2023 Weekly Update

Market update

The S&P 500 closed the week at 4,514.02, +2.24% higher. The Dow Jones closed at 34,947.28, +1.94%, with the Nasdaq higher by +2.37%. The volatility index VIX closed the week at 13.80 down from 14.17. The Euro Stoxx 600 rallied +4.85%.

The 10-year UST closed at 4.44% down from 4.65% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -96bps. US Corporate Bond spreads: Investment Grade tightened 6bps at 188bps and High Yield tightened 4bps at 429bps. German 10-year Bunds yield closed at +2.59% down from +2.72% a week before. In Europe, Corporate Investment Grade spreads tightened 6bps at 161bps and High Yield spreads tightened 13bps to 443bps.

The US Dollar Index (DXY) depreciated -1.84% last week and closed at 103.92. The Euro closed at 1.0915 (+2.14%); the Yen appreciated +1.25%, closing at 149.63 and the Swiss Franc appreciated +1.88%, closing at 0.8857. Gold closed at $1,980.82 appreciating +2.09%. Oil was lower, Brent closed at $80.61 (-1.01%) and WTI at $75.89 (-1.66%).

Macroeconomy

US CPI & PPI

Oct. CPI came in at +0.0% (vs. +0.1% expected), whilst core CPI also surprised on the downside at +0.2% (vs. +0.3% expected). With that, the y-o-y CPI fell back to +3.2% (vs. +3.3% expected), and core CPI fell back to a two-year low of +4.0% (vs. +4.1% expected). Lower gasoline costs were a big part of the reduction, which fell -5.0% on the month, whilst shelter inflation (+0.26%) saw its slowest print over the last two years. Other slower areas were lodging away from home (-2.4%) and airfares (-0.9%), whilst new vehicles (-0.1%) fell despite the workers’ strike. On the consumer side, Oct. retail sales saw a slightly smaller -0.1% contraction than the -0.3% expected, with the Sept. number revised up two-tenths to +0.9% but with August revised down. Retail control which goes into GDP was in line at 0.2% down from 0.7% (revised up 0.1pp) last time so some slowing. On the producers’ side, Oct. PPI surprised on the downside like the CPI. Monthly headline PPI was at -0.5% (vs. +0.1% expected), and the measure excluding food, energy and trade was ‘only’ up +0.1% (vs. +0.2% expected). That took y-o-y headline PPI down to +1.3% (vs. +1.9% expected).

Euro CPI

Europe HICP (CPI) inflation passed a peak of 10.6% y-o-y in Oct. 2022. With Oct. core HICP now at 4.2% y-o-y, inflation remains high, but it is expected to fall through Q4 2023 and early 2024. ECB expects inflation to fall to 3.2% in 2024 and to 2.1% in 2025. The goods components of HICP (energy, food, core goods) account for 55% of the basket. Their momentum has clearly turned since spring. The services (and domestic) part of the HICP basket has also turned at the end of summer. Investors are pricing in a 47% chance of an ECB rate cut by April, up from 37% at the start of the week. On Friday, ECB’s Villeroy said that the decline in inflation “fully justifies the halting of the sequence of rate hikes”. After the US close on Friday, we also heard from Moody’s, who raised their outlook for Italy from “negative” to “stable”.

Japan CPI

Japan nationwide CPI data for September show headline overall inflation up 3.0% y-o-y (Aug. was +3.2% y-o-y), core inflation excluding fresh food up 2.8% (vs. +3.1%in Aug.), and core-core inflation excluding fresh food and energy up 4.2% (+4.3%). The core and core-core figures came in higher than the consensus (2.7% for core and 4.1% for core-core). This opens a gap between with the forecast in the BoJ's quarterly Outlook Report of July: “the y-o-y rate of change is projected to be at around 3% for fiscal 2023 and then be in the range of 1.5-2.0% for fiscal 2024 and 2025”. Bloomberg, Reuters and Jiji Press have reported that the BoJ will revise upward its inflation forecast for FY2023-24 in its next Outlook Report later this month, which would be a natural move. At the same time, an increase in the inflation forecast in the Outlook Report would theoretically make it difficult for the bank to continue with its current stance at this month’s monetary policy meeting.

