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Friday, March 24, 2023


Futures, Global Stocks Slide, Dollar Jumps On Rising US-China Tensions, Fed Outlook

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-listed Chinese stocks are 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. Alibaba declined 1.8% before the bell, Baidu -0.4%, Pinduoduo -3%, JD.com -2.4%, Trip.com -1.1%, Bilibili -2.8%
  • Spotify (SPOT US) gains 1.5% after Wells Fargo and Atlantic Equities raise the music streaming company to buy-equivalent ratings, citing improved margins.
  • PayPal (PYPL US) declines 2.8% as it was cut to market perform from outperform at Raymond James in view of the stock’s out-performance so far this year, paired with the broker’s “cautious stance” on the digital payment company’s 4Q results.
  • Catalent (CTLT US) surges 20% following a Bloomberg report that Danaher (DHR US) is said to be interested in the company, valuing the target at a significant premium. Analysts highlighted that a deal would mean that Danaher would add a contract developing and manufacturing organization (CDMO) to its portfolio.
  • Dow (DOW US) shares edge 0.4% higher as Credit Suisse raised the chemicals company and its peer LyondellBasell (LYB US) to outperform, saying that both should benefit from investors looking optimistically toward 2024 for the US polyethylene market.

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:

  • Vesuvius shares fall as much as 6.7% after the materials technology company reported a “cyber incident” involving unauthorized access to its systems
  • Aurubis shares fall as much as 7%, the most since December, despite the copper smelting firm guiding to earnings at the upper end of expectations
  • Idorsia shares slump as much as 15%, most ever, after the Phase 3 trial of clazosentan failed to meet its main goals
  • Hargreaves Lansdown shares fall as much as 4% after the stockbroker is cut to underperform from neutral at Credit Suisse on concerns about key strands of its growth strategy
  • 3i Infrastructure falls as much as 3.2% after the private equity firm announced a proposed placing at a price of 330p per placing share, representing about a 3% discount to the last close
  • Lem shares fall as much as 3.5%, with Vontobel expecting a slowdown in demand in the near-term for the Swiss electrical component manufacturer
  • Rothschild shares gain as much as 19% to €47.70 after the Rothschild family’s holding company announced its intention to file a simplified tender offer at €48/share with dividends attached

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.

  • The euro fell below $1.08, to trade at the weakest level since mid- January, despite a slew of hawkish ECB commentary. Bunds fell, adding around 5-9bps to yields after hawkish commentary from policymakers. The ECB is far from stopping interest-rate increases, despite a slowdown in inflation, according to Governing Council member Bostjan Vasle. It should actively fight inflation until people feel price stability in their everyday lives, according to Governing Council member Robert Holzmann. The central bank would need to see data that “significantly differ” from what’s currently anticipated to avoid raising interest rates by 50 basis points in March as planned, Governing Council member Martins Kazaks said in a tweet. German factory orders grew 3.2% in December from the previous month, more than the 2% rise analysts had predicted in a Bloomberg survey
  • The yen slipped against all Group-of-10 peers amid speculation that an appointment of Masayoshi Amamiya as a next governor wouldn’t deter the Bank of Japan from withdrawing monetary stimulus.
  • The pound neared the $1.20 handle after posting its worst week against the dollar since September. Gilts bear-flattened with the two-year yield rising 19 basis points. The notes extended losses as Bank of England policy maker Catherine Mann warned against complacency in tackling inflation and says another rate hike is likely
  • The Swedish krona fell to its lowest level against the euro since 2009, amid broad-based dollar strength and as concerns abound over the state of the nation’s economy

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

  • S&P 500 futures down 0.6% to 4,123.00
  • MXAP down 1.5% to 165.97
  • MXAPJ down 2.2% to 541.80
  • Nikkei up 0.7% to 27,693.65
  • Topix up 0.5% to 1,979.22
  • Hang Seng Index down 2.0% to 21,222.16
  • Shanghai Composite down 0.8% to 3,238.70
  • Sensex down 0.6% to 60,499.33
  • Australia S&P/ASX 200 down 0.3% to 7,538.98
  • Kospi down 1.7% to 2,438.19
  • STOXX Europe 600 down 0.8% to 457.16
  • German 10Y yield little changed at 2.25%
  • Euro down 0.1% to $1.0781
  • Brent Futures little changed at $79.98/bbl
  • Gold spot up 0.5% to $1,875.08
  • U.S. Dollar Index up 0.24% to 103.16

