2023 Weekly Views

Highlights

Energy prices  

WTI crude oil reached a 9-month high at $84.40/bl, though Brent at $87.55 stayed a touch below its YTD highs reached in January. There was a preponderance of supply risks supporting a tight oil market narrative. Oil prices posted a seventh consecutive week of gains, which for Brent would be its longest run since early 2022. In Europe, natural gas prices spiked (+27.2%), as LNG supply risks reared their head with news of a possible strike that could affect LNG export facilities in Australia. Still, at EUR 39.50/MWh prices are at 13% of their peak last August (though around double their pre-Covid levels). And with EU gas storage 88% full, physical supply risks are low. Therefore, while gas price rises are a risk amid a tight global LNG market, it is the oil story that is more relevant in terms of the immediate impact on inflation and should be viewed as more pressing when looking at immediate Euro headline inflation.

Moody’s downgrade 

In the US, the regional banking story reappeared in the headlines after Moody’s downgraded ten small and midsize banks and put a number of larger firms on review or negative outlook. 29 banks in total saw some kind of action. The regional banking index had reached a post-SVB high the previous day, with a +34% increase since its low in mid-May, having reversed about two thirds of the post-SVB decline. Moody’s cited higher funding costs, potential regulatory capital weakness and increasing commercial real estate risks. Until we truly know where CRE will bottom, it’s impossible to call the all-clear for this cycle. This story shouldn’t fully play out for some time though.

Market update

Inflation easing

The S&P 500 closed the week at 4,464.05, -0.31% lower. The Dow Jones closed at 35,281.40, +0.62%, with the Nasdaq lower by -1.90%. The volatility index VIX closed the week at 14.84 down from 17.10. The Euro Stoxx 600 slipped -0.81%.

The 10-year UST closed at 4.15% up from 4.03% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -128bps. US Corporate Bond spreads: Investment Grade widened 1bp at 188bps and High Yield tightened 12bps at 413bps. German 10-year Bunds yield closed at +2.62% up from +2.56% a week before. In Europe, Corporate Investment Grade spreads widened 2bps at 164bps and High Yield spreads remained at 449bps.

The US Dollar Index (DXY) appreciated +0.81% last week and closed at 102.84. The Euro closed at 1.0949 (-0.52%); the Yen depreciated -2.26%, closing at 144.96 and the Swiss Franc depreciated -0.48%, closing at 0.8767. Gold closed at $1,913.76 depreciating -1.50%. Oil was higher, Brent closed at $86.81 (+0.66%) and WTI at $83.19 (+0.45%).

Macroeconomy

US inflation    

Core CPI came on the weaker side of consensus expectation, increasing 0.16% m-o-m. The y-o-y reading fell slightly to 4.7% from 4.8%. After averaging at a monthly run-rate of 0.4% m-o-m, core CPI has clearly slowed in the past two months. Importantly, the Fed’s preferred gauge of underlying inflation pressures, supercore CPI (core services ex housing), rose 0.19% m-o-m, up from its flat reading last month but still down sharply from its YTD average of 0.3%. The details are slightly stronger than the aggregate number suggests. Airfare fell sharply by -8.1% m-o-m. In fact, after two months of decrease, airfare has returned to its pre-pandemic level. Headline inflation also came on the weaker side of expectation, rising 0.17% m-o-m. Due to a difficult base effect, the y-o-y reading rose to 3.2% from 3.0%, the first increase in a year. Energy prices rose slightly due to price increases in gasoline. Food inflation rose just 0.2% - grocery inflation accelerated while restaurant inflation slowed. San Francisco Fed President Daly said that the “CPI data came in largely as expected but not a data point that says victory is ours" and that “if core services ex housing stalls out, that would be concerning”. Overall, she struck a clear data dependent tone without giving any view on the September meeting. She added that the conversation about cuts will be held next year, leaning against any prospects of an imminent Fed pivot. Y-o-y headline CPI is expected to rise again in August as gasoline prices are increasing. Therefore, we expect headline CPI to move higher in the near term before settling around 3% towards year-end. Before the next Fed meeting in September, there are a job and an inflation report. Investors’ expectations on near term rates have little changed with only a 11% chance of a hike in the Fed’s September meeting.

China economic data

Chinese exports fell further by -14.5% y-o-y in July, missing the already-low market expectation. Import growth also came in well below market expectation and slumped to -12.4% in July. By destinations, all major markets (US, EU, Japan and ASEAN) registering another double-digit contraction in July. While exports to the US and EU stayed muted, the ASEAN economies also showed further signs of weaknesses with its sequential growth dropping by -5.0% in July, which is consistent with the soft Asia PMIs. Despite some possible stabilization in industrial activity on the back of better domestic demand, the slowing global growth will likely add further headwinds to the Chinese and Asian economy. Chinese headline CPI inflation in July dropped to -0.3% y-o-y, driven by falling food prices and higher base effect. In m-o-m terms, however, the price index reverted its declining trend and rose by 0.2% in July, marking its first positive reading since Jan 2023. Core CPI rose notably by 0.5% m-o-m (or 0.8 % y-o-y) in July on strong services (particularly tourism-related activities). The disinflationary pressure of other consumer goods showed some easing signs in July. The latest inflation readings suggest some initial signs of revival in domestic consumption demand and manufacturing activities in China.

What to watch

• Monday: India: CPI (July)
• Tuesday: Japan: GDP (2Q, preliminary); Germany: ZEW survey (August); China: Industrial Production (July), Retail Sales (July), Fixed Assets Investments (July); USA: Retail Sales (July), Empire Manufacturing; Canada: CPI (July)
• Wednesday: USA: Building Permits & Housing Starts (July), Industrial Production (July); Eurozone: GDP (2Q, preliminary), Industrial Production (June); UK: CPI (August); Reserve Bank of New Zealand Policy Decision
• Thursday: USA: Leading Index (July); Eurozone: Trade Balance (June); Norges Bank Policy Decision
• Friday: Japan: National CPI (July); UK: Retail Sales (July); USA: Joe Biden hosts a trilateral leaders summit with Japanese prime minister and South Korean president at Camp David. Top of the agenda will be the threat posed by North Korea in the region