2023 Weekly Update

Market update

The S&P 500 closed the week at 4,320.06, -2.93% lower. The Dow Jones closed at 33,963.84, -1.89%, with the Nasdaq lower by -3.62%. The volatility index VIX closed the week at 17.20 up from 13.79. The Euro Stoxx 600 slipped -2.02%.

The 10-year UST closed at 4.43% up from 4.33% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -107bps. US Corporate Bond spreads: Investment Grade tightened 3bps at 183bps and High Yield widened 7bps at 412bps. German 10-year Bunds yield closed at +2.74% up from +2.68% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 161bps and High Yield spreads tightened 9bps at 425bps.

The US Dollar Index (DXY) appreciated +0.25% last week and closed at 105.58. The Euro closed at 1.0653 (-0.04%); the Yen depreciated -0.35%, closing at 148.37 and the Swiss Franc depreciated -1.08%, closing at 0.9066. Gold closed at $1,925.23 appreciating +0.07%. Oil was lower, Brent closed at $93.27 (-0.70%) and WTI at $90.03 (-0.82%).

Macroeconomy

US FOMC

As widely expected, the FOMC kept the Fed funds rate on hold but maintained clear hawkish tone. The starting point for the hawkishness came from the updated dot plot in the new Summary of Economic Projections. The end-2023 median dot was unchanged at 5.6%, but the median dot for 2024 moved 50bps higher to 5.1%. So, the median FOMC member is penciling in only two rate cuts in 2024, after one more hike this year. Interestingly, the newly published projections for 2026 showed the median dot at 2.9%, still above the long-term projection of 2.5%, so pointing to a persistently "tight" policy stance. The higher 2024-25 dot plot came as the SEP moved further towards a soft-landing view, lowering unemployment projections for both 2024 and 2025 by 0.4pp to 4.1%. That would be only a slight uptick from the latest 3.8% level. In the press conference Powell said that he “would not” have a soft landing as a baseline expectation, though later adding that soft landing is a primary objective for the FOMC. A little bit of a confusing message but overall, Powell reinforced a higher-for-longer message. Echoing the dot plot, he noted that the neutral rate may have risen, and it was “certainly possible that the neutral rate...at this moment is higher than (the long-run rate)”. He also downplayed the prospects of cuts, saying that the FOMC was “never intending to send a signal” about timing of rate cuts with its dot plot and that “there’s so much uncertainty around” this. Powell’s comments did see some moderation of the near-term tightening bias. He noted several times that the Fed is now in a position to “proceed carefully”. The prepared remarks struck a softer tone on labor market tightness and Powell highlighted that the last three inflation prints were “very good” readings, though not yet enough for the Fed to be confident they have reached a “sufficiently restrictive” stance. Fed fund futures saw the chances of another hike by the end of the year move up to 54% from 45% the day before, with the peak rate now priced for January 2024 (with a 58% chance of a hike by then). Fed funds pricing for end-24 rose by +13.3bps on the day to a new cycle high of 4.76% (this is still more than 30bps below the Fed’s new median dot).

Bank of England

The Bank of England kept their policy rate on hold at 5.25%, which ended a run of 14 successive hikes. It was a narrow 5-4 vote among the committee, with 4 of the members preferring a 25bps hike, and their statement still signaled the potential for more hikes. For instance, it said that “Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.” The other important development came with regards to quantitative tightening, where they voted to reduce the gilt portfolio by £100bn over the year from October, taking the total down to £658bn. For markets, the decision to leave rates unchanged came as a surprise, since swaps had been pricing in a 63% likelihood of a hike immediately prior to the decision. As a result, Sterling fell against both the US dollar and the Euro. However, gilt yields followed a pattern similar to the rest of Europe, with a noticeable steepening amidst rises in both the 2yr (+2.5bps) and the 10yr yield (+9.0bps).

Bank of Japan

The Bank of Japan left policy unchanged at their latest meeting, in line with expectations. During Governor Ueda press conference, it was highlighted that uncertainty remains very high, he cannot say when the BoJ will adjust policy, but the BoJ watches data closely and that it’s hard to know when it’ll be known about wage hike next year. Ahead of the decision, the latest CPI numbers for August were also stronger than expected, with headline CPI at +3.2% (vs. +3.0% expected).

Swiss National Bank

The Swiss National Bank (SNB) kept its policy rate unchanged at 1.75% at its September meeting. In justifying its decision, the SNB said that “the significant tightening of monetary policy over recent quarters is countering remaining inflationary pressure”. The new forecast sees average annual (headline) inflation at 2.2% in 2023 and 2024, and at 1.9% in 2025, meaning that inflation is now within the range of price stability at the end of the SNB’s forecast horizon.

Other central banks

In Sweden, the Riksbank raised their policy rate to 4%, in line with expectations. Likewise in Norway, the Norges Bank hiked by 25bps to 4.25%, and Governor Bache said “There will likely be one additional policy rate hike, most probably in December”. Banco do Brasil (BdB) has confirmed that it was on track for a rate cut cycle. The Copom decided unanimously to cut its SELIC rate by 50bps to 12.75% after a first cut of the same amount in August. Brazil headline CPI bounced back to 4.6% y-o-y in August vs 4.0% in July and core remains elevated (6.1%) compared to a 3% target. Moreover, inflation projections have been increased slightly (3.5% in 2024 compared to 3.4% previously). BdB is expected to continue to cut rates by 50bps per meeting. Two are left before year end. The next one will occur on 1st of November.

Highlights

On rates

Rate markets experienced another sell-off week, with longer-dated yields hitting new highs for the cycle across several countries. The US 10yr Treasury yield surpassed the 4.5% mark during the week, first time since 2007. In credit, Bloomberg’s global aggregate bond index closed at its lowest level of 2023 so far. Those moves have been driven by the prospect that central banks are likely to keep policy rates in restrictive territory for longer than previously thought. That was prompted initially by the Fed’s hawkish dot plot on Wednesday. But the sell-off then got fresh momentum on Thursday from the US weekly jobless claims, which came in at their lowest since January at 201k. That backdrop led to an intense bond sell-off. By Friday, the 10yr Treasury yield (+10.1bps weekly) was hovering around a post-2007 high of 4.43%. At the same time, the 10yr real yield (+9.0bps weekly) also hit a post-2009 high of 2.07%. The rise was stronger at the long end, with the 30yr yield up +10.7bps to 4.53%. Front-end yields also raised, with the 2yr yield ending the week +7.7bps higher at 5.11%. As a result, the 2s10s slope saw one of its most significant steepening since the March banking stress to -68.0bps. Over in Europe it was the same story, with yields on 10yr bunds (+6.4bps) hitting their highest intraday level since 2011.

What to watch

• Monday: Germany IFO Reports Release (Sep.)
• Tuesday: US Housing Price Index (July), Consumer confidence (Sep.), New Home Sales Change (Aug.)
• Wednesday: Switzerland ZEW Survey (Sep.), SNB Quarterly Bulletin (Q3); US Durable Goods Order (Aug.)
• Thursday: Eurozone Consumer confidence (Sep.); Germany CPI (Sep.), HICP (Sep); US Initial Jobless Claims (Sep. 22), Pending Home Sales (Aug.)
• Friday: Japan Tokyo CPI (Sep.), Unemployment Rate (Aug.), Retail Trade (Aug.); UK GDP (Q2); Germany Retail Sales (Aug.); Eurozone HICP (Sep.); US PCE (Aug.), Chicago Purchasing Manager’s Index (Sep), Michigan Consumer Sentiment Index (Sep.)