Further tightening measures loom as stocks dip
Stocks slide as US curve flattens after hot CPI. ECB must act even if inflation drivers are global, Schnabel says. China’s Li urges fiscal, monetary policies to boost economy. Oil halts slide a...
Chief Investment Office11 May 2022
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Stocks slid as data signalled US inflation will remain high for quite some time, adding to worries the Federal Reserve may unleash further tightening measures that could tip the economy into a recession.

Remarks from Fed Bank of Atlanta President Raphael Bostic did not help sentiment either as the official said he is open to “moving more” on rates if inflation persists at elevated levels. The S&P 500 erased gains and dropped to its lowest since March 2021, while the tech-heavy Nasdaq 100 tumbled over 3%. Small caps sank after a rally that approached 2% earlier in the day (11 May). The Treasury curve flattened, with the gap between 2Y and 10Y yields narrowing.

Traders seem to agree that a 75 bps hike is not likely, according to pricing in Federal fund futures markets. But they did increase bets that the Fed will roll out another half-point hike in September – following increases of that size in June and July. The US central bank lifted rates by a half-point last week (ended 6 May) and Fed Chair Jerome Powell signalled that similar increases are on the table for the next two meetings, while pushing back against making a larger move.

While annual measures of consumer prices cooled slightly from March – signalling a peak that economists expected – the details of a report Wednesday (11 May) painted a more troubling picture as monthly figures advanced more than forecast. Services costs accelerated while inflation for most goods remained stubbornly high, underscoring the persistence and breadth of price pressures.

The rout in stocks is not over just yet, according to a strategist, who sees scope for equities to correct further amid mounting concerns of slowing growth. He said that even after five weeks of declines, the S&P 500 is still mispriced for the current environment of the Fed tightening policy into slowing growth.

“We continue to believe that the US equity market is not priced for this slowdown in growth from current levels”, he said in a note. “We expect equity volatility to remain elevated over the next 12 months.” He recommends defensive positioning with an overweight in healthcare, utilities, and real-estate shares.

The S&P 500 may be at risk of a further slide toward 3,600 points – down 8.5% from Wednesday’s close – before reaching a historically important technical-support level. The 200-week moving average since 1986 has seen the US benchmark bounce back during all major bear markets, except for the tech bubble and the Global Financial Crisis. – Bloomberg News.

The S&P 500 Index declined 1.65% to 3,935.18 on Wednesday, the Dow Jones Industrial Average slid 1.02% to 31,834.11, and the Nasdaq Composite Index closed 3.18% lower at 11,364.24.



The European Central Bank (ECB) must respond to inflation even if the drivers that have pushed it to record levels are global by nature, according to Executive Board member Isabel Schnabel.

While the pandemic and the war in Ukraine have bolstered the idea that elevated price growth is being driven by worldwide imbalances between supply and demand, those developments cannot be ignored because persistent shocks can fuel excessive inflation expectations, Schnabel said Wednesday (11 May).  

“The fact that inflation is, to a considerable extent, driven by global factors does not mean that monetary policy can or should remain on the sidelines,” she said in a speech in Vienna.

“On the contrary, persistent global shocks imply that the firm anchoring of inflation expectations has become more important than ever,” Schnabel said.

There is a growing consensus among ECB officials to raise interest rates from record lows in July to tame prices that are surging at almost four times the 2% target. Energy has been a key driver, more so after Russia invaded Ukraine and stoked concern over fossil fuel supplies to Europe.

Schnabel said rapid action is needed to avoid more drastic steps later on.

“By responding swiftly and decisively to these risks, monetary policy can secure price stability over the medium term, thereby avoiding the much higher economic cost of acting too late,” she said. – Bloomberg News.

The Stoxx Europe 600 rose 1.74% to 427.59.



Toyota Motor (7203 JP) forecasts a 20% decline in operating profit for the current fiscal year despite posting robust annual car sales, citing an “unprecedented” rise in costs for logistics and raw materials that are negating the benefits of a depreciated yen.

The world’s largest automaker forecast an operating profit of JPY2.4t (USD18.4b) for the fiscal year through March, short of JPY3t posted during the just-ended period, and well down on analysts’ average projection for JPY3.4t. Shares fell 4.4%, the most in two months.

Although Toyota is known for issuing conservative guidance only to exceed it later, the tepid outlook took investors by surprise. In recent months, Toyota’s sales have kept up a strong pace, leading the automaker to post its second-highest unit sales ever for the year ended March. Toyota’s results are also being buoyed by a sharp decline in the value of the yen, which increases the value of earnings it brings back from overseas sales.

“It’s going to be a challenge”, said a market watcher. With the current year bringing supply chain issues, chip shortages, Covid-related lockdowns in China, and cost inflation, “there are many factors that are compiling to create a negative trend”, he said.

Toyota is predicting higher vehicle sales for the current fiscal year, with a target of 10.7m units, compared with 9.5m for the period that ended March. Net sales for the year are also predicted to climb about 5% to JPY33t, Toyota said, also announcing plans to buy back as much as JPY200b of its own stock, or about 1% of total shares.

