciliatory China turned more aggressive after the balloon was eventually shot down. We will see if there is any retaliation and/or how strong the rhetoric is.
Looking back at last week now. Risk assets performed strongly over the week, but fell back on Friday after the US jobs data surprised significantly to the upside and moderated market expectations of the Fed cutting rates at the back end of 2023. The ISM services index for January also surprised to the upside, rising 6 points to 55.2 (vs 50.5 expected). This is the largest monthly advance since June 2020 and adds to the view that economic growth in the US remains resilient for the time being. The new orders subcomponent also jumped to 60.4, its highest level since the start of last year.
These strong prints followed Chair Powell’s emphasis on Wednesday that a softer labour market, and particularly easing wage gains, were key to reducing inflation. Against this backdrop, markets moved to price in a higher terminal rate, with fed fund futures for June pricing a 5% terminal again after rising +12.6bps on the day to 5.025%. The implied rate for the final Fed meeting of 2023 also rose, increasing +23bps to 4.58%.
US stocks swung between gains and losses following the strong data on Friday but they maintained their strong start to 2023 over the week. The S&P 500 was down -1.04% on Friday but +1.62% on the week. The NASDAQ also finished the week up +3.31% (but -1.59% on Friday), and the FANG+ index outperformed in being up +7.03% on the week (-2.57% on Friday), its largest weekly move-up since mid-March and to its highest level since mid-April. Over in Europe, the STOXX 600 closed up +0.34% on Friday, its highest level since mid-April. In weekly terms, the index was up +1.23%.
In fixed income markets, US Treasuries fell back on Friday as markets priced in higher Fed rates. Policy sensitive 2yr Treasury yields spiked +18.4bps on Friday, closing up +8.9bps over the week. 10yr Treasuries also retreated, with yields up +13.2bps on Friday and up +2.1bps for the week. In Germany, the story was similar, with 2yr Bund yields climbing higher by +7.1bps to 2.53%, although they were down by -3.3bps in weekly terms. 10yr Bunds also retreated, with yields up +11.3bps on Friday to 2.19% but down -4.7bps on the week. Fixed income markets in the rest of the continent were also in red on Friday with OATs up +12.7bps (-6.0bps on the week) BTPs up +12.2bps (-7.2bps on the week after the biggest fall in a decade on Thursday after the ECB).
Staying with fixed income, credit markets saw significant tightening last week to reach their richest valuations since last Spring. USD IG cash spreads tightened -4bps to 115bps over the week (unchanged Friday) to their lowest levels since early April. Meanwhile, USD HY spreads tightened -28bps on the week (-1bp Friday) to 385bps, which is the tightest spreads have been since the first week of May. In Europe, EUR IG was -10bps tighter (-2bps on Friday) and EUR HY cash spreads were -24bps tighter (-12bps Friday) to also finish at their tightest levels since April.
Turning to commodity markets, WTI Crude had a poor week, down -6.29% (-3.28% on Friday) to $73.39/bbl, its lowest level since the first week of 2023. Brent Crude also fell back last week, down -7.75% (-2.71% on Friday). This weak performance also translated to other commodities, with copper down -3.93% last week (-0.84% on Friday) and gold -2.50% to $1,865 on Friday, down -3.27% on the week.