Top Overnight News from Bloomberg

  • The US sent divers to salvage what they believe is spy equipment from the Chinese balloon shot down off South Carolina, as pressure mounted on President Joe Biden to hit back at Beijing with new export controls on sensitive technology
  • There are early indications traders are gearing up for another period of bond scarcity in Europe that risks blunting the impact of monetary tightening
  • The UK Treasury is exploring a significant increase in the bonds it sells to retail investors, a move that analysts say may draw in as much as £70 billion ($85.8 billion) for financing deficits in the coming years
  • If reports are accurate and Masayoshi Amamiya becomes the next BOJ governor, that would be bullish for bonds and weigh on the yen and local financial stocks, according to market participants
  • Japan’s government plans to submit its nominations for the new Bank of Japan governor and 2 deputy governors next week, Kyodo reported, without attribution
  • The Hong Kong dollar is rapidly heading toward the weak end of its trading band against the greenback as traders sell the currency to buy higher-yielding US assets
  • One of the most powerful earthquakes to hit the Middle East in years has killed hundreds of people in Syria and Turkey, and forced a halt in crude oil flows to a key export terminal

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

  • Japan’s government has sounded out BoJ Deputy Governor Amamiya about becoming the next BoJ Governor with the government to present its nominee to parliament this month, while Amamiya is seen as more dovish than the other potential candidates and will face the task of normalising the BoJ’s ultra-loose policy, according to Nikkei citing government and ruling party sources. However, Finance Minister Suzuki said he hasn’t heard anything on BoJ Governor nominations yet and Deputy Chief Cabinet Secretary Isozaki later said there was no truth to the report that BoJ Deputy Governor Amamiya was sounded out for the next BoJ Governor.
  • Japanese government is likely to present nominees for the new BoJ governor next week, according to Kyodo.
  •    US military shot down the Chinese spy balloon off the US coast after US President Biden issued the order to take down the balloon, while a US defence official said it was a spy balloon intended to spy on sensitive military sites and part of a fleet of surveillance balloons that have spied over five continents, according to Reuters.
  • China’s Foreign Ministry said it expresses strong dissatisfaction and opposition towards the US’s use of force to attack the airship, while it claimed that the balloon incident was a complete accident caused by a force majeure. Furthermore, it noted that top diplomat Wang Yi communicated with US Secretary of State Blinken on how to deal with accidental incidents in a calm and professional manner, as well as told Blinken that both parties need to communicate in a timely manner and avoid misjudgements, according to Reuters.
  • China’s Defence Ministry said the use of force against the Chinese civilian unmanned airship was an obvious overreaction and China reserves the right to use necessary means to deal with similar situations, according to Reuters.
  • US is considering sanctions for Chinese surveillance companies regarding sales to Iran’s security forces, according to WSJ.
  • US is reportedly mulling deploying medium-range missiles in Japan as part of a plan to bolster defences against China along the East and South China Seas, according to Sankei.
  • China’s Commerce Ministry says the Australian and Chinese trade ministers held a virtual meeting on February 6th, conducted pragmatic and candid exchanges; meeting was an important step in getting relations back on track, willing to restart the economic and trade exchange mechanism with Australia.

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

  • A magnitude 7.7 earthquake hit Turkey near the border with Syria which killed dozens on both sides and injured hundreds, while Turkey’s disaster agency reported that 76 were killed and 440 were injured, according to Reuters. Subsequently, a new earthquake of magnitude 7.8 has struck southern Turkey, according to journalist Stein; earthquake was also reported in the Syrian capital Damascus.
  • EU will accept the principle that GB goods shipped to N. Ireland and staying there should be treated differently to goods moving into the single market, as such will agree to a green & red lane model at ports, via RTE’s Connelly citing a senior EU source; a separate source adds that there will not be an announcement this week.
  • UK PM Sunak was warned by senior Tories that he would face a backlash from the party and certain defeat in the House of Commons if he attempts to take Britain out of the European Convention on Human Rights, according to FT.
  • ECB’s Visco said short-term inflation expectations are dropping sharply and policy tightening can continue with due caution, while he added that longer-term inflation expectations are consistent with the price stability goal. Visco also commented that the risk of the Italian bond spread increasing will be contained as long as budgetary policies remain cautious and said that supervisors are monitoring credit, liquidity and refinancing risks as higher interest rates could impact banks’ funding costs quicker than in the past, according to Reuters.

Central Banks

  • BoE’s Mann says looking for a significant and sustained deceleration in higher frequency price increases, “We need to stay the course, and in my view the next step in Bank Rate is still more likely to be another hike than a cut or hold.” adding “In my view, a tighten-stop-tighten-loosen policy boogie looks too much like fine-tuning to be good monetary policy.”
  • BoE and UK Treasury draft document said that they believe a central bank digital currency will likely be needed by later in the decade, according to The Telegraph.
  • ECB’s Kazaks says if the data is in-line with expectations then rates will be hiked by 50bp in March, decision could be changed if the incoming data differs significantly.
  • ECB’s Holzmann says the risk of over-tightening policy appears to be dwarfed by the risk of doing too little.