China economy

Most recent activity data point to improved economic momentum on stronger fiscal stimulus. Domestic consumption continued to recover, albeit moderately with sequential growth still staying well below pre-pandemic level. Industrial production in the upper-stream material industries continued to register stronger growth, while sectors related to infrastructure activities also picked up notably. New government bond issuance came in at RMB 1.6trn in Oct. amid the issuance of special refinancing local government bonds (to swap out LGFV debt in provinces with acute liquidity stress) and the front-loading of special local government bonds. Compared to a year ago, new government bond issuance rose by 228%. In contrast, credit demand in the private sector remained soft. The property sector remains a drag, with main indicators continued to stay at subdued levels. On a positive note, it is reported that the Chinese government plans to provide around RMB1 trn of low-cost funding to finance the urban village renovation (UVR) and affordable housing programs. That said, the property sector will likely remain under pressure in the coming quarters before it stabilizes.

Highlights

Rates

Core sovereign bond yields fell over the week as inflation surprised to the downside, while hard data point to a softening of economic activity. The US 10-year yield fell 21bps to 4.44%, its German counterpart fell 13bps (to 2.59%), and the UK gilt fell more, by 23bps to 4.10%. This downward movement was in large part driven by a downward repricing by market participants of the Fed’s and ECB’s policy rate path in 2024. Current market expectations imply that rate cuts could happen as soon as next Spring and total 100bps next year while the probability for further hikes was erased after the CPI releases. Instead, investors moved to ratchet up the likelihood of a rate decrease, with the prospect of a cut by May soaring from 23% on Monday to 77% at the end of the week. The next FOMC meeting is expected to Dec. 13th with another jobs report and CPI report before that. In this regard, Fedspeak was cautious. Richmond Fed President Barkin said that “I’m just not convinced that inflation is on some smooth glide path down to 2%”. Chicago Fed President Goolsbee indicated that while people are "coming back to the job market" there is still a way to go. He pointed to housing costs as a key focus going forward and added that “commercial real estate remains an area of concern.” At the same time, the pricing of more dovish central banks and weaker economic growth has led to a fall in inflation-linked bond yields, with the 10-year US TIPS standing at 2.15% after having reached more than 2.5% in the past weeks. Lower oil prices have also led to falling market-based inflation expectations. Euro periphery sovereign bonds spreads have narrowed in recent weeks, with the 10-year BTP-Bund spread reaching 175bps after having shot up to 200 bps in late Oct. Moody’s was the last rating agency to review Italy’s rating and is at risk of downgrading it to high-yield. US and euro credits have benefitted from the recent rally on equities with spreads tightening close to the recent lows. Despite the positive mood, it is mostly IG names that rallied over the week, as US HY spreads were flat. The riskiest credits (rated CCC and lower) lagged the recent rally. The spread differential between BBBs and CCCs shot up to historically elevated levels and in euro HY the current level is even consistent with past severe market turmoil. Market participants still seem to differentiate between the weak companies that could face higher risks of defaults in the current environment of elevated funding costs, and the ones that are solid enough to cope with it.

What to watch

• Monday: Germany PPI (Oct)
• Tuesday: US Existing home sales change (Oct.), FOMC Minutes
• Wednesday: UK BoE monetary policy hearings; US Initial Jobless Claims (Nov 17), Durable goods order (Oct.), Michigan consumer sentiment index (Nov.), UoM 5-year inflation expectations (Nov. 17); Eurozone Consumer confidence (Nov.)
• Thursday: Eurozone HCOB PMI (Nov.); UK S&P PMI (Nov.); Eurozone ECB monetary policy meeting accounts
• Friday: Japan CPI (Oct.); Germany GDP (Q3), IFO reports (Q3); US S&P PMI (Nov.); UK Gfk consumer confidence (Nov.)