Hong Kong financial market
Macroeconomics: The number of new non-farm payrolls in the United States in March increased more than expected, and the timing of the first interest rate cut was further postponed. Eurozone inflation continued to slow in March, and PMI returned to expansion territory. In March, Chinese mainland's Caixin services PMI expanded for 15 consecutive months, and the Hong Kong PMI returned to expansion territory. Singapore's March PMI expanded for the 13th consecutive month, with retail sales rising 4.7% year-on-year in January-February.
Financial market: The Hong Kong stock market was affected by the holiday, and the Hang Seng Index rose 1.1% during the week. In the past two weeks, the interest rates of the Hong Kong dollar and offshore RMB have risen first and then fallen, and the Hong Kong Monetary Authority (HKMA) has released the liquidity of HKD and CNH through incremental liquidity arrangements at the end of March. The U.S. dollar came under pressure as a whole, with CNH rebounding after hitting 7.26. The issuance of Chinese dollar bonds and dim sum bonds remained active ahead of the holiday.
Market outlook: The weak fundamental expectations of China Bond and the low duration of the bank's bond allocation at the beginning of the year determine that there is little room for the short-term rebound of the bond market interest rate, 2.4%-2.45% is the upper limit of the 10-year bond band, and the allocation can be increased; In terms of U.S. bonds, it is concerned about whether more Fed officials will join the ranks of delaying interest rate cuts, and U.S. Treasury interest rates still have upward momentum and may further test the resistance of 4.47% and 4.6%. The recent signal of stable exchange rate expectations is strong, and USDCNY's short-term action can be limited, but the lower support is also strong. Gold began to rise rapidly at the end of March, and the CFTC long position increase was not significant, and the follow-up attention was paid to whether there were funds to passively make up for the increase. In terms of crude oil, the U.S.-China manufacturing cycle is showing signs of improvement, the growth of U.S. production is less than expected, the risk of declining Russian production, and the risk of continued escalation of geopolitical conflicts, oil prices are prone to rise and fall.
First, the macro situation
1.1 United States
The number of new non-farm jobs in the United States in March rose more than expected. The U.S. non-farm payrolls increased by 303,000 more than expected in March, the largest increase since May 2023, far exceeding the median forecast of 214,000, and the previous value was revised down from 275,000 to 270,000, raising the total increase in employment from January to February this year by 22,000. The U.S. unemployment rate fell to 3.8% in March from 3.9% in the previous month, in line with expectations, and has remained below 4% for 26 consecutive months, the longest record since the late 60s of the 20th century. The year-on-year growth rate of average hourly earnings, which is regarded as an important indicator of inflationary pressures, was 4.1% in March, and the previous value remained unchanged at 4.3%, in line with expectations and the lowest level since June 2021. The latest data further supports the view that the Fed is in no hurry to cut rates. During the week, Fed Chairman Jerome Powell stressed that the labor market is "strong but rebalanced", and that there is still room for the United States to cut interest rates this year, but the specific rate cut will depend on the data; Minneapolis Fed President Kashkari said that the Fed may not need to cut interest rates this year if inflation progress stalls, especially if the U.S. economy remains strong; and many other senior officials have also stressed that there is no rush to cut interest rates at this time. After the release of the non-farm payrolls data, the probability of a 25bp rate cut in June dropped to about 50%.
1.2 Europe
Eurozone inflation continued to slow in March. Eurozone harmonized CPI fell to 2.4% in March from 2.6% in February, less than market expectations of 2.5%, mainly due to a slowdown in the year-on-year increase in services and tobacco and food prices. Eurozone core CPI, which excludes food and energy, slowed to 2.9% in March from 3.1%, less than expectations of 3% and accelerated to 0.8% from 0.6% m/m, suggesting that price pressures remain. In terms of countries, the growth rate of inflation in Germany and France has declined, and the inflation rate in Spain and Italy has rebounded. Business activity in the eurozone as a whole returned to expansion territory. The final composite PMI for the Eurozone climbed to 50.3 in March from 49.2 in February, up from 49.9 in the preliminary reading, and overall business activity returned to expansion territory after a nine-month recession. By country, the final value of the services PMI in Spain and Italy was better than expected, and the German services PMI also returned to the expansion range after revision. The larger-than-expected decline in the Eurozone PPI may further cool inflation. The Eurozone PPI for February released during the week fell by 1.0% month-on-month, exceeding expectations of a 0.6% decline and a 0.9% decline in the previous value, the largest month-on-month decline since May 2023. On a year-on-year basis, the PPI in the euro area fell by 8.3%, with an expected decline of 8.6% and a previous decline of 8.3%.
