Markets last fortnight
During what is normally a very quiet season for markets, the important factor during the fortnight was the impact of the speedy Chinese reopening from its previous zero-COVID-19 policy. Amid press statements that up to a million people per day were getting infected and 5,000 were dying (with projections of 25,000 daily deaths by the Chinese New Year in a month), the juggernaut of reopening seemed to have an impact at least on market sentiment, once again helping Asian and emerging market equities over other markets, in particular the US, and also boosting oil prices after their recent drops.
Although central banks were generally non-communicative, there was a significant increase in government bond yields across the board, with US treasury bonds rising 39 bps and gilts 34 bps, probably due to markets starting to move closer to central bank views, in particular the US Federal Reserve (Fed).
US economic surveys were mixed in their directional signals despite widespread calls for a recession later this year. The US economy still looks very strong, with the Atlanta Fed’s growth forecast for Q4 upgraded from 2.7% to 3.7%.
Japanese shares were hit and the yen soared as the Bank of Japan (BoJ) widened its 10-year yield target limit to 0.5% against a backdrop of rising Japanese inflation and an ever-weaker yen. As a result of the policy change, the yen bounced back more than 4% against the US dollar in the last two weeks, whilst sterling weakened vs the euro as European data and surveys seem to point to a moderate economic improvement.
The Santa rally fizzled somewhat in the US, as some economic data came out which was too strong for the Fed’s taste, but the seasonal bullishness still had some legs in the UK and other parts of Asia. Yesterday, European markets were open and showed good strength.
Oil prices were buoyant in a pre-Christmas recapture of the previous fortnight’s drop, due to the Chinese economy reopening fast.
At the end of the period, in sterling terms global equities were positive. Energy had the best return and technology lost the most, as other sectors were fairly unchanged.
The week ahead
Wednesday and Friday: ISM manufacturing and services PMIs
Our thoughts: is the US going into a recession this year or not? Whereas opinions are split on the topic, economic surveys will help ascertain the likelihood and none are better than the ISM (Institute for Supply Management) PMIs (Price Management Index) due to the level of granularity provided: new orders, inventories, backlogs, prices paid, employment, all will help paint a picture of the US economy to guide us through the year. More importantly, is this going to be an industrial recession or a broader one? Manufacturing is clearly on a downtrend, but services are resilient. Will that distinction continue?
Friday: Eurozone CPI
Our thoughts: inflation in the US may dominate market participants’ concerns but being a global phenomenon, price rises in Europe will matter enormously too. Has eurozone inflation peaked, as the US seems to have? Is the difference between core and headline CPI (Consumer Price Index) still large or is it dwindling, which would indicate a spreading of inflationary pressures beyond energy? The country breakdown will also be a guide to the sectors affected by higher prices.
Friday: US employment data for December
Our thoughts: once again investors will be watching the US employment data to find out whether the US is still creating a quarter of a million jobs per month, which would not be welcome news for the Fed. Other statistics worth highlighting would be the make-up of new jobs per sector, the all-important labour force participation rate and average hourly earnings, all in the hope of second-guessing the level of hawkishness that Fed officials might display by the time of their next meeting.
The numbers for the week
Central banks/fiscal policy
A pause in communications for western central banks, but the Bank of Japan stuns markets with a rise in its yield guidance
The BoJ left rates unchanged at -0.10% for its policy balance rate and 0.0% for the 10-year yield target but widened its target band for the 10-year JGB (Japanese Government Bond) yield, raising the ceiling to 0.5% from 0.25%. It said it will now aim to keep 10-year yields around 0% with a 50 bp tolerance in either direction.
The BoJ also announced an increase in the pace of its bond purchases to 9.0trn yen
(-£57bn) per month from 7.3trn yen. This was likely aimed at softening the impact of the policy change on the yen and yields. Markets reacted quite sharply to the change in yield guidance, with the yen soaring by more than 4% on the day and Japanese equities capping their strong relative returns last year.
The People’s Bank of China (PBoC) left interest rates unchanged with the 1-year loan prime rate at 3.65% and the 5-year loan prime rate at 4.30%.
European Central Bank (ECB) Executive Board member Isabel Schnabel stated that interest rates will have to move into “restrictive territory” to bring inflation back to target. The danger of a policy overreaction by the ECB ‘continues to be limited, as real interest rates are still very low.’
