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S&P 500 Hits Record, Chinese Deflation Deepens

Published 02/08/2024, 01:50 AM
Updated 07/09/2023, 06:31 AM

Hawkish comments from the Federal Reserve members continued to make the headlines in the US, yesterday, with Susan Collins, Thomas Barkin and a new Fed Governor Adriana Kugler, all saying the same exact thing: that there is no hurry for the US to cut the interest rates when the economic data points at such a surprising and historical resilience to the modern times’ most aggressive rate hikes.

But knowing that the Fed is done hiking its rates and the expectation that the next move from the Fed will be a rate cut is enough to keep the market in a sweet spot. A delay in the timing of the first rate cut is even perceived as a good thing: the US economy is doing so well that there is no urge to cut the rates right away. And that’s tant mieux for your corporate earnings.

This is how the US economy shrugs off the latest commercial real estate worries that cost the New York Community Bancorp (NYSE:NYCB) more than half of its value. And even though the worries jumped to Germany’s Deutsche Pfandbriefbank, the stress is nowhere to be felt on the sovereign bond or index level. On the contrary, the US had a record-breaking auction for its 10-year bonds yesterday, where it sold $42bn worth of notes at a lower-than-anticipated yield. The strong demand for the US 10-year papers hints that investors continue to binge buy the US 10-year papers while sitting patiently in the waiting room and watching the major US indices’ record-breaking race to occupy themselves. You could think that the regional bank stress could bring the Fed to cut the rates earlier than otherwise, but that’s not necessarily what we sense in the market today, so I am sticking to my rate-cut expectation gun to explain why the US 10-year papers saw such a strong demand yesterday.

In Germany, the 10-year bund yield didn’t blink to Pfandbriefbank jitters, the DAX and the Stoxx 600 were down on Wednesday but the declines remained too soft to hint at panic, while the S&P 500 renewed record and traded at a spitting distance from the 5000 psychological mark. That’s a powerful psychological milestone mind you, and it could trigger some profit-taking due to the overbought market conditions and bubbling valuations. But the S&P 500’s rally is backed by the anticipation of upcoming rate cuts and robust earnings. And sentiment in both yields and earnings remains supportive. In this respect, Disney followed in the footsteps of its happy tech peers yesterday and rose almost 7% in the after-hours trading after reporting better-than-expected earnings and issuing an upbeat profit outlook.

All’s well that ends well.

In the FX

The slowdown in the US sovereign selloff is weighing on the US dollar. The dollar index returned below its 100-DMA. The fact that central bankers around the world, like the ones in Europe and Australia, are also pushing back on early rate cut expectations certainly play a role in the dollar’s limited gains. In this context, the Reserve Bank of Australia (RBA) warned earlier this week that the bank could even think of tightening the financial conditions if inflation didn’t ease to levels that they consider being acceptable. The hawkish accompanying statement from the RBA helped the AUD/USD limit losses near the 65 cents level earlier this week. But the pair remains offered into the 100-DMA, and the morose inflation figures from China don’t help cheer up the bulls.

Oh, China…

China announced this morning that deflation accelerated in January to -0.8% y-o-y, faster than a 0.5% deflation penciled in by analysts and the fastest price drop in over 14 years. In plain English, it means that the Chinese efforts to boost growth and bring inflation back are not working according to the plan. Money poured into the Chinese system doesn’t circulate in a way to stimulate the economy – blame people who lost confidence – and the radical measures that the government has put in place to prop up equity valuations hardly help China’s battered stock markets to get back on their feet. Today, sentiment in the CPI 300 index is mixed. I was writing yesterday that a deeper-than-expected deflation number will certainly encourage Chinese authorities to announce more stimulus measures. But measures alone won’t help getting the Chinese markets’ heads above water if investors don’t play along.

Another worry about the Chinese recovery is that because the Chinese dream has been dashed by a $7 trillion selloff in the equity markets, many could be tempted to take their loss and walk away in the slightest recovery. In summary, the road to a sustainable recovery seems far away.

Zooming in, Alibaba (NYSE:BABA) missed the opportunity to break above its down-trending channel that has been building since last August as its shares dived 6% after its sales missed expectations in the latest Q4 report. The latter offset a $25bn buyback program that the company has just announced. Alibaba’s price chart over the past 5 years is the best summary of how things went down for Chinese equities as Xi-led government was busy beating their tech gems with baseball bats, imposing absurd COVID-zero rules, and getting both the Chinese consumers and foreign investors on their back. Here we are today, waiting for more measures to cheer us up.

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