Markets last week
The generally better tone to markets continued once again, reinforcing the recent run. More evidence of inflation rolling over in the US and reaching a plateau in Europe and the UK increased confidence that we have seen the top and that the future speed of interest rate increases may moderate over the next few months before perhaps reaching a pause sometime in the second quarter of 2023.
In local currencies, the US rose 1.5%, Europe ex-UK by 1.0% and Japan by 2.6%.
The fun was less for sterling investors, as recent US dollar weakness continued; the greenback is now sitting close to its 200-day moving average, which is generally seen as a technical support level, so any further moves downward would be seen as indicating a change in trend. Sterling was also a little stronger against other currencies. Measured in pounds, the US actually fell by 0.3%, Europe only rose 0.4% and Japan’s rise was clipped to 1.6%. The UK climbed 1.5%.
Outside of the major equity markets, China was among the laggards as another surge in COVID-19 cases and increasing evidence of civil unrest in the face of draconian lock-down measures undermined confidence; some even suggest that President Xi – only very recently installed for a highly unusual and widely considered as a dictatorial third five-year term in office – may face pressure to resign. Whilst this is unlikely at the moment, it served to spook investors, especially foreign ones. China was flat, and down more than 2% in sterling. At the time of writing the Chinese equity market had fallen even more sharply on Monday with falls of another 4% after a weekend of protests across major population centres. Some 420 million Chinese citizens are currently estimated to be living under some form of lockdown.
Sectorally, outside of materials which were boosted by a rise in the iron ore price, leadership lay in more defensive names such as utilities and consumer staples, while financials were boosted by a decline in bond yields. Although up in the week, the weakest sectors lay in the broader technology space, with IT, consumer discretionary (where the internet retailers lie) and communication services. Energy also lagged broader indices, with a weaker oil price to blame.
Bonds also continued to recover in the face of the generally more optimistic view on inflation. So far this quarter we are seeing some impressive gains, although year to date remains one of the worst in living memory for fixed interest investors. The 10-year Gilt yield fell to 3.12% from 3.24%, and the US and German equivalents dropped from 3.83% to 3.68% and from 2.01% to 1.97% respectively.
In commodities, crude oil was the stand-out, with a decline of almost 5% driven by rumours that the Organization of the Petroleum Exporting Countries Plus (OPEC+) (which includes Russia) would add 500,000 barrels to daily production at a time when COVID-19 lockdowns in China were seen as likely to crimp demand. Copper and other industrial metals were generally a little weaker, although iron ore bucked the trend with a rise of 3.4%, with Beijing announcing further measures to boost the Chinese economy seen as a positive. Gold was broadly unchanged, closing marginally up on the week in US dollars, although in sterling its value fell.
In currency markets, sterling continued its recent rise after the retreat from the brief experiment in unorthodox economic management of the Truss government. Against the US dollar it climbed back above $1.20, closing at $1.21; against the euro it rose to €1.16. On a trade weighted basis, the pound climbed 1.1%, whereas the US dollar fell 0.6%.
The week ahead
Thursday: UK. Nationwide House Price Survey
Our thoughts: As evidence accumulates that the UK is at the start of a likely prolonged recession, there is a strong probability that house prices, which had increased so sharply during the pandemic, fall back perhaps sharply over the coming months. Some forecasts have even predicted declines of up to 20% from peak levels. So publication of the latest house price survey from the Nationwide Building Society will be keenly watched. Although the annualised figure will still show a rise, recent monthly moves have been negative, with a decline of 0.9% month-on-month last time. Consensus estimates are for a fall of around 0.4% this time, bringing the annual rise down to 5.8% from last month’s 7.2% and a peak earlier in the year above 11% year-on-year.
Thursday: USA. Institute of Supply Management (ISM), Purchasing Managers Indexes (PMI)
Our thoughts: Last week we saw much softer than expected PMI data from the S&P Global series in the US, so it would be no surprise this time were the published ISM numbers to be weaker than the forecast drop to 49.8 from last month’s 50.2. Perversely, we are in one of those periods when bad economic news is often positive for markets because it reduces pressure on the US Federal Reserve (Fed) to raise interest rates more aggressively.
Friday: USA. Non-Farm Payrolls, Unemployment and Average Hourly Earnings
Our thoughts: Expectations are for a relatively soft headline number for Non-Farm Payrolls, with a rise of just 200,000 some way below recent data points. Again, a markedly weaker number would likely be taken positively by markets, as the strength of the US labour market is a key concern for the Fed as it has been progressively underpinning rises in the stickier elements of inflation, like rents. At the same time the US Department of Labor releases official unemployment statistics. No change is forecast from last month’s level of 3.7%. Any rise above 4% would be welcomed. Finally, given worries about pay inflation, the annualised rate of increase in average hourly earnings, which came in at 4.7% last month, will be in focus. The consensus estimate is for a small decline to 4.6%.
