Global Macro and Markets
- Global Markets: The positive tone at the end of last week abruptly vanished yesterday as global equities took another lurch downwards. In the US, the S&P 500 dropped by 1.53%, and the NASDAQ fell 1.25%. In China, the CSI 300 fell by 1.46%, and the Hang Seng also declined by 0.33%. Bond yields rose very sharply yesterday. The yield on 2Y US Treasuries rose 12.2bp to 5.008% after Jerome Powell’s hawkish testimony to the Senate Banking Committee (See more below), though the 10Y yield was virtually unchanged at 3.964%. One of those yields probably needs to change now to deliver some consistency. Either the 10Y needs to rise to reflect the higher for longer rate view, or the 2Y yields need to revert to their previous level. Ahead of Friday’s payrolls release, it’s a toss-up which of these transpires. The sharp rise in shorter maturity yields sent EURUSD into a steep dive, which has seen it reach 1.0550. This has also brought the AUD down to 0.6590, which was probably not helped by yesterday’s “dovish hike” by the RBA. Cable has dropped to 1.1829 and the JPY has pushed up to 137.20. Other Asian FX was also weaker yesterday. The CNH weakened by 0.74% to 6.9959. The SGD was also one of the weaker currencies on the day, falling 0.72% to 1.3315.
- G-7 Macro: Despite the overtly political stage for Powell’s speech overnight, he chose to go large on the inflation-fighting credibility theme, rather than provide any more soothing noises about the economy and soft versus hard landings. At one stage, Powell even appeared to raise the prospect of a return to larger rate hikes, saying, “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. See James Knightley’s note for more detail. Today’s top data pick will be the ADP report. Admittedly, it was not even close to predicting last month’s 517,000 payrolls gain, but it is still the least bad labour market data point for indicating payrolls numbers. There is almost certainly no substance to the consensus 200K figure for this release. The Bank of Canada has a rate setting meeting today and is expected to leave rates at 4.5%. Tonight, we get the Fed’s Beige book.
- China: The Two sessions unveiled some changes to government structure, including a larger financial regulator, the State Administration of Financial Supervision and Administration (SAFSA), which will be responsible for monitoring and regulating risks in different parts of the financial system. After the changes are implemented, SAFSA will replace the existing regulator, CBIRC. We believe this will be helpful for risk prevention and earlier detection of risks in the financial system. We don't think SAFSA will tighten regulations immediately. Instead, we think it will gather more information from financial institutions in different areas and create a new model to monitor risk before implementing more regulations.
- In addition to the expanded financial regulator, there have been other changes in technology, data, agriculture, ageing, intellectual property and public complaints departments or bureaus. All in all, these policy-making and oversight functions will be more centralized - some of them falling directly under the State Council. The State Council will be able to make better use of the information it has to make more efficient and effective policies, though possibly at the expense of some flexibility of a less centralized system.
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