2023 Weekly Update

Market update

The S&P 500 closed the week at 4,559.34, +1.13% higher. The Dow Jones closed at 35,390.15, +1.27%, with the Nasdaq higher by +0.97%. The volatility index VIX closed the week at 12.46 down from 13.80. The Euro Stoxx 600 surged +1.39%.

The 10-year UST closed at 4.47% up from 4.44% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -95bps. US Corporate Bond spreads: Investment Grade tightened 7bps at 181bps and High Yield tightened 9bps at 420bps. German 10-year Bunds yield closed at +2.64% up from +2.59% a week before. In Europe, Corporate Investment Grade spreads widened 1bp at 162bps and High Yield spreads tightened 15bps to 428bps.

The US Dollar Index (DXY) depreciated -0.49% last week and closed at 103.40. The Euro closed at 1.0939 (+0.22%); the Yen appreciated +0.13%, closing at 149.44 and the Swiss Franc appreciated +0.30%, closing at 0.8830. Gold closed at $2,000.82 appreciating +1.01%. Oil was lower, Brent closed at $80.58 (-0.04%) and WTI at $75.54 (-0.46%).

Macroeconomy

US economic data

Initial jobless claims (-24k in the week ending 18 Nov.) and continuous claims (-22k in the week ending 11 Nov.) showed larger-than-expected declines following a rebound in the previous weeks. Given that non-seasonally adjusted numbers were higher, it remains to be seen whether this surprise will mark a change in the ongoing trend of labor market loosening as jobless claims remain consistent with subdued payrolls growth in Nov. The University of Michigan consumer survey confirmed the rise in inflation expectations from the preliminary release, including long-term inflation expectations at a 12-year high of 3.2%. Part of the rise seems to have been driven by higher expectations of gasoline prices, which looks at odds with recent developments. Still, an unwelcome development for the Fed which may fuel more hawkish talk going forward.

FOMC minutes

The minutes were very similar to the Fed Chair’s remarks at the press conference. There was a unanimous decision to “proceed carefully” and that further tightening could be needed if inflation were to be persistent. The minutes showed that “participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing”. The FOMC saw aggregate demand moderating “in the face of tighter financial and credit conditions, and labor markets were reaching a better balance". On Quantitative Tightening, some participants noted that the balance sheet runoff could continue even after fed fund policy eased. During a discussion on financial conditions the staff noted that valuations in equities, housing, and CRE were high.

UK budget

The Chancellor presented the Autumn budget based on updated macro projections. Higher nominal GDP growth and fiscal revenues helped generate additional fiscal room of around GBP30bn, above expectations. The Chancellor used this space to announce a set of new fiscal measures: a 2pp decline in payroll taxes (national insurance contributions), a permanent tax credit scheme for companies (full expensing capital allowance previously scheduled to end in 2026), and structural reforms aimed at increasing the participation rate. Also, UK’s Debt Management Office confirmed that GBP237.3bn of government bonds were issued in the 23-24 fiscal year, which was above expectations. Both events contributed to a selloff in rates with 10-year Gilt yields rising by about 18bps on the back of perceived inflation risks over the longer-term while the pricing of BoE rate cuts was postponed into H2 2024 - the chance of a cut by the June meeting was down from 82% to 60%.

Europe PMI

Euro area Flash Composite PMI rose by 0.6 points to 47.1 in Nov., above consensus expectations of 46.8. The improvement was mostly due to manufacturing, with the output index up 1.1 points to 44.3 in Nov. There were some encouraging signs in the most forward-looking components of the euro area manufacturing PMI; new orders, exports orders and backlogs of work all improved in Nov. One downside in the report was the further move down in the PMI employment index. Companies in the services sector recorded a further increase in input and output costs. This consistent with the fact that inflation will take some time to move back to target and will keep the ECB on hold for some time. Overall, PMIs suggest that the worst of the downturn in business activity is behind and that manufacturing activity is bottoming out.

Japan data

Japanese manufacturing PMI continues to moderate to 48.1 in Nov. (from 48.7 in Oct.) amid softening external demand, while services inflation hold up relatively well in expansionary territory at 51.7. On inflation front, core inflation (all items ex-food) edged up in Oct. to 2.9% (from 2.8% in the previous month) on stronger recreational demand, and reduced subsidies on energy. But this will unlikely move the BoJ to rush on exiting its monetary easy policy, as Japanese wage growth (BoJ’s key watching indicator) hasn’t shown sustained momentum so far.

China economy

The Chinese government lately ramped up support for the property sector, which includes 1) offering additional financing support to the selected 50 property developers who are on the “white list”; 2) ensuring unfinished homes delivery, by pressuring banks to provide funding to developers; 3) accelerating the program for faster housing destocking, and; 4) further housing policy easing (including a notable cut in down payment ratio in Shenzhen) to spur demand. In terms of economic activity, the Central Economic Working Conference in December 2023, which set the key macro policy stances for 2024, will be the next key event to watch in China. The policymakers may set a tone of growth target at "around 5%" (official GDP growth target will only be announced in the NPC meeting in March 2024). A step-up in central government-led fiscal stimulus is likely to fuel the recovery in China, while the PBoC may continue to adopt an accommodative monetary policy.

Highlights

European rates

Several ECB officials once again cautioned about the expectation of rate cuts. ECB’s Simkus warned “expectations on ECB rate cuts are too optimistic”, and ECB President Lagarde also stated it was “not the time to start declaring victory on inflation”. Also, Bundesbank President Nagel said that it’d be “a mistake to loosen our monetary policy stance too early”, and Irish central bank governor Makhlouf said, “I would not rule out today that we have to go up another rung”. The account of the ECB’s latest meeting in Oct. said that “the view was held that the Governing Council should be ready, on the basis of an ongoing assessment, for further interest rate hikes if necessary”. This contributed to a selloff in European government bonds, with yields on 10yr Bunds (+6bps), French OATs (+5bps) and Italian BTPs (+4bps) all rising. 10yr Gilt yields (+18bps) saw the biggest move. Investors dial back the more dovish expectations for a rate cut following the US CPI report on Nov. 14. Market pricing for an ECB rate cut by April hit an intraday peak of 93% the week before but was down to 59% by the end of last week. At the Fed, the chance of a cut by May has fallen from a peak of 94% the previous week to 56%.

What to watch

• Monday: China industrial profits (Oct.); US new home sales (Oct.), Dallas Fed manufacturing activity (Nov.)
• Tuesday: Germany GfK consumer confidence (Dec.); France consumer confidence (Nov.); Eurozone M3 (Oct.); US consumer confidence (Nov.), FHFA house price index (Sept.), House price purchase index (Q3), Richmond Fed manuf. index (Nov.), Dallas Fed services activity
• Wednesday: Japan retail sales (Oct.), Industrial production (Oct.); Germany CPI (Nov.); US wholesale inventories (Oct.)
• Thursday: China PMIs (Nov.); Japan Consumer confidence (Nov.); Germany unemployment (Nov.), Retail sales (Oct.); France CPI (Nov.), PPI (Oct.); Eurozone CPI (Nov.), Unemployment rate (Oct.); US personal income & spending (Oct.), Home sales (Oct.), PCE deflator (Oct.)
• Friday: US ISM (Nov.), Total vehicle sales (Nov.); China Caixin manufacturing PMI (Nov.); France budget balance (Oct.)