At the same time, Toyota executives said the company is grappling with “unprecedented” increases in materials and logistics costs, speaking at a briefing Wednesday (11 May). Because Toyota is forecasting a JPY1.45t hit from soaring material prices for the current year, Chief Financial Officer Kenta Kon said the weakened yen will not deliver a “major” lift.

Toyota is also assuming an exchange rate of JPY115 for each dollar, which implies a smaller boost compared with current levels near JPY130, leading some to question Toyota’s forecasts.

Though the yen’s historic fall had somewhat bolstered optimism around Japanese automaker earnings, industry analysts have, at the same time, been warning of a growing number of risks related to both automotive supply and demand in the coming year.

In March, IHS Markit downgraded its output forecast for the current calendar year in order to factor in the impact from Russia’s invasion of Ukraine, then revised it down further last month in response to the fallout from Covid-related lockdowns in China, along with other mounting risks.

Others are warning of potential shocks to demand. Jefferies Financial Group sees expectations for Toyota’s earnings as being “too bullish” for the current fiscal year. The aggravation of cost inflation due to the Ukraine crisis and a potential slowdown in global economic growth will probably cause “considerable damage” to the auto sector overall, according to an analyst.

An analyst said that for Japanese automakers in general the yen depreciation has a positive impact accounting-wise for the medium-term. At the same time, “the yen depreciation, it’s like window-dressing. It doesn’t resolve the real, underlying issues”, he said. – Bloomberg News.

The Nikkei 225 Index opened 1.60% lower at 25,793.50 on Thursday morning, reversing its climb of 0.18% to 26,213.64 the previous session.



Chinese Premier Li Keqiang urged officials to use fiscal and monetary policies to stabilise employment and the economy as the country reels from virus outbreaks and rising inflationary pressure.

The world’s second-largest economy came under greater pressure in April due to the latest flareups and bigger-than-expected impact from developments abroad, state broadcaster China Central Television reported, citing a State Council meeting headed by Li.

“We should implement the arrangements of the central committee of the party and the State Council, strengthen confidence, face up to difficulties and challenges, and strive to stabilise the overall economic situation”, the report cited the meeting as saying. “We should further study and use a variety of policy tools to effectively stabilise employment.”

The report said China’s monetary and fiscal policies should prioritise employment but did not elaborate on what measures Beijing will take. Some Chinese analysts, including a former official at the foreign exchange regulator, predict China may cut banks’ reserve requirements and interest rates, possibly in the second quarter.

The meeting of the State Council, the nation’s cabinet, came just days after Li warned of a “complicated and grave” employment situation as Beijing and Shanghai tightened curbs on residents in a bid to contain coronavirus outbreaks in the country’s most important cities. Li instructed government departments and regions to prioritise measures aimed at helping businesses retain jobs and weather the difficulties.

The cabinet also called for stabilising consumer prices and ensuring grain output and supply, CCTV reported Wednesday (11 May).

China’s factory and consumer prices rose faster than expected in April as lockdowns battered supply chains and prompted people to stockpile food.

The producer price index rose 8% from a year earlier compared to 8.3% in March, official data showed Wednesday, above the 7.8% median estimate in a Bloomberg survey of economists. Consumer price growth accelerated to 2.1% from 1.5% in the previous month, faster than a projected 1.8% gain.

China’s consumer prices are expected to see a modest increase this year from 2021 due to supply shocks, rising international commodity prices and a low base effect, China Securities Journal said in a report Thursday, citing analysts. – Bloomberg News

The Shanghai Composite Index upped 0.75% to 3,058.70 on Wednesday, while the Hang Seng Index rose 0.97% to 19,824.57.



One of the world’s most expensive property markets faces its biggest test in more than 30 years.

Australia’s AUD10t (USD7t) residential real estate sector will this year have to absorb the sharpest interest rate increases since 1989, if bond markets are right. The Reserve Bank last week (ended 6 May) began its first tightening cycle in 11-1/2 years, shaking the confidence of consumers with some of the world’s highest debt loads.

After surging on the back of pandemic stimulus over the past couple of years, economists expect home prices to fall and building to slow as borrowing costs rise. That turnaround was on display at a weekend auction in the inner Sydney suburb of Darlington, where a two-bedroom home of 104 square meters yielded no bidders.

A declining housing market will be a challenge for the winner of a 21 May election as so much of Australians’ wealth is tied up in property. The result is likely to be weaker household sentiment and consumption, compounding the effects of higher mortgage repayments.

Australian housing has been surging for much of the past decade, reflecting the Reserve Bank of Australia’s (RBA) slashing rates from 4.75% in November 2010 to 0.1% during the depths of the pandemic in November 2020. Property prices jumped more than 20% last year.

The protracted easing cycle means an estimated 1.2m home borrowers had not experienced a hike before the central bank’s bigger-than-expected 25 bps increase last Tuesday.

