Morning Wrap: ASX 200 to rise, S&P 500 rallies as Fed leaves rates unchanged

Major US benchmarks rose for a third straight session as the Fed kept interest rates on hold at 5.25% to 5.5%, treasury yields fell sharply on the Fed decision and Powell speech, US manufacturing slumped deeper into contraction territory, AMD shares rally on upbeat outlook for chip sales, Estee Lauder shares nosedive to 6-year lows on a far worse outlook, a closer look at the Bank of Japan and Citi's somewhat bullish on eCommerce stocks.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 higher, finished near best levels (Source: TradingView)

MARKETS

• S&P 500 higher, closed near best levels – Marking a three day win streak up 2.9%

• Gains were led by big tech including Nvidia (+3.8%), Meta (+3.5%), Amazon (+2.9%), Microsoft (+2.4%) and Alphabet (+1.9%)

• No major changes with commodities, with most prices up or down less than 1%

• Bond yields fell sharply after the Fed held rates steady but flagged ‘tighter financial and credit conditions’ which reinforces the view of a long pause

• Several moving pieces in the overnight session as key US data including ADP private payrolls and ISM manufacturing came in weaker-than-expected

• November FOMC meeting reiterated previous themes such as no plans for rate cuts, left the door open for further hikes and economic activity remains ‘strong’

• BofA contrarian gauge implies ~16% return for S&P 500 in next 12 months (Bloomberg)

• Strategists see limited room for further US dollar appreciation (Bloomberg)

• Macro hedge funds outperformed in Q3 as market volatility climbed (Bloomberg)

STOCKS

• AMD flags lower gaming revenue, upbeat on new AI processor (Bloomberg)

• WeWork plans to file for bankruptcy (Bloomberg)

• Tesla valuation struck by concerns demand for EVs will begin to weaken (Bloomberg)

• UAW strikes cost Stellantis US$3.2bn revenue loss through October (CNBC)

• Toyota raises earnings outlook as hybrid demand surges, EV demand slows (CNBC)

• Charles Schwab lays off 1000s of employees in $500m cost saving measure (Reuters)

KEY EARNINGS

AMD (+9.7%): AMD shares were down as much as 7% in after-hours trade after reporting a double beat with a weaker-than-expected guidance. The stock turned things around after CEO Lisa Su said:

• "... we now expect Data Center GPU revenue to be approximately $400m in Q4 and exceed $2bn in 2024 as revenue ramps throughout the year. This growth would make MI300 the fastest product to ramp to $1bn in sales in AMD history."

Estee Lauder (-18.9%): Massive double miss with net sales down 10% to $3.5bn. Guidance was extremely weak, with full-year EPS of $2.17-2.42 vs. analyst expectations of $3.61. 

• "Organic net sales declined 11%, primarily driven by expected pressures in the Company’s Asia travel retail business, as well as incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China.”

• "... the expected growth rate of overall prestige beauty has slowed in Asia travel retail and Mainland China, which is currently also evidenced in the presale phase of the 11.11 Shopping Festival"

CENTRAL BANKS

• Fed leaves rates unchanged, acknowledges US economy is strong (Reuters)

• BoJ intervenes in JGB market following YCC policy tweak (Reuters)

• BoJ Governor Ueda gets reality check on yen normalization (Reuters)

• Bundesbank President says ECB will have to keep rates high for longer (Bloomberg)

CHINA

• PBOC withdraws liquidity, signaling that it perceives Tuesday's spike in money market rates as temporary (Bloomberg)

• Private survey shows China's manufacturing sector fell back into contraction (Reuters)

• China commits to establishing mechanism to address local debt risks (Bloomberg)

• China home sales decline slows in October after stepped-up policy support (Bloomberg)

• China Evergrande to struggle to revive its debt restructuring plan (Reuters)

ECONOMY

• US job openings remain elevated, layoffs at nine-month low (Reuters)

• US manufacturing sector slumps in October ISM (Reuters)

• Japan factory activity contracts for a fifth straight month (Reuters)

• South Korea exports grow for first time in more than a year (Reuters)

• Taiwan Q3 GDP growth below government forecasts as investment slows (FocusTaiwan)

Sectors to Watch: Breadth Things

A bit of a short one today. Major US benchmarks continued to bounce but when you look at the above ETF performance – Things were relatively mixed. Just breadth things. Sectors such as Energy, Staples and sub-sections of tech/materials underperformed major benchmarks by a wide margin.

