2023 Weekly Update

Market update

The S&P 500 closed the week at 4,604.37, +0.21% higher. The Dow Jones closed at 36,247.87, +0.01%, with the Nasdaq higher by +0.69%. The volatility index VIX closed the week at 12.35 down from 12.63. The Euro Stoxx 600 surged +0.13%.

The 10-year UST closed at 4.22% up from 4.20% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -117bps. US Corporate Bond spreads: Investment Grade were unchanged at 177bps and High Yield tightened 6bps at 408bps. German 10-year Bunds yield closed at +2.28% down from +2.36% a week before. In Europe, Corporate Investment Grade spreads tightened 1bp at 157bps and High Yield spreads widened 1bp to 422bps.

The US Dollar Index (DXY) appreciated +0.72% last week and closed at 104.10. The Euro closed at 1.0763 (-1.11%); the Yen appreciated +1.27%, closing at 144.95 and the Swiss Franc depreciated -1.23%, closing at 0.8799. Gold closed at $2,004.67 depreciating -3.26%. Oil was lower, Brent closed at $75.84 (-3.85%) and WTI at $71.23 (-3.83%).

Macroeconomy

Jobs report

Last Friday report showed job gains continue to slow gradually. The Household Survey is noisy, but the decline in the unemployment suggests the labor market remains tight. The report does not meet the high bar for another hike but should reduce the urgency and degree of rate cuts priced by the market, which showed the first rate cut as early as March in recent weeks. Nov. nonfarm payrolls (NFP) came in slightly stronger than expected at 199k (vs. expectation of 185k), and private payrolls added 150k jobs. Returning striking workers at auto plants and in media boosted NFP by around 40k. There were again sizable downward revisions (-35k). Revisions tend to be cyclical, and they have been negative for the past ten months for private payrolls. Excluding the impact of strikes, Nov. showed private job creation continues to slow from its rapid pace earlier this year. Hiring continues to occur predominantly from slower-moving services sectors like healthcare, which added another hefty 93k jobs in Nov. given the structurally stronger need for caretakers. Ex healthcare, private payrolls have been running at a much slower pace of 60k in the past three months. Leisure and hospitality sector saw job gains, but there were losses in retail jobs, consistent with some early signs of sluggish holiday shopping this season. The unemployment rate declined more than consensus expected, from 3.88% to 3.74%. The decline in the unemployment rate was due to strong results from the Household Survey, which showed employment rising by 747k after falling by 348k in Oct. (a still strong 483k adjusted to match the NFP concept). There was also a strong increase in labor supply as labor force participation moved up to 62.8% from 62.7%. Wage growth accelerated to 0.4% m-o-m with the y-o-y growth at 4.0%. Looking at the 3m annualized rate, wage growth is still slowing on trend, but remains inconsistent with the Fed’s 2% target. Hours worked rose to 34.4 from 34.3.

Central banks preview

The Fed FOMC will take place among significant easing in financial markets, inflation slowing but still above the Fed’s 2% target (closely watched gauge of underlying inflation remains at 3.5% y-o-y) and officials pointing more to an extended rates plateau or even another hike. Since June, the quarterly "dot plot" of policymakers' rate projections has shown rates rising another 25bps this year. However, policymakers are expected to hold rates steady for the third meeting in a row and in a new policy statement take stock of data that has largely moved in line with a "soft landing" in which economic activity and job growth slow modestly as inflation steadily declines. Regarding the quarterly update of the dot plot, as policymakers did in Sept., the updated projections are likely to show interest rates will be lower by the end of 2024, focusing attention on the fact that the next move more likely than not is a rate reduction, and triggering debate about when that becomes appropriate. If the FOMC does not hike as expected, Powell will likely push back against market pricing of early rate cuts. Powell is likely to repeat that “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease”. On the European ECB side, investors do not anticipate any policy changes this week. The meeting is expected to be about acknowledging the improvement on the inflation front and that the next move is likely to be a cut. President Lagarde is expected to emphasize that interest rate cuts are not on the immediate horizon and that the bank’s strategy remains reliant on data analysis, with wage growth remaining a risk. A key focus will also be staff projections. PEPP reinvestments could also be discussed. Lastly, the Swiss SNB will probably sound less hawkish than before but still focus on domestic price pressures. A key focus will be the language about FX interventions. Last week, Swiss inflation surprised to the downside in Nov., with the headline rate down to 1.4% y-o-y from 1.7% in Oct. Core rate softened to 1.4% from 1.5% the previous months. The decline was driven by base effects related to covid-sensitive services such as (international) package holidays and hotels as well as energy prices. Housing rents rose by 1.1% q-o-q in Q4 and 2.4% y-o-y. Looking ahead, headline inflation is expected to pick up early next year due to a rise in VAT, as well as in electricity prices and rental prices.

Japan data

Wage growth in Japan picked up to 1.5% y-o-y in Oct. after declining in the previous few months. Most of the rise in wage growth was due to base salary. However, wage growth in Japan still falls behind the rise in inflation. This means the real purchasing power for an average Japanese worker continues to deteriorate, which is down by 7% over the past decade. Japanese real GDP in Q3 was revised down in the second estimate. The economy contracted by 2.9% q-o-q annualized (vs. -2.1% estimated previously). Both household consumption and corporate capex have contributed to the weakness, while a decline in export growth was also one factor. Markets participants are closely watching when the yield curve control and negative interest rate policy will be removed. Investors believe BoJ will stay put in the upcoming Dec. meeting.

Highlights

Market reaction

The S&P 500 posted a 6th consecutive weekly gain for the first time since the pandemic, after US jobs report cemented the soft-landing narrative, although it did push back on the growing speculation about rate cuts. NASDAQ just outperformed over the week, up +0.69%, led by mega cap tech stocks. In the meantime, US HY spreads tightened for a 7th consecutive week, falling -14bps to their tightest level in over 18 months, at 360bps. One effect of the jobs report was it raised the bar for a dovish pivot by the Fed, and expectations for rate cuts next year were dialed back. Fed funds futures pared back the cuts expected by the Dec. 2024 meeting to 111bps, down from 134bps at the beginning of the week (and 125bps as of Thursday). That helped US 10yr Treasury yields jump +7.7bps on Friday, erasing their earlier declines to finish the week up +3.0bps. 2yr yields saw the larger rise, up +18.2bps on the week (and +12.5bps on Friday), whilst the 30yr yield was up +4.8bps on Friday but were down -8.5bps over the five days. Therefore, a sizeable curve inversion playing out as investors remain more sanguine on long-term inflation prospects, but with data questioning the prospects for imminent cuts. And as investors priced out cuts for next year, the US Dollar index also rallied +0.45% on Friday, and +0.72% on the week.

What to watch

• Monday: No major announcements
• Tuesday: Eurozone ZEW survey expectations (Dec.); US CPI (Nov.)
• Wednesday: Japan Tankan manufacturing outlook (Q4); US PPI (Nov.), FOMC rate decision; Eurozone Industrial production (Oct.)
• Thursday: Switzerland SNB policy rate; Eurozone ECB refinancing & deposit rate; Norway Norges Bank rate; UK BoE bank rate; US Initial jobless claims (Dec. 9), Retail sales (Nov.)
• Friday: China Industrial production (Nov.); Eurozone HCOB PMI (Dec.); UK S&P Global PMI (Dec.); USA S&P Global PMI (Dec.)