The numbers for the week – 13 Nov 23

The numbers for the week – 13 Nov 23

Markets last week

Equities rallied earlier in the week, spurred on by the ‘Peak Fed’ narrative (the dovish interpretation of the November US Federal Reserve (Fed) meeting), and further evidence of global disinflation. Jerome Powell’s hawkish comments on Thursday abruptly ended the longest winning streak for the US equity market in two years (more on this in the central bank section below). Stocks dusted themselves off on the last day of trading and ended the week with strength. The bond market mostly played its part to spur on the rally, with 10-year treasury yields coming off 16-year highs to settle around 4.65%, whilst the VIX (a measure of implied volatility in US equities that is impacted by sentiment and therefore a good measure of fear in financial markets, often referred to as the ‘fear index’) fell to a seven-week low.

In terms of sectors, technology names were the standout performers, with the ‘Magnificent Seven’ (Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla) taking centre stage yet again. Energy stocks languished as concerns grew around demand and oil prices fell. Earnings have been in the limelight, with Reuters reporting that US companies are set for their biggest year-over-year gain in quarterly earnings since the second quarter of 2022. Thus far, 81% of results have surpassed analysts’ expectations.

Thursday deserves more examination, as the heightened volatility had been put down to more than the Fed Chair’s comments, with the weaker than expected 30-year bond auction gaining attention. The national budget deficit grew to $1.7trn in fiscal 2023, (the 12 months through September), making it about $300bn more than the year before, according to the Congressional Budget Review. This has caused investors to focus more acutely on Treasury auctions in recent months. Contrarian commentators also speculate that the lack of demand simply has to do with the wide opportunity set available today. BMO Capital Markets even theorised that November is a typically bad month for 30-year bond auctions, as just 26% of new issuances have been strong since 2018.

Macroeconomic data was mostly negative, as US Consumer sentiment fell for the fourth month in a row, and household expectations for both near and long-term inflation rose yet again (five-ten-year expectations hit the highest level since 2011). Homeward bound, the UK economy flatlined but avoided recession, which is not too dissimilar to key countries within the eurozone. Across Asia, Japan’s Tankan Survey showed that manufacturer confidence rose for the first time since August, whilst service sector sentiment improved for the second month in a row. Meanwhile in China, the mood music soured as the country tipped back into deflationary territory with a -0.2% year-on-year consumer price index (CPI) print.

On the commodity markets, Brent fell to the lowest level in three months, at $81.43 per barrel, both on demand concerns following weaker global economic data, and due to the rise in US crude stocks. Gold retreated from recent highs to settle at $1,940.

The week ahead

UK CPI inflation data for October is anticipated to show a significant fall, denoting substantial progress for the Bank of England’s battle against inflation.

Tuesday: US CPI

Our thoughts: The US CPI Data for November will be released on Tuesday, the recent weakening in the labour market would seem to point to a fall in inflation. Economists expect month-on-month inflation to fall from 0.4% in September to 0.1% for October. If this were to be the case it would reflect progress from the central bank’s perspective on returning inflation back to their 2% target, validating their ‘wait and see’ policy, and in turn lowering the likelihood of a further hike in the December meeting.

Wednesday: UK CPI    

Our thoughts: The UK’s CPI data on Wednesday could well be more impactful than the US or the EU’s, as the UK faces a greater inflation problem. Given the deteriorating economic backdrop, the UK CPI will be an important indication of the risk of stagflation in the UK. Consensus expectations are for a significant drop in year-on-year inflation, from 6.7% in September to 4.7% in October, and for core inflation (excluding volatile food and energy prices) to tick lower too.

Thursday: US industrial production

Our thoughts: Nonfarm payrolls came in significantly weaker than expected, the US services sector declined for the second consecutive month, and consumer sentiment fell further than anticipated. This recent data, and similar examples, have led some to believe that the Fed’s rate hiking cycle is now certainly over. US industrial production is likely to take a slight drop, but any negative surprises could add to this recently accelerating narrative.

Friday: EU CPI

Our thoughts: The eurozone has seen a steep fall in inflation on the back of continuous rate hikes, inflation data releasing on Friday is anticipated to fall in line with recent trends.

The numbers for the week


Sources: FTSE, Canaccord Genuity Wealth Management
 

Central banks/fiscal policy

‘Fed speak’ takes a hawkish turn

Since the Fed meeting at the start of the month equity and bond markets have rallied aggressively. The US equity market has had its longest winning streak in two years. This was largely down to the Fed meeting, as although the Fed decision was as expected, maintaining the base rate at 5.5% (upper bound), Fed chair, Jerome Powell’s comments were interpreted in a ‘dovish’ manner.