1.3 China and Asia-Pacific Markets
Chinese mainland: Caixin services PMI expanded for 15 consecutive months in March. The Caixin China Services PMI recorded 52.7 in March, up 0.2 percentage points from February, indicating that the recovery of the service industry has accelerated, and since the beginning of 2023, the Caixin China Services PMI has been in the expansion range for 15 consecutive months, and the economic activity of the service industry has continued to expand. The previously released Caixin China manufacturing PMI rose 0.2 percentage points to 51.1 in March, which has been in the expansion range for five consecutive months and hit a new high since March 2023. The prosperity of the two major industries both improved, driving the Caixin China Composite PMI to rise by 0.2 percentage points to 52.7 in March, the highest since June 2023.
Hong Kong: Domestic retail sales rose 1.4% year-on-year in January-February. Hong Kong, China's preliminary value of retail sales increased by 1.9% year-on-year in February and 0.9% in January, after deducting price changes, the preliminary value of retail sales increased by 0.5% year-on-year in February. In January and February this year, the value of sales rose by 1.4% year-on-year, but the volume of sales fell by 0.4%. The local PMI returned to expansion territory in March. Hong Kong's S&P PMI rose to 50.9 in March, up 1.2 percentage points month-on-month, returning to expansionary levels after being in contraction territory for two consecutive months. According to the S&P survey, new orders from private companies increased for the first time this year, with the construction industry seeing the most prominent growth, but the volume of new business from overseas and mainland China continued to shrink and the decline widened.
Japan: The services PMI hit a seven-month high in March. After seasonal adjustment, Japan's service PMI in March was revised downward from the preliminary value of 54.9 to 54.1 and the previous value of 52.9, still hitting a new high in seven months, and the final value of the composite PMI in March was also revised downward, still rising from the previous value of 50.6 to 51.7, expanding for three consecutive months and hitting a six-month high. The Governor of the Bank of Japan pointed to an increased likelihood of achieving the inflation target. Bank of Japan Governor Kazuo Ueda pointed out in an interview during the week that since the results of the "spring fight" will be reflected in the prices of summer and autumn, the probability of achieving the 2% inflation target will increase rapidly, and this may be the time point when the Bank of Japan will decide to raise interest rates further. He also reiterated that the central bank will react to changes in the exchange rate if the yen's exchange rate changes have a non-negligible impact on the goal of a virtuous cycle of wages and prices.
Southeast Asia: Singapore's March PMI expanded for 13 consecutive months. Singapore's S&P PMI for March came in at 55.7, down slightly from 56.8 in February, but the pace of expansion remained strong. The S&P survey pointed out that Singapore's demand for goods and services improved further in March, with new orders rising for the 15th consecutive month, the fastest pace since May 2023. Private sector output expanded at its fastest pace since October 2022, with new orders and output growing fastest in the wholesale and retail sectors. Singapore's retail sales rose 4.7% year-on-year in January-February. Singapore's retail sector extended its January rally, with sales rising 8.4% y-o-y in February, driven by higher spending during the Lunar New Year period, while retail sales excluding motor vehicle sales rose 9.4% y-o-y in February, reversing a 1.8% decline in January. From January to February, retail sales increased by 4.7% year-on-year. The overall recovery in visitor arrivals to Singapore so far this year was mainly boosted by the Lunar New Year and the visa waiver arrangement between Singapore and Chinese mainland, while Chinese mainland and Hong Kong were the main contributors to Singapore's visitor arrivals in February.
Second, the dynamics of the financial market
There were no new listings or listings in the primary market of Hong Kong stocks during the week. This week, a total of 5 companies submitted statements to the Hong Kong Stock Exchange, including Lala (listed as "Lala Technology"), BenQ Hospital Group, gold jeweler Mengjinyuan, etc. The secondary market was volatile and closed higher. This week's Caixin PMI data showed that the mainland's manufacturing and service industry activities maintained expansion, and the People's Bank of China's regular monetary policy meeting released a positive signal to strengthen countercyclical adjustment, but the Hong Kong stock and A-share markets were affected by the Easter and Qingming Festival holidays. At the same time, the latest U.S. employment data was unexpectedly strong, the market's expectations for the timing of the first interest rate cut were postponed again, and the U.S. Treasury yield was close to 4.4% again. As of the close of trading on April 5, the Hang Seng Index closed at 16,723.92 points, up 1.1% in the week, and the Hang Seng Technology Index fell 0.8%. During the week, the southbound funds of Hong Kong stocks accumulated a net inflow of HK$8.82 billion from April 1 to 2.