Lack of clear direction in surveys and most economic data, with the exception of the ever-tight jobs market, the slumping housing sector and slowly easing inflation
Housing: the NAHB (National Association of Home Builders) housing market index fell from 33 to 31, close to the COVID-19 lows. Building permits fell a massive 11.2% in November with housing starts also down 0.5%. Existing home sales fell 7.7% from 5.9% the prior month. MBA mortgage applications rose 0.9% after 3.2% the previous week. New home sales rose 5.8% from +7.5% whereas pending home sales fell 4.0% compared to -4.6%.
The FHFA (Federal Housing Finance Agency) house price index in October was flat compared to +0.1% the previous month. The S&P CoreLogic Case-Shiller 20-city house price index fell 0.52% in October with the year-on-year growth dropping to 8.64% from 10.43%.
Surveys: the Conference Board consumer confidence index unexpectedly surged from 101.4 to 108.3, driven by both the present situation and the expectations component. The Leading Index was quite weak at -1.0% vs -0.9% the prior month. The Kansas City Fed manufacturing activity index fell from -6 to -9. The Dallas Fed manufacturing activity index fell to -18.8 from -14.4. The Richmond Fed manufacturing activity index rose to +1 from -9. The MNI (Markets News International) Chicago PMI surged to 44.9 from 37.2.
Employment: initial jobless claims remained low at 216K vs 214K the previous week and then the following week stood at 225K. Continuing claims moved from 1672K to 1669K and 1710K.
Consumer: personal income in November rose 0.4% from 0.7%, with personal spending at +0.1% from 0.8%.
Inflation: the PCE (Personal Consumption Expenditures) deflator fell from 6.1% year-on-year to 5.5% with the core PCE from 5.0% to 4.7%. The core PCE is the benchmark gauge used by the Fed for inflation.
Industry: durable goods orders in November dropped 2.1% vs +1.1% the prior month, with capital goods orders non-defence ex aircraft down 0.1% vs +1.4%. Wholesale inventories rose 1.0% vs +0.5% and retail inventories +0.1% vs -0.4%.
Worsening public finances
Public finances: there was a marked deterioration in the public finances, as the Public Sector Net Borrowing Requirement (PSNBR) soared from £13.4bn to £21.2bn, the highest level on record for November.
Surveys: the CBI (Confederation of British Industry) Trends surveys were fairly stable, with total orders falling from -5 to -6 but selling prices rising from 47 to 52. The Lloyds business barometer improved from 10 to 17. The CBI Distribution series improved considerably, with the CBI total distribution reported sales rising from -24 to -5 and the retailing reported sales up from -19 to +11.
Housing: the Nationwide house price index fell in December by 0.1% after -1.4% the prior month.
Moderate improvement in very weak conditions
Construction: the eurozone construction output rose 1.3% in October, from 0.5% the prior month.
Surveys: The widely followed IFO (Institut für Wirtschaftsforschung) survey in Germany improved, with business climate up from 86.4 to 88.6, the current assessment up from 93.2 to 94.4 and expectations up from 80.2 to 83.2. Also in Germany, the GfK consumer confidence index rose from -40.1 to -37.8. The eurozone consumer confidence survey improved marginally from -23.9 to -22.2.
Inflation: the German PPI (producer price index) was less high at 28.2% vs 34.5% previously. The French PPI also fell from 24.7% to 21.5%.
Money supply: eurozone money supply fell moderately with M3 up 4.8% year-on-year, from 5.1% previously.
China: foreign direct investment (into China) fell from 14.4% year-on-year to 9.9%. Industrial profits in November were down 3.6% year-on-year. The official (CFLP) manufacturing PMI fell to 47.0 from 48.0 but the non-manufacturing PMI collapsed to 41.6 from 46.7. The unofficial Caixin manufacturing PMI dropped to 49.0 from 49.4.
Japan: the national CPI (consumer price index) increased further from 3.7% to 3.8%, with the core CPI ex fresh food and energy also higher at 2.8% vs 2.5%. The PPI services in November eased to 1.7% from 1.8% the prior month. The jobless rate fell to 2.5% from 2.6%, with the job-to-applicant ratio unchanged at 1.35. Housing starts improved a little to -1.4% from -1.8% year-on-year. Industrial production fell 0.1% in November from -3.2% previously.
Massive oil bounce-back
A massive pre-Christmas rally in crude prices recovered the losses of the previous two weeks without any fundamental announcements. There is a strong possibility that the recovery is related to the fast-paced reopening of the Chinese economy, although industrial metals did not share in the upswing. Gold continued on its November rally and easily recaptured the US$1,800 level.