US Market Wrap: Stocks, bonds fall as jobs report gives Fed green light to continue hawkish normalisation

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  SNAPSHOT: Equities down, Treasuries down, Crude up, Dollar up.


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  REAR VIEW: US jobs growth cools, but unemployment falls; Fed pricing little changed, still expect 75bps hike in November, peak at 4.50-4.75% in Q1; Fed's Waller leans back on FOMC pivot arguments.


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  WEEK AHEAD PREVIEW: Highlights include: FOMC minutes US CPI, G20 finance ministers/central bank heads. To download the report, please click here.


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  CENTRAL BANK WEEKLY: Previewing FOMC minutes; reviewing RBA, RBNZ, ECB minutes. To download the report, please click here.


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  WEEKLY US EARNINGS ESTIMATES: [WED] TSM, PEP; [THURS] BLK; [FRI] UNH, PNC, USB, JPM, WFC, MS, C. To download the report, please click here.

MARKET WRAP

US

NFP: Headline NFP came in marginally above expectations at 263k, above the 250k expectation and within analyst forecast ranges of 127-375k. The Unemployment rate saw a surprise move lower, falling back to 3.5% from 3.7%, despite expectations for an unchanged print - emphasising how tight the labour market is - although it was accompanied by a move lower in the participation rate to 62.3% from 62.4%. However, Oxford Economics note that declining participation does not account for all the decline in the unemployment rate "as the number of employed as counted in the household survey rose 204k. Meanwhile, the U6 underemployment (a measure of slack) fell to 6.7% from 7.0%. The markets responded hawkishly as the strong fall in unemployment provides the Fed with more room to keep its foot on the economic brakes and continue with an aggressive tightening process. Markets are now pricing in over a 90% probability of a 75bps hike for November, with the terminal rate seen around 4.6% in March, implying an FFR of 4.50-4.75%. The report also gives no credence for the Fed to implement a Fed pivot as although jobs are slowing, it is not at a fast pace while attention now turns to the September CPI print next Thursday. The wages component of the jobs report rose 0.3% M/M, matching the prior month's pace while the Y/Y print slowed to 5.0% from 5.1%, an encouraging sign on the inflation narrative, however Oxford Economics highlight this is still above the pre-pandemic pace of 3.0%. With the unemployment rate at 3.5%, the Fed is projecting an unemployment rate at 3.8% by the end of 2022 - suggesting a further weakening of the labour market, before accelerating in 2023 to 3.3%. Looking ahead, analysts at Oxford Economics expect a "more marked moderating in job growth" in Q4, before seeing outright job losses by Q2 23. The consultancy concludes "Softer labor market conditions should translate into slower wage growth and ease inflationary pressures, allowing the Fed to eventually take a pause from hiking interest rates in 2023". However, a tight labour market keeps the Fed on track to hike by 75bps in November and another 50bps in December.

FED

Waller (voter) spoke after hours when he towed a hawkish line, supporting continued rate hikes until they see meaningful and persistent progress on US inflation, adding policy can and must be used aggressively to bring inflation down. He expects additional hikes into early next year and will have a "very thoughtful" discussion about the pace of tightening at the next meeting and he is not considering slowing rate increases or halting them due to financial stability concerns - a pretty hard pushback on the Fed pivot narrative, and he later said the Fed should not pause until they see signs of inflation is beginning to moderate and it is not clear why a pause would be warranted. Waller added there is not enough data between now and the November meeting to significantly alter his view. He thinks there is a chance the Fed can achieve a soft landing, but the longer inflation stays up, the more aggressive the fed has to be which will diminish the chances of achieving it.

Mester (2022, 2024 voter) spoke overnight where she repeated that the focus right now is on the inflation part of the Fed's mandate, and getting that back down is the first priority. Mester said they will not be cutting rates next year at all and it is going to take a while to bring inflation back down. She sees more persistence in inflation and sees rates rising higher than the median of Fed policymakers. On the balance sheet, she repeated selling some MBS eventually would be a good thing in her view and the balance sheet run-off equates to about 50bps of tightening over time.

