2023 Weekly Views

Highlights

FX

The US dollar has strengthened since early May thanks notably to higher market expectations for the Fed’s rate path and a relatively resilient US economy. Progress in negotiations over the debt ceiling and outperformance of the US stock market have also likely provided some support to the greenback. The loss of momentum in China’s economic recovery also helped the US dollar as it led to a depreciation of the renminbi. While the People’s Bank of China is expected to keep the renminbi broadly stable, they do not seem concerned over the renminbi’s depreciation at this stage. Given the rise in interest rate and the robust global risk appetite, the Japanese yen has been weak. Interestingly, cyclical currencies have failed to outperform. It seems that central banks are providing less support and make these currencies more sensitive to their domestic outlook.

Market update

Deal to Congress

The S&P 500 closed the week at 4,205.45, +0.63% higher. The Dow Jones closed at 33,093.34, -1.00%, with the Nasdaq higher by +2.51%. The volatility index VIX closed the week at 17.95 up from 16.81. The Euro Stoxx 600 slipped -1.59%.

The 10-year UST closed at 3.80% up from 3.67% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -150bps. US Corporate Bond spreads: Investment Grade tightened 6bps at 209bps and High Yield tightened 12bps at 492bps. German 10-year Bunds yield closed at +2.54% up from +2.43% a week before. In Europe, Corporate Investment Grade spreads tightened 2bps at 183bps and High Yield spreads tightened 3bps at 482bps.

The US Dollar Index (DXY) appreciated +0.98% last week and closed at 104.21. The Euro closed at 1.0723 (-0.76%); the Yen depreciated -1.90%, closing at 140.60 and the Swiss Franc depreciated -0.67%, closing at 0.9057. Gold closed at $1,946.46 depreciating -1.59%. Oil was lower, Brent closed at $76.95 (+1.81%) and WTI at $72.67 (+1.57%).

Macroeconomy

Debt ceiling agreement

An agreement was reached by President Joe Biden and Republican House Speaker Kevin McCarthy on Sunday to temporarily suspend the debt ceiling and cap some federal spending. The deal still needs to be passed by the House of Representatives and Senate in the coming days. The deal would suspend the $31.4trn debt ceiling until Jan. 1, 2025, after the 2024 election. The terms include the two-year ceiling increase coupled with non-defense discretionary spending being held approximately flat over that period; some time limits will be imposed on people in the TANF (temporary assistance) and SNAP (nutrition) programs, but Medicaid recipients will not be subject to work requirements.

FOMC minutes

The latest FOMC minutes showed that the Fed saw significant uncertainty at its May meeting over the path forward for monetary policy, with central bank officials acknowledging a need to keep their options open as they debate whether to continue raising interest rates or hold them steady in coming months. Staff judged that the banking system was sound and resilient despite concerns about profitability at some banks. The equity risk premium and corporate bond spreads declined over the past few months but remained near historical medians. Valuations in both residential and commercial property markets remained elevated. In particular, the commercial real estate sector remained vulnerable to large price declines with some banks and the CMBS market that could experience stress should prices of these properties decline significantly. Participants noted that the labor market remained very tight, with robust payroll gains in March and an unemployment rate near historically low levels. Investors are pricing a 56% chance of a hike in June which had a zero probability just a couple weeks ago in May and there was a 100% probability of a cut priced during the SVB turmoil in March. Cumulatively, there is a 95% probability of a hike priced in by July so the markets view that we would see a pause is being challenged.

German GDP

German GDP growth was revised down to -0.3% y-o-y in Q1 from 0.0% in the preliminary estimate. This decline followed a 0.5% fall in GDP in Q4, confirming that the economy entered a technical recession at the end of 2022. The GDP detail showed that the main hit to growth came from a 4.9% plunge in government spending. The decline in government spending was mainly due to the end of spending on Covid vaccination and testing.

European PMI

The flash composite PMI for the euro area fell by 0.8 points to 53.3 in May, slightly below expectations (53.5). The decline comes after 6 consecutive increases. Across sectors, the growth divergence between manufacturing and services has widened further this month. Services sector continues to be supported by pent-up demand from the reopening, strong labor market and fiscal support, while manufacturing suffers from weak demand. The bright spot remains employment, where even in the manufacturing sector, employment is increasing. In all, the May PMI report remains consistent with decent euro area GDP growth in Q2 thanks to the healthy state of the services sector. Country wise, signs of weakness in the German manufacturing sector became more obvious, while the expansion in the services sector accelerated. In France, the expansion of the services sector softened, while the contraction in the manufacturing sector was less severe than in the previous month. Surveys price measures showed that services sector firms reported higher pricing power amid resurgent demand, while in manufacturing, weak demand, lower energy prices and easing bottlenecks have pushed selling prices lower.

UK CPI

The Consumer Prices Index registered 8.7% in April, higher than estimates or the 8.4% forecast by the central bank. Core prices excluding food, energy and tobacco accelerated to 6.8% from 6.2% in March. The figures overshadowed the fact that inflation fell into single digits for the first time in eight months and will add to pressure on the Bank of England to keep raising interest rates through the summer. Investors are expecting 3 to 4 additional rate hikes until the end of the year.

What to watch

• Monday: -
• Tuesday: Eurozone Consumer / Industrial confidence (May); US House price index (Q1); US Dallas Fed Manufacturing index (May); Conference Board Consumer Confidence (May)
• Wednesday: China PMI Manufacturing/Services (May); France, Italy, Germany CPI inflation (May); US JOLTS Job openings (Apr.); US Fed beige book
• Thursday: Eurozone PMIs (May); Eurozone CPI inflation (May); US ADP Employment change (May); US Initial jobless claims (May 27); ISM manufacturing (May)
• Friday: US Jobs report (May)