The numbers for the week – 5 Dec 22
Markets last week
US (and global) investors focused on a speech delivered on Wednesday by US Federal Reserve (Fed) Chair Jay Powell where he all but confirmed that next week’s rate rise would be 50 bps rather than the previous 75 bps. Many of his other statements seemed to cause less market movement, as indeed comments made by his Fed colleagues or other central bankers across the world. The mega-cap US stocks were the winners of the massive rally in US equities on that day.
Economic statistics are pointing to a progressive slowdown of growth in the US, the UK, China and Japan, with the eurozone appearing to be rebounding mildly from very weak conditions. Money supply is consistently falling across most geographies, pointing to slower growth in the real economy. Housing is one of the main falling sectors, both in the US and the UK. More recently, we are starting to see some softening in the previously air-tight US job market, but different statistics are showing different directionality, which provides room for market volatility.
After the bullish investor reaction based on Chair Powell’s Wednesday speech, markets were more subdued on Friday as the employment numbers in the US surprised by their strength, which is unlikely to give the incentive for the Fed to curb its rate hikes in the next few meetings. In addition, the US crude oil gauge, West Texas Intermediate (WTI), took a tumble as a result of the strong jobs report, but the reversal of the US dollar slump did not last the whole day.
Chinese markets were particularly well supported last week, as investors anticipate a progressive reopening of the Chinese economy from the COVID-19 lockdowns, quarantines and restrictions, as well as a stronger drive to vaccinate senior citizens, in light of recent protests in various cities across the country.
At the end of the week, the most notable movement was the drop in US government bond yields, indicating a willingness by investors to assume cuts in Fed rates sometime next year, although they have not been flagged by Fed officials. Gilt yields did not fall, as they had previously lost the 1.5% premium from the last government’s policies.
The US dollar kept being the weakest currency, with the Japanese yen surprising by its rally and sterling eking out a little strength over the euro. The lower US dollar inevitably helped commodities (which are all US dollar-denominated), with copper beating oil on the upside and gold attempting to cross the US$1,800/oz level again.
Equities were mixed, as currency moves voided quite a few large increases. US equities were positive in local currency but lost their return once converted to sterling. Within the US market, the large stocks (‘mega-caps’: mostly technology-based) did best on the expectation that future earnings would be discounted at a lower interest rate. Chinese shares were the undisputed winner, due to the reopening noises made by the government, with Hong Kong up more than 5% in sterling terms. Globally, technology and financials did best whilst energy fell.
The week ahead
Monday: Institute of Supply Management (ISM) services purchasing managers’ index (PMI) in the US
Our thoughts: we now have surveys pointing to a manufacturing recession in the US. The bulk of the US economy, though, is in services, so the services sector will determine whether the US overall is headed into a recession. The current forecast is for a slowdown in the services PMI survey rather than a big drop, as we saw for manufacturing. The details will also matter. Services are a very wide sector, with many activities people don’t associate with services such as construction or transport. New orders, supplier deliveries and employment will be analysed carefully, but no sub-index will be scrutinised more than prices paid and prices received, to see whether inflation in services is likely to fall.
Thursday: inflation in China
Our thoughts: last month, we saw the producer price index (PPI) in China turn negative, helping China export deflation to the rest of the world. It will be a market-moving event if this gauge is still growing more negative, as it would add to signs of a peak in inflation globally. The consumer price index (CPI) will be less significant for the rest of the world, but nevertheless interesting considering that the country is managing consumer inflation around 2%, whereas western countries are barely expected to get there by the end of next year.
Friday: US PPI
Our thoughts: just like China, the PPI in the US matters a lot to investors, as it will have an impact on ongoing inflationary pressures. One important detail will be the difference between the headline PPI and the core PPI excl. food and energy to figure out whether higher prices are spreading through the economy again.
