Markets last week
Momentous moves in markets ushered in the New Year, with strong US data and the US Federal Reserve (Fed) December meeting minutes setting the stage for a large increase in government bond yields worldwide, and a sector rotation from growth sectors to value sectors in tow.
The Fed’s December minutes underscored a change of mood among officials, with a broader palette of actions now available, including not just eliminating asset purchases (quantitative easing – QE), but also raising interest rates soon afterwards and potentially reducing the Fed’s balance sheet by selling assets (quantitative tightening). Eye-watering inflation readings in the US and other developed countries are feeding wage-price spiral fears with expectations of strong action by central banks, the Fed at the helm. Markets are now pricing in an 80% probability of a Fed hike at the March meeting, as QE ends.
Against that backdrop, investors are also making assumptions about COVID-19. Omicron seems to be the fastest-spreading virus ever. Barely a month after its detection in South Africa, it’s already dominant in countries around the world, and there have been more cases than ever before. Investors are clearly hoping that omicron will be the catalyst for the pandemic to turn endemic. Hospitalisations remain below the peaks of the previous two waves, but they are rising.
The combination of strong growth despite COVID-19, surging prices and Fed willingness to act soon and decisively, drove government bond yields meaningfully higher during the week, with the US 10-year treasury yield jumping 25 bps and gilt yields also up 21 bps. The impact of these moves was felt vividly across all markets. In equities, cyclicals did well, with energy, financials, industrials and materials rising and tech and healthcare falling, in a repeat of what we saw a year ago after the vaccine announcements. In commodities, Brent oil topped US$80 again, but copper and gold fell. Risk currencies rose, with sterling leading, and defensive currencies fell (Japanese yen worst).
Over the week, energy shares were the clear leader, up more than 8%, with financials also rising 4%, but information technology and healthcare falling close to 5%. The rotation was particularly noticeable for smaller, highly-rated tech companies. Geographically, markets reacted according to the relative percentage of each sector in the indices, with the FTSE doing best thanks to its high energy and financials component and the US doing poorly due to its technology dominance.
The week ahead
Wednesday: US December CPI
Our thoughts: eye-watering numbers are expected again, with a 7% headline estimate for CPI (consumer price index), up from 6.8% the previous month. Confirming that number or beating it would be a strong signal for the US Federal Reserve (Fed) to accelerate its tightening of monetary policy. If the core CPI, ex food and energy, also surges to 5.4% vs. 4.9%, as estimated, this would add arguments to the Fed’s hawks. The details of the inflation data will also matter. Is it spreading across the whole economy?
Thursday: Chinese trade data
Our thoughts: once again, Chinese exports and imports are expected to be strong, highlighting the interconnection between major supply sources in the world. No winddown of globalisation has yet been observed in Chinese trade data. As a result, the country keeps pocketing a high trade surplus every month which adds to foreign exchange reserves and helps the currency, the renminbi. Will anything be different for December?
Friday: UK November GDP details
Our thoughts: markets are expecting a good month for the UK economy in November, although figuring out where it comes from will be important for markets. Services are the major share of the British economy and omicron has hit them hard, so the participation of the services sector in growth will matter, with construction output, manufacturing production and the ‘trade drag’ (the fact that the UK is constantly importing more than exporting, which is a drag for economic growth) also worthy of analysis.
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||0.40%||-13.70%||0.10%||-13.80%|
|Emerging market equities||-0.50%||-5.00%||-0.80%||-4.50%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.76%||25||85|
|10-year German Bund||-0.04%||13||53|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||81.75||5.10%||57.80%|
|WTI oil (bbl)||78.9||4.90%||62.60%|
|Copper (metric tonne)||9647||-0.80%||24.20%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Market-moving Fed minutes
The minutes of the Fed FOMC (Federal Open Market Committee) for the 14-15 December meeting were published and had a big impact on markets. They hinted strongly at a balance sheet run-off after QE tapering is over, as a way to avoid a flattening of the yield curve compared to raising rates sharply. The prospect of another year of growth above the economy’s speed limit with inflation already strong, along with a large balance sheet that’s suppressing longer-term borrowing costs “could warrant a potentially faster pace of policy rate normalisation”. This was the first such comment about reducing the Fed’s balance sheet and markets reacted sharply to it, now pricing in an 80% probability of a Fed hike at the March meeting, as QE ends. The average of seven various US core inflation measures – core CPI (consumer price index), core PCE (personal consumption expenditures), trimmed-mean CPI, median CPI, sticky core CPI, trimmed-mean PCE and market-based core PCE – has seen a surge to 4%.
The Fed does not appear worried about a short-term COVID-19-related dip in demand, due to fiscal spending still being on the cards (Biden will attempt to bring back the Build Back Better legislation) and strong employment.
