2022 Weekly Views

Highlights

China Covid policy

Triggered by a deadly fire in Urumqi, large-scale protests against stringent covid restrictions broke out on 26-27 Nov. in multiple major cities (the “White Paper Revolution”). The protests, which were the largest since Tiananmen Sq. protests in 1989, prompted local governments to swiftly relax covid controls in the following days, starting with Guangzhou. On Dec 1, Vice Premier Sun Chunlan, one of the highest-ranking officials who is responsible for the country’s public health affairs, spoke at a National Health Commission seminar. In her speech, she dropped the term of zero-Covid and called for steady push for further “optimization” of Covid control measures, and an improvement in medical resources allocation. With the relaxation in covid restrictions, a surge of infection cases is likely in the near term. As the government clearly is not well prepared, the re-opening path will likely be messy.

Market update

Resilient job market

The S&P 500 closed the week at 4,071.70, +1.13% higher. The Dow Jones closed at 34,429.88, +0.24%, with the Nasdaq higher by +2.09%. The volatility index VIX closed the week at 19.06 down from 20.50. The Euro Stoxx 600 rallied +0.58%.

The 10-year UST closed at 3.48% down from 3.68% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -83bps. US Corporate Bond spreads: Investment Grade tightened 1bp at 184bps and High Yield widened 4bps at 488bps. German 10-year Bunds yield closed at +1.86% down from +1.97% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 192bps and High Yield spreads widened 2bps at 547bps.

The US Dollar Index (DXY) depreciated -1.33% last week and closed at 104.55. The Euro closed at 1.0550 (+1.35% weekly); the Yen appreciated +3.51%, closing at 134.31 and the Swiss Franc appreciated +0.92%, closing at 0.9372. Gold closed at $1,797.63 appreciating +2.43%. Oil was up, Brent closed at $85.57 (+2.32%) and WTI at $79.98 (+4.85%).

Macroeconomy

Non-farm payrolls

The Nov. jobs report was very strong at 263k, above the 200k forecast. Notable job gains occurred in leisure and hospitality, health care, and government. Construction employment continued to trend up (+20k). Employment declined in retail trade and in transportation and warehousing. According to the Household survey, the number of employed people fell further, this time by 138k. The unemployment rate held steady at 3.7% (in line with consensus). The participation rate fell to 62.1% (down from 62.2% in Oct. and below expectations at 62.3%). Wages ran very hot, with a 5.1% y-o-y in Nov. (vs. the 4.6% consensus), and Oct. wages were revised up significantly (from +4.7% to +5.6%).

Powell’s speech

Powell emphasized that his priority is inflation-fighting and was in line with recent hawkish speeches from regional Fed presidents. He highlighted that the Fed needs “substantially more evidence” that inflation is declining. The US labor market is still tight, highlighting the job openings to unemployed ratio (1.7x), implying that such a tight market could still pose upside risks to inflation. For next week meeting, the Fed is indeed looking at +50bps instead of +75bps delivered at the last meeting. This is already priced in money markets and in most economists’ forecasts. Then Powell predicts “somewhat higher” terminal rate than in September (was 4.6%).

Fed speakers

New York Fed President John Williams advised that “stronger demand for labor, stronger demand in the economy than I previously thought, and then somewhat higher underlying inflation, suggest a modestly higher path for policy relative to September”. He also added that recession was not a part of his baseline forecast but that there were downside risks to the outlook. St. Louis Fed President James Bullard, one of the Fed’s most hawkish officials, said that he believes “markets are underpricing a little bit the risk that the FOMC will have to be more aggressive rather than less aggressive in order to contain the very substantial inflation that we have in the US”.

Inflation data

US Core PCE inflation rose 0.2% m-o-m (5.0% y-o-y) but the sub-index ‘services ex-housing’ remained resilient at +0.3%. So, while inflation may abate sharply due to goods and commodities, the slowdown for services prices looks to remain more gradual. In Europe, Eurostat's flash headline inflation came in at 10.0% y-o-y in Nov. down from 10.6% in Oct., below expectations at 10.4%. Core inflation was stable at 5.0% as expected. Energy (down to +34.9% from 41.5%) was the major factor behind the moderation. Country-wise, data were mixed, with Germany (11.3%) and Spain (6.6%) recording substantial drops, while Italy (12.5%) has a slight decline and French HICP (7.1%) remained steady.

Economic data

Oct. US household savings rate fell to the lowest level since 2005, signaling that consumers are getting more financially stretched as they tap accumulated savings and credit card debt. While spending was firm in Oct. (+0.8% m-o-m) there is anecdotal evidence that consumers are more price-sensitive and shopping for deals. The US ISM manufacturing index dropped to contraction territory for the first time since the Covid shock. The ‘new orders’ sub-index fell to 47.2, suggesting the ISM is likely to remain under pressure in coming months. Swiss GDP expanded by 0.2% q-o-q in Q3, up from 0.1% in Q2. Growth was mainly driven by accommodation and food services sector. Regarding price dynamics, Swiss headline inflation remained steady at 3.0% y-o-y in Nov., while core inflation rose from 1.8% in Oct. to 1.9% y-o-y. In China, the Nov. manufacturing PMI weakened to 48.0 missing expectations. The official non-manufacturing PMI also slipped to 46.7 in Nov. The services PMI fell for the sixth consecutive month.

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.)