The numbers for the week
Central banks/fiscal policy
Many comments from central banks among which markets seem to choose the dovish ones
There was quite a lot of communication from Fed officials last week, with some comments early in the week reinforcing the view that rates have to continue to rise to stem inflation. New York Fed President John Williams said that stronger demand and the tight labour market “suggest a modestly higher path for policy relative to September”. St. Louis Fed President James Bullard stressed that “markets are under pricing a little bit the risk that the Fed will have to be more aggressive rather than less aggressive in order to contain the very substantial inflation that we have in the US.” Former New York Fed President William Dudley, on the other hand, said he saw a Fed rate hike pause next year once rates have reached 5-5.5%.
Markets paid much more attention to Fed Chair Jerome Powell on Wednesday who confirmed that the Fed is on track to raise rates by 50bps rather than 75bps at the meeting next week. “Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”
The Bank of England (BoE) sold £346m of gilts it bought during the recent market chaos, with BoE Governor Andrew Bailey warning about a fragile gilt market after a period of severe illiquidity. He was reluctant to start selling the assets accumulated during the QE period (quantitative easing) in the current market environment. Separately, BoE policy maker Catherine Mann warned that UK inflation expectations were becoming “increasingly embedded” and headed toward 4%, which is twice the BoE’s target.
European Central Bank President Christine Lagarde said inflation expectations “need to remain anchored. Given this exceptional uncertainty, what we central bankers have to do is actually deliver monetary policy that anchors expectations, so those expectations remain moored to target”.
Contradictory labour data (more job cuts and fewer job openings, but strong payrolls and lower jobless claims) add to a confused economy with strong consumer spending but slumping housing. Weaker inflation readings provide hope but are still way too high for the Fed
Housing: the US Case-Shiller house price index fell another 1.24% last month reducing the year-on-year growth to barely double digits, a far cry from the 20%+ at the beginning of the year. Pending home sales dropped 4.6% in October, after -8.7% the prior month. Construction spending fell 0.3% in October from a positive previous month.
Consumer: personal income rose 0.7% in October, up from 0.4% previously, with personal spending at 0.8% from 0.6%.
Industry: the total vehicle sales series published by Wards fell from 14.9 million annualised to 14.14 million in November.
Employment: the Challenger, Gray & Christmas series of job cuts soared from 48.3% year-on-year growth to 416.5% in November, the highest level since the 2020 pandemic data. The job openings and labour turnover survey (JOLTS) job openings reading fell from 10.7 million to 10.33 million, still close to the all-time record. Jobless claims are still subdued, though, with initial claims falling from 225K from 241K the previous week but continuing claims rising from 1551K to 1608K.
The November non-farm payrolls increased by 263K, way above estimates, from an upward-revised 284K the previous month, with most of the new jobs coming from inflation-prone services (leisure/hospitality, education, health) rather than manufacturing sectors that are past their peak inflation level. The unemployment rate remained at 3.7% and the underemployment rate eased from 6.8% to 6.7%, but the labour force participation rate fell from 62.2% to 62.1%, highlighting the lack of labour supply even as labour demand is not slowing down fast.
Inflation: the personal consumption expenditures (PCE) deflator fell from 6.3% to 6.0% with the PCE core deflator (excl. energy and food) down from 5.2% to 5.0%. The average hourly earnings in the employment report increased from 4.9% (already upgraded from 4.7%) to 5.1%, showing that wages are still sticky.
Surveys: the Conference Board consumer confidence index fell from 102.2 to 100.2 in line with estimates. The Market News International (MNI) Chicago PMI dropped abruptly from 45.2 to 37.2. The ISM manufacturing PMI fell below the 50 threshold between expansion and contraction, from 50.2 to 49.0, with most of the underlying indices also weak: employment falling from 50.0 to 48.4, new orders from 49.2 to 47.2 and prices paid from 46.6 to 43.0, pointing out to manufacturing in the US heading to a recession.
Recession Forecasts: the Philadelphia Federal Reserve (‘Philly Fed’) produces an Anxious Index, which is the probability of a decline in real GDP. The Q4 2022 survey said that there is a 47.2% chance that real GDP will decline in Q1 2023, the highest reading since Q2 2009. The probability of a recession over the next four quarters was 43.5%, the highest on record.