Williams (voter) spoke after the NFP report, and said the economy has shown extraordinary post-COVID strength, inflation is very high and the economy is a long way from where it needs to be. Although, he did note the economy is slowing somewhat and while housing is moderating, it is unsurprising. On the labour market, he said it is likely we will see it slow and sees positive growth in 2023 but unemployment will increase. Note, on Monday Williams said the US likely to see unemployment rise to 4.5% by end of 2023 (median view 4.4%). Meanwhile, on policy he added the Fed need to get rates up further and requires policy to slow economic activity.

FIXED INCOME

Yields rose along the Treasury curve in wake of decent jobs data for September where, although the headline rate of payrolls growth is cooling, the rate of joblessness fell, giving the Fed scope to continue raising rates in November. Ultimately, market-implied pricing for the November 2nd confab was only little changed (a 75bps rate rise to 3.75-4.00% is still the most likely outcome, priced with almost complete certainty, and rates are still seen peaking in Q1 2023 at 4.50-4.75%). The short-end/belly of the curve underperformed most notably (5s yields up 7bps; 10s up by around 6bps). The tone of Fed commentary on Friday added little to the narrative, although overnight commentary from Fed Governor Waller was hawkish, as he leaned back on the notion that the Fed was on the cusp of a policy pivot due to financial stability concerns. The next major catalysts for the complex come next week, with the release of September CPI data (a mixed report is expected – see our week ahead preview for details), while the Treasury will auction 3s, 10s and 30s in the week.

CRUDE

WTI (X2) SETTLES USD 4.19 HIGHER AT USD 92.64; WTI (Z2) SETTLES USD 3.76 HIGHER AT USD 91.35; BRENT (Z2) SETTLES USD 3.50 HIGHER AT USD 97.92.

Crude futures moved higher at the end of the week, despite risk assets coming under pressure and the USD rising. There wasn't a clear catalyst for the upside, but analysts at Citi argued that the moves came amid light volumes, which suggests to them that the gains were a function of little opposition to the upside, with sellers backing away after OPEC's decisions this week. "Buying has been limited, although still enough to push prices higher, with some traders still hoping for a pullback as an easier entry point at a lower level. However, at some point if the dip doesn’t arrive, we see risk that that lose patience and end up chasing the price even higher on stronger volume," its strategists wrote, adding that "much of the market seems to have been caught positioned for the recession, not for the OPEC+ offset." Meanwhile, the Baker Hughes weekly rig count saw total rigs cut for the first time in four weeks (total was down 3 to 762 in the week); oil rigs were down by 2 taking it to 602, while natgas rigs were lower by 1 taking it to 158.

EQUITIES

CLOSES: S&P 500 -2.7% at 3641, Nasdaq-100 -3.9% at 11049, Dow Jones Industrial Average -2.1% at 29316.

SECTORS: TECHNOLOGY -4.14%, CONS DISC -3.54%, COMMUNICATION SVS -2.85%, MATERIALS -2.54%, REAL ESTATE -2.49%, FINANCIALS -2.32%, HEALTH -2.11%, UTILITIES -2.08%, INDUSTRIALS -1.92%, CONS STPL -1.55%, ENERGY -0.7%.

EUROPEAN CLOSES: EURO STOXX 50 -1.68% at 3,375, FTSE 100 -0.09% at 6,991, DAX 40 -1.59% at 12,273, CAC 40 -1.17% at 5,866, FTSE MIB -1.13% at 20,901, IBEX 35 -0.99% at 7,436, SMI -0.85% at 10,302.