This would not have been Powell’s intention, and when he spoke for the first time since the decision on Thursday at the Fed Division of Research and Statistics conference, he took a more hawkish approach. During his speech he staunchly restated that the Fed would keep interest rates high enough to ensure that inflation would fall back to the 2% target, adding, “if it becomes appropriate to tighten policy further, we will not hesitate”. He continued that he was not confident that the current level of interest rates was sufficient. Bond yields reversed their downward trend on Thursday, with the 10-year yield rising from 4.47% before the speech, to 4.65% by the end of the week.

Mary Daly, President of the San Francisco Fed, spoke to CNBC news on Friday, reinforcing Powell’s hawkish tone in suggesting that without further progress on inflation, and if the US economy continues to show resilience, the Fed will not hesitate to hike again.

In stark contrast, Christine Lagarde, President of the European Central Bank (ECB), spoke with the Financial Times on Friday in a more dovish tone. This seems more appropriate given the relative weakness of the European economies in combination with the recent fall in eurozone inflation. Lagarde suggested that maintaining rates at the 4% level should be enough to bring inflation back to the target level without further policy tightening. She didn’t rule out the possibility of another hike but suggested that discussion around cuts was premature.

United States

Sentiment takes a hit and credit availability contracts

Surveys: According to the most recent Senior Loan Officer Opinion Survey (SLOOS) by the Fed, banks continued to tighten their grip on commercial credit in October, albeit at a reduced rate. The survey revealed a further decline in consumer demand for credit and a worsening outlook for smaller businesses seeking commercial and industrial loans. It suggests that bank credit is unlikely to serve as a source of economic resilience in the near future.

The University of Michigan’s Sentiment survey fell sharply, well below consensus expectations. Consumers heightened their inflation expectations to 4.4% from 4.2% for the year ahead. Coupled with elevated borrowing expenses and a weakened labour market, this indicates a loss of momentum in the US economy following a period of unexpected robustness.

Employment: Continuing claims persists as the area of most concern for the US labour market, rising more than expected last week. The rate at which the continuing claim numbers are rising points to a risk of increasing unemployment.

United Kingdom

UK economy narrowly escapes contraction in the third quarter

GDP: The UK economy narrowly escaped contraction in the third quarter, as was the consensus expectation. UK GDP neither expanded nor contracted during the third quarter, beating the consensus estimate for a contraction of 0.1%. Optimists would say that this mild positive surprise shows that the UK economy can avoid a recession in-spite of higher interest rates. Absent of any market shocks it’s likely that the line between contraction and expansion will remain fine for the time being.

Industry: The prior industrial and manufacturing production data for August came in weaker than expected and showed a decline in business activity. The data for September was broadly in-line with expectations and showed somewhat of a rebound from the negative prior reading. Industrial production month-on-month was in-line with consensus at 0.0%, rising from -0.7% in August, and manufacturing rose from -0.8% in August to 0.1% in September.

Europe

Continued signs of weakness for European economies.

Industry: Purchasing Managers’ Index (PMIs) have fallen significantly across Europe, showing how business activity has meaningfully contracted. S&P Global released the composite PMI for the eurozone in October. The index fell from 47.2 to 46.5, the lowest reading since November 2020 and the fifth consecutive month of contraction.

Inflation: In Germany, year-on-year inflation came in at 3.8%, in-line with consensus and continuing a downward trajectory.

China/India/Japan/Asia

Record current account surplus in Japan driven by falling imports, a second order effect of a depreciated Yen

Japan: During the first half of this fiscal year, Japan achieved a historic high in its current-account surplus, presenting a potentially favourable development for the nation’s economic recovery and its depreciated currency. The Finance Ministry reported that the current account surplus for the six months ending in September reached a record ¥12.7trn ($84.2bn), primarily attributed to a decline in imports. In September alone, the surplus increased to ¥2.72trn, marking the highest level in 18 months and extending the country’s surplus streak to eight consecutive months. However, it fell slightly short of economists’ consensus forecast of ¥2.98trn.

China: In October, China’s deflationary pressures intensified, with consumer prices falling by 0.2%, dropping below zero again, and producer prices experiencing a thirteenth consecutive monthly decline, decreasing by 2.6%. This outcome, contrary to the People’s Bank of China’s expectation of a rebound in prices, underscores persistent challenges in countering deflation. The data fuels expectations for additional stimulus measures to support economic growth amid the ongoing struggle against weakening prices, particularly in the manufacturing sector.

The trade data for October in China presented a nuanced view of the economic outlook, with an unforeseen increase in imports counterbalanced by a larger than expected fall in exports, indicating that global demand for Chinese goods is encountering challenges.

Oil/Commodities/Emerging Markets

Weaker economic data paints a more challenging picture for oil demand

On the commodity markets, Brent fell to the lowest level in three months, at $81.43 per barrel, both on demand concerns following weaker global economic data, and due to the rise in US crude stocks. Gold retreated from recent highs to settle at $1,940.

 

 

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