OPEC vs. Strategic Reserve Fund...
While market expectations had built early last week about a possible early Central Bank pivot, these hopes were dashed last Thursday after 5 Fed officials spoke in unison against the idea. The job report on Friday was actually not that strong but sufficiently so to stoke concerns that the Fed could be harsher than it needs. Most of the strong equity market rally of the first start of the week were subsequently lost.
The job market on Friday showed NFP rising by 263k (250k expected) and even with the fall in unemployment rate which was mostly due to people falling off the labour force which they will have to re-join sooner rather than later, the report was not that strong. Average hourly earnings rose yoy by 5%, in line with expectations.
L. Summers views about the job report were more sanguine. Friday’s jobs report underscored that “we’ve got an inflation problem,” he said. “We’ve got an economy that is too strong” to allow inflation to be going down. “We are headed for a collision of some kind or other, and we’ve just got to manage that collision carefully. And I think the sooner we start managing for some slowdown, the better we’re going to do.”.
Among other key developments last week was the sharp turnaround and 16% rally in oil prices (accompanied by rising commodities more broadly) which followed OPEC decision on Wednesday to deliver a 2mn production cut, starting in November. The US President response was to release another 10mn barrels from the strategic reserve fund which already stood at its lowest level since 1984 and had little dampening effect on prices.
Among the weakest equity sectors last week were real estate (-4.5%) followed by utilities (-2.7%) which underperformed as yields rose.
Two key data are awaited for this coming week; the US CPI (next Thursday) and retail sales (next Friday) for September.
Headline inflation may have slowed (due to lower energy prices last month and easing real estate prices) from 8.3% (for the previous reading) to 8.1% but core inflation (ex food and energy) is expected to have risen to a cyclical high at 6.5% (from 6.3% previously), crippling expectations of an imminent Fed pivot. Those were in any case jointly watered-down last Thursday by 5 Fed officials, causing the market to reconsider the strong equity rally of the first part of last week.
Retail sales are expected to have slowed mom to +0.2% (from +0.3%) as consumers are expected to suffer from three adverse developments; a drawdown in savings, their record use of credit cards (commanding an interest rate charge not of 3.25% but 21%) and the impossibility to refinance (home equity loans) advantageously.
The UN last week asked Central banks to stop hiking rates and we will see what the annual IMF/World Bank meeting talking place in Washington this week will bring as outlook and recommendations.
One subject likely to be at the forefront of preoccupations and discussions is the UK situation…which already drew a stern criticism from the IMF (and US officials) for causing unnecessary troubles.
“Finance officials and central bankers do not want to be distracted from the serious global issues by British problems,” said Adam Posen, a former BOE policy maker and president of the Peterson Institute for International Economics. “This will require Kwarteng to quietly accept demands that the UK government avoid destabilizing markets. If Kwarteng decides to lecture back, then things will go very badly for him.” As the FT noted, it’s still possible that Kwarteng will go on the offensive, noting the damage that surging US interest rates and a soaring dollar are doing to economies around the world.
The market turmoil touched off by Kwarteng’s mini-budget last month is alarming for the IMF, whose role is to ensure global financial and economic stability. Those risks came sharply into view on Sept. 28, when the Bank of England stepped in with emergency purchases of UK bonds. Worries about the UK are widespread, with US officials amplifying the IMF’s critique. US Commerce Secretary Gina Raimondo said world leaders need to take inflation “very seriously and it’s hard to see that out of this new government.” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, weighed in, saying Kwarteng’s measures increase the prospect of a global recession.
Elsewhere in Europe, the euro dropped across the board as the region faces an acute energy crisis, high inflation and recessionary forces and mounting debt issues. European peripheral spreads widened along with the rest of the HY sector. JPY touched a 24 year low as the market questioned how long the Central bank can continued manipulate interest rates lower and hold the dam.
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Over the past week, the S&P500 gained 1,6% (-23,6% YTD) while the Nasdaq100 gained 0,7% (-32,4% YTD). The US small cap index rallied 2,2% (-24,2% YTD). AAPL gained 1,4% (-21,1%).
Cboe Volatility Index dropped -0,8% (82,1% YTD) to 31,36.
The Eurostoxx50 gained 1,6% (-19,3%), outperforming the S&P500 by 0,1%.
Diversified EM equities (VWO) gained 1,8% (-24,9%), outperforming the S&P500 by 0,2%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,5% (18,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,3% (-7,9%).
10Y US Treasuries dropped 5bps (237bps) to 3,88%. 10Y Bunds climbed 9bps (237bps) to 2,19%. 10Y Italian BTPs underperformed rising 19bps (353bps) to 4,71%, underperforming Bunds by 8bps.
US High Yield (HY) Average Spread over Treasuries dropped -54bps (215bps) to 4,98%. US Investment Grade Average OAS dropped -8bps (69bps) to 1,69%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -4bps (90bps) to 1,45%.
Gold rallied 2,1% (-7,3%) while Silver rallied 5,8% (-13,6%). Major Gold Mines (GDX) gained 1,1% (-23,9%).
Goldman Sachs Commodity Index rallied 9,8% (33,6%). WTI Crude rallied 16,5% (23,2%, Z-score 2,1).
Overnight in Asia,,,
S&P500 -11points; Nikkei -0.7%; CSI300 -1%
Asia is mostly lower on the heels of the weak US close.
V. Putin declared the attack on the Crimean bridge that occurred on Saturday as an act of terrorism, blaming the Ukraine secret service for the attack which could open the way for further escalation.
Have a nice week ahead and be good to yourself!
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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