2023 Weekly Views

Highlights

On rates

Ahead of Powell’s speech last week, there were some interesting developments in market pricing. Futures now suggest that another Fed rate hike to the 5.5-5.75% range is more likely than not for the first time since SVB’s collapse, with the chance of another hike by the November meeting at 53%. We will have another jobs report and CPI print ahead of the next meeting, but the moves suggest that markets are coming round to the Fed’s most recent dot plot from June, which suggested there’d still be one more rate hike from here. The prospect of another hike meant that Treasuries sold off again, and the 3m T-Bill yield (+2.8bps) hit a fresh post-2001 high of 5.464%. There was also an increase in yields further out the curve, with the 2yr yield up +5.6bps to 5.02%, and the 10yr yield up +4.5bps to 4.24%. Not all officials seemed to agree with that, with Philadelphia Fed President Harker (a voter this year) saying that “I think that we’ve probably done enough”, and that “I’m in the camp of, let the restrictive stance work for a while, let’s just let this play out for a while, and that should bring inflation down”. On other hand, Boston Fed President Collins sounded more open to further hikes, commenting that “We may need additional increments, and we may be very near a place where we can hold for a substantial amount of time”.

Market update

Jackson Hole

The S&P 500 closed the week at 4,405.71, +0.82% higher. The Dow Jones closed at 34,346.90, -0.45%, with the Nasdaq higher by +2.26%. The volatility index VIX closed the week at 15.65 down from 17.30. The Euro Stoxx 600slipped -0.05%.

The 10-year UST closed at 4.24% down from 4.25% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -127bps. US Corporate Bond spreads: Investment Grade tightened 5bps at 186bps and High Yield tightened 5bps at 421bps. German 10-year Bunds yield closed at +2.56% down from +2.62% a week before. In Europe, Corporate Investment Grade spreads widened 3bps at 169bps and High Yield spreads widened 10bps at 447bps.

The US Dollar Index (DXY) appreciated +0.68% last week and closed at 104.08. The Euro closed at 1.0796 (-0.71%); the Yen depreciated -0.72%, closing at 146.44 and the Swiss Franc depreciated -0.31%, closing at 0.8847. Gold closed at $1,914.96 appreciating +1.36%. Oil was lower, Brent closed at $84.48 (-0.38%) and WTI at $79.83 (-1.75%).

Macroeconomy

Jackson Hole    

During last week Jackson Hole symposium, several central bankers gave their views, notably Fed chairman Jerome Powell. The tone from his speech is certainly much more balanced than it was last year (as nearly everyone expected). It sounded like the Fed is ready to tighten further if necessary, but it has started to shift its attention to managing the risks of doing too much. Powell said: “although inflation has moved down from its peak - a welcome development - it remains too high”. Regarding the risks, he mentioned: “doing too much could also do unnecessary harm to the economy”. Adding to this point, “the wide range of estimates of these lags suggests that there may be significant further drag in the pipeline”.  In terms of economic growth, Powel highlighted: “we are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up”. About the labor market, he pointed out that "the rebalancing of the labor market has continued over the past year but remains incomplete... we expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response". In terms of the Fed neutral rate, he commented that: “real interest rates are now positive and well above mainstream estimates of the neutral policy rate. We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint. Lastly, regarding inflation, "two percent is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time".

Global PMIs

French and German flash PMIs for August came in beneath expectations, with the French composite PMI unchanged at 46.6 (vs. 47.1 expected), whilst the German composite PMI deteriorated further to 44.7 (vs. 48.3 expected). For Germany it was the weakest composite PMI reading since May 2020, back when Europe was still experiencing the initial wave of Covid lockdowns. The overall Euro Area reading deteriorated as well, with the composite PMI falling back to 47.0 (vs. 48.5 expected), its lowest since late 2020. Notably, it was services (-2.6pts to 48.3) that led the decline with the previous resilience from H1 fading. It was a similar story in the UK, where the composite PMI fell to 47.9 (vs. 50.4 expected), which was the first contractionary reading since January. In the US, flash composite PMI was only barely in expansionary territory at 50.4 (vs. 51.5 expected). Regionally, the Richmond Fed’s manufacturing index for August came in at a 7-month high of -7 (vs. -10 expected), while the Philadelphia Fed’s non-manufacturing index fell from +1.4 to -13.1, largely reversing its improvement in July. Japan’s composite PMI ticked up to a 3-month high of 52.6, whereas Australia’s composite PMI fell back to a 19-month low of 47.1.

US Real estate

Property sales fell for the fourth time in five months, weighed by high mortgage rates and limited inventory that's driving prices higher. The US Mortgage Bankers Association said that the average 30yr fixed-rate mortgage had risen to 7.31% over the week ending August 18, which is its highest level since December 2000. In addition, the index of home-purchase applications fell to its lowest level since 1995, which demonstrates the effect that higher rates have had on housing activity. On top, existing home sales in July fell back to an annualized rate of 4.07m (vs. 4.15m expected), which is their lowest level in 6 months. Existing home sales dropped another 16.6%, compared to an 18.9% drop in June

European energy

In Europe, natural gas prices (+12.01%), which closed above €40 per megawatt-hour for the first time since mid-June. That comes as LNG workers at a key facility in Australia could go on strike from early September if a pay agreement isn’t reached. That has the potential to affect 10% of global LNG exports, and while Europe does not receive LNG from Australia, it will increase competition for shipments from elsewhere. Europe is still in a much better position than last year however, since gas storage is currently 91% full, which is above the 77% mark at the same point in 2022. Furthermore, prices are still only a sixth of their levels back then. That said, the move still marks a decent uptick from their levels at the end of July, when they closed at €28.37 per megawatt-hour, and risks adding to inflationary pressures once again.

What to watch

• Monday: no major events

• Tuesday: Japan UR (July); Germany Cons. Confidence (Sep.); US Housing Price Index (June), Cons. Confidence (Aug.), JOLTS Job Opening (July)

• Wednesday: US ADP (Aug.), PCE (Q2, prel.), GDP (Q2, prel.), Pending Home Sales (July); Eurozone Cons. Confidence (Aug.); Germany CPI (Aug., prel.)

• Thursday: China Manuf. & Non-Manuf. PMI (Aug.); US Initial Jobless Claims (Aug. 25), Personal Income & Spending (July); Eurozone CPI (Aug, prel.)

• Friday: China Caixin PMI (Aug.); US Unemployment Rate, Non-Farm Payrolls (Aug.), ISM PMI Manuf. (Aug.); Germany HCOB Manuf. PMI (Aug.)