Markets last fortnight
The Christmas-New Year period tends to be very quiet in Europe and the UK but much less so in the US. Indeed, we saw a flurry of statistics emanating from the US, generally pointing to a resilient economy despite Omicron. With global COVID-19 cases exceeding 2 million on 30 December and 10 million over the past week, the 2-year anniversary of a mysterious pneumonia in Wuhan, China, was overshadowed by holiday celebrations worldwide and generally bullish risk markets.
Economic data were buoyant in the US, with positive surveys, jobless claims and durable goods. Japan is showing a moderate but steady improvement in its economy, which has not quite been noticed by markets yet. Chinese data are starting to point towards a rebound in growth. The UK is navigating between a strong housing market and weak surveys. In Europe as well as the US, inflation readings are still surging.
Over the last fortnight, government bond yields rose sharply in the UK and Europe, a little less so in the US, setting the stage for broadly bullish equities. European and UK shares did best but Japanese and emerging markets fell during the period.
Last week, 10-year gilt yields briefly exceeded 1%, helping sterling recover against both the US dollar and the euro, but the yield did not stay above 1% for long. The Japanese yen was the weakest currency. Oil prices bounced back strongly on news of reduced stockpiles. Copper and gold were also higher, driven mostly by the inflation backdrop.
Over the course of 2021, risk markets had an exceptional run, with equities in double digits in western markets. The US stock market achieved a 28% return in sterling (without dividends), with the FTSE 100 and 250 almost identical near 14.5%, edging European equities by almost 1%. In Asia, however, the picture was very different. Japanese shares were flat for the year, Hong Kong was down almost 14% and Asian emerging markets in general were negative. The discrepancy between market sectors was less than in previous years, with energy pipping technology and financials to the highest return and defensive sectors like utilities and consumer staples at the bottom.
Bond yields rose sharply in the UK and less so in other regions, making government bonds the worst asset class in 2021. The biggest movement for the year, though, was in oil prices, up more than 50%, copper up more than 25% but gold down more than 3%. In foreign exchange, sterling was up 6% in euros but down 1% in US dollars and the Japanese yen was the weakest developed currency.
Yesterday, most global markets were open, with the exception of the UK, Japan and China. Equities had a strong first trading day for 2022. Bond yields rose sharply in the US and core EU countries. Commodity and risk currencies were the best performers.
The week ahead
Tuesday: US ISM manufacturing PMI
Our thoughts: once again, the US economy is leading world growth and we need to understand whether Omicron has caused any slowdown. The ISM (Institute for Supply Management) publishes a very detailed PMI both for manufacturing and services. The manufacturing PMI has been in the headlights in 2021 due to the supply chain issues. As usual, new orders, backlogs, prices paid, employment, consumer inventories will give us a more accurate description of the economy than growth data and a better picture on inflation than price data.
Friday: eurozone data dump (CPI, retail sales, industrial confidence, economic confidence, services confidence)
Our thoughts: it is rare to have so many data points from the eurozone in one day, which means this might move markets. The December CPI (consumer price index) will be eagerly awaited given global concerns about inflation and the unusually high readings in a low-inflation area like the eurozone. Retail sales are expected to be down, but the magnitude will shed some light on the impact of Omicron restrictions across the region. Perhaps the most up-to-date statistics will be the confidence numbers (economic confidence, industrial confidence and services confidence), all of which have recovered very well since the pandemic, but will they stay at these heights?
Friday: US December employment data
Our thoughts: these days, it is less the headline non-farm payroll number that matters to markets and more the other details. The US Federal Reserve (Fed) will undoubtedly scrutinise the data and maybe extrapolate job creation to figure out when a full employment situation will be reached. The unemployment rate, last at 4.2%, the underemployment rate, last at 7.8%, and the labour force participation rate, will complete the jobs picture for the Fed. Equally important, though, will be the income data: average hourly earnings growth and the number of weekly hours worked will help determine how sticky inflation is likely to be.
Markets for the week
|In local currency||In sterling|
|Index||Last fortnight||YTD||Last fortnight||YTD|
|Hong Kong equities||0.90%||-14.10%||-1.10%||-13.80%|
|Emerging market equities||1.30%||-4.60%||-0.80%||-3.80%|
|Government bond yields (yield change in basis points)|
|Current level||Last fortnight||YTD|
|10-year US Treasury||1.51%||11||60|
|10-year German Bund||-0.18%||20||39|
|Current level||Last fortnight||YTD|
|Commodities (in USD)|
|Current level||Last fortnight||YTD|
|Brent oil (bbl)||77.78||5.80%||50.20%|
|WTI oil (bbl)||75.21||6.10%||55.00%|
|Copper (metric tonne)||9720.5||3.00%||25.20%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
No major statements or meetings
The People’s Bank of China (PBoC) injected capital into the bond market through open-market operations and continued to bring overnight borrowing rates down.
President Biden was rumoured to be in the process of making appointments to fill three vacancies at the US Federal Reserve (Fed), including the all-important Head of Banking Regulation.
