Should we worry about higher interest rates?
That weakened investor sentiment as it increased fear that the US Federal Reserve may keep interest rates unchanged at high levels for a longer period of time.
The strong ISM Manufacturing PMI surprised to the upside (actual 50.3 Vs 48.4 expected) and the Prices paid component of the index was at the highest level since July 2022 (55.8 actual vs 52.7 expected and 52.5 previous). This caused both the 2-year and 10-year US bond yields to spike 13 basis points higher in the day. That weakened investor sentiment as it increased fear that the US Federal Reserve may keep interest rates unchanged at high levels for a longer period of time.
However, the Fed Chair Powell said last week that inflation data we saw on Friday was within his expectations and that is likely a hint he still expects to cut interest rates 3 times this year. One data point will not be changing his view any time soon.
As such, the key data point for this week will be the US jobs data on Friday. A more moderate job market will ease fears that there might be unexpected inflation pressure to the upside.
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Day Ahead
The US JOLTS Job Openings is expected to show a decline of jobs openings from 8.863 million to 8.79 million in Feb.
Trading Plan
1. Currencies:
Neutral
2. Commodities:
Uranium & Energy - Stay invested for now.
3. Stocks:
US Stock Index: The US stock market showed slight weakness on the day on the back of higher US bond yields due to a stronger than expected US Manufacturing PMI.
(For more timely info on our Trading plan, click HERE)
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: Comments from US Federal Reserve officials about their views on the possibility of interest rate cuts in the months ahead could influence risk sentiment.
What Happened Yesterday
The RBA meeting minutes showed that board members did not consider raising rates in the most recent RBA meeting. Members also noted that it was difficult to either rule in or out future changes in cash rate and it will still take some time before the board could be confident inflation is returning to target. Market reaction to the minutes was muted.
The ISM Manufacturing PMI in the US rose to 50.3 (vs 48.4 expected) in March 2023, improving from February's 47.8. This increase signalled the manufacturing sector's first growth in over 16 months. The sector saw an upswing in demand, evidenced by the rise in the new orders Index to 51.4 and the steady new export orders Index at 51.6, though backlogs still slightly declined at 46.3. Price increases persisted, reaching 55.8 due to fluctuating commodity prices.
The US Treasury Yield curve inversion remained at 0.39% as the US 2-year bond yield and 10-year yield rose +0.13% to 4.72% and 4.33% respectively due to the strong US Manufacturing PMI.
The US stock futures opened higher from last Thursday and then moved sideways through the Asian and early London trading sessions before falling as the New York session approached. Hence, when the New York session began, the S&P 500 futures was down -0.05% from the day's open (but still +0.14% higher from the close on Thursday).
The US stock market opened higher from last Thursday. It then started to fall following the release of the stronger than expected Manufacturing PMI and stayed at lower levels through the rest of the New York session. The S&P 500 was down -0.20% (high: +0.18%, low: -0.48%), the Dow Jones slipped -0.60% lower (high: +0.02%, low: -0.79%) while the Nasdaq managed to eke a slight gain of +0.21% (high: +0.75%, low: -0.24%).
The crypto market experienced slight weakness on the day due to higher US yields. Bitcoin was down -2.30% while Ether was down -3.87%.
Headlines & Market Impact
Japan ready to take action vs excessive yen volatility, says finance minister
Notable Snippet: Japanese Finance Minister Shunichi Suzuki said on Tuesday that authorities were ready to take appropriate action against excessive currency market volatility, without ruling out any options.
"We are carefully watching daily market moves," Suzuki told a news conference after a regular cabinet meeting, when asked about the yen's continued declines.
"We are watching currency moves with a strong sense of urgency," he said.
The yen has been on a downtrend despite the Bank of Japan's decision on March 19 to end eight years of negative interest rates, and hit a 34-year low against the dollar at 151.975 last week. It stood at 151.655 in Asia on Tuesday.
With the BOJ's policy rate still stuck around zero, expectations the gap between U.S. and Japanese interest rates will remain wide are giving traders an excuse to keep selling the yen, analysts said.
Suzuki said monetary policy was only among many factors that affect currency moves, such as each country's current account balance, price developments, geo-political risks, market sentiment and speculative moves.
"It's important for currency rates to move stably reflecting fundamentals. Excessive volatility is undesirable," he said.
What we think: We have been hearing calls of intervention from numerous Japanese officials and it may happen soon if the USDJPY breaches the 152 level in a highly volatile fashion.
Gold prices hit another record high after fresh U.S. data spurs Fed cut expectations
Notable Snippet: Gold prices scaled to another record high Monday, propelled by U.S. interest rate cut expectations and the metal’s appeal as a safe haven asset.
Spot gold added 0.3% to trade at $2,240.04 per ounce. U.S. gold futures rose 0.8% to settle at $2,257.10 per ounce. The metal hit a high of $2,286.4.
“I think it’s a really exciting moment for gold,” said Joseph Cavatoni, market strategist at the World Gold Council, told CNBC on Monday. “What’s really driving it is, I think, many market speculators really getting that confidence and comfort [in] the Fed cuts,” he said.
Gold prices tend to share an inverse relationship with interest rates. As interest rates fall, gold becomes more appealing compared with fixed income assets such as bonds, which would yield weaker returns in a low interest rate environment.
Bullion prices were also driven higher by overseas demand, according to Caesar Bryan, portfolio manager at investment management company Gabelli Funds.
“In China, private investors have been attracted to gold because the real estate sector has done poorly,” Bryan said, adding that China’s general economy has remained weak and its stock market and currency have not been performing well.
The gold rally so far has been fueled by robust purchases from the world’s central banks in a bid to diversify reserve portfolios due to geopolitical risks, domestic inflation and the U.S. dollar’s weakness, said Cavatoni from the World Gold Council.
What we think: While both gold and bitcoin have both been making new all-time highs, bitcoin has been outperforming . With the US BTC ETFs making it much easier for investors to invest in BTC, BTC's role as a store of value will continue to increase.
Citadel's Griffin expects US economic landscape to be challenging, more favourable for fixed income
Notable Snippet: Citadel's hedge fund billionaire Kenneth Griffin told investors he expects the medium-term economic landscape will remain challenging, but more favourable for fixed-income markets in the U.S., as inflation eases, according to a letter seen by Reuters.
"Economic growth is likely to be modest, staying below potential in the upcoming quarters, with the (U.S.) central bank persisting in its fight against inflationary pressures," he wrote, adding that consumers will continue to experience real income growth.
Griffin, who controls the $59 billion hedge fund Citadel Advisors and the market maker Citadel Securities, reiterated in the letter his concerns about the U.S. fiscal situation, saying it cannot be overlooked.
"It is irresponsible for the U.S. government to incur a deficit of 6.4% when unemployment is hovering around 3.75%," he added.
The U.S federal budget deficit grew by 13% in February from a year earlier on interest costs and tax refunds. For the first five months of the fiscal year, the deficit rose by $106 billion, or 15%, to $828 billion, as interest costs on the national debt rose.
Last year, the hedge fund posted a 15.3% gain for its flagship Wellington fund, outperforming multi-strategy competitors.
What we think: While fixed income may be an attractive asset class due to the inverse relationship between US bond yields and bond prices, risk assets are likely to benefit more should the Federal Reserve begin cutting interest rates.
Sentiment
FX
Stock Indices
Best,
Phan Vee Leung
CIO & Founder, TrackRecord