Morning Wrap: ASX 200 to rise, US yields surge to 17-year highs, China data in focus

The good-news-is-bad-news dynamic is back in play as bond yield surged in response to strong US retail sales data, GM is delaying EV truck production to make sure EVs are more profitable, Goldman Sachs says it hasn't seen this much shorting in consumer staples since August, Goldman Sachs says its impaired or marked down its commercial real estate in office space by around 50%, China is set to release a slew of data on Wednesday and why messy market dynamics are back.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 finishes at the midpoint of intraday ranges (Source: TradingView)

MARKETS

• Major US benchmarks finished around breakeven, near the midpoint of intraday ranges

• Technology underperformed, with Nvidia (-4.7%) a notable drag after new US export restrictions on advanced AI chip exports to China

• Consumer staples underperformance brings sector to “extreme oversold” levels, Goldman Sachs notes short selling in sector was the largest in three months 

• US 2-year yield up 11 bps, topping the recent high to the highest level since July 2006

• US 10-year yield up 13 bps, marking the highest close since August 2007

• Upward pressure on rates driven by much stronger-than-expected US retail sales, up 0.7% month-on-month in September vs. 0.3% consensus

• Good news is bad news theme back in play after the strong retail sales data 

• BofA fund survey shows bearish investors increasingly expect hard landing (Bloomberg)

• Companies scramble to file IPOs ahead of potential government shutdown (Bloomberg)

STOCKS

• GM to delay all-electric truck production to make EVs more profitable (CNBC)

• Nvidia hit by US curbs on AI chip exports to China (Reuters)

• Wyndham rejects US$9.8bn takeover bid, calling it "underwhelming" (Bloomberg)

EARNINGS

Bank of America (+2.3%): Double beat, lifted FY23 net interest margin outlook. 

Lockheed Martin (+0.1%): Double beat, boosted authorised buybacks to US$13 billion or 12% of its market cap, missiles and fire control backlog rose 15%.

• "Our Q3 results were at or above our expectations across the board, generating US$2.5bn of FCF, with ~100% returned to shareholders … Our backlog remains robust at US$156bn as both domestic and international orders were strong.” – CEO James D. Taiclet

Johnson & Johnson (-0.9%): Double beat, sales growth of 6.8% in 3Q23, raised full-year guidance driven by demand for its top-selling drug Stelara (treatment for Crohn's disease).

Goldman Sachs (-1.6%): Earnings beat but revenue miss, net interest margin missed consensus, investment banking fees unchanged in the third quarter, equity and debt underwriting revenue jumped 26%.

• Consumer softness: "I am hearing as I interact with CEOs you know, particularly around consumer businesses, in some softness, particularly in the last 8 weeks in some of their behaviours.”

• More to come: “... in the past quarter, materially tightened economic conditions and I just think there's a lag in most sectors of the economy, not all … And I do think over the next, 2 to 4 quarters, the impact of that tightening will be more evident."

• Geopolitical risks: "There's been an escalation of geopolitical stresses around the globe … the war in Ukraine, tensions with China and now the conflict in the Middle East. Overall, levels of risk are more elevated than we've seen in quite some time."

• CRE write offs: “... our CRE in the office space, we've either marked or impaired that down by ~50% … that's quite significant"

CENTRAL BANKS

• ECB chief economist says quite some distance from rate cuts (Reuters)

• ECB watching oil for inflation risks (Bloomberg)

• RBA saw upside risks to inflation at October meeting, discussed hike (Reuters)

CHINA

• China data likely to show fragile economy in need of support (Bloomberg)

• China tells banks to roll over local gov't debt as risks mount (Reuters)

• Country Garden on brink of default as payment deadline nears (Reuters)

ECONOMY

• US retail sales top forecasts in September, up for 6th straight month (Bloomberg)

• US homebuilder sentiment drops to 10-month low, third straight monthly fall (CNBC)

• Canada’s inflation slows in September, likely heading off rate hike (Reuters)

• German ZEW economic sentiment jumps in October (Reuters)

• New Zealand consumer inflation slows but still above central bank target (Reuters)

Messy Market Dynamics

Retail sales account for approximately a third of total US consumer spending. The strong data and jump in bond yields suggests that the pace of retail sales growth might be a little too healthy.

The likelihood of another 25 bp hike from the Fed (by year end) edged higher to 38.7% from 32.7%, according to CME's Fedwatch Tool.

The market's recent bounce from oversold levels (and extreme fear) was supported by factors such as dovish Fedspeak, declining yields and positive third-quarter earnings. But the rise in yields makes it a rather murky comeback.

You have buyers trying to get ahead of the Fed's dovish pivot, still-solid earnings and seasonality tailwinds. But yields are saying 'not so fast'. With the 10-year surpassing the September high and real yields pushing positive against their breakevens, we might find ourselves once again asking "is something going to break?".

ASX corporate actions occurring today:

• Trading ex-div: Newcrest Mining (NCM) – $1.74, K&S Corp (KSC) – $0.08

• Dividends paid: Nick Scali (NCK) – $0.35, Super Retail Group (SUL) – $0.44, Sims (SGM) – $0.21 

• Listing: CGN Resources (CGR) at 12:00 pm 

Economic calendar (AEDT):

• 1:00 pm: China Q3 GDP

• 1:00 pm: China Industrial Production, Retail Sales and Fixed Asset Investment

• 1:00 pm: China Unemployment Rate

• 5:00 pm: UK Inflation 

• 11:30 pm: US Building Permits