Markets last week
Equities had a mixed week due to a combination of omicron variant fears and confusion about central bank activity.
The investment and economic discourse is still dominated by inflation talk. Comments by Fed Chair Jay Powell moved markets, in particular in the US. His statement was balanced, with concerns about the new omicron variant offsetting his increasingly hawkish message on persistent inflation. He gave strong hints of ending the quantitative easing programme sooner. Markets started pricing in more interest rate increases in 2022 and 2023, in addition to the ending of asset purchases early next year.
The inflation backdrop is driving the political process, too, with President Biden’s Build Back Better legislation stuck in Congress and the swing-voting Senator Joe Manchin loudly voicing his concern about spending so much money when the Fed is still buying assets. It therefore seems that Fed Chair Powell was not just speaking to markets last week about unwinding quantitative easing faster, but also to the political classes in the US.
Omicron is complicating the investment picture. (1) It is still a mystery. We don’t know whether it really is milder than delta and other variants and will supersede it, in which case, the world could go back to normal next year and a massive cyclical value rally could take place; or it is as lethal as delta, only easier to spread and bypasses existing vaccines, in which case markets could drop broadly until a timeline for new inoculations is promised and only technology and healthcare could do well. Markets are somewhere in between both scenarios and keep reacting to omicron news. (2) Almost regardless of the above, the near-term risk is that supply chains, which are starting to improve, could revert back to more bottlenecks which would add to inflation. Scientists and vaccine firms have yet to take markets out of their misery and hence the news flow will be moving risk appetite during a season that is normally characterised by a ‘Santa rally’.
The interesting conundrum is that, as investors worry about omicron and the Fed tapering and raising rates, real economic growth is surging during this quarter. The widely followed Atlanta Fed GDPNow GDP forecast has just been upgraded to a 9.7% US growth rate for the fourth quarter!
Due to Chair Powell’s statements, bond traders boosted bets on the pace of Fed tightening, pushing the US Treasury yield curve to its flattest level since January. The spread between 2- and 10-year maturity yields in Treasuries fell to a low 0.75% from 1.1% not that long ago, with government bond yields falling across the board. The US dollar and risk-off currencies had a strong week with sterling being particularly hit, as high expectations of the Bank of England raising rates are being reconsidered.
US shares fell but the UK and Europe were positive. Within equities, energy and utilities were more defensive whereas healthcare and information technology fell the most.
The week ahead
Tuesday: ZEW survey in the eurozone and Germany (expectations and current situation)
Our thoughts: Europe has so far borne the brunt of the cold-season COVID-19 restrictions and it will be important to gauge economic growth and momentum in the eurozone and its industrial engine, Germany. Surveys have been mixed recently, although remaining at high levels. The ZEW has the advantage of separating the current situation from expectations and providing it for both the eurozone and Germany specifically.
Wednesday: China PPI and CPI
Our thoughts: the gap between CPI (consumer price index) and PPI (producer price index) in China has been puzzling economists for some time and we have mentioned it here before. The expectation for the November numbers points towards an increase in the CPI and a decrease in the PPI, although the CPI is still estimated at levels way below the West. Given how important Chinese industrial exports are to the rest of the world, the PPI will matter for imported inflation globally.
Friday: UK monthly GDP
Our thoughts: the UK has been benefiting from strong economic surveys recently, but are these going to be corroborated by the October GDP data by sector of the economy? Industrial production, of which manufacturing is an important component, has generally been stronger than services, which is a concern for a services-led country like the UK. Construction output has been the star, though, and it will be useful to understand whether that particular trend is softening now.
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||-1.30%||-12.70%||-0.50%||-10.50%|
|Emerging market equities||0.10%||-5.20%||0.90%||-2.20%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.34%||-13||43|
|10-year German Bund||-0.39%||-5||18|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||69.88||-3.90%||34.90%|
|WTI oil (bbl)||66.26||-2.80%||36.60%|
|Copper (metric tonne)||9418||-0.40%||21.30%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Central banks keeping us on tenterhooks until next week, but Fed Chair moves markets
US Federal Reserve (Fed) Chair Jerome Powell all but announced ending the tapering of asset purchases a few months earlier than previously forecast, also commenting that inflation is proving more persistent than forecast and the word ‘transitory’ should be retired. Although he did state that the omicron variant poses risks to both sides of the central bank’s mandate to achieve stable prices and maximum employment, the markets took his overall message to be one of increasing fight against inflation through tapering and then interest rate hikes. The next Fed meeting is 14-15 December.
On 16 December, the European Central Bank (ECB) is set to announce the end of its pandemic bond-buying plan, but it may be worth watching for any surprises.
On 16 December also, the Bank of England Monetary Policy Committee (MPC) will meet and there is still an expectation in markets that they will announce the first interest rate hike in this cycle, in spite of the omicron variant uncertainty. MPC members have been uncharacteristically quiet but this may change this coming week, as Deputy Governor Ben Broadbent delivers a speech that may give clues as to whether rates are likely to rise at the meeting next week.
Despite disappointing headlines, the employment market is strong. Some signs of peaking inflation
Housing: pending home sales rose 7.5% in October. The growth in US home prices slowed down just a bit in September. The Case-Shiller measure of home prices in 20 cities jumped 19.1%, down from 19.6% in August. Nationwide, prices climbed 19.5%, which was also down from a month earlier.
