The numbers for the week – 12 Dec 22

The numbers for the week – 12 Dec 22

Markets last week

Significant divergence between financial markets was seen last week, as China stepped up its efforts to reopen its economy whereas concerns about US inflation kept American equities in check.

Chinese markets consolidated after recent strong gains but continued to exhibit some buoyancy, amid warnings that the relaxation of the zero COVID-19 policy could run into chaotic problems for the country’s healthcare system. In addition to health measures, the government seems to be pushing a growth agenda, which was reflected in help for the real estate sector as well.

The US, however, was less bullish. Due to the standard pre-meeting blackout, US Federal Reserve (Fed) officials did not speak, but there was an article in the Wall Street Journal widely attributed to the Fed, aimed at preparing the market for “higher for longer” interest rates and a terminal Fed Funds rate higher than 5.25%. The communication put a floor below US government yields, which had fallen significantly of late, and also boosted the weakening US dollar, albeit only moderately.

The most remarkable move last week, however, was in oil prices. Whether driven by the European Union’s decision to cap Russian oil prices at US$60/bbl, supply factors or growth worries, crude fell sharply (11-12% over the week), mostly wiping out this year’s increases. This had an impact over the energy sector, which was the biggest loser in equities as a result.

At the end of the week, US treasury yields had climbed 9 bps with the dollar very slightly better as a result. Share markets diverged massively, with Hong Kong and China providing strong returns, but the US falling both in US dollar terms and for sterling investors too. The worst sector was energy, down more than 6%, although the technology segment was also quite weak. Only utilities managed to eke out a positive return globally.

 

The week ahead

Tuesday: US CPI

Our thoughts: US inflation has clearly peaked but the main question for monetary policy (and for investors) is at which speed it will come down. In that respect, the next few Consumer Price Index (CPI) readings will be crucial. The recent Producer Price Index (PPI) number was on a downtrend but still above expectations. How will markets react if something similar happens to the CPI this week? It is well known that energy prices are now falling, that goods prices have peaked, but also that services prices are very sticky due to the extremely tight US labour market. How will that complicated combination work out? 

Wednesday: UK CPI

Our thoughts: on the surface, we could assume the same issue applies to the UK, but not quite. Inflation is still on a rising path in the UK. For how long? Besides, how much does government interference affect prices for energy? It is almost impossible to calculate and hence markets are bound to be surprised one way or another. The Bank of England is concerned about inflation expectations having lost their long-term anchor at a low level and the multiple public services strikes we are seeing are threatening to involve the authorities in a wage and salary increase for a large swathe of the workforce. Against that backdrop, how will markets react to the next CPI print?

 Wednesday: FOMC meeting

Our thoughts: to say that much is riding on this week’s Fed Federal Open Market Committee (FOMC) meeting is an understatement. Officials have been in the pre-election period (purdah) for the last fortnight and the last comment markets had was over 10 days ago from Fed Chair Jerome Powell. During that last speech, he gave mixed messages but investors chose to believe some of them only. The question is how loudly he will repeat such messages. On the surface, the uncertainty is about how high the interest rate hike will be, but almost everyone expects 50 bps this time, down from 75 bps over the last three meetings. What will therefore matter the most is the communication and whether Powell stresses the likely future pause in rate hikes, the need to keep rates high for a long time to stem inflation or the potential concerns about a recession. What balance of risks will he focus on?

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management
 

Central banks/fiscal policy

The relaxation of Chinese COVID-19 policy is becoming quite broad-based in what seems to be a growth drive

As per the rules of the Fed, officials were not allowed to make public comments about their views on policy ahead of the meeting of the Fed this week.

In China, there were many announcements, however, mostly dealing with the reopening of the Chinese economy following the strict COVID-19 lockdowns and quarantines. There was a further relaxation of COVID-19 restrictions (scrapping outdoor mask rules and relaxing testing requirements). There were measures providing additional support to the beleaguered property sector. Lastly, the government leaked comments that the economy would be subject to a 5% growth target.

