2023 Weekly Update

Market update

The S&P 500 closed the week at 4,594.63, +0.77% higher. The Dow Jones closed at 36,245.50, +2.42%, with the Nasdaq higher by +0.38%. The volatility index VIX closed the week at 12.63 up from 12.46. The Euro Stoxx 600 surged +0.81%.

The 10-year UST closed at 4.19% down from 4.47% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -120bps. US Corporate Bond spreads: Investment Grade tightened 4bps at 177bps and High Yield tightened 6bps at 414bps. German 10-year Bunds yield closed at +2.36% down from +2.64% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 158bps and High Yield spreads tightened 7bps to 421bps.

The US Dollar Index (DXY) depreciated -0.13% last week and closed at 103.27. The Euro closed at 1.0884 (-0.560%); the Yen appreciated +1.75%, closing at 146.82 and the Swiss Franc appreciated +1.56%, closing at 0.8692. Gold closed at $2,072.22 appreciating +3.57%. Oil was lower, Brent closed at $78.88 (-2.11%) and WTI at $74.07 (-1.95%).

Macroeconomy

Fedspeak

Lots of fedspeak last week right before the blackout period pre-FOMC meeting scheduled for Dec. 12-13. Markets are pricing in another pause with a 97.7% probability that officials will keep the benchmark rate steady, according to the CME FedWatch Tool. Fed Chair Powell said that while the Fed has made significant progress on bringing inflation down to its 2% target, it’s still prepared to tighten monetary policy further if needed. Powell said that the 11 rate hikes so far have shifted monetary policy “well into restrictive territory” however, the full effects of rate hikes have likely not yet been felt. Hence, Powell said that policy makers are proceeding carefully, making decisions on a meeting-by-meeting basis based on the “totality of the incoming data” and the balance of risks. We heard from other Fed speakers during the week. NY Fed President Williams said: “it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2% longer-run goal on a sustained basis”. Separately, San Francisco President Daly said that “I’m not thinking about rate cuts at all right now”. Richmond Fed President Barkin struck a hawkish tone pointing out that “if inflation is going to flare back up, I think you want to have the option of doing more on rates”. Atlanta Fed President Bostic expressed confidence that the “the downward trajectory of inflation will likely continue”, while Cleveland Fed President Mester said that “monetary policy is in a good place”. Generally hawkish Fed Governor Waller said that he was “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%”. Fed Governor Bowman said that her baseline outlook “continues to expect that we will need to increase the federal funds rate further”.

ECB talk

On the ECB side, we did hear pushback to cut rates from President Lagarde. She reiterated they weren’t thinking about cutting rates, saying that it was “not the time to start declaring victory”, and that they expected “that maintaining interest rates at current levels for a sufficiently long duration will make a substantial contribution to restoring price stability”. She also said that the question of PEPP (Pandemic emergency purchase program) reinvestments “will come probably for discussion and consideration within the Governing Council in the not-too-distant future”. The higher yields of October likely stopped this conversation then but with yields now lower the ECB might feel more comfortable to start thinking of an early exit to these PEPP reinvestments.

US data

Oct. PCE inflation data (the measure the Fed officially targets) showed headline PCE at a monthly 0.0% (vs. +0.1% expected), which brought the y-o-y number down to +3.0%, and the lowest since March 2021. Core PCE was still a bit higher at +3.5% however, looking at the last 6 months alone, core PCE is now down to an annualized +2.5%. US Q3 GDP was revised up. The latest estimate showed annualized growth at a +5.2% (vs. +4.9% before), and it also included downward revisions to PCE and core PCE inflation, confirmed later by the above PCE data.

Europe CPI

Nov. Euro Area flash CPI showed headline annual inflation down to +2.4% (vs +2.7% expected), the lowest since July 2021, and almost back at the ECB’s 2% target. This was partly due to energy prices which are currently down -11.5% y-o-y. Core inflation remained more elevated at +3.6% but this also surprised clearly on the downside (+3.9% expected) with a marked slowdown in the past three months, down from +5.3% as recently as August. At a country level, preliminary Nov. German CPI fell to just +2.3% on the EU-harmonized measure (vs. +2.5% expected), the lowest since June 2021. Earlier in the day, we also had a downside surprise from Spain, where CPI fell to +3.2% (vs.+3.7% expected).

Global employment

US continuing jobless claims were at highest level in almost two years, at 1.927m (vs. 1.865m expected). Seasonals seem to be extremely volatile this year. This coming Friday, US non-farm payrolls data are expected with headline and private payrolls expected at +180k and +160k respectively. Unemployment is expected to hold steady at 3.9% by consensus. In Germany, the registered unemployment rate climbed to a two-and-a-half year high of 5.9%. Japan’s unemployment rate edged down to 2.5% in October (v/s 2.6% expected) while the job-to-application ratio slightly went up to 1.30 after having stayed at 1.29 in the preceding three months. In a separate report, capital spending in 3Q23 advanced +3.4% y/y as expected after a +4.5% gain in the previous quarter.

China PMI

The Nov. Manufacturing Caixin PMI expanded in November, hitting 50.7 (vs. 49.6 expected). That was the fastest expansion in three months and up from 49.5 in October. To highlight, the Caixin PMI stands in contrast to the latest official PMI which shrank for the second consecutive month in November, slipping to 49.4 (v/s 49.8 expected) from 49.5 in October, dragged down by insufficient demand. Additionally, the official non-manufacturing PMI dropped to 50.2 in November (v/s 50.9 expected) from 50.6 in October, recording its weakest level since December 2022. This highlights that more stimulus will likely be required to reinvigorate growth in the world’s second biggest economy.

Highlights

Oil

Oil prices gave up their earlier gains following the conclusion of the OPEC+ meeting. The group agreed additional supply cuts totaling about 900kb/d (Thousand barrels per day) on top of an existing reduction of 1,300kb/d by Saudi Arabia and Russia. However, the move was in the form of “voluntary cuts” by several OPEC+ countries rather than an agreement on reduced production quotas, leaving questions over how disciplined the implementation of the supply curbs will be.

What to watch

• Monday: Switzerland CPI (Nov.); US Factory Orders (Oct.)
• Tuesday: Japan Tokyo CPI (Nov.); China Caixin PMI (Nov.); US ISM services (Nov.), JOLTS Job Openings (Oct.); Reserve Bank of Australia Policy Decision
• Wednesday: US ADP employment change (Nov.), Trade Balance (Oct.); Eurozone Retail Sales (Oct.); Germany Factory Orders (Oct.); Bank of Canada Rate Decision
• Thursday: Germany Industrial production (Oct.); Switzerland Foreign Currency Reserves (Nov.); China Trade Balance (Nov.); Two-day EU China summit in Beijing
• Friday: Germany HICP (Nov.); US Change in Nonfarm Payrolls (Nov.), Unemployment Rate (Nov.), University of Michigan Sentiment (Dec.,Prel.); China CPI and PPI (Nov.); Reserve Bank of India Rate Decision