The Fed Pause and Powell's Outlook

The Fed kept interest rates at a 22-year high of 5.25% to 5.5% for a second straight meeting, in-line with market expectations. Powell's speech was a little less hawkish and contained some subtle changes. Here are the key takeaways and highlights:

• The economy remains 'strong': Officials made few changes to the statement but upgraded their description of the pace of economic growth from 'solid' to 'strong'

• Yields are doing work: Some officials noted the recent surge in long-term Treasury yields may reduce the need to further hikes. The statement added the words 'financial conditions' to "tighter financial and credit conditions for household and businesses are likely to weigh on economic activity, hiring and inflation."

• Powell's opening statement: Reiterated the strong state of the economy including unemployment still low at 3.8%, immigration has returned to pre-pandemic levels, job gap remains an issue and wanted more confidence that inflation is heading towards 2.0%

• Underestimating the consumer: "We may have underestimated the balance sheet strength of households and small businesses ... We still have to get to pre-pandemic savings, we may not be there yet. Clearly, people are still spending."

• Locking in lower rates: Powell noted how plenty of borrowers have locked in lower rates as one of the reasons why current tightening hasn't slowed the economy enough.

• No cuts, no hikes: "The question of rate cuts just doesn’t come up," said Powell, adding that "it’s fair to say the question we’re asking is should we hike more." But he also noted that "the idea it would be difficult to raise again after stopping for a meeting or two is just not right."

How did the market react: Futures are currently expecting a 28% chance of another rate hike in January 2024 before rate cuts begin to take place in June 2024. Interestingly, the odds of rate cuts into March 2024 was beginning to tick upwards, now at 14.4%.

The Cost of Doing Nothing

The Bank of Japan left their flagship yield curve control policy more or less unchanged bar a small tweak which changed its 1% upper limit into a reference band. In other words, the Bank will defend it by buying more bonds but not as fiercely as it once did. But when you play with markets, you play with fire. And this market is having none of it.

Not only did bond vigilantes sell more Japanese bonds, but participants also tackled the currency markets. The USD/JPY cross-rate is through 150 for the first time since June 1990 and the EUR/JPY cross-rate is through 160 for the first time since August 2008.

US dollar and Yen exchange rate (Source: TradingView)

Why does this matter: Put simply, traders have been pressuring the Bank of Japan for months now to get rid of its unconventional policy tactics to bring it in line with the rest of the world. But the Bank has remained adamant and traders are losing their patience. If traders can't sell off any more bonds, they will tackle the currency markets and vice versa. And the Japanese government can only defend one at a time (i.e. either currencies or bonds).

The result of this ongoing cat-and-mouse game has big consequences for the global market. Japan is one of the world's largest buyers of US government bonds. If Japanese investors were to exit that market, yields would move higher making equities and bonds together even more unattractive.

Citi: Bullish eCommerce, Bearish Bricks-And-Mortar

Citi has initiated coverage on the major ASX-listed online retailers. The initiation follows an in-house survey of more than 2,500 shoppers and the general view that online shopping is now just as important as bricks-and-mortar retail. They had this to say about the following names:

• Temple and Webster (ASX: TPW) - We are most positive about TPW given its unique position as a range leader in furniture and homewares and a lack of marketplace competition currently. (BUY)

• Adore Beauty (ASX: ABY): We are also positive on ABY given it has long been an excellent operator in the beauty and personal care category. The High Risk rating reflects near-term uncertainty around margins, as well as a lack of exclusive brands relative to competitors. The main thing we will be watching is how quickly ABY could return to profit. (BUY/HIGH RISK)

• Kogan (ASX: KGN): We are concerned over KGN’s transition towards a fully-fledged marketplace at a time when Amazon and Temu are accelerating their Australian expansion. The competitive landscape for marketplaces in offshore markets leaves little room for domestic competitors and Australia may go that way too.The three stocks are up an average of 16% for the year so far. (SELL)

ASX corporate actions occurring today:

• Trading ex-div: Wotso Property (WOT) – $0.03 

• Dividends paid: Arena REIT (ARF) – $0.04 

• Listing: None 

Economic calendar (AEDT):

• 11:30 am: Australia Balance of Trade

• 11:30 am: Australia Home Loans

• 11:00 pm: UK Interest Rate Decision