2023 Weekly Update

Highlights

Oil

The rise in oil prices saw Brent crude (+2.37%) surpass the $90 mark for the first time since November. That followed an announcement from Saudi Arabia that they’d be extending their unilateral production cut of 1 million barrels per day until December, as well as one from Russia that they’d be extending their own cutback of 300k barrels per day over the same period. Russia’s move was in line, and a partial reversal of the 500k cut seen in August, but the length of the extension by Saudi Arabia was a surprise, as during the summer it had extended its production cut for one month at a time. This added to the tight oil supply. This run-up continues a trend that’s been going since the end of June, when Brent was still only at $72. The move has already had a clear impact on gasoline/petrol prices and is expected to lead to some hot CPI reports in August.

Market update

The S&P 500 closed the week at 4,457.49, -1.11% higher. The Dow Jones closed at 34,576.59, -0.42%, with the Nasdaq lower by -1.95%. The volatility index VIX closed the week at 13.84 up from 13.09. The Euro Stoxx 600 slipped -1.48%.

The 10-year UST closed at 4.26% up from 4.18% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -121bps. US Corporate Bond spreads: Investment Grade widened 2bps at 189bps and High Yield widened 8bps at 418bps. German 10-year Bunds yield closed at +2.61% up from +2.55% a week before. In Europe, Corporate Investment Grade spreads tightened 1bp at 170bps and High Yield spreads tightened 17bps at 440bps.

The US Dollar Index (DXY) appreciated +0.82% last week and closed at 105.09. The Euro closed at 1.0700 (-0.74%); the Yen depreciated -1.10%, closing at 147.83 and the Swiss Franc depreciated -0.90%, closing at 0.8931. Gold closed at $1,919.08 depreciating -1.08%. Oil was higher, Brent closed at $90.65 (+2.37%) and WTI at $87.51 (+2.29%).MacroeconomyECB meeting

Macroeconomy

ECB meeting

The outcome of this week meeting of the ECB’s Governing Council (GC) looks very uncertain, more than any ECB meeting in recent history. The last time the ECB surprised markets was in July 2022 with a 50bps rate hike, but at least everyone expected the ECB to hike then. The consensus of economists is split on the decision and markets are pricing in roughly 40% chance of a hike. Chances moved up during the week following comments from several ECB speakers. The more hawkish members kept the option of a September hike firmly on the table, with the Dutch central bank governor Knot saying that the decision was a “close call”, whilst Slovakia’s Kazimir said that the ECB should “take one more step”, that a hike next week was preferable to waiting in September and delivering another hike later in the year. Meanwhile, Italy’s Visco said he believed “we are near the level where we can stop raising rates”. So, by no means full confidence in a pause from one of the more dovish ECB voices.

European economic data

The latest revisions to Q2 GDP growth for the Euro Area showed a two-tenths downgrade, with the latest estimate now at just +0.1%. So that means we’ve now had a -0.1% contraction in Q4, followed by +0.1% growth in Q1 and Q2, meaning there’s basically been stagnation since last autumn. Final PMIs showed an even weaker picture than the flash readings. For instance, the final composite PMI for the entire Euro Area came in at 46.7 (vs. flash 47.0), and the services PMI came in at 47.9 (vs. flash 48.3). Alongside that, German industrial production fell by a larger-than-expected -0.8% in July (vs. -0.4% expected). In the same lines, data showed that German factory orders contracted by -11.7% in July (vs. -4.3% expected). That’s the largest slump since the pandemic-related decline in April 2020. The German construction PMI for August came in at 41.5, which was its 17th consecutive month in contractionary territory.

Fed speakers

Late Fedspeak has been on the hawkish side. Chicago Fed President Goolsbee, one of the more dovish FOMC members and a voter this year, noted that “we are very rapidly approaching the time when our argument is not going to be about how high should the rates go”. New York Fed President Williams said that the Fed is “in a good place”, and “we are restrictive, still an open question whether we are sufficiently restrictive”. Echoing the restrictive policy tone, Atlanta Fed President Bostic (non-voter) commented that “we just need to let that restriction play out”. On the same lines, Dallas Fed President Logan (voter) noted that “another skip could be appropriate” in September, “but skipping does not imply stopping” and her base case “is that there is work left to do”. The hawkish comments along with positive economic data, moved fed funds futures to price in a 50% chance of a hike by the time of the November meeting, up from 46% on Monday. The market saw it as even odds whether we’ll get another hike. And looking further out, the rate priced in for the December 2024 meeting hit a new high for the cycle of 4.45%. It shows how investors are becoming increasingly skeptical about the prospect of rate cuts soon.

US economic data

ISM services index came in much stronger than expected. The headline number was at 54.5 (vs. 52.5 expected), which was above every economist’s expectation on Bloomberg, as well as the highest level since February. So it made a change from the more downbeat data over recent weeks, such as the negative revisions in the last jobs report. On top of that, the employment component (54.7) hit a 21-month high, new orders (57.5) were at a 6-month high, and there were even signs of fresh momentum on inflation, since the prices paid component rose for a second consecutive month to 58.9. On the Real Estate front, latest weekly data from the Mortgage Bankers Association showed that mortgage applications for home purchases fell to its lowest level since April 1995 last week, which just shows how rates at these levels are having an effect. Lastly, the Fed’s Beige Book was published, which summarizes anecdotal information gathered by the regional Feds. On the consumer side, this noted strong tourism spending, which “most contacts considered the last stage of pent-up demand for leisure travel”. But it pointed out that "job growth was subdued across the nation".

China trade data

Chinese exports growth came in at -8.8% y-o-y in August, after the slump of -14.5% y-o-y in July. On a sequential basis, the August reading averted its downward trend and grew by 1.3 % after seasonal adjustment (sa). Import growth also turned less negative at -7.3% y-o-y (or 3.8% m-o-m sa) in August, up from -12.4% in July and beating market expectations of -9.0%. Trade surplus fell to USD 68.4bn in August on stronger imports, from USD 80.6bn in the previous month. By main destination, exports to the EU and Japan continued to contract from the previous month at -2.5% m-o-m (sa) and -5.3% m-o-m (sa) respectively, while exports to the US and ASEAN rebounded in August after consecutive months of contraction since April this year. On the import front, growth picked up possibly on a recovery in domestic industrial demand.

Other central banks

The Bank of Canada held their target for the overnight rate at 5%, as expected. However, their statement said that the Governing Council “remains concerned about the persistence of underlying inflationary pressures and is prepared to increase the policy interest rate further if needed”. The Reserve Bank of Australia (RBA) decided to keep its benchmark policy rate unchanged at 4.1% for the third straight month with the statement seemingly very similar to last month.

What to watch

• Monday: No major release

• Tuesday: UK Employment Change (Aug.) & ILO Unemployment Rate (July); Eurozone ZEW Survey (Sept.)

• Wednesday: UK GDP (July) & Industrial Production (July); Eurozone Industrial Production (July); US CPI (Aug.)

• Thursday: Eurozone ECB monetary policy decision; US Initial Jobless Claims (Sept. 8), PPI (Aug.), Retail Sales (Aug.)

• Friday: US Industrial Production (Aug.) & Michigan Consumer Sentiment Index (Sept.); China Industrial Production (Aug.) & Retail Sales (Aug.)