2023 Weekly Update

Highlights

China measures

More policy support measures were announced lately to stabilize growth. Particularly on the property front, some measures are: cutting the nationwide minimum down payment to 20% for first-time buyers and 30% for second-time purchasers; encouraged lenders to lower rates on existing mortgages; extend the definition of first homebuyers in some tier-1 cities (Guangzhou and Shenzhen); extend until end of 2025 with some conditions, the full refund of individual income tax related to home sales. In terms of fiscal spending, government requires that the planned new issuance for this year should be completed by end September and fund deployment should be completed by end October. Lastly, some measures were taken on the capital markets side such as cutting the stamp duty by half from 10bps to 5bps or slowing the pace of IPOs and tightening refinancing of listed companies (with an exemption to property developers).

Credit market US

investment-grade (IG) and high-yield (HY) corporate bond spreads have remained range-bound over the summer, with both standing at the relatively low levels of 187bps and 410bps, respectively on Aug. 31st. In euro credit, disappointing economic data has put some upward pressure on spreads, as they trade wider than their US counterparts, at 171bps and 457bps, respectively. Year-to-date, US IG and HY spreads have tightened by 16bps and 96bps, respectively. In IG the largest contributor to the tightening is the financial sector while in HY these are cyclical sectors such as energy, leisure and media. The spread tightening in short-term US and euro IG over the last couple of months has helped compensating for the rise in sovereign bond yields. It means that both one-to-five-year IG yields are hovering between 5.5% and 6% in the US and 4.0% to 4.5% in euro, with spreads that remain comfortably wider than in 2021. In US and euro HY the borrowing costs are higher, especially for the lowest rated issuers at 14% and 19%, respectively. Nevertheless, for the BB-rates ones, yields are hovering around 7% in the US and 6% in euro, making funding more accessible.

Market update

China tries harder

The S&P 500 closed the week at 4,515.77, +2.50% higher. The Dow Jones closed at 34,837.71, +1.43%, with the Nasdaq higher by +3.25%. The volatility index VIX closed the week at 13.09 down from 15.68. The Euro Stoxx 600 gained +1.38%.

The 10-year UST closed at 4.18% down from 4.24% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -126bps. US Corporate Bond spreads: Investment Grade widened 1bp at 187bps and High Yield tightened 11bps at 410bps. German 10-year Bunds yield closed at +2.56% down from +2.62% a week before. In Europe, Corporate Investment Grade spreads widened 2bps at 171bps and High Yield spreads widened 10bps at 457bps.

The US Dollar Index (DXY) appreciated +0.15% last week and closed at 104.24. The Euro closed at 1.0780 (-0.15%); the Yen appreciated +0.15%, closing at 146.22 and the Swiss Franc depreciated -0.05%, closing at 0.8851. Gold closed at $1,940.06 appreciating +1.31%. Oil was lower, Brent closed at $88.55 (+4.82%) and WTI at $85.55 (+7.17%).

Macroeconomy

Jobs report

The US economy added 187k jobs in August, better than the 170k forecast. Employment in June and July was revised down by 110K in aggregate; indeed payrolls have been downgraded from their initial print for the last 7 months now (every month in 2023 and totaling 355k) and June's print, which when released was +209k, has been revised down twice to 'only' +105k now. Employment continued to trend up in health care, leisure and hospitality, social assistance, and construction. Employment in transportation and warehousing declined. The unemployment rate shot higher to 3.8%, up from 3.5% in July and above the 3.5% forecast (3.8% is the highest since early 2022). The participation rate ticked up to 62.8%, up 20bps from July (and 20bps ahead of expectations). Average hourly wages were cool on a m-o-m basis (+0.2% m-o-m vs. the +0.3% forecast and down from +0.4% in July) and inline y-o-y at +4.3% (down from +4.4% in July). The workweek length ticked higher to 34.4 hours (up from 34.3 hours in July and ahead of the 34.3 consensus). Average weekly earnings were $1,163.41, up 3.9% y-o-y (an acceleration from +3.4% in July, but still 40bps lower than the hourly wage number).

European economic data

The Euro area economic sentiment survey went down 1.7 points to 93.3 in August. This decline echoes the fall in the August PMI The signal of the EC survey is a bit better than the signal of the PMI. The details showed that the decline in the EC survey was broad-based across sectors, even if it is worth mentioning that services sentiment remains significantly above sentiment in other sectors such as manufacturing or construction. Country wise, sentiment remains far better in peripheral countries in particular in Spain than in Germany and France. August euro area flash headline inflation was unchanged at 5.3% y-o-y, which was above our expectations. The key driver behind the upside surprise was a rise in energy inflation amid the recent increase in the oil price. Core inflation was slightly down in August to 5.3%, in line with expectations. The drop was due to both core goods inflation as well as services inflation. The ECB hawks will probably ignore the slowdown in August services inflation and push for a last hike in September. On the other side, Isabel Schnabel of the ECB Executive Board said that recent developments “point to growth prospects being weaker than foreseen in the baseline scenario” in the June projections. She continued advising that whilst further rate hikes could be warranted, there was also an acknowledgement that “should our assessment of the transmission of monetary policy suggest that the pace of disinflation is proceeding as desired, we may afford to wait until our next meeting”.

Swiss economic data

Swiss survey data were mixed consistent with a slowdown in economic activity. Swiss manufacturing PMI was up by 1.4pts to 39.9 in August. It is still at its lowest level since during the pandemic-induced recession of 2020 and the global recession during the financial crisis of 2009. Meanwhile, KOF economic barometer was down by 1.1pts to 91.1. in August, below its historical average. Swiss inflation remained unchanged in August at 1.6% y-o-y (0.2% m-o-m), while core inflation eased to 1.5% y-o-y in August from 1.7%.

China PMI

Chinese manuf. PMI improved to 49.7 in August. This is the second consecutive month that the official manufacturing PMI rose from the previous month. The official non-manufacturing PMI declined further to 51.0 in August from 51.5 in July. The broad-based improvement in the manufacturing PMI was likely driven by the recovery in domestic demand, while new exports stayed muted. The input price sub-index rose sharply to 56.5 in August from an average of 44.1 in Q2. This indicates a recovery in domestic industrial demand and potentially a trough of the Producer Price Index (PPI) might have been behind us. In contrast, the services sub-index moderated for the fifth consecutive month and marked the lowest reading of this year at 50.5 in August, suggesting that the strong post-covid rebound in service demand is fading.

What to watch

• Monday:  Germany Trade Balance (July); Eurozone Sentix Investor Confidence (Sept.)
• Tuesday: China Caixin Composite and Services PMI (Aug.); Eurozone: PPI (July); Eurozone Composite and Services PMI final (Aug.)
• Wednesday: Eurozone Retail Sales (July); US ISM Services PMI (Aug.), S&P Composite and Services PMI final (Aug.) & Fed’s Beige Book
• Thursday: Eurozone GDP final (Q2); Germany Industrial Production (July); Eurozone Employment Change (Q2); US Initial Jobless Claims; China Trade Balance in CNY & USD (Aug.), Exports and imports (Aug.)
• Friday: Japan GDP (Q2); Germany HICP inflation final (Aug.)