Markets last week
Another highly volatile week in markets, with cyclical equity sectors rising and smaller company shares falling. Daily movements were exceptional, with some US stock market indices rebounding nearly 3% from an intra-day low to the close.
The 2-year US Treasury note yield tends to be a good year-ahead leading indicator for the Federal Funds rate. It started the year at 0.77%, implying three 25bps rate hikes this year. On Friday, it closed at 0.97%, implying four rate hikes from the Fed (US Federal Reserve). Indeed, there was a smorgasbord of comments from Fed members, all vowing to stamp out inflation and seeming to agree on at least three rate increases this year. President Biden finally filled the three remaining positions on the Fed’s Board of Governors as Chair Powell had his confirmation hearings in the Senate, where he was grilled on inflation.
As expected, US inflation hit a 40-year high, with a 7% headline CPI (consumer price index) but also a core reading (ex food and energy) climbing from 4.9% to 5.5%. There are some signs of a potential slowdown in prices, with import prices in the US appearing to peak and, crucially, export prices from major manufacturing countries ebbing, with softer PPIs (producer price index) in China and Japan, as well as stalling wholesale prices in Germany. This trend is fighting rising wages in the US, however. The longer industrial prices remain high, the more likely that they will feed into wages and salaries. Consumers are feeling the pinch all over the world and this gets reflected in confidence indices (University of Michigan) and retail sales. European data are not so grim, though, and the growth picture in the UK pre-omicron was very healthy. We have to see what the variant fallout will be.
Over the week, energy was the strongest equity sector, with industrials and financials also registering positive returns, but with healthcare and technology correcting again, continuing the trend seen since the beginning of the new year. Emerging markets and the FTSE 100 were at the top, with small capitalisation shares suffering, whether in the US or the UK. Government bonds were mainly unchanged after a volatile ride. The US dollar extended its weakness against developed currencies, having lost 2% from its high on 24 November. The star for the week was crude oil, rising as much as 6% against a backdrop of unabating growth and inflation.
The week ahead
Tuesday-Thursday: US Empire Manufacturing Survey and Philadelphia fed Survey
Our thoughts: the US economy has been extremely resilient so far to soaring inflation, in particular gasoline prices which matter a lot to US consumers and to omicron which has forced many people onto sick leave. Consumer confidence has taken some beating but business surveys have remained surprisingly buoyant. The question is whether the Fed’s announcement of tighter money policy could be the last straw for business surveys. The Empire State Fed (NY) and Philadelphia Fed (Philly Fed) surveys are manufacturing surveys covering most of the north-eastern US and are generally viewed as a bellwether pair, providing a good outlook on business surveys for the whole country. Surprises here could spread more widely.
Wednesday: UK CPI, RPI and PPI
Our thoughts: inflation is still the biggest issue globally. For the UK, the Bank of England has already started hiking rates and hence will pay very close attention to the latest readings. The CPI (consumer price index) is the focus, but the PPI (producer price index) both for input and output, give a good picture on how fast inflationary pressures are spreading across the country. Globally, we are seeing rising CPI and falling PPI. Will the UK buck that trend?
Friday: UK December retail sales
Our thoughts: it is not clear how strong and resilient the UK consumer is post-omicron. Pre-omicron he or she was doing very well, hence the evolution since then will be of great interest to markets. It may be that retail sales have been pulled forward to November due to Black Friday. We will find out.
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week|
|Hong Kong equities||3.80%||4.20%||3.40%|
|Emerging market equities||2.60%||2.10%||2.00%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.78%||2||27|
|10-year German Bund||-0.05%||0||13|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||86.06||5.30%||10.60%|
|WTI oil (bbl)||83.82||6.20%||11.40%|
|Copper (metric tonne)||9719.5||0.80%||0.00%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
The Fed’s existing and potential members in the limelight
US Federal Reserve (Fed) Chair Jay Powell said ahead of and during his Senate confirmation hearings that the Fed won’t let inflation get out of control.
There were many comments from Fed members (San Francisco’s Mary Daly, Philadelphia’s Patrick Harker, St Louis’ James Bullard, Cleveland’s Loretta Mester), including dovish Vice Chair Lael Brainard, making it very clear that fighting inflation is now the #1 task. Fed Governor Chris Waller said that three Fed hikes are the baseline this year. Charles Evans agreed but added that he could be convinced to add a fourth hike.
The markets now seem to be anticipating as many as four Fed rate rises this year (adding up to 1%), with the first one expected in March.
President Biden nominated Sarah Bloom Raskin to lead financial oversight at the Fed, as well as economists Lisa Cook and Philip Jefferson to fill the remaining two vacancies on the Board of Governors. All these names were widely expected and are more likely to be dovish than hawkish, although Raskin’s Senate confirmation may be a difficult one given her views on bank regulation.
The People’s Bank of China (PBoC) cut the rate for its one-year medium-term lending facility from 2.95% to 2.85%.