2.1 Money Market
In terms of Chinese dollar lending, the liquidity of the offshore market was stable and loose across quarters. Fed officials have spoken one after another this week, and due to inflation and the recurrence of inflation-related data, Fed officials have disagreed on the number and timing of interest rate cuts this year. Due to the impact of cross-quarter factors, the short-end interest rate of US dollar trading of Chinese institutions in the offshore market this week was significantly lowered, and the transactions were mainly concentrated within 3 months, while the long-term trading remained light. During the week, the overnight trading rate was around 5.35%, the 1-month USD funding was quoted at 5.55%-5.65%, the 2-month and 3-month USD funding was quoted in the range of 5.65%-5.75%, and the 1-year USD was quoted at 5.60%-5.70%. In terms of US dollar repo, the 1-month and 3-month closed at 5.63% and 5.65% respectively, with a cumulative increase of 6bp and 3bp in the past two weeks.
In terms of Hong Kong dollar borrowing, liquidity was generally balanced at the beginning of the month, and interest rate spreads between the United States and Hong Kong widened slightly. This week, the liquidity of the Hong Kong dollar of all maturities was generally stable, the short-end price was slightly lowered, the liquidity of other maturities was balanced, and the trading of the Hong Kong dollar was mainly concentrated in the short term. As of April 5, the overnight, 1-month and 3-month HKD interbank rates were 3.97%, 4.46% and 4.64% respectively, with weekly changes of -103.3p, -34bp and -8bp respectively. With the decline in the HKD short-term HIBOR rate, the spread between the 1-month USD LIBOR and the HKD HIBOR widened by about 32.9bp to 97.1bp. Due to the tight liquidity of Hong Kong dollars in the face of bank settlement demand at the end of the quarter, the Hong Kong Monetary Authority (HKMA) has released a total of HK$5.12 billion of overnight funds to the banking system through the discount window mechanism at the request of individual banks since 26 March.
In terms of offshore RMB, CNH liquidity was generally stable at the beginning of the month, and short-term interest rates were slightly lowered. The People's Bank of China (PBoC) withdrew RMB542 billion through open market operations before the Ching Ming holiday, while offshore RMB liquidity tightened significantly at the end of March, CNH HIBOR rose overall, and the Hong Kong Monetary Authority (HKMA) used RMB16.4 billion in RMB20 billion intraday repo liquidity on March 28. At the beginning of April, CNH liquidity turned slightly looser, and short-end CNH HIBOR was lowered. As of April 5, the 1-week, 3-month and 1-year CNH HIBOR closed at 4.49%, 3.90% and 3.31% respectively, with weekly changes of -12.3bp, +27.8bp and +4.5bp respectively.
2.2 Bond Market
U.S. Treasuries: This week, the external market has priced in ahead of strong non-farm payrolls data and hawkish Fed statements, while U.S. Treasury yields of all maturities have steepened further after an unexpected surge in non-farm payrolls data at the end of the week. As of April 5, the yields of 2-year, 5-year, and 10-year U.S. Treasury bonds rose by 14bp, 17bp, and 19bp respectively during the week, and were at 4.73%, 4.38%, and 4.39% at the end of the week, respectively, and the 10-year U.S. Treasury yield hit a new high since the end of November 2023. Before the Qingming holiday, the yield of Chinese government bonds fell slightly, further deepening the inversion of the interest rate differential between China and the United States.
The People's Bank of China (PBOC) held a regular meeting of the Monetary Policy Committee (MPC) in the first quarter this week, calling for "more attention to countercyclical adjustment" and continuing to "promote the steady and moderate decline in corporate financing and household credit costs", the intensity of countercyclical adjustment is expected to increase, and the current market expectation for the PBOC to cut interest rates has also increased compared with the end of 2023. According to the data of China Bond, the yield to maturity (AAA) of the one-year interbank certificate of deposit was 2.19% as of April 3, down 4.3bp from the end of the previous week, the yield of the 10-year treasury bond active bond was at 2.29% at the end of the week, down 1.6bp from the previous week, and the yield of the 10-year CDB active bond edged down by about 0.35bp to 2.40% at the end of the week.
Offshore bond market: In terms of Chinese dollar bonds, a total of eight Chinese dollar bonds have been priced since March 25, with a total issuance size of US$2.87 billion, of which AIA issued US$2 billion. In the secondary market, the market trading was thin before the Qingming holiday, and risk appetite was disturbed by U.S. fundamental data and the Federal Reserve's statement, and the overall return index of Chinese dollar bonds fell slightly by 0.2%, and the high-yield index closed higher. In terms of offshore RMB bonds, a total of 10 offshore RMB bonds have been priced since March 25, with a total issuance scale of CNY4.48 billion, mainly urban investment bonds.
