2022 Weekly Views

Highlights

On rates

Officials in September had projected rates rising to around 4.6% next year from a current target range of 3.75% to 4% as reflected into the Fed’s dot plot. Those projections will be updated at the Fed’s Dec. 14 meeting. The US 10-year Treasury yield fell only slightly over the week to 3.78% as hawkish speeches from Fed members stymied market participants’ expectations for a lower terminal rate. According to Fed funds futures, the terminal rate could reach 5% in Spring 2023, but anticipated rate cuts would bring it back towards 4.5% by end 2023. Market participants’ expectations that the end in the Fed’s hiking cycle is nearing and that rate cuts would soon follow (probably due to an economic recession), has led both the 10-year and 30-year US Treasury yields to fall below the Fed fund effective rate. However, hawkish Fed’s speeches have led to a rebound in the two-year yield to 4.53%, which means that the US 10-to-2-year slope of the US yield curve has continued to flatten, reaching -71bps, a level not seen since 1982.

Crude oil

Oil prices fell as Druzhba pipeline (the largest from Russia to Europe) reopened and as China Covid worries stayed at the forefront. Crude oil is now trading close to $87.60. The US Energy Information Administration has published its estimates of global oil demand and supply. World consumption declined further in October. Global oil supply increased by 0.3mbd (million barrels per day) in October, to 101.6mbd, close to 102.2mbd, the all-time high reached in November 2018. Supply is expected to decline by at least 1mbd from November due to the last OPEC+ decision and the EU ban on Russian crude entering into force (5 December for crude, 5 February for products). The OPEC has revised down by 0.1mbd to 2.2mbd its 2023 forecast. As Western economies are slowing down, demand is likely to remain weak in the months to come. This could weight on oil prices this winter. However, several factors could put a floor on oil prices: US shale oil production is losing momentum, non-OPEC+ supply is already above pre-pandemic levels, Russia supply is likely to decline by 1mbd due to sanctions. As a result, the OPEC is in the driving seat. The organization is likely to cut further in case of weak demand. Chinese economy reopening combined with western economies recovery is likely to boost oil demand in 2023. The barrel of Brent is expected to bounce back in 2023 after temporary weakness during this winter.

Market update

Sufficiently restrictive?

The S&P 500 closed the week at 3,965.34, -0.69% lower. The Dow Jones closed at 33,745.69, -0.01%, with the Nasdaq lower by -1.57%. The volatility index VIX closed the week at 23.12 up from 22.52. The Euro Stoxx 600 rose +0.25%.

The 10-year UST closed at 3.83% up from 3.81% a week before. The yield curve inverted with the yield spread between the 3-month and 10-year UST at -42bps. US Corporate Bond spreads: Investment Grade tightened 13bps at 193bps and High Yield tightened 17bps at 500bps. German 10-year Bunds yield closed at +2.01% down from +2.16% a week before. In Europe, Corporate Investment Grade spreads tightened 18bps at 205bps and High Yield spreads tightened 34bps at 569bps.

The US Dollar Index (DXY) appreciated +0.60% last week and closed at 106.93. The Euro closed at 1.0325 (-0.21% weekly); the Yen depreciated -1.12%, closing at 140.37 and the Swiss Franc depreciated -1.38%, closing at 0.9547. Gold closed at $1,750.68 depreciating -1.16%. Oil was down, Brent closed at $87.62 (-8.72%) and WTI at $80.08 (-9.98%).

Macroeconomy

Fed speakers

Several Fed officials gave somewhat hawkish comments last week. St. Louis Fed President James Bullard said policymakers should raise interest rates to at least 5% to 5.25%, from previous comments at 4.75% to 5% as target. San Francisco Fed President Mary Daly said on Wednesday that “somewhere between 4.75 and 5.25 seems a reasonable place to think about” for the level that officials should raise rates to then go on hold. Minneapolis Fed President Kashkari said “I need to be convinced that inflation has at least stopped climbing, that we’re not falling further behind the curve before I would advocate stopping a progression of future rate hikes, so we’re not there yet”. Lastly, Lael Brainard mentioned that the Fed should probably soon reduce size of rate hikes, adding “but I think what’s really important to emphasize, we’ve done a lot, but we have additional work to do”.

UK budget

Chancellor Jeremy Hunt sought GBP 54bn in his latest budget released on 17 November, mostly by taxing energy companies more as well as lowering the tax thresholds for wealthier taxpayers. Some tax thresholds will be frozen (which due to inflation means that more people will pay higher taxes). Household support to energy bills will be reduced from April. The budget watchdog OBR estimated the country was entering recession and saw inflation-adjusted GDP dropping 1.4% in 2023. Money markets currently price a 57bps interest-rate hike at the next meeting on 15th December, with a peak Bank rate seen at around 4.6% in June. Meanwhile, a fresh poll from YouGov showed that the share of Brits believing Brexit was a wrong decision soared to 56% (highest since the survey began after the EU referendum).

US economic data

US data show that the economy continues to slow, but at a remarkably uneven pace, underscored by the latest housing, consumer, and jobs data. Housing activity is weakening fast: housing surveys remained under strong pressure, the NAHB homebuilder survey hit the lowest level in a decade (excluding the Covid 19 episode). This is the longest stretch of monthly declines since 1985. The culprit is still the sharp rise in mortgage rates with the 30-year mortgage rate currently at around 6.9% according to Bankrate.com. On flip side, October retail sales were stronger than expected, rising 1.3% in nominal terms. Sales were boosted by Amazon Prime Days (two days versus one last year) as well as stimulus checks in California.

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.)