STOCK SPECIFICS: AMD (AMD) reported preliminary Q3 revenue way short of expected citing weaker client segment revenue. AMD CEO said PC market weakened significantly in the Q amid macroeconomic conditions and a significant inventory correction across the PC supply chain. Disney's (DIS) ESPN and DraftKings (DKNG) are reportedly nearing a large partnership, according to Bloomberg. Apple (AAPL) is preparing for 2nm chips and is looking to collaborate with TSMC (TSM) for its in-house developed processors with the new node, which is scheduled to enter volume production in 2025, according to DigiTimes. CVS Health (CVS) received a downgrade of one of its Aetna Medicare Advantage plans in annual ratings issued by the Centers for Medicare and Medicaid Services. Levi Strauss & Co (LEVI) beat on EPS and revenue but looking ahead lowers its FY guidance as it is seeing an impact from higher costs, supply chain issues and a stronger Dollar. Ambac (AMBC) settled RMBS litigations vs Bank of America (BAC) for USD 1.84bln. Twitter (TWTR) said Elon Musk's proposal to halt litigation is an "invitation to further mischief and delay", and adds Musk "can and should" close the deal next week, according to a court filing cited by Reuters. In other news, a Delaware judge halted Twitter litigation against Elon Musk until 17:00ET on October 28th to permit a deal to close. Lyft (LYFT) was downgraded at RBC who said its driver supply analysis points to a less bullish outlook for Lyft and that competitor Uber (UBER) enjoys “structural advantages” over Lyft. Tesla (TSLA) CEO Musk tweeted he is excited to announce the start of production of the Tesla Semi Truck with deliveries to Pepsi on December 1st. CVS (CVS) reportedly in exclusive talks to acquire Cano Health (CANO). FedEx (FDX) Ground Division expects to lower volume forecasts, according to an internal memo, as a result of customers expecting to ship fewer holiday packages. Nissan (NSANY) is pressing its partner, Renault (RNLSY), to sell down a portion of its stake in the auto maker as part of a bargain to reorganize its alliance, according to the WSJ. Southwest (LUV) Pilots Union backs Boeing (BA) on 737 Max 7 and Max 10 certification alerting requirements, Reuters reports. Credit Suisse (CS) is reportedly ramping up efforts to strengthen its finances, WSJ reports, and it has held informal talks with investors on fresh capital, but has not started any official process. Nvidia (NVDA) does not expect new US eport rules to have any material impact on its business, it said in a statement.

WEEKLY FX WRAP

Payrolls pave the way for Fed to keep tightening expeditiously

USD - A real roller-coaster start to the new month and final quarter of the year, as bonds staged a rousing recovery from late September lows amidst the meltdown in UK debt that forced the BoE into emergency action. This lifted broad sentiment to the detriment of the Dollar alongside a disappointing US manufacturing ISM adding to the case for less Fed policy aggression and a potential pivot. However, the tables began to turn by Wednesday when the services ISM exceeded expectations in headline terms and the employment component showed faster growth in stark contrast to contraction in the manufacturing sector, and yields had already rotated more than full circle even before the latest official monthly jobs data arrived. In the event, headline NFP was firmer than forecast and the jobless rate declined against consensus for no change to more than offset marginally softer y/y average earnings and a slight downtick in labour force participation. Hence, the Buck bounced further almost across the board and the DXY posted a higher w-t-d high, at 112.840 vs 110.050 low, with Fed’s Williams the first to speak after the BLS report and maintaining a hawkish line on the grounds that inflation remains very elevated. On that note, various other Fed speakers stuck to a similar script, including erstwhile dove Kashkari who said the FOMC is quite a way from pausing the normalisation process and the bar is very high for any shift in stance.

CAD - The Loonie could and arguably should have drained more fuel from crude tanks given the rally in WTI that totalled almost Usd 12/brl over the course of a week leading up to and beyond OPEC+ agreeing to cut output by 2 mn bpd from the beginning of November, but risk aversion propped Usd/Cad between 1.3504-1.3826 parameters, irrespective of hawkish-leaning remarks from BoC Governor Macklem on the eve of a decent Canadian LFS. To recap, the former noted that the Bank needs further information before considering moving to a more finely balanced decision-by-decision approach, adding that more rate hikes will be needed and more is to be done on inflation, while the latter revealed a bit more employment gains than anticipated and an unexpected decline in the unemployment rate.