 

United States

The relaxation of Chinese COVID-19 policy is becoming quite broad-based in what seems to be a growth drive

As per the rules of the Fed, officials were not allowed to make public comments about their views on policy ahead of the meeting of the Fed this week.

In China, there were many announcements, however, mostly dealing with the reopening of the Chinese economy following the strict COVID-19 lockdowns and quarantines. There was a further relaxation of COVID-19 restrictions (scrapping outdoor mask rules and relaxing testing requirements). There were measures providing additional support to the beleaguered property sector. Lastly, the government leaked comments that the economy would be subject to a 5% growth target.

United Kingdom

Surprising strength in surveys against slow reduction in inflation

Surveys: the Institute for Supply Management (ISM) services PMI rose from 54.4 to 56.5, the highest level this year. Thirteen services industries reported growth in November, led by real estate, rental and leasing, mining, agriculture, forestry, fishing and hunting. The measure of services employment also improved. The prices paid index edged down but remains elevated at 70, well above pre-pandemic levels and suggesting inflation may be slow to dissipate.

The University of Michigan sentiment index surprised on the upside, rising from 56.8 to 59.1, with current conditions up from 58.8 to 60.2 and expectations up from 55.6 to 58.4.

The NY Fed probability of recession in the US in the next twelve months increased from 26% to 38%.

Productivity: Q3 productivity and unit labour costs were revised sharply, with non-farm productivity improving from 0.3% to 0.8% and unit labour costs falling from 3.5% to 2.4%, although the ratio of both readings is still unfavourable for inflation.

Housing: the Mortgage Bankers Association (MBA) mortgage applications series fell 1.9% after -0.8% the previous week.

Trade and Industry: factory orders were up 1.0% in October, from 0.3%. Wholesale trade sales in October rose 0.4%, up from 0.1% the prior month.

Employment: initial jobless claims rose marginally from 226K the prior week to 230K and continuing claims rose from 1609K to 1671K.

Inflation: the PPI fell from 8.1% to 7.4%, with the PPI ex food and energy also down from 6.8% to 6.2%, albeit both above estimates. The inflation forecast within the University of Michigan survey fell from 4.9% to 4.6% for the 1-year forecast but remained at 3.0% for the 5-10-year forecast.

Europe

Limited data show economy still weak despite some recovery

Surveys: the eurozone Sentix investor confidence bounced back from -30.9 to -21.0. The S&P Global construction PMI for Germany fell from 43.8 to 41.5.

Retail: eurozone retail sales for October fell 1.8%, or 2.7% year-on-year, down from 0% the previous month.

China/India/Japan/Asia

Foreign trade and inflation numbers in China show weakness in economy which explains the reopening efforts

China: foreign trade fell sharply, with exports down 8.7% in US dollars year-on-year and imports down 10.6%. The trade balance fell from US$85.1bn to US$69.8bn. The foreign exchange reserves, however, increased from US$3.05trn to US$3.12trn.

Inflation was well under control, with the CPI falling from 2.1% to 1.6% and the PPI unchanged at -1.3%.

Japan: surveys softened with the Eco Watchers survey down, both for the current conditions (49.9 to 48.1) and the outlook (46.4 to 45.1), although the Leading Index CI was slightly better at 99.0 vs. 98.2 with the coincident index down from 100.8 to 99.9. Household spending fell from 2.3% to 1.2% year-on-year in October, with labour cash earnings down from 2.2% to 1.8% as well.

The money stock was stable, with M2 remaining at 3.1% year-on-year and M3 edging up from 2.6% to 2.7%. The PPI eased somewhat to 9.3% from 9.4% previously, above estimates.

Oil/Commodities/Emerging Markets

Massive slump in oil prices

Oil fell nearly 12% in three trading sessions, with Brent crude ending the week around US$76, the lowest level since 10 January this year. The European Union set a limit of US$60/bbl for Russian oil. It is not clear whether this was the trigger for the massive drop in prices.

 Copper has been more resilient, up 1% over the week.

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