The numbers for the week – 24th January 2022
Markets last week
Against a backdrop of record COVID-19 infections in the US, a spreading of omicron to the largest Chinese cities and an Israeli trial proving that the Pfizer vaccine was insufficient to prevent omicron contagion, markets have been less concerned with any economic slowdown due to COVID-19 restrictions, and much more focused on high prices and central bank response to inflation.
In a week shortened by the Martin Luther King holiday in the US on Monday, the week started with sharp drops in equity markets and surging government bond yields across the globe. The German 10-year finally turned positive for the first time since 2019, although it finished the week in negative territory again. Economic data were less buoyant than in previous weeks, with softer surveys, a surprise jump in US jobless claims and a sharp drop in UK retail sales. US Q4 growth expectations were downgraded by the Atlanta Fed forecast to 5% from the high 7s.
All the while, markets have been trying to price the probability of US Federal Reserve (Fed) rate hikes and quantitative tightening (QT) to follow quantitative easing (QE), i.e. the Fed selling assets into the market after purchasing them over the past years. The end of the week saw some downward repricing of the chances of a major 0.5% hike in March, due to the high jobless claims number.
Once again, sectors behaved differently, with energy up in double digits for the year to date and technology worst. The technology correction has now reached double digits year to date and is affecting small and mid-cap firms more than the large megacap stocks, previously known as FANG.
In the commodity space, oil continues to soar, but aluminium, iron ore and nickel are up 8% to 15% this year so far. Copper seems poised to hit US$10,000/metric tonne again. Gold rallied as well, making it positive for the year to date.
On Friday, sterling was hit by the poor UK December retail sales.
At the end of the week, government bond yields were slightly lower in the US and higher in the UK. The US yield curve flattened to 75 bps between 2 years and 10 years. In the equity world, the worst sectors were technology, communications and consumer discretionary. No sector was up overall, but utilities and consumer staples lived up to their defensive reputation. The US had by far the worst return, down 5%, and Hong Kong the best, up 3%, with the UK and Europe down less than 1% (although part of the US weakness happened on Friday and may lead to negative catch-up this week). Small capitalisation shares again lagged large caps. The US dollar was lower, helping commodities which were generally very strong.
The week ahead
Monday: manufacturing and services PMIs for UK, eurozone and US
Our thoughts: manufacturing has been in the eye of storm of supply chain issues and the resulting inflation spikes for close to a year now. The PMIs give us a reading of orders, backlogs, employment, prices paid, etc. These are the areas we need to understand to determine the durability of the current inflation surges. Likewise, for services, it will be important to figure out how ready the services economy is for a return of consumers from goods spending to services spending. The PMIs should give us a good reading across the UK, Europe and the US.
Thursday: US Q4 GDP
Our thoughts: GDP data tend to be so backward-looking that they matter little to the markets. Q4 2021 for the US might just be that exception that confirms the rule. With Omicron hitting the US economy in the middle of the quarter, sky-high growth estimates of near 8% were revised down to the 5% area. This is still an extraordinary growth level during the second year of post-pandemic recovery and may well usher in the new year at a high level of expansion. The data will be worth analysing and breaking down.
Friday: US PCE deflator and PCE core deflator
Our thoughts: the PCE (personal consumption expenditures) deflator is less broadly followed than the CPI (consumer price index) but the core PCE (ex food and energy) is the US Federal Reserve’s main gauge for inflation and one of their two objectives. There are no expectations of a drop, but simply a moderate 0.1% increase in both the headline and core readings for PCE. It is too early to await a change in the trend, but the direction and speed will nevertheless be meaningful to markets.
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||2.40%||6.70%||3.10%||6.70%|
|Emerging market equities||-1.00%||1.00%||-0.30%||0.80%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.76%||-3||25|
|10-year German Bund||-0.07%||-2||11|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||87.89||2.10%||13.00%|
|WTI oil (bbl)||85.14||1.60%||13.20%|
|Copper (metric tonne)||9941||2.30%||2.30%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
China cutting rates as the Fed gets ready to hike
No change in policy rates from the Bank of Japan (BoJ) but the BoJ upgraded its economic forecasts, with inflation edging up slightly to above 1% (the first change since 2014) and growth moving around from year to year.
The People’s Bank of China (PBoC) cut rates, reducing the rate for its one-year medium-term lending facility from 2.95% to 2.85% for the first time in 2 years, the 1-year loan prime rate down 10 bps from 3.80% to 3.70% (it was cut from 3.85% to 3.80% on 20 December) and the 5-year loan prime rate from 4.65% to 4.60%. Rates in China and seem to be tracking COVID-19 infections, as we saw in 2020.
After the deluge, the dearth: US Federal Reserve (Fed) members were silent over the week.