2.3 Foreign Exchange Market
The US dollar remained strong during the week, and the exchange rate of the Hong Kong exchange rate and offshore RMB continued to be under pressure. Strong fundamental data and Fed statements further supported expectations of "no rush to cut rates" during the year, with the dollar index closing at 104.29 after breaking above 105 to the upside. During the week, the Hong Kong exchange rate weakened slightly by about 0.03% as the interest rate differential between the United States and Hong Kong widened, and the US dollar was trading at 7.8286 against the Hong Kong dollar as of April 5. The net outflow of northbound funds through the Mainland-Hong Kong Stock Connect before the Qingming holiday during the week was 3.89 billion yuan, and the onshore and offshore RMB exchange rates hit a low point in nearly four months due to the strong US dollar, and then rebounded slightly, as of April 5, the US dollar was quoted at 7.2525 against the offshore yuan, and the offshore yuan rebounded slightly by about 0.1% from the end of the previous week. The offshore RMB swap was actively traded, with the next-day swap point volatility pivot of USD/CNH falling to -3ips from +3pips in the previous week, and the one-year swap pivot rising from -1700pips to about -1600pips.
3. Strategic outlook for the market outlook
In terms of Chinese bonds, the bond market is passivated by fundamental disturbances, the core is that the high-frequency data and the low-frequency data deviate seriously, pay attention to the follow-up convergence direction, on behalf of the real estate start-up, infrastructure of the black system, on behalf of the real estate completion of glass, soda ash have recently fallen larger, the fundamental expectations are weak and the bank has a low duration of the year's bond allocation determines that the bond market interest rate has little room for short-term rebound, 2.4%-2.45% is the upper limit of the band, and the allocation can be increased. At the same time, the level of funds is the key factor restricting the downside of 10-year treasury bonds, under the pressure of stabilizing the exchange rate, the fluctuation of capital prices is significantly lower than that of the same period in previous years, the price of funds has not shown a downward trend, the scale of single-issue treasury bonds issued in April has risen, the current Ministry of Finance has not announced the issuance plan of 30-year and 50-year treasury bonds in the second quarter or preparations for the issuance of ultra-long-term special treasury bonds, focusing on the disturbance of the supply of ultra-long bonds to the bond market, below 2.3% implies a strong expectation of interest rate cuts, and in the case of no interest rate cuts, 2.2%-2.25% It is difficult to break through, and you can reduce your holdings on dips.
In terms of U.S. bonds, high-frequency U.S. fundamental indicators have bottomed out in early April, and the market has begun to show concerns about the Fed's delay in cutting interest rates, which is now about 50% likely to be cut in June. In the past week, more Fed officials have expressed the view of delaying or even not cutting interest rates, and the market needs to pay attention to whether more officials will join the bandwagon. In addition, we will continue to monitor the issuance of U.S. bonds and beware of supply shocks. Technically, the 10Y yield rebounded near the 60-day moving average as expected, and broke through the 120-day moving average resistance on the long white line, and there is still upward momentum in the short term, which may further test the 4.47% and 4.6% resistance, and support the 60-day moving average and 4% below.
In terms of the RMB exchange rate, affected by the public holidays in Hong Kong and the Qingming holiday in the mainland, there are only two Shanghai-Shenzhen-Hong Kong common trading days this week. The market trading was relatively flat, A-shares were basically flat, northbound funds had a small net outflow, and swaps implied a marginal rise in US interest rates. USDCNY edged higher on the back of the strong performance of the dollar index, but the median price remained below 7.10. Under the influence of the inter-quarter, the offshore RMB liquidity has fallen after a significant tightening, and USDCNH has fluctuated lower. With the U.S. dollar index blocked at the 105 strong resistance level, USDCNY's short-term action is limited, and it is difficult to break through the 7.24 line resistance, and it is expected that there will be strong support below the 7.20 line.
In terms of commodities, the current trend of gold and high-frequency indicators is differentiated, and the strong trend of gold may be affected by a variety of factors, first, the possibility of interest rate cuts in the United States within the year still exists, and the leverage ratio of many governments continues to expand; Remain vigilant under the extreme interpretation of the short-term gold bull market, and continue to stay long on dips in the long term. Shanghai gold resilience is still strong. In terms of crude oil, the CFTC holdings as of April 2 showed that crude oil fund longs increased their positions this week, short positions were flat, and crude oil fund net longs continued to rise. Producers have significantly reduced their long and short positions, among which the long positions have been reduced even more, and the net long highs of crude oil producers have continued to fall. The divergence of non-commercial-commercial positions in crude oil rebounded to 4. Both supply and demand are good for oil prices, and while the geopolitical crisis continues, oil prices may still have room to recover (see "U.S. Treasury Interest Rates Still Have Upward Momentum - FICC Strategy Report 2024 Issue 10").
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