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  • Marc Bentin

Softer Inflation & Retail Sales…

Updated: Dec 29, 2022

BentinPartner Weekly



With the exception of a November US inflation report that came on Tuesday slightly softer than expected (0.1% MoM vs. 0.3% expected; 7.1% YoY vs. 7.3% expected with core numbers also showing some improvements), global markets were confronted for the rest of the week with the twin negative forces of more coordinated central bank tightening coupled to a fairly hawkish discourse and more evidence of a weakening global economy.


November US retail sales came in surprisingly weak, dropping by -0.6% MoM (vs. -0.2% expected and +1.2% last) reflecting on the negative US economic momentum. Credit spreads widened (HY by 20bps on the week) as Moody’s sanctioned the accelerated credit cycle downturn by raising its speculative grade corporate expected defaults for 2023, warning they could more than quadruple under its pessimist scenario with a base case default rate increased to 4.9% for next November from a forecast of 2.9% for the end of 2022.


While the Federal Reserve tightened at a reduced pace of 50bps as expected, J. Powell press conference surprised as he ironed out a fairly hawkish message. “We have more to do. Where we are missing is on the inflation side. And we are missing by a lot.” “We are seeing a very strong labor market… We are not at a sufficiently restrictive level yet”. Federal Reserve Bank President of San Francisco M. Daly also said policy makers remained committed to lowering inflation and are not close to accomplishing that task.


What was surprising perhaps is that US treasury yields dropped by 10bps in the long end (and -17bps in 2Y notes), essentially further disbelieving the Fed’s hawkish message.


However, the European bond market response to a similar 50bps rate hike decision and similarly hawkish discourse from ECB President Lagarde on Thursday came in sharp contrast, with 10Y German Bund yields increasing by 22bps on the week (to 2.15%) and Italian 10Y BTP yields surging 48bps (to 4.28%), leading Italian officials to lash out at the ECB “crazy” rate rise. The ECB President noted that inflationary pressures were now stronger than in the US.



SNB President T. Jordan after raising rates by 50bps noted that the Swiss inflation of 3% in October/November was receding slightly but remained well above the 0%-2% objective. Just like the cold, there are different impression of cold in function of the wind and the humidity of the air. My inclination is to believe that Swiss inflation feels like something well above 3%.


Equity markets started strong on the better-than-expected US CPI report but an inability to sustain those gains followed by the hawkish Central banks decision and rhetoric (BoE and SNB also raised rates) led risk appetite to retrench meaningfully. Share buy back activity was also reported to be weaker than expected.


Pressure did not abate in the crypto market with outflows from Binance accelerating to USD6bn in the first half of the week as the accounting firm Mazars reportedly halted working on its “proof of reserves” reports for Binance, a process that was aimed at reassuring investors following the downfall of FTX.


President Xi told Gulf Arab leaders early last week that China would work to buy oil and gas in yuan, a move that comes in support of Beijing’s goal to establish a stronger currency footprint and weaken the USD grip on international trade, Reuters reported. In particular at a time of deteriorating relationship between Saudi Arabia and the US, any move or threat by the country to give a growing importance to CNY at the expense of USD will be closely monitored as building evidence that the so-called petrodollar system that has benefited the US so greatly since the 60’s is fading. Despite subdued economic data, CNY gained slightly on the week.


While November wholesale prices rose 9.3% YoY with food and energy prices continuing the increase, more senior BoJ officials are reportedly seeing a case to remove the bank’s cap on bond yields, a shift in narrative that has helped JPY lately but unlikely to materialize before the end of BoJ Governor Kuroda’s term.



As analysts prepare to fold a dismal year for traditional investment strategies across asset classes, Morgan Stanley noted that 2022 turned to be a decent year for systematic factor or quant investing. While Morgan Stanley estimates that US equity markets could continue to sell off in Q1 2023 (all the way to 3000-3300 for the S&P500), “from a quant perspective, significant market swings are likely to favor “trend following” strategies and diverging speed of central bank adjustments may favor “carry” strategies.



 

Click on the Picture below for our latest Leaders & Laggards Report:




Over the past week, the S&P500 sold off by -2,5% (-19,3% YTD, Z-score -2,5) while the Nasdaq100 sold off by -2,8% (-31,1% YTD, Z-score -2,1). The US small cap index sold off by -2,4% (-21,6% YTD, Z-score -2,2). AAPL sold off by -5,4% (-24,2%, Z-score -2,4).

Cboe Volatility Index dropped -0,9% (31,4% YTD) to 22,62.

The Eurostoxx50 sold off by -3,5% (-9,0%, Z-score -2,9), underperforming the S&P500 by-1%.

Diversified EM equities (VWO) dropped -1,6% (-20,1%), underperforming the S&P500 by0,9%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,2% (10,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,3% (-5,2%).


10Y US Treasuries rallied -10bps (197bps) to 3,48%. 10Y Bunds climbed 22bps (233bps, Z-score 2,5) to 2,15%. 10Y Italian BTPs underperformed rising 46bps (313bps, Z-score 2,9) to 4,30%, underperforming Bunds by 24bps.

US High Yield (HY) Average Spread over Treasuries climbed 20bps (174bps) to 4,57%. US Investment Grade Average OAS climbed 2bps (43bps) to 1,43%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 6bps (50bps) to 1,05%.


Gold dropped -0,2% (-2,0%) while Silver dropped -1,1% (-0,4%). Major Gold Mines (GDX) dropped -1,6% (-10,7%). Interestingly, Goldman said it was expecting gold with its real demand drivers to outperform the highly volatile bitcoin over the long term, citing Gold as a “useful portfolio diversifier” against inflation and dollar debasement risks while bitcoin resembles a “risk on high growth tech company stock”.


Goldman Sachs Commodity Index rallied 2,8% (20,1%). WTI Crude rallied 4,6% (-1,2%).

 

As analysts prepare to fold a dismal year for traditional investment strategies across asset classes, Morgan Stanley noted that 2022 turned to be a decent year for systematic factor or quant investing. While Morgan Stanley estimates that US equity markets could continue to sell off in Q1 2023 (all the way to 3000-3300 for the S&P500), “from a quant perspective, significant market swings are likely to favor “trend following” strategies and diverging speed of central bank adjustments may favor “carry” strategies.


 


Overnight in Asia…


  • S&P500 +10points; Nikkei -1.1%; CSI300 -0.5%

  • EU IFO business survey is due out today (expected at 88 from 86.3 last) and US housing data on Tuesday. Japan CPI is due out on Friday (expected at 4% from 3.7% previously).



Marc Bentin, BentinPartner GmbH

Chief Investment Officer

 

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Marc Bentin serves as Economic Advisor to Blue Lotus Management,

a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.


BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.

 

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