2023 Weekly Views

Highlights

Oil

Oil headed for a weekly loss of almost 10% marking its lowest level of the year so far. OPEC+ decided to keep oil production unchanged as (1) the market is facing huge uncertainties about Russian flows following the price cap adopted by the G7, (2) risk of slowing demand if big economies fall into recession and (3) risk of chaotic reopening in China. At the same time, G7 leaders have agreed to introduce a $60 per barrel price cap on Russian oil. The EU will now ban the import of crude oil produced in Russia and transported by sea.

Market update

A busy week ahead

The S&P 500 closed the week at 3,934.38, -3.37% lower. The Dow Jones closed at 33,476.46, -2.77%, with the Nasdaq lower by -3.99%. The volatility index VIX closed the week at 22.83 up from 19.06. The Euro Stoxx 600 slipped -0.94%.

The 10-year UST closed at 3.58% up from 3.49% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -72bps. US Corporate Bond spreads: Investment Grade widened 20bps at 204bps and High Yield widened 9bps at 497bps. German 10-year Bunds yield closed at +1.93% up from +1.86% a week before. In Europe, Corporate Investment Grade spreads tightened 5bps at 187bps and High Yield spreads widened 9bps at 556bps.

The US Dollar Index (DXY) appreciated +0.25% last week and closed at 104.81. The Euro closed at 1.0540 (+0.05% weekly); the Yen depreciated -1.68%, closing at 136.56 and the Swiss Franc appreciated +0.32%, closing at 0.9342. Gold closed at $1,797.23 depreciating -0.02%. Oil was down, Brent closed at $76.10 (-11.07%) and WTI at $71.02 (-11.20%).

Macroeconomy

Bankers’ comments

Some fears about the resilience of US and global growth came back into focus after pessimistic forecasts from major US banks just ahead of the Federal Reserve's last monetary policy meeting of 2022 this week (13 & 14 Dec.). After four consecutive 75 basis point hikes, the Fed is expected to raise interest rates by a smaller 50 basis points. The Fed's aggressive rate hikes have sparked fears of a recession in 2023, despite the resilience the US economy has shown so far. JPMorgan Chase CEO Dimon warned that the economy faces a mild or more severe recession in the coming months, while the Bank of America CEO also said the bank's research points to three quarters of mildly negative growth next year. The European Central Bank is expected to raise interest rates next week and will need to raise rates several more times to tame price pressures, according to the ECB's chief economist, Philip Lane. "We expect that more rate hikes will be needed, but a lot has already been done," Lane said. The Bank of England and the Swiss National Bank also meet this week.

Other central banks

The Reserve Bank of Australia (RBA) decided to increase the cash rate target by 25 bps to 3.10%. It also increased the interest rate on Exchange Settlement balances by 25bps to 3%. The RBA raised rates for the eighth time with an accompanying statement that was slightly less dovish than market participants had expected. The RBA also stated that it was not on a preset course to tighten policy, but that inflation was still too high. The Bank forecasts annual growth of around 1.5% in 2023 and 2024. The Bank of Canada (BoC) delivered a sixth outsized increase to interest rates, while opening the door to a pause in its hiking cycle. The benchmark overnight lending rate was raised by 50 basis points to 4.25% on Wednesday, the highest since the beginning of 2008. The move was in line with the expectations of a slim majority of economists. The language suggested larger magnitude increases to borrowing costs have probably ended, and that policymakers are open to a break in their aggressive hiking cycle as they weigh the need for fine-tuned adjustments.

PMIs

The Nov. US ISM Non-manufacturing PMI came at 56.5 vs. 53.3 forecast. New orders gauge was down to 56.0 from prior 56.5 but business-activity fared better. Employment shifted back into growth after contracting in Oct. Prices paid moved slightly lower but remained elevated. Euro zone activity declined for a fifth month in Nov. as consumers cut spending amid surging inflation. S&P Global composite PMI for the euro zone nudged up to 47.8 in Nov. from Oct.’s 23-month low of 47.3. Services PMI slipped to 48.5 from 48.6, lowest since early 2021. UK’s services sector shrank for a second month in Nov. The Services S&P Global/CIPS PMI held at 48.2 last month as expected, matching Oct.’s 21-month low. The composite PMI held at 48.2, its lowest since January 2021. In China, the Caixin Services PMI fell to 46.7 in Nov. from 48.4 in the prior month, vs. expectations of 48.0. The index marked its third straight month below 50. Manufacturing activity also shrank over the past three months, with the Caixin composite PMI tumbling to 47 in Nov., showing an extended decline in business activity.

China Covid policy

The Dec. Politburo meeting emphasized stabilization and economic growth as top priorities, instead of covid management. Notably, “Housing not for speculation” and “Covid-zero” were not mentioned. Consequently, China announced the most sweeping changes to its resolute anti-Covid regime since the pandemic began 3 years ago. The relaxation of rules, which includes allowing infected people with mild symptoms to quarantine at home and dropping testing for people travelling domestically, is the clearest sign that Beijing is pivoting away from its zero-Covid policy. Many of the changes announced by the National Health Commission reflected steps already taken in various cities and regions in recent days, following protests against Covid controls that were the biggest demonstration of public discontent since President Xi Jinping came to power in 2012. Shanghai was among the first to announce that it would put the new guidelines in place and remove rules on travelers entering the city. Latest high-frequency indicators point to a gradual recovery in activities, primarily from public transportation. In the near term, more easing policies are likely however, the reopening process will likely be bumpy.

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.)