Is the Fed too focused on the rearview mirror?

Thoughts of the Day

US inflation is slowing faster than expected, as shown by the latest CPI data. Headline CPI +3.2% YoY (EXP +3.3%), Core Index +4.0% (EXP +4.1%). The S&P 500 surged almost 2%, signaling a belief that we have seen the last interest rate hike of this cycle. Probability of a Dec rate hike is nearly 0, with a 30% chance of a Fed rate cut in Mar. If job market data shows further slowdown, risk sentiment will strengthen & underinvested asset managers will need to chase the market higher.

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Day Ahead

The UK Consumer Price Index is expected to show that prices rose +4.8% in October on a Year-on-Year basis, down from +6.7% in September. The core index is expected to show that prices rose +5.8% YoY compared to 6.1% in September.

The US Producer Price Index is expected to show that prices rose +1.9% in October on a Year-on-Year basis, down from +2.2% in September. The core index is expected to show that prices rose +2.7% YoY as it did in September.

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What Happened Yesterday

Market Movements as of New York Close 14 Nov 23
  • The US Consumer Price Index showed that prices rose +3.2% in October on a Year-on-Year basis (vs 3.3% expected), down from +3.7% in September. The decrease is largely attributed to a fall in energy costs with (-4.5%). The core index showed that prices rose +4.0% YoY (vs +4.1% expected and prev). Shelter costs slowed to 6.7% from 7.2% in the prior month. On a month to month basis, prices are unchanged in Oct for the headline index (actual 0% vs expected +0.1%) and +0.2% (expected +0.3%) for the core index.
  • The US Treasury Yield curve inversion narrowed to 0.36% as the US 2-year bond yield fell -0.22% to 5.02% while the US 10-year bond yield slipped -0.19% to 4.44%.
  • The US stock futures moved sideways through the Asian and London trading sessions as the market awaited the release of the US CPI data. The release of the US CPI data then sent the S&P 500 futures higher by +1.33%.
  • The US stock market opened lower from Monday. The market then traded higher and remained at elevated levels due to the weaker than expected US CPI print.  Consequently, the S&P 500 closed the day higher at +1.91% (high: +2.20%, low: +1.07%), the Dow Jones rose +1.43% (high: +1.73%, low: +0.71%) while the Nasdaq soared +2.13% (high: +.2.37%, low: +1.57%).
  • The crypto market fell on the day despite the improved risk sentiment in the US stock market due to the liquidation of leveraged positions. Bitcoin fell -2.42% while Ether dropped -3.66%.
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Headlines & Market Impact

US House passes spending bill to avert government shutdown

Notable Snippet: The U.S. House of Representatives on Tuesday passed a temporary spending bill that would avert a government shutdown, with broad support from lawmakers in both parties.

The legislation, which would extend government funding through mid-January, now heads to the Senate, where Democratic and Republican leaders have voiced support.

To prevent a shutdown, the Senate and Republican-controlled House must enact legislation that President Joe Biden can sign into law before current funding for federal agencies expires at midnight on Friday.

The 336-95 vote was a victory for House Speaker Mike Johnson, who faced down opposition from some of his fellow Republicans, in the first consequential vote of his tenure.

Senate Majority Leader Chuck Schumer, a Democrat, said in a statement on Tuesday night after the vote that he was pleased the bill passed “with a strong bipartisan vote,” adding that he would work with his Senate Republican counterpart, Mitch McConnell, to pass it “as soon as possible.”

The stopgap spending bill would extend government funding at current levels into 2024, giving lawmakers more time to craft the detailed spending bills that cover everything from the military to scientific research.

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Japan’s economy shrinks far more than expected in third quarter

Notable Snippet: Japan’s economy shrank at its fastest annualised quarterly pace in two years in the July-September period, provisional government data showed Wednesday, as rising domestic inflation weighed on consumer demand, adding to export woes as demand waned.

Both declines were Japan’s first in four quarters and are part of an unstable trend since the start of the Covid-19 pandemic in early 2020 that has seen periods of economic expansion alternating with contraction. The latest growth print underscores the policy challenges that Prime Minister Fumio Kishida and Bank of Japan Governor Kazuo Ueda face in the coming months.

Provisional gross domestic product fell 2.1% in the third quarter compared to a year ago, after expanding 4.8% in April-June. This was its biggest contraction since the third quarter of 2021 and a bigger contraction than the expected 0.6% decline in a Reuters poll. The GDP deflator in the third quarter stood at 5.1% on an annualised basis.

The world’s third-largest economy also contracted 0.5% in the third quarter from the previous quarter, after expanding 1.2% in the second quarter from the first. This was also a larger contraction than expectations for 0.1% contraction.

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China receives US equipment to make advanced chips despite new rules, report says

Notable Snippet: Chinese companies are buying up U.S. chip making equipment to make advanced semiconductors, despite a raft of new export curbs aimed at thwarting advances in the country’s semiconductor industry, a congressional report said on Tuesday.

China watchers had theorised that SMIC could have made the chip with equipment obtained prior to the October 2022 rules, but it had other options for obtaining the equipment from overseas, the report shows.

The United States managed to plug a key loophole in its efforts to stymie China’s access to advanced chipmaking tools by convincing allies Japan and the Netherlands, with similarly robust chip making equipment industries, to announce their own restrictions on exports of the coveted technology.

But China stockpiled equipment by taking advantage of the lag time between the United States’ October 2022 rules, and Japan and the Netherlands’ similar moves in July and September of 2023 respectively, the report details.

According to the document, between January and August 2023, China imported $3.2 billion (RMB 23.5 billion) worth of semiconductor manufacturing machines from the Netherlands, a 96.1% increase over the $1.7 billion (RMB 12 billion) recorded over the same period in 2022. China’s imports of semiconductor equipment from all countries totaled $13.8 billion (RMB 100 billion) over the first eight months of 2023, it added.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord