The numbers for the week – 2 Oct 23

The numbers for the week – 2 Oct 23

Markets last week

Another difficult week for risk markets, as bond yields once again took centre stage with a further surge. In fact, on Thursday, gilt yields climbed as much as 20 bps in one day, the largest such rise in almost a year. After 10-year gilt yields being as high as 40 bps above US treasury yields and giving up all their increase, they started catching up again last week.

The US equity market hit a three-month low earlier in the week (in US dollars). The end of the week saw a rally to try and trim the heavy quarterly losses in many markets, the largest such decline since Q3 2022, but the recovery in the US fizzled on Friday afternoon. Once again, the stronger US dollar helped cushion losses for non-US investors, with the euro and Japanese yen particularly weak.

There were many other concerns for markets last week: the US autoworkers’ strike, a potential US government shutdown and soaring oil prices. A better number in eurozone inflation helped support investments despite all these issues. Economic data pointed to softer consumer and corporate sentiment in the US and a recovery in data in the UK, but the eurozone was still looking challenged on sentiment surveys. Chinese statistics were not as dire as predicted and in fact industrial profits recovered amid stable surveys. Far Eastern investors are still glued to announcements by the Chinese authorities about regulatory hurdles being lifted (the latest being about cross border data rules for technology companies), but the pace of such changes seems to be too slow for markets.

Over the weekend, the US Congress managed to avoid a government shutdown which should help the mood for this coming week, although the autoworkers’ strike outcome is still too close to call. Another sentiment-lifting piece of news was a press report about improved odds of a summit between President Biden and Chinese leader Xi later this year.

Last week, gilt yields surged by close to 20 bps, with other bond yields also much higher, causing global equities to fall further. Japanese shares and smaller companies in the UK were worst hit, and the top technology stocks in the US were among the only ones rising. Defensive equity sectors like utilities and consumer staples were the weakest, together with financials, with energy once again eking out the only positive return. Oil prices were supported by lower inventories, but gold slumped below US$1,850, as higher bond yields highlighted the lack of yield in the yellow metal.

Over the third quarter, global bonds lost 2%, equity returns were negative, especially in US dollar terms, down more than 3%, but sterling-based investors were partly cushioned by the stronger dollar. Indices, though, hid the huge discrepancy between sectors, with energy shares up in double digits and every other sector sharply down. Commodities were highly volatile, with oil prices up almost 30%, copper flat and gold down almost 4%

The week ahead

Monday: Institute for Supply Management (ISM) manufacturing purchasing manager index (PMI)

Our thoughts: once again trying to figure out whether the US economy will grind to a halt or keep growing at surprisingly high rates, will exercise markets. In that respect, nothing beats the ISM surveys. The manufacturing side is now very important for the US. “Reshoring” industrial activities to the US from China, or other countries that may not be fully friendly to the US, is a significant investment activity right now. Of course, Americans are mindful of employment costs, and any new local facility is likely to be highly automated to minimise labour friction (as currently seen with the automakers strike in Detroit). How much more upside is there in manufacturing? The ISM survey will focus on the overall index, new orders, inventories, backlogs, employment, prices paid, a wealth of details that will help paint the growth picture ahead.

Wednesday: ISM services index

Our thoughts: services never fell as much as manufacturing in the US and hence the ISM services index remained comfortably above 50 throughout the last couple of years. Where is it going from here? The same underlying categories will be detailed, new orders, employment, prices paid, etc., and should help figure out whether the US consumer is really slowing down as per some of the less positive confidence and sentiment surveys.

Friday: US employment data for September

Our thoughts: how many new jobs are still being created in the US? This will help determine the type of economic outcome for next year, the likelihood of a soft-landing recession, and the continuing monetary policy from the US Federal Reserve (Fed). The number of non-farm payrolls is always critical for markets. It has been slowing down but still shows good growth. Revisions to past data, though, are crucial, as historical numbers have been downgraded significantly in the past few months. Have we been led to believe that there was more employment than in reality? The unemployment and underemployment rate, together with the participation rate, will also be closely scrutinised, and average hourly earnings should help figure out whether wage inflation is still high.

The numbers for the week


Sources: FTSE, Canaccord Genuity Wealth Management
 

Central banks/fiscal policy

A flurry of US central bank officials keep feeding “higher for longer” story

Some US Fed officials have made hawkish comments about future Fed monetary policy. Chicago Fed President, Austan Goolsbee, said that high inflation posed a greater risk to the economy than high interest rates. Minneapolis Fed President Neel Kashkari said he expects another rate increase before year-end, Boston Fed President Susan Collins said that “further tightening is certainly not off the table”, and Fed Governor Michelle Bowman mentioned that more that one rate hike might still be needed.

Further comments from Neel Kashkari related to the US government shutdown and the autoworkers’ strike, highlighting that a slower US economy as a result of these events would necessitate less effort from the Fed to bring inflation down. Richmond Fed President Thomas Barkin felt confident that the US would avoid a severe recession.

The Chinese authorities seem to be producing new regulations every weekend to try and improve the mood of consumers and investors. The latest was a relaxation on cross border data rules, which is particularly meaningful for Chinese technology companies.

United States

There now seems to be a downward trend among surveys, indicating some softening of the US economy, but it has yet to affect the employment sector, in particular jobless claims

Surveys: the Chicago Fed National Activity Index dropped from +0.07 to -0.16. The Dallas Fed Manufacturing Activity survey fell from -17.2 to -18.1. The Richmond Fed Manufacturing Index, however, bounced back from -7 to +5, although business conditions fell from +1 to -5.

