2023 Weekly Views

Highlights

Rates

Bonds rallied at the end of the week on the back of the strong jobs report and the poor PMI readings. The 10yr Treasury rate closed the week at 3.56% compared to 3.87% a week before. The drop in yields was echoed in Europe, where yields on 10yr Bunds (-36bps), French OATs (-40bps) and Italian BTPs (-25bps) were down for the week as well. The moves came after several comments from Fed officials. James Bullard (St. Louis Fed) published a somewhat dovish speech: “inflation remains too high but has declined recently. Inflation expectations are back to relatively low levels. While the policy rate is not yet in a zone that may be considered sufficiently restrictive, it is getting closer. During 2023, actual inflation will likely follow inflation expectations to a lower level as the real economy normalizes”. Other Fed officials had more hawkish comments. Kashkari (Minneapolis Fed) said: “I have us pausing at 5.4%, but wherever that end point is, we won’t immediately know if it is high enough to bring inflation back down to 2% in a reasonable period of time”. Bostic (Atlanta Fed) mentioned: “I appreciate recent reports that include signs of moderating price pressures, but there is still much work to do”. While George (Kansas City Fed) argued: “I have raised my forecast over 5%.”

Market update

Resilient job market

The S&P 500 closed the week at 3,895.08, +1.19% higher. The Dow Jones closed at 33,630.61, +1.23%, with the Nasdaq higher by +0.87%. The volatility index VIX closed the week at 21.13 down from 21.67. The Euro Stoxx 600 rallied +4.60%.

The 10-year UST closed at 3.56% down from 3.87% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -107bps. US Corporate Bond spreads: Investment Grade widened 2bps at 209bps and High Yield tightened 26bps at 492bps. German 10-year Bunds yield closed at +2.21% down from +2.57% a week before. In Europe, Corporate Investment Grade spreads remained at 182bps and High Yield spreads tightened 17bps at 520bps.

The US Dollar Index (DXY) appreciated +0.34% last week and closed at 103.88. The Euro closed at 1.0644 (-0.57% weekly); the Yen depreciated -0.73%, closing at 132.08 and the Swiss Franc depreciated -0.37%, closing at 0.9279. Gold closed at $1,865.69 appreciating +2.28%. Oil was down, Brent closed at $78.57 (-8.54%) and WTI at $73.77 (-8.09%).

Macroeconomy

US jobs

The US economy added 223k jobs during Dec. ahead of the 203k forecast. Leisure and hospitality continued to add jobs (+67k). For the whole year, the survey payroll employment rose by 4.5m in 2022 (an average monthly gain of 375k), less than the increase of 6.7m in 2021 (an average monthly gain of 562k). The unemployment rate sank down to 3.5%, below the 3.7% forecast and down from 3.6% in Nov. The participation rate ticked up to 62.3% (above the 62.2% forecast and up from 62.1% in Nov). Wage growth cooled, coming in +4.6% y-o-y and +0.3% m-o-m (vs. consensus of +5% and +0.4%, respectively). The average workweek length dipped to 34.3 hours, below the St’s 34.4 forecast. This is the shortest the workweek has been since April 2020.

Fed minutes

Minutes from the Dec. Fed meeting indicated that central bankers are concerned that markets are underestimating their resolve in tackling inflation implying a hawkish message.  The meeting summary emphasized multiple times that policymakers see rates continuing to rise and staying there for “some time”. Participants concurred that the inflation data received for Oct. and Nov. showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. One passage also noted that a smaller rate increase of half a percentage point at the meeting, following three straight 75bps hikes, “was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”

PMIs

On Friday, the Dec. ISM services index unexpectedly collapsed to 49.6 vs. 55.0 expected and from 56.5 in Nov. This is the first time in contraction territory since the height of the pandemic in May 2020. Details were weak, with new orders slumping to 45.2 from 56.0. It may not be clear to what extent bad weather may have affected the survey. Earlier, the ISM manufacturing index showed a contraction in the sector after 30 months of expansion, down to 48.4 from 49 in Nov. The S&P competing survey showed similar results: the S&P Global final US Services PMI for Dec. came in at 44.7 (vs. 44.4 expected) and the composite PMI dropped to 45 from 46.4 in Nov., the lowest reading since August 2022.

EU inflation

Inflation in the Euro area slowed more than expected to 9.2% from 10.1% in Nov., while analysts were expecting it at 9.5%. Most of the decline came from a drop in energy prices, while all the key structural inflation components rose. Core inflation - excluding food and energy prices - rose to 6.9% from 6.6%, while the measure ex. alcohol and tobacco rose to 5.2% from 5%. Inflation in services and non-energy industrial goods accelerated, adding to concerns that price increases are more persistent than previously estimated. France EU-harmonized inflation rate fell to 6.7% in Dec., down from 7.1% in Nov. and below market forecast of 7.2%. Energy prices increased 15.1% compared with 18.4% in Nov. Food price inflation remained steady at 12.1%. In Germany, Dec. inflation came in at +9.6% y-o-y, down from +11.3% in Nov. and below the +10.2% forecast.

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.)