2023 Weekly Update

Market update

The S&P 500 closed the week at 4,719.19, +2.49% higher. The Dow Jones closed at 37,305.16, +2.92%, with the Nasdaq higher by +2.85%. The volatility index VIX closed the week at 12.28 down from 12.35. The Euro Stoxx 600 surged +2.37%.

The 10-year UST closed at 3.91% down from 4.23% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -148bps. US Corporate Bond spreads: Investment Grade tightened 9bps at 168bps and High Yield tightened 25bps at 383bps. German 10-year Bunds yield closed at +2.02% down from +2.28% a week before. In Europe, Corporate Investment Grade spreads tightened 19bps at 136bps and High Yield spreads tightened 33bps to 389bps.

The US Dollar Index (DXY) depreciated -1.40% last week and closed at 102.55. The Euro closed at 1.0895 (+1.23%); the Yen appreciated +1.93%, closing at 142.15 and the Swiss Franc appreciated +1.07%, closing at 0.8691. Gold closed at $2,019.62 appreciating +0.75%. Oil was higher, Brent closed at $76.55 (+0.94%) and WTI at $71.43 (+0.28%).

Macroeconomy

Fed meeting

The FOMC signaled a dovish shift by the updated Summary of Economic Projections dot plot. The median FOMC member expects 75bps of rate cuts in 2024 (from 50bps before but from a lower peak). The number of officials seeing risks to inflation as titled to the upside also went down from 14 to 8 (out of 19), with most now seeing risks as balanced. In the statement, there were dovish tweaks on inflation and activity, while the previous hawkish bias was toned down, adding “any” in its reference to “the extent of any additional policy firming that may be appropriate”. Powell confirmed in the press conference that participants no longer expected further hikes, although they did not want to take the possibility off the table. Further, he stated that a “preliminary” discussion around rate cuts took place at the December meeting and offered no direct pushback when asked about recent market pricing. There were one or two elements of caution in his comments, indicating that “no one is declaring victory”. But overall, he struck an optimistic tone on the progress made in fighting inflation, validating a dovish risk-on takeaway. There is a wide dispersion of rates forecasts for 2024, ranging from zero to six cuts. But the market pricing remains more aggressive than the Fed.

European Central Bank

The ECB announced they kept rates on hold as widely expected. But they didn’t echo the more dovish stance from the Fed, and President Lagarde said that “we should absolutely not lower our guard” and that “we did not discuss rate cuts at all”. Alongside that, the ECB also announced that they would reduce the PEPP portfolio by €7.5bn per month on average over H2 2024 and discontinue reinvestments under PEPP by year-end 2024. Nevertheless, the ECB did acknowledge the better inflation picture, dropping the wording from previous statements that inflation was set “to stay too high for too long”. Their latest forecasts also expect weaker inflation, with headline inflation now seen falling to 2.7% in 2024 (vs. 3.2% in September). Looking further out, they even saw inflation falling below target to 1.9% in 2026, but core inflation was still seen at 2.1% then.

Bank of England

The Bank of England struck a mild dovish tone in their own statement. Specifically, they held rates at 5.25%, and three of the nine members on the committee were still in favor of another 25bp hike. The statement also said that monetary policy would “need to be sufficiently restrictive for sufficiently long”, so there wasn’t an equivalent nod to rate cuts like we had from the Fed. Governor Bailey himself pushed back on market expectations, saying that “we are more cautious because we need to see those more persistent elements of inflation, which we see in things like services prices, turn in the right direction quite decisively.”

Swiss National Bank

The Swiss National Bank (SNB) left unchanged its policy rate at 1.75%. Importantly, the SNB dropped the tightening bias in its press statement. A key focus was the language about FX interventions. Here we got subtle changes, with the SNB mentioning that "we are no longer focusing on foreign currency sales. This reflects that monetary conditions are currently appropriate". The SNB revised down its inflation forecast, in particular for 2025. The SNB now sees annual inflation at 2.1% in 2023, 1.9% in 2024 and 1.6% in 2025. Overall, the SNB confirmed that it had finished with rate hikes but gave no clear indication that a rate cut was coming soon, emphasizing instead that monetary conditions are “appropriate at the current level”.

Highlights

Rates reaction

The recent Fed meeting sparked a global bond rally as market participants gained confidence in the Fed's intention to cut rates next year. Both the 2-year and the 10-year sovereign yields fell, with the 10-year yield closing below 4% for the first time since July. The rally was primarily driven by changes in rate path expectations, leading to a decrease in real yields. The market movements were amplified by lower liquidity as the year-end approaches. In particular, 5-year and 10-year inflation-linked yields declined by 40bps and 30bps respectively while inflation expectations, as indicated by inflation breakeven yields, remained relatively flat during the week. Earlier last week, the market anticipated rate cuts by the Fed of almost 100bps until November 2024. Following the Fed meeting, there was a further downward market repricing to reflect expectations of 130bps in cuts for the upcoming year. The market’s dovish stance is more pronounced than the Fed’s dot plot, which suggested 75bps of cuts in 2024. While the ECB and BOE pushed back on Powell’s dovish tone, it did not disrupt the bonds rally. However, there was a slight market repricing for smaller rate cuts from the ECB in 2024 due to a more hawkish tone by Christine Lagarde. Overall, the decline in short-term yield validates the belief that the Fed has concluded its monetary policy tightening, while the movement in long-term yields is positive for markets, indicating eased financial conditions for households and businesses. Hence, credit spreads continued to tighten this week. The US IG spreads remain well below its median, while the European spreads continue to be above its median.

What to watch

• Monday: Germany IFO surveys (Dec.)
• Tuesday: US Building permits (Dec.), Housing starts (Dec.); Japan BoJ policy balance rate
• Wednesday: Germany PPI (Nov.); UK CPI (Nov.), Retail price index (Nov.); US Existing home sales (Nov.), Current account balance (Q3), Conf. Board Consumer Confidence (Dec.)
• Thursday: US Initial jobless claims (Dec. 16)
• Friday: Japan: Natl CPI (Nov); US Personal income & spending (Nov.), Durable goods order (Nov.), New home sales (Nov.)