The Philadelphia Fed Non-Manufacturing Activity survey dropped from-13.1 to -16.6. The Kansas City Fed Manufacturing Activity index also fell from 0 to -8. The Kansas City Fed Services Activity index rebounded from -1 to +2. The MNI (Market News International) Chicago PMI slumped from 48.7 to 44.1, way below estimates.

The bellwether Conference Board consumer confidence index was down from 108.7 to 103.0, a four-month low, with the present situation slightly higher at 147.1 vs. 146.7, but expectations slumping from 83.3 to 73.7.

Housing: the S&P CoreLogic CS 20-City house price index (formerly known as Case-Shiller) was up 0.87% for July, for a 0.13% year-on-year increase, with the broader US house price index up 0.98% year-on-year. The FHFA (Federal Housing Finance Agency) house price index also rose 0.8% in July.

New home sales dropped 8.7% in August, after a positive +8.0% the previous month. Pending home sales also slumped 7.1% vs. +0.5%. MBA (Mortgage Bankers Association) mortgage applications fell 1.3% for the week ended 22 September.

Industry: durable goods orders rose 0.2% in August, after a very negative -5.6% previously, and ex transportation durable orders were up 0.4%, with capital goods orders non-defence ex aircraft up 0.9%. Wholesale inventories fell 0.1% in August, after -0.2% previously.

Employment: the weekly jobless claims series continues to show lower numbers than expected, with the initial claims at 204K vs. 202K the prior week, and continuing claims at 1670K vs. 1658K.

Inflation: the eagerly awaited personal consumption expenditures (PCE) inflation data were in line with estimates. The headline PCE deflator rose from 3.4% to 3.5%, whereas the PCE core deflator fell from 4.3% to 3.9%, with the monthly rise at 0.1%; the lowest since November 2020.

Consumer: personal income rose 0.4% in August, following 0.2% the prior month, whilst personal spending went up 0.4% after 0.9%.

Trade: the advance goods trade balance improved from a deficit of US$90bn to US$84.3bn.

United Kingdom

Are the small improvements in the UK economic picture real and sustainable?

Surveys: the CBI (Confederation of British Industry) distribution surveys improved, with retailing reported sales up from -44 to -14, and total distribution reported sales up from -26 to -14.

Credit: net consumer credit rose from £1.3bn to £1.6bn in August for a year-on-year growth of 7.6% in consumer credit. Net lending securitised on dwellings bounced back from £0.2bn to £1.2bn, as mortgage approvals fell from 49.5K to 45.4K.

Growth: the revised Q2 GDP growth numbers improved the picture retroactively, with Q2 growth year-on-year at 0.6% vs. 0.4%. It was the detail, though, that interested investors, with a large upgrade in “gross fixed capital formation”, i.e., investment, and in total business investments, which was revised from 6.7% year-on-year to 9.2%.

Housing: the Nationwide house price index was flat in September for an unchanged year-on-year move of -5.3%.

Europe

A good drop in consumer price inflation

Surveys: the widely followed German IFO (Institut für Wirtschaftsforschung) survey was fairly stable, with the business climate at 85.7 vs. 85.8, the current assessment at 88.7 vs. 89.0, and the expectations at 82.9 vs. 82.7. Also in Germany, the GfK consumer confidence index was down from -25.6 to -26.5. In France, consumer confidence was off as well from 85 to 83.

The eurozone confidence numbers were mixed, with economic confidence down from 93.6 to 93.3, industrial confidence up from -9.9 to -9.0, and services confidence lower at 4.0 from 4.3.

Consumer: German retail sales unexpectedly fell 1.2% in August from a flat prior month.

Inflation: the eurozone CPI fell from 5.2% to 4.3%, below estimates, and the core CPI also fell from 5.3% to 4.5%, a one-year low, driven by lower energy bills and food costs but mostly non-energy industrial goods and services inflation.

China/India/Japan/Asia

The recovery in Chinese industrial profits seems to be ahead of movements in surveys, but Japan is seen to be slowing somewhat

China: industrial profits recovered in August, with the year-on-year growth surging from -6.7% to +17.2%.

The official (CFLP) PMIs were a little better than estimated, with manufacturing at 50.2 vs. 49.7 previously, and the non-manufacturing PMI at 51.7 vs. 51.0, but the unofficial Caixin were worse, with the manufacturing PMI at 50.6 vs. 51.0 and the Caixin services PMI down to 50.2 from 51.8.

Japan: the jobless rate remained unchanged at 2.7%, with the job-to-applicant ratio staying at 1.29. Retail sales edged up 0.1% in August for an unchanged 7.0% year-on-year increase. Industrial production was flat for a -3.8% year-on-year movement. Housing starts had another bad month, falling 9.4% year-on-year, vs. -6.7% previously.

The consumer confidence index lost some steam, down from 36.2 to 35.2.

The Tankan survey for Q3 improved somewhat, with large manufacturing up from five to nine, large non-manufacturing from 23 to 27, small manufacturing unchanged at -5, and small non-manufacturing up from 11 to 12.

Oil/Commodities/Emerging Markets

Oil still strong but gold correcting

The strong upward trend in oil prices was halted last week, despite crude inventories falling by 2.17 million barrels, as per the EIA (Energy Information Agency), supporting both West Texas Intermediate (WTI) and Brent prices. Inventories in the US hub of Cushing, Oklahoma, dropped just below 22 million barrels, a very low number and the seventh fall in a row in the stockpile.

Oil prices, both the Brent and WTI gauges, managed to have the strongest growth last quarter since Q1 2022, which is when Russia invaded Ukraine.

Gold fell quite sharply, to below US$1,850/oz, in most part due to the higher government bond yields globally.

Sign up for the latest market updates, financial insights and advice.

  • This field is for validation purposes and should be left unchanged.

Copyright © 2022 Benjamin Sharvell