Surveys: the Dallas Fed manufacturing activity index fell from 14.6 to 11.8, though indexes of production and new orders rose, and inflationary pressures kept going.
Consumer confidence decreased to a nine-month low in November. The Conference Board’s index declined to 109.5 from a downwardly-revised 111.6 reading in October. Expectations about short-term growth prospects rose, but job and income prospects fell. Concerns about higher prices were the primary drivers of the slight decline in confidence, despite solid job growth, robust wage gains and record-high stock prices. Consumer sentiment is well above levels seen earlier in the pandemic, however.
The MNI Chicago PMI took a tumble, from 68.4 to 61.8. It peaked in May and is now back to early 2021 levels. The Markit manufacturing PMI is down from 59.1 to 58.3. The Markit services PMI went the other way, from 57.0 to 58.0.
The one that matters most, though, is the US ISM manufacturing PMI at 61.1, up from 60.8. Prices paid were slightly lower at 82.4 vs. 85.7, supplier deliveries eased from 75.6 to 72.2, new orders were better at 61.5 vs. 59.8 and employment improved at 53.3 vs. 52. We’re starting to see some pointers towards an end to supply chain issues and inflationary pressures, with the ISM supplier deliveries index and prices component levelling out (through they are still at elevated levels). The ISM services index soared from 66.7 to 69.1.
Employment: jobless claims were mixed but still very bullish. Initial claims rose from the exceptionally low 194K (revised down from 199K) to 222K, still near the pandemic lows, but continuing claims fell sharply from 2.063 million to 1.956 million. The Challenger, Gray & Christmas job cut announcements fell slightly from -71.7% year-on-year to -77%. Finally, the monthly employment survey was strong, even though the headline non-farm payrolls number missed estimates at 210K jobs vs. 546K the previous month. The last two months revision was a net positive of 82K. More importantly, the unemployment rate (U-3) fell from 4.6% to 4.2% and the underemployment rate from 8.3% to 7.8%, with the labour force participation rate rising from 61.6% to 61.8%. Average hourly earnings grew 0.3% in November or 4.8% year-on-year, below expectations, with the average weekly hours edging up from 34.7 to 34.8.
Industry: the Wards series total vehicle sales disappointed at 12.86 million annualised vs. 12.99 million and below estimates. Factory orders rose 1% in October with the ex-transport orders up a strong 1.6%.
Stable numbers in growth territory
Credit: consumer credit fell 1% in October year-on-year. Mortgage approvals fell from 71.9K to 67.2K. M4 money supply remained at an increase of 7% year-on-year.
Surveys: the Lloyds business barometer fell from 43 to 40. The Markit manufacturing PMI was still strong at 58.1 vs. 58.2 and the Markit/CIPS services PMI was almost unchanged at 58.5 vs. 58.6.
Housing: the Nationwide House Price Index rose 0.9% in November for a 10% year-on-year growth, vs. 9.9% the previous month.
Sales: the BRC shop price index rose 0.3% in November, vs. -0.4% previously.
Soaring inflation is particularly visible in producer prices and energy
Surveys: eurozone economic confidence eased from 118.6 to 117.5, with industrial confidence slightly down from 14.2 to 14.1 and services confidence from 18.2 to 18.4, while consumer confidence remained at a low -6.8. The eurozone manufacturing PMI was almost unchanged at 58.4 vs. 58.6. The services PMI eased somewhat from 56.6 to 55.9.
Inflation: German inflation surged more than expected in November. Prices increased 6% EU-harmonised or 5.2% nationally. Eurozone inflation surged to a record and exceeded all forecasts. The CPI (consumer price index) rose an annual 4.9% in November. The core CPI ex-food and energy also reached a record, at 2.6%, showing that energy is the biggest factor behind higher inflation levels. The eurozone PPI (producer price index) surged by an eye-watering 5.4% in October to reach 21.9% year-on-year.
Sales: eurozone retail sales rose 0.2% in October for a 1.4% year-on-year growth.
China surveys unchanged, Japan improving, but the real growth is in Taiwan
China: the CFLP manufacturing PMI edged up over 50 at 50.1 vs. 49.2. The non-manufacturing PMI was more stable at 52.3 vs. 52.4. Unlike the official CFLP PMI, the unofficial Caixin manufacturing PMI fell from 50.6 to 49.9. They’re both hovering round 50, though.
Japan: industrial production rose 1.1% in October and the jobless rate fell from 2.8% to 2.7%. Housing starts were strong in October, up 10.4% year-on-year vs. 4.3% earlier. Vehicle sales were down 13.4% year-on-year but that’s up from -30.2% the prior month. The consumer confidence index remained unchanged at 39.2 in November.
Other Asia: Taiwan’s manufacturing PMI has been above 60 most of 2021 and has recovered to 59.5 last month from 58.3 showing that global growth is not easing.
Oil prices again fell, with the Brent grade below US$70/bbl, in part moved by Russia and OPEC agreeing to add to oil output in January. Most other commodities were also softer as growth is being reconsidered under the shadow of omicron.