2023 Weekly Update

Market update

The S&P 500 closed the week at 4,450.32, -0.16% lower. The Dow Jones closed at 34,618.24, +0.12%, with the Nasdaq lower by -0.39%. The volatility index VIX closed the week at 13.79 down from 13.84. The Euro Stoxx 600 surged +1.29%.

The 10-year UST closed at 4.33% up from 4.26% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -114bps. US Corporate Bond spreads: Investment Grade tightened 3bps at 186bps and High Yield tightened 13bps at 405bps. German 10-year Bunds yield closed at +2.68% up from +2.61% a week before. In Europe, Corporate Investment Grade spreads tightened 5bps at 165bps and High Yield spreads tightened 6bps at 434bps.

The US Dollar Index (DXY) appreciated +0.22% last week and closed at 105.32. The Euro closed at 1.0657 (-0.40%); the Yen depreciated -0.01%, closing at 147.85 and the Swiss Franc depreciated -0.43%, closing at 0.8969. Gold closed at $1,923.91 appreciating +0.25%. Oil was higher, Brent closed at $93.93 (+3.62%) and WTI at $90.77 (+3.73%).

Macroeconomy

US CPI

Monthly CPI for August came in at +0.6% as expected, mainly due to a sharp uptick in gasoline prices. But with core coming in a tenth stronger than consensus at +0.3%, investors are still pricing in a near-evens chance of another Fed rate hike this year, whilst the 2yr inflation breakeven hit another 4-month high. So, there’s still a lingering concern that inflation could remain above target. In terms of the details of the CPI release, the big story was that spike in gasoline prices (+10.6% on the month) which drove most of the overall headline gain (+0.6%). In fact, that +0.6% reading was the strongest monthly inflation print since June 2022, and was still higher than any month throughout the entire 2010s. In turn, that sent the year-on-year measure up to +3.7%, which was a bit higher than the +3.6% expected by the consensus. Whilst the headline figure was strong, inflation swaps had already been pricing in a +0.64% headline print, so it wasn’t a big surprise. Instead, the more concerning story came from the core print, which moved back up to +0.3% (vs. +0.2% expected), albeit a low +0.3% with the unrounded number at +0.27%. Furthermore, the “supercore” measure that also excludes shelter and used cars and trucks spiked up to a 6-month high of +0.4%. A big driver of that was a strong performance for transportation services, which includes things like vehicle insurance and airline fares. That was up by +2.0% on the month and makes up almost 6% of the CPI basket. A slightly concerning underlying trend was also shown by Cleveland Fed’s estimates of median and trimmed mean inflation, both of which were at their highest in four months at +0.3% m-o-m.

European Central Bank

After much speculation the ECB announced a 25bps rate hike, which took their deposit rate up to 4%. That’s the highest level for the deposit rate since the ECB’s creation, exceeding the previous peak back in 2000. And having now delivered 450bps of rate hikes over the last 15 months, it also marks the fastest pace of tightening ever done. Indeed, even if you go back before the ECB’s formation and look at previous tightening episodes from the German Bundesbank, they’ve now delivered as much tightening in the space of 15 months as the Bundesbank did since 1948. President Lagarde said that a “solid majority” were in favor of the decision to hike rates (which sounds less convincing than the “large” or “overwhelming” majorities seen in the recent past). The Governing Council’s statement said they thought rates were now at levels that if “maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The statement also said that “future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary”. In its forecasts, the ECB raised the inflation projections for this year to +5.6% (vs. 5.4% in June), and for 2024 to +3.2% (vs. +3.0% in June), although this was largely due to energy prices with the core inflation projection a touch lower for 2024 and 2025. So, the recent oil price rise may have played a sizeable part in the rationale for the hike. The growth forecast was revised down as the ECB pushed out its expected recovery from H2-23 to H1-24, with 2024 growth downgraded half a point to +1.0% as a result. Looking forward, markets are now pricing a 27% likelihood of another hike from the ECB by year-end.

China economic data

Chinese headline CPI inflation in August turned positive at 0.1% y-o-y, up from -0.3% y-o-y in July. In sequential terms, the price index posted the second consecutive positive reading at 0.3% m-o-m in August, compared to 0.2% in July. Core CPI remained unchanged at 0.8% y-o-y, or 0.0% m-o-m. The rise in headline CPI inflation was partly due to less drag from food prices (primarily from pork which jumped by 11.4% m-o-m, compared to 0.0% in July), and a jump in fuel prices at 4.8% m-o-m.  Meanwhile, the sub-index for consumer goods registered its first sequential growth since Jan 2023 at 0.4% m-o-m, suggesting that the impact of policy support may start to show up in the real economy. Industrial production growth came in at 4.5% y-o-y in July, above market expectation of 3.7%. Growth in FAI (Fixed asset investment) edged down further, primarily dragged by the property sector. In contrast, FAI in manufacturing picked up notably, likely reflecting an improved business sentiment amid the recovering industrial demand and easing financial conditions in China. Major property indicators continued to point to a downbeat picture, with housing prices falling further across city tiers in August. However, the August reading does not fully reflect the impact of the latest set of policy easing in the property sector. Based on high-frequency data, home sales improved significantly over the past weeks, but the magnitude and sustainability of such improvement remain to be seen. Lastly, the PBOC announced a RRR (Reserve requirement ratio) cut of 25bps. After the RRR cut, the average RRR in the banking system will fall from 7.6% to 7.4% (10.5% for large banks and 8.5% for mid-sized banks). This is the second RRR cut this year, after the 25bps cut in March.

What to watch

• Monday: No major release

• Tuesday: US Building Permits (Aug.) & Housing Starts (Aug.)

• Wednesday: UK CPI (Aug.); US FOMC Rate Decision and Fed Chair News Conference; China PBoC Interest Rate Decision

• Thursday: UK BoE Interest Rate Decision; Switzerland SNB Rate Decision; US Existing Home Sales (Aug.)

• Friday: USA PMI (Sep., prel.); UK: PMI (Sep., prel.) & Retail Sales (Aug.); Japan CPI (Aug.), Jibun Bank Japan PMI (Sep., prel.) & BoJ Interest Rate Decision and Monetary Policy Statement; Eurozone: PMI (Sep., prel.)
  

Highlights

Oil

Oil hit a new 10-month high last week. Supply continues to tighten following production cuts by Saudi Arabia and Russia alongside OPEC’s warning last week that the oil market would likely be in large deficit by the end of 2023. Global oil demand continues to appear resilient thanks to increased demand in the US, relatively stable consumption in other advanced economies and strong momentum in emerging economies ex Asia (+1.7mbd since April, mbd: million barrels per day). Chinese demand eased for the four months in a row (-0.9mbd since April). It is dragging the rest of emerging Asia (-0.8mbd since May). Recent Chinese relatively good news should help to put a floor on consumption in the months to come.