GBP - Another see-saw week for Sterling that reached new peaks of revival from the depths of its flash crash lows with the aid of a U-turn by PM Truss on the controversial, divisive and damaging proposal to cut the top tax band only to unravel when Gilts suffered more angst and a couple of ratings agencies downgraded the UK’s ratings outlook to negative from stable. Additionally, the BoE’s DPM raised its one year ahead inflation forecast to pile further pressure on the MPC to take forceful action in November and a letter from the Bank to the TSC describing very poor liquidity conditions before intervention to prevent LDI-related default in pension fund bodes poorly for the next FPC statement and set of accounts due for publication on October 12. As a result, Cable reversed sharply and abruptly at times from circa 1.1495 to sub-1.1100 and Eur/Gbp rebounded to around 0.8830 from 0.8650 at one point, awaiting next month’s policy meeting and perhaps just as importantly if not more so, Chancellor Kwarteng’s medium term fiscal plan, scheduled for release on November 23.

NZD/AUD - The Kiwi and Aussie are both on track to sustain heavy losses against the Greenback within 0.5813-0.5598 and 0.6547-0.6371 respective ranges, but the Nzd may be forgiven for feeling hard done by following a hawkish hike from the RBNZ and a slowdown in the pace of tightening by the RBA. In short, the former delivered its 5th consecutive 50 bp rate rise and even considered increasing the OCR by 75 bp, while the latter slipped down a gear to 25 bp from ½ point. Nevertheless, the Aud/Nzd cross bounced from 1.248 to just over 1.1350, albeit still down from best levels (1.1441 or so) as Aud/Usd derived some underlying support from China where the offshore Yuan consolidated off record lows and got close to 7.0100 vs its US rival temporarily during Golden Week.

JPY/EUR/CHF - Calmer waters for the Yen that spent the bulk of the first trading week of October, Q4 and Japanese fy H2 restrained between 144.00-145.00 confines against the Dollar, with only brief deviations outside to 145.34 and 143.54 at the other extreme. UST/JGB differentials continued to impact rather than the general market mood, while top currency diplomat Kanda and some regional BoJ branch managers maintained the focus on Jpy weakness and wild one-way moves to remind participants about potential intervention. Elsewhere, the Euro tried to touch parity on Tuesday and Wednesday when the Greenback was flagging, but narrowly failed and remained bogged down by stagflationary or even recessionary Eurozone risks as the energy supply squeeze rumbled on. Indeed, hawkish ECB rhetoric provided little impetus as Eur/Usd lost grip of the 0.9900 and 0.9800 handles on the way down to 0.9727 and Eur/Chf veered lower within a 0.9800-0.9644 band regardless of prompts by the SNB that it will intervene to curb excessive Franc strength or weakness. Perhaps, Usd/Chf was more cognisant of the SNB/Fed policy divide as it whipsawed between 0.9954-0.9782 rather than SNB chief Jordan reiterating that the currency is not highly valued.

SCANDI/EM - More depreciation for the Nok and Sek on seasonal and independent or specific factors, such as downbeat Norwegian and Swedish macro releases, but the former got a belated boost from Brent topping Usd 98/brl compared to just under Usd 86.50 at worst. Conversely, the Pln was caught out by the NBP taking time out rather than hiking rates by 25 bp and the Huf was far from content with the NBH switching to tightening liquidity from monetary policy after signing off with a big 125 bp rate rise. Meanwhile, the Mxn was resilient in the face of overall and eventual Usd strength with backing from oil, the Brl was bolstered by Brazil’s preliminary election result favouring the more centrist ex-President Lula over Bolsonaro and the Zar tracked Gold within wide Usd 1658.30-1729.39/oz extremes to an extent.

07 Oct 2022 - 21:05- Fixed IncomeExclusive- Source: Newsquawk