The jump in jobless claims will be noticed by the Fed
Surveys: the Empire Manufacturing survey (NY State) slumped from 31.9 to -0.7, way below estimates, the biggest fall since the April 2020 pandemic reading. The Philadelphia Fed survey showed an improvement, however. The headline advanced to 23.2, up from 15.4 prior, which was the weakest reading in a year. There was a jump in unfilled orders and less labour usage due to omicron. Orders and shipments growth rose, employment and the average workweek fell. Indicators of prices show the upswing may not be over, with an increase in input costs.
The Leading Index was up 0.8% in December, from a downwardly revised 0.7% the previous month.
Housing: housing starts rose 1.4% in December, against expectations of a drop, although the previous month was revised downward. Building permits soared 9.1% after 3.9% the previous month. MBA mortgage applications rose 2.3% last week after 1.4% the prior week. Existing home sales dipped 4.6% in December, contrasting with the strength in the housing starts and building permits. The NAHB housing market index eased a smidge from 84 to 83.
Employment: jobless claims surged last week to a three-month high and the increase in claims last week was the largest in six months. Initial claims increased by 55,000 to 286,000, exceeding all estimates. Continuing claims rose to 1.64 million. There may be seasonal issues, as well as COVID-19-related layoffs.
Omicron starting to have an impact on surveys and sales amid soaring prices
Employment: employment improved in November and December, with the ILO unemployment rate in the 3 months to November down from 4.2% to 4.1% and average weekly earnings falling from 4.9% to 4.2% over the last three months. For December the claimant count rate (a different series) eased from 4.8% to 4.7% and the payrolled employees monthly change was up 184K, above estimates, although the previous number was revised down 95K.
Inflation: inflation overshot estimates. The CPI (consumer price index) rose to 5.4% from 5.1% after a monthly 0.5% rise. Core CPI also surprised on the upside, up to 4.2% from 4.0%. If there is any silver lining, it is the PPI (producer price index), which had a soft month, -0.2% for PPI input (13.5% year-on-year) and +0.3% for the PPI output (9.3% year-on-year), despite the previous month’s figures being revised up quite a bit.
UK wages are not keeping up with the cost of living. Average earnings rose 3.5% in November, below the rate of increase for consumer prices for the first time since July 2020 and down from as much as 8.9% in May. That left real average weekly earnings, a measure that captures the difference between pay and wages, down 0.9%.
Sales: retail sales collapsed in December, down 3.7% including auto fuel or 3.6% excluding auto fuel.
Surveys: the GfK consumer confidence index fell from -15 to -19, the lowest level since the first COVID-19 lockdown in early 2021.
Surprisingly positive surveys
Growth: the German economy is still 2% smaller than in 2019. Private consumption remained nearly 6% below pre-crisis levels in 2021, while the gap for equipment investment exceeded 8%. Output shrank as much as 1% in the fourth quarter and is likely to contract again in Q1, putting the economy on track for a technical recession.
Industry: EU 27 car registrations are still down heavily, down 22.8% year-on-year in December vs. -20.5% the previous month.
Surveys: investor confidence in Germany hit its highest level since July 2021 on hopes for a strong recovery once the current wave of COVID-19 infections passes. The ZEW institute’s gauge of expectations jumped to 51.7 in January from 29.9 the previous month. The index of current conditions, however, dropped to an eight-month low of -10.2, reflecting tighter virus restrictions and curbs on activity. For the eurozone as a whole, the same ZEW survey soared from 26.8 to 49.4. French confidence numbers were a tad softer, with business confidence down from 109 to 107, manufacturing confidence up from 110 to 112, the production outlook indicator down from 21 to 13, but the business survey overall demand stable at 20.
Inflation: the German PPI (producer price index) jumped 5% in December to a year-on-year record of 24.2%, above estimates of 19%.
Chasm between manufacturing and services in Japan
China: no meaningful statistics were issued last week.
Japan: exports went up 17.5% year-on-year in December, better than estimates, and imports rose 41.4%.
The headline CPI (consumer price index) fell from 0.9% to 0.8% whereas the core CPI (ex fresh food and energy) fell from -0.6% to -0.7%.
The Jibun Bank manufacturing PMI was strong at 54.6 vs. 54.3, but the services PMI fell sharply from 52.1 to 46.6, reflecting the Omicron impact.
Commodities rising strongly year to date
According to the US EIA (Energy Information Administration), crude inventories rose by 500,000 barrels against estimates of a decrease of 1 million barrels, which partly clipped oil prices on Friday.
Copper is about to hit US$10,000/metric tonne again, which it exceeded in May and October last year and previously only in 2011. Other industrial metals have been very strong this year, with nickel, aluminium and also iron ore in double-digit territory.