Property consultancy CoreLogic estimated just before this month’s rate rise that a 200 bps increase in variable loan mortgage costs would see monthly repayments climb by AUD1,005. The nation’s four major banks all raised variable rates by the same 25 bps.

Money markets are wagering the RBA will boost borrowing costs every month through December to bring the cash rate to about 3% by year’s end from 0.35% now.

The surge in house prices has seen affordability become an election issue.

The opposition Labour party plans to help lower-income earners get a foot on the property ladder by contributing 40% equity for newly built homes and 30% for existing dwellings. The ruling centre-right coalition is supporting first home buyers and single parents through a programme that allows home deposits of 5% or 2%, respectively.

It remains uncertain how Australia’s households, with AUD2.1t in outstanding mortgage debt, will respond to rising borrowing costs.

But Australia’s biggest lenders are confident in the position of most borrowers. Households have built up an additional AUD240b in savings over the past two years, with the average owner-occupier mortgage more than two years ahead in repayments and loan arrears still very low. – Bloomberg News.

The S&P/ASX 200 Index opened 1.17% lower at 6,981.90 on Thursday (12 May) morning. The benchmark rose 0.19% to 7,064.70 the previous session.

South Korea’s Kospi Index declined 0.87% to 2,569.80 in early-Thursday trading, after losing 0.17% to 2,592.27 on Wednesday.

The Taiwan Stock Exchange Weighted Index fell 0.35% to 16,005.25.



Oil rallied as the European Union (EU) continued to haggle with holdouts over a Russian crude ban while a US government report showed fuel inventories plunging ahead of the summer driving season.

West Texas Intermediate (WTI) futures rebounded over USD5.00 on Wednesday (11 May), halting a two-day slide in which futures shed more than USD10.00. On Wednesday, Hungary said it will only agree to a ban on Russian imports if shipments via pipelines are excluded. In the US, the Energy Information Administration reported that distillate inventories fell to the lowest since May 2005.

US retail gasoline and diesel prices rose to a record just ahead of the nation’s summer driving season. Demand for both products fell domestically last week (ended 6 May) but inventories are shrinking with US refiners sending more product abroad to replace Russian supplies.

Many refiners were forced to shut operations during the pandemic when fuel demand evaporated. With so much less fuel making capacity both in the US and across the globe, it is going to be difficult to meet refined product demand, said a portfolio manager.

The oil market has been whipsawed over the last couple of months by Covid-19 restrictions across China and Russia’s invasion of Ukraine. The war has fanned inflation, driving up the cost of everything from food to fuels. In the US, consumer prices rose more than expected, indicating inflation will persist at elevated levels for longer.

WTI for June delivery rose 4.93% to settle at USD105.71 a barrel in New York. Brent for July settlement gained 5.96% to settle at USD107.51 a barrel.

Meanwhile, Shanghai reported a 51% drop in new coronavirus infections on Tuesday, with zero cases found in the community – a key metric for the city to end a punishing lockdown that has snarled global supply chains and left tens of millions of people stuck inside their homes for about six weeks. – Bloomberg News.



The Hong Kong dollar fell to the weak end of its trading band for the first time in three years as the US interest rate increase this month undermined the appeal of the city’s assets, prompting the local monetary authority to buy the currency for the first time since 2019.

The currency declined to 7.85 per US dollar, hitting the weak end of its allowed trading range for the first time since May 2019. Selling of the local dollar has intensified in recent months as a hawkish Federal Reserve boosted the greenback, while pandemic restrictions in the former British colony have damped its growth outlook. In response, the Hong Kong Monetary Authority bought some HKD1.586b to defend the peg system, which confines the currency to a band of 7.75 to 7.85 vs the greenback.

The testing of the band’s limit on Wednesday (11 May) came around the same time as faster-than-expected US inflation data sent the greenback briefly up and Treasury yields surging. And while broader gauges of the greenback and longer-end Treasury yields subsequently retreated, the Hong Kong currency continues to hover right near the band’s edge.

The Hong Kong dollar is down close to 0.7% this year, with some of the weakness coming as the Fed’s interest rate hike widened the funding rate gap between the US and the special administrative region, prompting traders to borrow the currency more cheaply in the interbank market and sell it vs the higher-yielding greenback. The premium of the three-month US interbank rate, known as Libor, over Hong Kong’s equivalent, Hibor, rose to the widest point since 2019 in April.

The Hong Kong dollar will remain under pressure as US yields climb on rate hike bets, said Samuel Tse, economist at DBS Bank.

Slower domestic activity due to measures to tame a Covid outbreak also weighed on the currency. Hong Kong’s economy contracted 4% in the first quarter from a year earlier, worse than the 1.3% median estimate in a Bloomberg survey. Further loosening of curbs in May could put the economy on track for a recovery in the second quarter, according to Bloomberg economics. – Bloomberg News.

On Wednesday, the US Dollar Index lost 0.07% to 103.846, the euro fell 0.15% to USD1.0513, the pound lost 0.53% to USD1.2251, and the yen strengthened 0.37% to 129.97 per dollar.


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