Data are not (yet?) showing any slowdown associated with Omicron
Housing: MBA mortgage applications fell 0.6% for the penultimate week of the year. Existing home sales rose 1.9% in November, vs. 0.8% the previous month. New home sales surged 12.4%, up from a negative -8.4% before. Pending home sales, however, dropped 2.2% after a strong previous month, bringing the annual growth to a paltry 0.2%. The Case-Shiller price index for housing moderated from 19.09% year-on-year to 18.41% in October, with the 20-city gauge likewise easing from 19.66% to 19.08%. The FHFA house price index rose 1.1% in October vs. 0.9% the previous month.
Industry: durable goods orders surged 2.5% in November, up from 0.1% the previous month, with ex transportation orders also up 0.8% vs. 0.3%. Capital goods shipments non-defence ex aircraft rose 0.3% vs. 0.4% previously.
Trade: the US trade deficit widened to a record in November, as imports rose to an all-time high. The merchandise gap rose from US$83.2bn to US$97.8bn with imports rising 4.7% and exports decreasing. Retail inventories surged 2% in November, vs. 0.3% the previous month, although wholesale inventories were more moderate, rising 1.2% vs. 2.5%.
Income: the income and spending spree abated somewhat, with personal income up 0.4% in November, down from 0.5% and personal spending up 0.6% from 1.4% the previous month.
Inflation: the November PCE (personal consumption expenditures) inflation reading increased from 5.1% to 5.7%, with the PCE core deflator from 4.2% to 4.7% (the core PCE is the Fed’s official inflation gauge with a 2% target).
Employment: initial jobless claims remained steady at 205K the first week with a fall the next week to 198K. Continuing claims dropped more sharply from 1867K first to 1856K and then to 1716K.
Surveys: the Leading Index rose from 0.9% to 1.1% in November. The Chicago Fed National Activity Index fell from 0.75 to 0.37. The Conference Board consumer confidence index rose from 111.9 to 115.8, with the current situation almost stable at 144.1 vs. 144.4 but expectations surging from 90.2 to 96.9. The Dallas Fed Manufacturing Activity Index fell from 11.8 to 8.1 but the Richmond Fed Manufacturing Index rose from 12 to 16. The MNI (Market News International) Chicago PMI (also called Business Barometer) improved from 61.8 to 63.1.
House prices still strong and budget deficit swelling
Surveys: the CBI Trends and Retailing data were softer. The Trends total orders series fell from 26 to 24 and selling prices from 67 to 62. The Retailing reported sales slumped from 39 to 8 and total distribution reported sales from 43 to 12, although there could have been a Black Friday effect behind the drop. The Lloyds Business Barometer was unchanged at 40.
Housing: house prices, as computed by Nationwide, rose 1% in December vs. 0.9% in November, bringing the annual return to 10.4%, up from 10.0%, the fastest pace since 2006.
Public Finances: the public sector net borrowing requirement swelled in November from £11.6bn to £16.6bn with the number ex banking groups also rising from £12.4bn to £17.4bn.
Growth: although by now extremely backward-looking, final Q3 GDP numbers softened from 1.3% to 1.1% for the quarter, driven by negative growth in government spending, gross fixed capital formation (i.e. investment) and exports, despite better private consumption.
Inflationary pressures still building
Surveys: eurozone consumer confidence feel from -6.8 to -8.3 in December. In Germany, the GfK consumer confidence report slumped from -1.8 to -6.8. As a perspective the reading before COVID-19 was around +10.
Inflation: German import prices continued to soar, with the import price index up 24.7% year-on-year in November, from 21.7% the previous month. The French PPI (producer price index) surged from 15.2% to 17.4%.
Money supply: monetary growth in the eurozone eased, as M3 money supply grew 7.3% year-on-year in November down from 7.7% previously.
Chinese PMIs show an uptick, but profits are down
China: industrial profits dropped from 24.6% year-on-year to 9.0% in November, totally erasing the early 2021 surge post-COVID-19. The official CFLP (China Federation of Logistics and Purchasing) PMIs were a tad better. The manufacturing PMI edged up from 50.1 to 50.3 and the non-manufacturing PMI from 52.3 to 52.7. The unofficial Caixin manufacturing PMI also rose from 49.9 to 50.9.
Japan: inflation rose from very low levels, with the national CPI (consumer price index) up from 0.1% to 0.6% but the core CPI ex fresh food and energy barely recovering from -0.7% to -0.6% and the PPI (producer price index) services edging up from 1.0% to 1.1%.
Housing starts slowed from 10.4% year-on-year to 3.7% in November. Retail sales did better, up 1.2% in November with the year-on-year growth climbing from 0.9% to 1.9%. Industrial production surged 7.2% in November, with the year-on-year turning from a negative -4.1% to a positive +5.4%.
The jobless rate moved up a notch from 2.7% to 2.8% with the job-to-applicant ratio unchanged at 1.15.
Oil prices climbed to a one-month high on news of big drops in US crude stockpiles. The American Petroleum Institute reported US crude holdings falling by 3.1 million barrels during the Christmas week.