Inflation hits high, as expected. Consumer sentiment and retail sales ailing.
Inflation: the CPI (consumer price index) rose 0.5% in December with the core (ex food & energy) CPI accelerating to 0.6%. On a year-on-year basis, the headline is 7%, a 40-year high, up from 6.8% and the core 5.5%, accelerating from 4.9%.
There was a slight relief on the PPI (producer price index), rising to 9.7%, up from 8.6% instead of the 9.8% estimate, but the PPI ex food and energy climbed from 7.7% to 8.3%.
US wage growth increased to 4.5%, the highest in 20 years, with the lowest paid and the under-24s getting the highest raises, also rectifying some imbalances in society, with women, lower-skilled and non-whites getting higher raises.
Import prices were softer in December, up 10.4% year-on-year vs. 11.7% the previous month, whereas export prices also subsided somewhat, up 14.7% vs. 18.2%.
The University of Michigan survey showed higher inflation expectations, from 4.8% to 4.9% for one year and from 2.9% to 3.1% for 5-10 years.
Housing: MBA mortgage applications recovered, up 1.4% on the week.
Employment: the weekly initial jobless claims had an unexpected spike from 207K to 230K, but with continuing claims actually slumping 200K from 1,753K to 1,559K.
Surveys: the NFIB small business optimism index edged up from 98.4 to 98.9. The University of Michigan sentiment index fell from 70.6 to 68.8, driven by a drop in the expectations component from 68.3 to 65.9 whereas current conditions remained stable at 73.2 vs. 74.2.
Consumer: December retail sales fell sharply, down 1.9% on the month, down 2.5% ex auto and gasoline and down 3.1% for the control group. This was the biggest fall in 10 months.
UK economy was looking good before omicron
Consumer: retail sales jumped 0.6% in December vs. 1.8% the previous month, up 4.6% compared with December 2019, as per the British Retail
Consortium. A separate report from Barclaycard showed consumer spending grew 12.2% in the last month compared to two years before. For the year as a whole, retail sales were up 6.6% from 2019 and 9.9% from 2020, the BRC said.
GDP growth: the UK had surprisingly strong growth in November before omicron struck. GDP rose 0.9% for the month, up from 0.2%. Output was 0.7% above its level in February 2020, before the pandemic started. Service industries that account for about 80% of the economy expanded 0.7% in November, slightly more than expected. Manufacturing gained 1.1% and construction by 3.5%, both figures more than five times estimates. Separate figures showed imports of goods excluding precious metals rose by almost 5% in November, while exports fell 1%.
Improvements in surveys, employment and industry
Inflation: in Germany, the wholesale price index eased a little but was still high, at 16.1% vs. 16.6% year-on-year.
Surveys: in the eurozone, the Sentix investor confidence survey rose from 13.5 to 14.9. The Bank of France sentiment index rose from 106 to 108, above estimates.
Employment: eurozone unemployment fell from 7.3% to 7.2% in November.
Growth: German GDP was pre-announced at 2.7% for the whole of 2021, compared with a negative -5.0% in 2020.
Industry: in the eurozone, November industrial production rose 2.3%, although the year-on-year number is down 1.5%.
Have PPIs really peaked? Both China and Japan seem to point that way
China: the CPI (consumer price index) fell from 2.3% to 1.7% and the PPI (producer price index) also from 12.9% to 10.3%.
In 2021, passenger vehicle sales rose 4.1%, driven by electric cars.
Chinese money supply rose: M0 up 7.7% year-on-year vs. 7.2%, M1 up 3.5% vs. 3.0% and M2 up 9.0% vs. 8.5%. This is going against data in the rest of the world, where money supply is now decelerating.
The December trade surplus expanded, as exports rose 20.9% year-on-year, slightly better than expected and imports increased 19.5% which was much lower than estimates.
The monthly economic data package showed some economic deceleration, in particular in retail sales: industrial production was up 4.3% year-on-year vs. 3.8% the previous month, property investment 4.4% down from 6%, fixed assets ex rural (investment) at 4.9% down from 5.2%, retail sales at 1.7% down from 3.9% and the surveyed jobless rate edged up to 5.1% from 5.0%.
Japan: the Leading Index increased from 101.5 to 103.0 and the Coincident Index from 89.8 to 93.6. The Eco Watchers survey (Outlook) fell sharply from 53.4 to 49.4 whereas the Current survey was almost unchanged.
M2 money supply eased from 4.0% to 3.7% and M3 from 3.5% to 3.4%.
The PPI (producer price index) fell from 9.2% to 8.5%. Machine tool orders were also softer in December, with the year-on-year growth down from 64% to 40.5%.
Crude oil had another bumper week, rising 5-6% depending on the grade. There were no particular announcements boosting prices, only the general economic backdrop with strong growth and eye-watering high inflation. Copper and gold were both well supported. The softer US dollar is helping commodity prices in general.