  • DXY continues to climb and has lifted to a 103.38 peak from a 103.00 base given the broad-based hawkish price action and despite fleeting/limited bids in GBP and EUR.
  • Specifically, the EUR saw some shortlived support amid familiar commentary from hawkish ECB officials and upside in the region’s construction PMIs; though, EUR remains lower and at the 1.0761 trough vs USD.
  • Similarly, GBP received a slight bid following BoE’s Mann; though, as above, this has been eroded by the USD’s underlying strength and as such Cable is at the lower end of 1.2023-1.2070 parameters.
  • JPY is the standout laggard amid, since refuted, reports that current BoJ Deputy Amamiya could be the gov’ts nominee for Governor, with USD/JPY up to 132.56 given Amamiya’s dovish stance.
  • Elsewhere, the non-US dollars are succumbing to the USD’s bid with the RBA due this week and attention on the regions geopolitics.
  • PBoC set USD/CNY mid-point at 6.7737 vs exp. 6.7755 (prev. 6.7382)

Fixed Income

  • A continuation of Friday’s post-NFP hawkish repricing has pushed Bunds to retest and eventually lose Thursday’s 137.00 trough after opening just below the post-NFP 137.70 low this morning.
  • In the wake of BoE’s Mann, Gilts slipped to a 106.29 low at the time; a trough that has since been significantly eclipsed with the contract down to 105.65 as the session’s broader hawkish tone intensifies.
  • Stateside, the picture is very much the same as above. With the post-NFP hawkish repricing in full swing as participants await guidance from numerous Fed officials this week, with Chair Powell on Tuesday the on-paper highlight.
  • US yields continue to lift with action much more pronounced at the short-end of the curve; nonetheless, the 10yr yield has printed a 3.616% peak ahead of the YTD 3.84% best.


  • Crude benchmarks are firmer on the session and have largely been consolidating after the substantial post-NFP losses, with geopolitics and the halt of some oil deliveries in Turkey post-earthquake occurring perhaps factoring.
  • Currently, the benchmarks reside towards the top-end of USD 73.13-74.03/bbl and USD 79.61-80.81/bbl parameters for WTI Mar and Brent Apr.
  • IEA chief Birol said the price cap on Russian oil achieved the objectives of stabilising the oil markets and cutting Russia’s oil revenues with its oil and gas export revenues in January down by almost 30% or around USD 8bln in January from a year ago. Birol also commented that the largest uncertainty this year is China and expects half of global oil demand growth will be from China this year, while he also stated that China’s jet fuel demand is exploding this year which puts upward pressure on global demand and noted that the products markets will stabilise in H2 as more refineries come online, according to Reuters.
  • Saudi’s Energy Minister said he hopes that sanctions, embargoes and a lack of investment don’t lead to a shortage of energy supplies, according to Reuters.
  • UAE’s ADNOC set March Murban crude OSP at USD 82.63/bbl vs USD 80.11 in February. It was separately reported that the UAE, France and India established a tripartite initiative as they seek to cooperate in areas including energy and climate change, according to state news agency WAM.
  • Saudi Arabia sets its March Arab Light Crude OSP to Asia at +2.00/bbl (+0.20/bbl vs exp. USD -0.30/bbl) vs Oman/Dubai averages, according to Reuters sources; the first increase in six months.
  • Spot gold is attempting to nurse losses but has been drifting from USD 1881/oz best levels as the renewed upside in yields supports the USD; while base metals are succumbing to the broader risk tone.


  • Ukrainian President Zelensky said there are fierce battles in the Donetsk region and the situation is very difficult with Russia intensifying pressure on various fronts and in terms of information heading into the first anniversary of the war, according to Reuters.
  • Ukraine’s Defence Minister Reznikov was transferred to another ministerial job and the head of the Main Directorate of Intelligence of the Ministry of Defence Budanov was named as the new Defence Minister. Furthermore, there were prior comments by Reznikov that they expect a possible major Russian offensive this month and that Ukraine has the reserves to hold back the Russian offensive despite not receiving all of the latest military supplies from the west by then, according to Reuters.
  • UK PM Sunak spoke with Ukrainian President Zelensky over the weekend and agreed it was vital for the international community to speed up assistance for Ukraine, according to Reuters.
  • Russian Defence Ministry said Kyiv is preparing to blow up buildings in the eastern Ukrainian city of Kramatorsk and accuse Russia of war crimes in a false flag operation, according to Reuters. Russia’s Defence Ministry also announced that 63 Russian POWs were returned from Ukrainian captivity after complex negotiations with Ukraine that were mediated by the UAE.
  • Russia and Iran advance plans for an Iranian-designed drone facility in Russia, according to WSJ.
  • Russian Kremlin says a meeting between President Putin and IAEA Chief Grossi is not planned but Rossi will meet with the foreign ministry and Rosatom officials.
  • Iran’s Supreme Leader Khamenei pardoned a large number of security-related prisoners that were arrested due to recent protests, according to state TV.
  • US cybersecurity agency CISA is assessing the impact of reported incidents after Italy raised the alarm regarding a global hacking attack, according to Reuters.

US Event Calendar

  • Nothing major scheduled

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.

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