Weekly Market Wrap | 2 September 2022

A longer runway for a soft-ish landing

August saw a gain of 315,000 jobs, a good showing and in line with consensus estimates of 293,000. The jobs demonstrated that the US labour market is still resilient but not as exuberant as before, a good sign for the Fed.

Image credit: NY Times

After the release, the Fed funds futures market priced in a reduced possibility (still more than 50%) of a 75bps rate hike for the September FOMC.

Tighter financial conditions are percolating through the economy and showing up in macroeconomic data such the latest jobs report, a promising sign that the economy may have a longer runway for a soft landing, without a “growth recession”.

Hong Kong’s GDP Forecast

Hong Kong’s Census and Statistics Department announced the Q2 GDP contracted for 1.4% yoy, the second consecutive quarter of year-on-year contraction. The Hong Kong government revised the 2022 GDP growth forecast downwards to -0.5% to 0.5% from the 1% to 2% reviewed in May. 

Our H2 GDP heavily relies on the de-facto ‘living with COVID ‘ and domestic consumption. Given the HKD is pegged with USD, Fed’s rate movement would be influential to the Prime rate. Current 1-month Hibor is 1.9%. Market expects the Fed to hike another 75bp at the next FOMC meeting, bringing further upward pressure on HK’s rates.

A breakthrough? 

Last week we wrote about how Chinese internet and technology companies rallied. Somewhat surprisingly, this week, it is Chinese junk bonds’ turn to shine. The sector, dominated by beleaguered real estate firms, returned 6.8% in August, the best monthly showing since February 2012. Many retail investors piled into the asset class last year when yields were high, but the bonds are still trading close to distressed levels (60-70 cents on the dollar). 

A sustained recovery across the sector would be highly unlikely at the moment, even with greater support (than what is already announced) for both developers and buyers. 

We will be watching the Chinese Communist Party congress set to take place next month where we could see significant reshuffles of the top economic positions.

The US government imposed export restrictions to China and Russia on AMD and NVIDIA’s latest high-end GPU and AI accelerators shipments, although Nvidia states that the U.S. government has authorised the exports of the related chips. It is another piece of evidence demonstrating tight China-US tensions. 

Chengdu’s lock down, which started on Thursday and extended over the weekend, is another hit to China’s economy. The city accounts for around 1.7% of China’s GDP. Consumption demand in Shanghai is still far below pre-lockdown levels as the city is taking longer to recover. China keeps its strong commitment to the dynamic zero-Covid strategy despite its huge economic cost.

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