Disappointing but the market remains optimistic

Thoughts of the Day

The US PPI showed higher-than-expected inflation (ACT 1.6%, EXP 1.2%, PREV 0.8%), causing a brief market dip. However, optimism prevailed, the S&P500 closed up 0.8%, because expectations that the Fed will keep interest rates unchanged persist. If the University of Michigan Consumer Sentiment Index out later today provides good news on the inflation expectations components, risk assets are likely to end the week on a high note.

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Day Ahead

The US University of Michigan Consumer Sentiment is expected to fall off slightly to 69.2 from 69.5.

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What Happened Yesterday

Market Movements as of New York Close 14 Sep 23

The ECB surprised with a 0.25% hike and added that inflation should fall towards the 2% target if current rates are maintained for a sufficient duration of time, implying that this is likely the peak of their hiking cycle. The EURUSD first spiked from 1.0730 to 1.0747 on the surprise hike but quickly fell to 1.0703 because the implication that this could be the last interest rate hike of the cycle was considered dovish. In her press conference, ECB President Lagarde oddly mentioned that the ECB may not be at peak rates but the market stuck to its initial assessment of the ECB statement. She also added that some members voted for a pause during the meeting. Nevertheless, she expects inflation to come off in the coming months as the economy is likely to remain subdued.

The US Producer Price Index surprised markets with the headline inflation rate showing that prices rose +1.6% (vs +1.2% exp), up from +0.8% in July. The surprise was largely due to an increase in energy prices from last month. The Dollar Index spiked +0.26% on the release from 104.93 to 105.2, the S&P 500 futures fell -0.1% from 4536 to 4530 following the release while the US 2 year yields jumped +0.05% from 4.97% to 5.02. The core index showed a +2.2% YoY rise in prices as expected and in line with the previous print (revised down from +2.4%).

The Chinese Retail Sales rose +4.6% on an annual basis (vs +3% expected), up from +2.5% in July. The Chinese unemployment rate fell slightly to 5.2% from 5.3%. The CNH strengthened as a result of the data release with the USDCNH falling -0.24% from 7.2835 to 7.2657 before recovering to the 7.27 level.

The US Treasury Yield curve remained at 0.71% as the US 2 year bond yield and the 10 year bond yield both rose +0.04% to 5.00% and 4.29% respectively.

The US stock futures drifted higher through the Asian and London trading session due to optimism that the Federal Reserve will keep interest rates unchanged at the policy meeting next week. The S&P 500 futures rose +0.30% on the day before the ECB policy decision and US PPI data. The futures dipped temporarily as a result of the US PPI data but the move quickly faded and the futures continued to rise thereafter.

The US stock market opened higher from Wednesday. The US stock market then continued to rise higher through the New York session due to optimism from the successful IPO of ARM (IPO price: 51, open: 56.10, high: 66.28, low: 55.54, close: 63.59) on the Nasdaq. Consequently, the S&P 500 closed the day slightly higher at +0.84% (intraday high: +1.00%, low: +0.25%) the Dow Jones increased +0.96% on the day (intraday high: +1.16%, low: +0.32%) while the Nasdaq gained +0.82% (intraday high: +1.07%, low: -0.07%).

The short squeeze in the crypto market continues with Bitcoin and Ether both up +1.1% on the day.

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Headlines & Market Impact

All eyes on China’s economic data a day after surprise rate cut

Notable Snippet: The People’s Bank of China said late Thursday that it was cutting the amount of cash that banks need to have on hand by 25 basis points, effective Friday. It was the second reserve requirement ratio cut this year since one in March.

In the last several weeks, Beijing has announced a slew of measures to support the real estate market and consumption.

Monetary policy has remained relatively loose compared with aggressive rate hikes in the U.S. and Europe.

Also effective Friday is a reduction in the foreign exchange reserve requirement ratio for financial institutions to 4%, from 6%. The planned cut was announced two weeks ago.

The central bank has also trimmed other benchmark rates, such as the one-year loan prime rate.

Moody’s on Thursday downgraded its outlook on China’s property sector to negative from stable. The firm expects sales to fall by around 5% over the next six to 12 months.

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Biden vows to cut US gasoline prices

Notable Snippet: President Joe Biden vowed on Thursday to get U.S. gasoline prices down, one day after a report showed consumer inflation surged by the most in 14 months due to higher energy costs.

“I’m going to get those gas prices down again, I promise you,” Biden told an audience in Largo, Maryland, during a speech on the economy.

Biden did not elaborate on steps he would take, but the U.S. Energy Department has talked to oil producers and refiners to ensure stable fuel supplies, a top Biden economic adviser said on Wednesday.

Biden previously authorised large withdrawals from the United States’ Strategic Petroleum Reserve to combat high prices, leaving it at its lowest level in decades. Tapping it again this year would be seen as a risky move.

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Citigroup starts layoff talks after management overhaul, sources say

Notable Snippet: As Citigroup (C.N) embarks on a sweeping reorganisation, support staff in compliance and risk management are among the most likely to lose their jobs, according to sources familiar with the situation.

Technology staff working on overlapping functions are also at risk of being laid off, one of the people said.

Citi managers are already convening discussions with employees about potential layoffs, according to the sources, who declined to be identified discussing personnel matters. One-on-one meetings about departures were also starting, one of the sources said.

The conversations come after the third largest U.S. bank announced on Wednesday it will strip out a layer of management and cut jobs. CEO Jane Fraser, who called the reorganisation Citi’s biggest in almost two decades, will gain more direct control over its businesses in an effort to boost profits and the stock price.

Executives overseeing revenue-producing businesses held calls on Wednesday to explain the changes and reassure their teams that the overhaul would reduce bureaucracy and prioritise profit-making activities, one source said.

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Phan Vee Leung
CIO & Founder, TrackRecord