In today’s briefing:
- Corporate Value Up Program Guidelines Proposed by the FSC – Disappointing & Needs Improvement
- NPS Changes Its Core Asset Allocation Method – First Time in 18 Years
- Powell so Wants to Cut Rates!
- 5 Things We Watch Ahead of the FOMC Meeting
- Fed Snap (May 1 Meeting): Current & Future Takeaways
- China Ups the Ante with Relaxation of Property Curbs
- Strong US Payroll Will Completely Crush Rate Cut Hopes
- Market Thinking May 2024
- Macro Daily – MX 1Q-24 GDP
- Hedge in May and Go Away
Corporate Value Up Program Guidelines Proposed by the FSC – Disappointing & Needs Improvement
- Some of the Corporate Value Up program’s initial guidelines proposed by the Financial Services Commission (FSC) were announced today.
- Overall, the initial guidelines were disappointing mainly because they lacked concrete figures with regards to tax incentives for companies that make significant improvements to their corporate governance.
- More concrete measures announced today included recommendations for overlapping parent company listing (split listing) and disclosure recommendations for the majority shareholder’s profit transfer to an unlisted private company (tunneling).
NPS Changes Its Core Asset Allocation Method – First Time in 18 Years
- NPS announced today that it will change its core asset allocation method, which aims to increase its purchase of risky assets including stocks and alternative assets.
- Under the new system, the proportion of risky assets will increase to 65% of the NPS’ entire fund assets and the remaining 35% will be allocated to the safe assets.
- There is an increasing probability that a portion of the 24.6 trillion won (2.3% of AUM) could get allocated to risky assets including domestic equities.
Powell so Wants to Cut Rates!
- Powell had to give a hawkish message and take the signal from three disappointing CPI reports but did so with a ‘dovish’ flavor.
- The Federal Reserve remains well-positioned to cut rates several times this year, especially now that economic momentum is turning.
- The question is if Powell’s statement reliefs markets from the stagflationary data that have come in recently
5 Things We Watch Ahead of the FOMC Meeting
- Today’s ‘5 Things We Watch’ will center around tonight’s FOMC meeting, which will not be any surprise to markets looking at the interest rate decision itself, but the Fed is in a difficult position in regards to addressing the path for Fed Funds in 2024, and the rhetoric later today will be key.
- Powell promised 3 cuts in December, but market pricing is increasingly leaning towards no action from the Fed, likely forcing him to pivot from his pivot.
- With the Fed’s position as the big brother in central bank space, the choice of rhetoric will not be an easy task, as the ECB / BoE is hopefully waiting for the Fed to lead the cutting cycle to avoid balancing FX risks on top of inflation, and hawkish rhetoric from the Fed – although probably required to get financial conditions back under control again – could put fuel to the fire in Asian FX.
Fed Snap (May 1 Meeting): Current & Future Takeaways
- Financial markets zigzagged mostly as a result of Chair Powell, to a lesser extent the post-meeting statement
- The current policy debate is centered on the duration of the prevailing pause and the timing of the eventual rate cut
- The latest market pricing for dialing back policy over the next three meetings is less than or roughly a coin-flip
China Ups the Ante with Relaxation of Property Curbs
- Property restrictions removed in major cities, continuing the gradual process from the last 6-8 months
- A BIG signal to the market and the public with the relaxation of curbs in Beijing
- China’s factory output continues expansion and travel data positive for consumption
Strong US Payroll Will Completely Crush Rate Cut Hopes
- Chair Powell decided to maintain Fed fund rates at 5.25%-5.5% sticking to the much expected higher for longer strategy given the reverse direction of travel on rates.
- Forget rate cuts. Those hopes are diminishing. US prediction markets are pricing a 40% chance of zero rate cuts this year.
- Nonfarm Payroll numbers tomorrow will hint at the path of interest rate travel for the rest of the year. Continued strength will melt hopes of rate cuts further.
Market Thinking May 2024
- Every year, for as long as we can remember, we have written a weekly or a monthly note with some variation of the ‘Sell in May’ trope, so we see no reason to break the habit this year.
- The chart (courtesy of Nick Glydon and team at Redburn Atlantic) shows the steady uptrend in searches for the expression every April over the last 14 years and while obviously there is a ‘usage factor’, it is certainly on a lot of traders’ minds at the moment.
- The historic rationale for the expression comes from the leveraged trading end of the spectrum and tended to reflect the fall in speculative activity in the commodities markets over the summer months and while the speculators have moved heavily into other markets since those days, the seasonal drop off in activity as the head traders head to the beach remains a factor – the juniors tend to flatten the books and keep things ticking over.
Macro Daily – MX 1Q-24 GDP
- In 1Q-24, the economy accumulated ten quarters of expansion, growing 0.2% QoQ. This dynamism was supported by the growth of commercial and service activities.
- According to the National Statistics Institute, in the first quarter of the year, agricultural activities contracted -1.1% QoQ while industrial activities did it by -0.4% QoQ. These setbacks were more than offset by the 0.7% QoQ expansion in commercial and services activities.
- The latter have been supported by a mix of a strong labor market, record remittances to the country, and the increase in the amount allocated to social programs.
Hedge in May and Go Away
- A sharp rise in market rates drove down equity prices in April. The correlated move was consistent with our suggestion before Easter to hedge the downside with equity options.
- We now believe the front end is broadly flat enough, so we have turned neutral on rates relative to the market despite being more hawkish than the consensus on the BoE.
- The potential for market expectations to overshoot again, extending the bearish trends, means hedging with options may still appeal over selling or hoping for recovery.
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