Economic data still very strong
Surveys: the ISM (Institute for Supply Management) manufacturing PMI dropped from 61.1 to 58.7, making it 19 consecutive months of growth, having hovered around 60 for a full year, which is exceptional. New orders fell slightly from 61.5 to 60.4 but the employment index actually rose from 53.3 to 54.2. The biggest drop was in prices paid, from 82.4 to 68.2 (the high was 92.1). Supplier deliveries also fell to 54.9, down 7.3. ISM gauges of supplier deliveries and prices paid for materials in December both hit their lowest levels in more than a year, highlighting reduced pressure on supply chains.
The ISM services PMI dropped to 62.0 from 69.1, but this is still a very high number in light of Omicron-driven restrictions in activity.
Employment: the JOLTS job openings were lower at 10.6 million vs. 11.1 million. Weekly jobless claims remained very low, rising only slightly from 200K to 207K, with continuing claims up from 1718K to 1754K. Layoff announcements (from Challenger, Gray & Christmas) also remained low in December, down 75% year-on-year vs. 77% before.
Although on the face of it, the non-farm payrolls for December disappointed by creating only 199K jobs, vs. 450K expected and 249K the previous month, the last two-month data were revised upwards by 141K and other details looked very positive. The unemployment rate (U-3) fell further from 4.2% to 3.9% and the underemployment rate (U-6) from 7.7% to 7.3% with an unchanged labour force participation rate at 61.9% and unchanged average weekly hours at 34.7. Average hourly earnings jumped 0.6% during the month, up from 0.4% but the year-on-year fell from 5.1% to 4.7%, albeit above estimates.
Industry: in the auto sector, the Wards total vehicle sales for December disappointed, falling from 12.9 million annualised rate to 12.4 million. In November, factory orders rose 1.6%, up from 1.2% the previous month.
Housing: mortgage rates in the US jumped to the highest level since the early months of the pandemic. The average for a 30-year loan was 3.22%, up from 3.11% last week and the highest since late May 2020. Rates hit a record low of 2.65% a year ago. After a week off, MBA mortgage applications fell 5.6%.
Strong economic data, other than car sales
Consumer debt: British consumers took on the most debt since July 2020, adding £1.2bn to their unsecured debts in November, up from £828m in the previous month.
Housing: net lending secured on dwellings soared from £1.1bn to £3.7bn. The data also showed more homeowners seeking to re- mortgage, with a jump in transactions to 44,500, the highest level since before the pandemic. Mortgage approvals for house purchases were almost unchanged at 67K. Obviously, the increase in re-mortgaging coincided with growing speculation about an imminent interest rate increase. Still, the effective rate on newly drawn mortgages fell to a record low of 1.5%, while the rate on the total outstanding stock of loans fell to 2.02%, also the lowest ever.
UK house prices rose at the fastest pace since before the financial crisis in December after a sixth consecutive month of growth. The average price of a home rose 1.1% last month to a record £276,091. The gain from a year earlier was 9.8%, the most since July 2007.
Industry: UK new car registrations fell 18.2% year-on-year in December down from a positive number previously.
Surveys: the Markit/CIPS construction PMI fell from 55.5 to 54.3. The manufacturing PMI was revised up from 57.6 to 57.9.
Money supply: M4 money supply eased a smidge from 7.0% year-on-year to 6.9%.
Services activity hampered by high inflation
Inflation: the eurozone PPI (producer price index) rose again from 21.9% year-on-year to 23.7%. The eurozone CPI (consumer price index) surprised on the upside, rising from 4.9% to 5.0%, although the core CPI (excluding energy, food, alcohol and tobacco) remained at 2.6%. German CPI slowed from its highest level in decades, rising 5.7%, down from the previous month’s 6%, while Spain and Italy both saw inflation quicken last month.
Industry: German industrial production fell 0.2% in November vs. a positive 2.4% the previous month.
Sales: eurozone retail sales jumped 1% in November for a 7.8% year-on-year growth vs. 1.7% previously.
Surveys: eurozone confidence surveys generally fell, economic confidence from 117.6 to 115.3, services confidence from 18.3 to 11.2, but industrial confidence edged up from 14.3 to 14.9.
The Chinese economy is not slowing down
China: the unofficial Caixin manufacturing PMI rose to 50.9, best since June, only up 1 point but that is a big move in China.
Foreign exchange reserves climbed further from US$3.22T to US$3.25T, helping the Chinese renminbi’s currency strength.
The authorities called on banks to boost real estate lending in the first quarter and eased a key debt restriction for developers, a sign that authorities are becoming increasingly concerned about the industry’s liquidity crisis.
Japan: the consumer confidence index was almost unchanged at 39.1 vs. 39.2 and the monetary base was up 8.3% year-on-year in December vs. 9.3% the previous month.
Oil prices increased sharply last week, up 5% for most crude gauges, in light of economic growth not expected to subside anywhere. Industrial metals were less buoyant, with copper slightly down.