2022 Weekly Views

Highlights

Oil market

Earlier in the week, Opec+ agreed to cut crude supply in a bid to prop up oil prices by cutting 100,000 barrels a day from supply from October, reversing an earlier increase of the same amount agreed last month following a visit to Jeddah by President Biden. However, oil prices dropped during the week as concerns about the strength of global demand continued to fester. One of the main concerns behind the declines has been the continued pursuit of the zero-Covid strategy in China, and it was reported that Chengdu (city with population of 21m) would be extending its lockdown in most of the city. Brent crude traded beneath $90/bbl for the first time since early February before Russia’s invasion of Ukraine began.

Market update

Jumbo hike by the ECB

The S&P 500 closed the week at 4,067.36, +2.53% higher. The Dow Jones closed at 32,151.71, +1.56%, with the Nasdaq higher by +2.78%. The volatility index VIX closed the week at 22.79 down from 25.47. The Euro Stoxx 600 gained +1.06%.

The 10-year UST closed at 3.31% up from 3.19% a week before. The yield curve flattened with the yield spread between the 3-month and 10-year UST at +25bps. US Corporate Bond spreads: Investment Grade was unchanged at 190bps and High Yield tightened 23bps at 522bps. German 10-year Bunds yield closed at +1.70% up from +1.52% a week before. In Europe, Corporate Investment Grade spreads tightened 6bps at 217bps and High Yield spreads tightened 18bps at 607bps.

The US Dollar Index (DXY) depreciated -0.48% last week and closed at 109.00. The Euro closed at 1.0042 (+0.88% weekly); the Yen depreciated -1.62%, closing at 142.47 and the Swiss Franc appreciated +2.02%, closing at 0.9614. Gold closed at $1,716.83 appreciating +0.27%. Oil was down, Brent closed at $92.84 (-0.19%) and WTI at $86.79 (-0.09%).

Macroeconomy

ECB

The European Central Bank (ECB) decided to hike rates by 75bps which was largely anticipated. The accompanying statement mentions that the hike “frontloads the transition” from highly accommodative policy toward a stance that will help bring inflation back to target. The ECB expects to raise rates further “over the next several meetings…because inflation remains far too high and is likely to stay above target for an extended period”. ECB staff have significantly revised up their inflation projections and they now expect 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024. After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023. This outlook is reflected in the latest staff projections for economic growth. Regarding bank reserves, the two-tiered system will be suspended by setting the multiplier to zero, meaning that all bank reserves in excess of minimum requirements can be remunerated at the deposit rate if banks park the cash at the ECB’s deposit facility.

Fed speakers

Fed Vice Chair Brainard published a speech with some dovish highlights. She calls the recent inflation dip “welcome”, although warns that there will need to be several months of disinflation before the Fed can be confident about price increases moving back to the 2% target. She noted that supply chain constraints and gasoline were both major contributors to the inflation spike, but each is now abating, while the labor force participation rate is moving up (something that’s disinflationary). Brainard thinks corporate margins could be at risk in certain areas, including the auto industry, and this will act as a disinflationary force in the economy. She mentioned that “at some point in the tightening cycle, the risks will become more two-sided. The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with overtightening”. Fed Chairman Jerome Powell sent a hawkish message: “the public has really come to think of higher inflation as the norm and to expect it to continue, and that’s what makes it so hard to get inflation down in that case,” Powell says. “So it is very much in our view, in my view, that we need to act now”. Powell argued that the message he delivered at Jackson Hole last month was that the Fed accepts its responsibility to quell inflation and that history cautions strongly against prematurely loosening policy. Powell said the Fed will do what is necessary on inflation: “We need to act now, forthrightly, strongly as we have been doing and we have to keep at it until the job is done”.

Energy in Europe

EU energy ministers proposed to offer emergency funds to power firms facing soaring collateral requirements. They plan windfall taxes which would see governments skim off excess revenues from wind, nuclear and coal-fired power plants that can currently sell their power at record prices determined by the cost of gas and use the money to curb consumer bills. No Russian gas price cap for now is expected as the European Commission warned that capping natural gas prices in Europe could risk diverting it to other regions instead, depriving Europe of much-needed fuel. Governments are putting in place packages to lower bail in energy firms and reduce consumers electricity bills: the 4 largest economies have pledged €250bn which amounts to 2.75% of GDP in 2022-23.

Services sector

Conflicting data was released on the performance of the services sector in August. According to the Institute for Supply Management (ISM) report, the non-manufacturing PMI climbed to 56.9 in August from 56.7 in July, gaining ground for the second consecutive month after three months of decline. Average analyst estimates in a Reuters poll had placed the index at 54.9. A different survey by S&P Global, however, showed that business activity contracted at an even faster pace in August than the previous month. In particular, the final PMI for business activity in services fell to 43.7 in August from 47.3 in July, missing the preliminary reading of 44.1. This is the fastest decline in activity since May 2020, S&P Global said.

What to watch

• Monday: US ISM manuf. index (Apr.)
• Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
• Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
• Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
• Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)