Separately, economists put the probability of a recession in the next 12 months at 63%, up from 49% in July’s survey, the first time above 50% since July 2020. On average, the economists now predict GDP will contract at a 0.2% annual rate in Q1 2023 and shrink 0.1% in Q2.
Price pressures not abating and economy weakening
Inflation: the British Retail Consortium (BRC) shop price index kept rising, from 6.6% to 7.4%, catching up with the overall inflation rate. Inflation pressures in the UK economy showed only limited signs of abating in November, with companies expecting to raise prices by 5.7% in the coming 12 months. Chief financial officers surveyed for the Bank of England (‘the Decision Maker Panel’) also said they expect consumer prices to be growing at an annual rate of 7.2% a year from now and 3.9% in three years, almost double the 2% Bank of England target.
A business confidence survey by Lloyds Bank showed that 60% of UK companies are targeting higher prices, with manufacturing and importing firms most likely raise the cost of their products.
Surveys: the Lloyds business barometer fell from 15 to 10. The CBI retailing series fell quite sharply, with total distribution reported sales at -24 from 0 the previous month and retailing reported sales at -19 from +18.
Housing: UK house prices fell more sharply than expected, according to the Nationwide Building Society. Home prices fell 1.4% in November, the second decline in a row and the fastest drop since June 2020.
Credit: net consumer credit rose moderately from £0.6bn to £0.8bn in October with consumer credit rising 7% year-on-year, down from 7.1%. Housing-related credit, though, fell strongly with net lending secured on dwellings down from £5.9bn to £4.0bn and mortgage approvals dropping from 66K to 59K, reflecting the higher mortgage loan rates.
Money supply: money supply growth dropped, with the monthly rate of M4 money supply at 0% in October, bringing the year-on-year growth down from 5.4% to 4.8% and the three-month annualised from 14.6% to 9.2%.
Softer inflation and bottoming surveys
Surveys: in the eurozone, confidence was mixed, with economic confidence edging up from 92.7 to 93.7 and services confidence slightly better at 2.3 vs. 2.1, but industrial confidence falling from -1.2 to -2.0.
Inflation: the eurozone consumer price index (CPI) eased from 10.6% to 10.0% in November after a negative month, with the core CPI remaining at 5.0%. The eurozone PPI was -2.9% in October, clipping the year-on-year growth to 30.8% from 41.9%. The import price index into Germany fell from 29.8% to 23.5% year-on-year, as exports were stable, but imports fell.
Employment: the eurozone unemployment rate fell from 6.6% to 6.5%. German unemployment, however, moved the other way, rising from 5.5% to 5.6%.
Consumer: German retail sales fell sharply in October, down 2.8%, after a positive +1.2% the prior month. French consumer spending dropped 2.8% in October after+1.3%.
Money supply: the eurozone M3 money supply was much weaker in October, down to 5.1% year-on-year growth from 6.3%.
China appears to be in a recession
China: PMIs fell further, with the official China Federation of Logistics and Purchasing (CFLP) manufacturing PMI down to 48 from 49.2 and non-manufacturing down to 46.7 to 48.7, showing a clear contraction of the economy. The unofficial Caixin manufacturing PMI edged up from 49.2 to 49.4, though.
Japan: the jobless rate remained at 2.6% and the job-to-applicant ratio was marginally higher at 1.35 vs. 1.34. In October, retail sales rose 0.2%, down from 1.5% the prior month, industrial production fell 2.6% after -1.7% previously and housing starts were down -1.8% year-on-year, from +1.1%. In November, vehicle sales dropped from 19.7% year-on-year to 1.0%. The consumer confidence index eased from 29.9 to 28.6.
The monetary base kept falling year-on-year, at -6.4% in November vs. -6.9%.
Rebound in energy and metals prices as China is expected to reopen
Oil prices bounced back from a low in late November on the expectation that China is about to reopen its economy after the COVID-19 lockdowns. This also helped industrial metals prices. On Friday, the European Union agreed a US$60/bbl price cap for Russian oil.
At the end of the week, Brent crude rose 2.3% and copper 5.5%.
Gold managed to recapture the US$1,800 level on Friday but closed the week slightly below.