Markets last week
One of the strongest daily moves in US equities was witnessed last week when the country unveiled a weaker CPI (consumer price index). US shares soared, leading the rest of the world, bonds yields fell sharply, and the US dollar collapsed with gold prices surging. Investors were angling for good news on the monetary policy front and assumed that a weaker inflation number would keep the US Federal Reserve (Fed) from hiking rates as much as expected. Global inflation was also impacted by the Chinese PPI (producer price index) flipping into negative territory, meaning that China is once again exporting falling prices to the rest of the world.
Despite a slate of Fed officials urging caution over a month’s data, risk markets were set on fire by the US CPI reading. Earlier in the week, Chinese markets had seen a halt to the recent “reopening rally” after a jump in Covid-19 infections, but following the US inflation surprise, Hong Kong and mainland China shares soared, in particular the technology sector.
This was the story for the whole week, against a backdrop of poor economic data in the UK and Japan, weakening surveys in the US and a potential bottoming of sentiment in Europe (albeit at a very low level).
At the end of the week, equities had rallied sharply, but the falling dollar cut gains for non-US investors. US equities rose 5.9% in US dollar terms but only 1.7% in sterling. The best markets ended up being UK small capitalisation shares, Europe, and Japan, generally the beneficiaries of higher risk appetite. Sectors switched from losers to winners and vice versa. Technology was the strongest sector, up in double digits in US dollars. Energy was the weakest, explaining why the FTSE 100 actually went down slightly during the week.
Government bond yields slumped on the inflation news, with US treasury yields dropping a massive 35 bps but gilt and European yields also falling between 10 and 20 bps. The US dollar corrected 4-5% against European and Asian currencies, boosting dollar-denominated gold prices as well as other commodities (copper in particular).
The week ahead
Monday-Thursday: Empire manufacturing and Philly Fed surveys
Our thoughts: the Empire State manufacturing survey (NY State) is generally paired with the Philly Fed (Philadelphia Fed Business Outlook) as indicators of industrial activity and momentum in the US. Given the weaker University of Michigan and National Federation of Independent Business (NFIB) surveys, the regional Fed surveys take added importance in gauging how far we are from a possible US recession. The regional Fed surveys also give details on prices paid and received, which could help confirm the recent drop in the US CPI.
Tuesday: China October economic data
Our thoughts: how much has China’s economy lost as a result of the Covid-zero lockdowns and restrictions? Other than the challenged property sector, what else is happening to the second-largest economy under the bonnet? The monthly data should give us that picture, at a time when markets are desperately waiting for good news on China reopening the country.
Wednesday: UK inflation numbers
Our thoughts: unlike the US, it does not look like UK inflation has peaked yet and the recent numbers will have an impact on sentiment, particularly on the sensitive gilt and sterling markets. Headline CPI is expected to keep rising, with core CPI (ex food, energy, tobacco, and alcohol) and the PPIs, both input and output, estimated to ease somewhat. The final print will matter.
The numbers for the week
Central banks/fiscal policy
Warning from Fed officials on rates
Amid generally reduced communications from central banks, following the falling inflation data in the US, many Fed governors spoke up to remind investors that there is a long way to go before Fed funds reach restrictive territory.
CPI drop sets markets on fire, but University of Michigan survey is not so bullish on inflation
Surveys: the NFIB index fell from 92.1 to 91.3. Now 32% of small business owners said that they are planning to raise worker compensation, up from 23% in September. Also, 34% said they are planning on raising their average selling prices. The percentage of small business owners with job openings remained very high at 46%. The widely followed University of Michigan sentiment index slumped from 59.9 to 54.7 with both current conditions and expectations falling, from 65.6 to 57.8 and 56.2 to 52.7 respectively.
Housing: MBA mortgage applications fell 0.1%, slightly better than the previous week at -0.5%.
Inflation: the CPI surprised on the downside at 7.7%, down from 8.2% the prior month, but importantly, the core CPI came down faster than expected at 6.3%, down from 6.6%, whereas in previous months headline CPI had fallen with the core reading rising. It is probably that difference that boosted risk appetite. The University of Michigan inflation expectations edged up a little, though, with the 1-year inflation forecast up from 5.0% to 5.1% and the 5-10-year numbers from 2.9% to 3.0%.
Employment: the weekly jobless claims edged up from 218K to 225K, with continuing claims up from 1487K to 1493K.
Weak data across the board, in particular the housing market
Sales: retail sales growth slowed in October. The British Retail Consortium’s like-for-like sales fell to +1.2% year-on-year last month from +1.8% in September.
Growth: the UK had another poor month for economic growth, with Gross Domestic Product falling 0.6% in September. Although manufacturing was flat and construction output rose 0.4%, the largest sector, services, dropped 0.8%.
Housing: the Royal Institute of Chartered Surveyors house price balance collapsed from +30% to -2% in October, way below estimates. The Rightmove house price index also fell 1.1% from +0.9% the previous month, for a year-on-year growth of 7.2%, down from 7.8%.
Small improvements marking the bottom?
Surveys: the eurozone Sentix investor confidence survey improved from -38.3 to -30.9. The S&P Global Germany construction Purchasing Managers’ Index rose from 41.8 to 43.8, still a depressed level.
Sales: retail sales in the eurozone rose 0.4% in September, up from 0% the prior month.
Chinese PPI turning negative is good news for global inflation
China: inflation fell sharply in China, with the CPI down from 2.8% to 2.1% and the PPI going into negative territory, as forecast, at -1.3%, down from +0.9%.
Foreign exchange reserves improved slightly, up from US$3.029trn to US$3.052trn.
Money supply was fairly stable, with M0 up from 13.6% to 14.3% year-on-year, M1 down from 6.4% to 5.8% and M2 down from 12.1% to 11.8%.
Japan: household spending fell from 5.1% year-on-year to 2.3% in September as labour cash earnings edged up from 1.7% to 2.1%.
The Leading Index CI slumped from 101.3 to 97.4, with the Coincident Index more resilient at 101.1 vs. 101.8. Likewise, the Eco Watchers surveys were weak, with the current situation up from 48.4 to 49.9 but the outlook down from 49.2 to 46.4.
The money stock fell, with M2 down from 3.3% to 3.1% year-on-year and M3 from 2.8% to 2.6%. The PPI fell from 10.2% to 9.1% year-on-year but was above estimates.
Machine tools orders, an important gauge of global manufacturing, slumped from +4.3% year-on-year to -5.4% in October.
Gold up more than 5%
Gold stole the show last week, surging from US$1,629 to US$1,771 in less than 10 days. Unusually, copper also rallied almost 5% during the week. Gold tends to behave better during risk-off environments, vs. copper during risk-on, but the crypto currency collapse may have helped bullion sentiment and flows. Part of the rally may also have been due to the US dollar falling by about 4% against European currencies and more than 5% vs. the Japanese yen.