The numbers for the week
Central banks/fiscal policy
The highlight this week was the publication of the minutes of the most recent rate-setting Fed Open Markets Committee meeting. These showed a more balanced range of opinions than had been expected, with a number of voting members highlighting the impact recent interest rates are having on the economy and highlighting the likelihood of a moderation of the recent aggressive speed of increases, with smaller increases to be introduced ‘soon’. The next interest rate decision is on December 14. Although the minutes noted that the so-called ‘terminal rate’ (the level at which interest rates are expected to peak) would be somewhat higher than the previously expected 4.6% mark, this brought the Fed more into line with market expectations, where a number of around 5% is expected (currently the Fed Funds Rate is 4%).
The more dovish tone was taken positively by markets and contributed to a more positive week for risk assets.
A quiet week and relatively few data points released with the Thanksgiving holiday keeping the lid on activity. What data was published tended to the mixed or weaker side of things.
Employment: After a period when jobless claims had been stuck in the low 220,000 level, an uptick to 240,000 this week was seen as a green shoot of a hoped for cooling in the red-hot US labour market.
Housing: New home sales fell 2.6% year-on-year, slowing at much the same rate as previously. The impact of higher US mortgage rates is still being felt on the housing market in the US, with few signs that pressure will reduce any time soon.
Industry: Durable goods orders, excluding the highly volatile transportation sector (where orders for civil aircraft are very large and tend to be lumpy) rose 0.5% on the month. There was no sign of a slow down in this data.
Surveys: Several regional Fed offices published surveys. The Chicago Fed National Activity Index dropped to -0.05 from a revised 0.17, a bigger decline than expected. The Richmond Fed Manufacturing index, which had already weakened, moved only marginally higher to -9 from -10. The University of Michigan Consumer Confidence Survey was unexpectedly strong, with an overall print of 56.8 compared with 54.7 last time. The expectations component was especially robust at 55.6 compared with 52.7 previously. The much-watched inflation expectations survey came in with a decline in one-year expectations to 4.9% from 5.1%, although the 5 to 10-year survey remained unchanged at 3.0%.
S&P Global Survey: The S&P Global PMI survey for the US showed marked weakness, with a decline in the manufacturing measure to 47.6 compared with last month’s 50.4, and the services survey dropping further to 46.1 compared with 47.8 last time. The soft data here was taken positively by the market.
Very little data, with the public sector finances less awful than feared
Public sector finances: The Public Sector Net Borrowing Requirement (PSNBR) came in at £12.7bn for the month, less than the £16.9bn expected. Although this appears encouraging, it is important to take a long view with this data series as the timing of tax receipts and large government capital projects can both be lumpy.
S&P Global Survey: The S&P Global PMI survey for the UK was flat at rather depressed levels compared with last month. Both the manufacturing and the services measures were unchanged at 46.2 and 48.8 respectively.
Bumbling along the bottom
Economy: German GDP for quarter 3 (Q3) came in at 1.2% annualised, little changed from the previous quarter’s 1.1% rate. A weaker winter is in prospect with the energy crisis likely to hit output.
Inflation: In the first sign that European inflation may be peaking, German Producer Price Index (PPI) came in at a still eye-watering 34.5% year-on-year, but well down from last month’s extraordinary 45.8%. Expectations had been for a drop to 42.1%.
Surveys: French manufacturing confidence dropped slightly to 101 from 102. In Germany, the much-followed IFO survey on manufacturing saw a small recovery to 86.3 from 84.5, encouragingly driven by the expectations component, which rose to 80.0 from 75.9. However, current conditions remain in the doldrums at 93.1 compared with 94.2 last time. Even though the headline number improved, this is still at very low levels. Similarly, the GfK Consumer Confidence measure came in at -40.2 compared with the dreadful previous reading of -47.9.
S&P Global Survey: The S&P Global PMI surveys for Europe showed a split between slightly better manufacturing and stable services measures, both at generally low levels. In Germany manufacturing came in at 46.7 compared with 45.1; in France at 49.1 compared with 47.2. For services, Germany came in at 46.4 compared with 46.5, and in France at 49.4 versus 51.7.
Japanese survey data weak, very little data otherwise, with the focus on COVID-19 lockdown protests in China.
Japan PMI survey: The Jibun PMI surveys showed a pullback in activity, with the manufacturing version dropping to 49.4 from 50.7 and the services measure dropping to 50.0 from 53.2. This paints a rather gloomier picture than of late when combined with last week’s rise in inflation.
Oil price dropping despite supply tightness due to fears of global recession
Oil was weak for another week, this time as rumours swirled that OPEC + (including Russia) would increase production by 500,000 barrels a day, even in the face of softer Chinese demand, in an attempt to wrest market share from non-OPEC producers. Crude fell another 5% or so, with Brent crude closing at $87.6/barrel. Elsewhere in the commodities complex, iron ore was the stand-out, rising almost 3.5% as hopes of further Chinese government support for the troubled property sector boosted sentiment. Copper was a touch weak, dropping 0.8%. Gold was steady, closing at $1755/oz.