More evidence required before pivots

More evidence required before pivots
  • The Fed will go higher for longer
  • Europe’s monetary and energy conundrum
  • The BoE’s balance
  • Regulators get serious
  • ​Key data for the coming week

S&P 500   12.10% QTD and  15.66% YTD
Nasdaq 100   7.04% QTD and  28.04% YTD
Dow Jones Industrial Average   18.74% QTD and  6.14% YTD
NYSE   15.01% QTD and  9.72% YTD

Stoxx 600   14.09% QTD and  9.28% YTD
DAX   19.36% QTD and  8.97% YTD 
CAC 40   16.81% QTD and  5.90% YTD 
IBEX35   13.49% QTD and  4.05% YTD 
FTSE MIB   19.01% QTD and  10.14% YTD
FTSE 100   8.73% QTD and  1.51% YTD

MSCI World Index   14.16% QTD and  15.97% YTD
Bitcoin   4.29% MTD and  61.50% YTD
Ethereum   1.21% MTD and  64.45% YTD

Note: As of 5 pm EST 14 December 2022

The Fed strikes again. The Fed raised interest rates by 50 basis points on Wednesday to a 4.25% to 4.5% target range and projected at least an additional 75 basis points of increases by the end of 2023. According to the Fed’s median forecast the targeted federal funds rate is now 5.1% before being cut to 4.1% in 2024. The Fed’s latest projections have inflation remaining above 3% by the end of 2023 and above the 2% until the end of 2025. The median projected unemployment rate is seen rising to 4.6% from the current 3.7% and GDP is forecast to grow by just 0.5% in 2022 and 2023 before rising to 1.6% in 2024 and 1.8% in 2025. According to Chairman Jerome Powell, slower progress on inflation means higher rates for longer. Powell said it was far too soon to think about the Fed cutting interest rates and that the Fed's focus was on returning inflation to its 2% target. He noted that although the inflation data received in October and November showed a welcome reduction in the pace of price increases, it will take substantially more evidence to give confidence inflation is on a sustained downward path. He said that there appears to be a structural problem in the labour market, that companies are likely to hoard labour and that vacancies can come down without layoffs.

The USD bounced around this week on fears that rising interest rates could push the US economy into recession. However, this is not the end for the mighty dollar as it remains buoyed by the Fed’s rate rises and its traditional safe haven status; the GBP is down about 8.2% YTD against the USD, the EUR down approximately 6% YTD, and is up over 17.5% against the YEN.

In anticipation of a continuing rising rate environment, this week saw investors turning to defensive health stocks like ModernaPfizerAbbott LaboratoriesEdwards Lifesciences, and Johnson & Johnson which were all .

Energy stocks had a mixed week as Europe argued over carbon credits and analysts questioned just how quickly Chinese demand will pick up as Marathon Oil CorporationConocoPhillipsSchlumbergerExxon MobilChevron CorporationOccidental PetroleumDevon Energy Corporation, and Pioneer Natural Resources Company managed to recover some ground.  

Tech and growth stocks had a bumpy week as investors reacted to the Fed staying higher for longer. AppleAlphabetMeta PlatformsAmazon, and Nvidia edged upwards while Microsoft jumped up on news that it was buying a 4% stake in the London Stock Exchange Group (LSEG).  Tesla   to its lowest level in more than two years on Wednesday as investors, according to Reuters, lashed out at Musk's distraction from the electric car company following his purchase of Twitter.

Europe’s slowed down by energy. The ECB raised rates another 50 bps on Thursday, its fourth successive rate hike. Although inflation declined to 10% in November from 10.6% in October, new projections have average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023. Inflation is then projected to average 3.4% in 2024 and 2.3% in 2025. The ECB will begin reducing its €5 trillion stock of bonds from the beginning of March 2023 onwards. The ECB stated, "the decline will amount to  €15 billion per month on average until the end of the second quarter of 2023."

It seems that the ECB will, like the Fed, have to keep rates higher for longer. However, in Europe, policy is likely to be tempered by the greater risk of recession as Europe continues to suffer from high energy prices. Eurozone industrial production fell more than expected in October as production was scaled back due to high gas and electricity prices. The continuing disagreement on an energy price cap underlines the disharmony of the bloc’s energy dynamics. Under the European Commission’s original plan, the cap would go into effect when prices on the Dutch TTF hub hit €275 per megawatt-hour for two weeks, and if those prices are more than €58 per MWh higher than liquefied natural gas prices on the global market. However, many countries in the Eurozone have argued that the suggested cap was too high.

The BoE’s need for balance. The Bank of England raised interest rates for a ninth time in a row to a 14-year high of 3.5% on Thursday although UK inflation fell to 10.7% in November from 11.1% in October. Most of that drop came in goods prices due to international supply chain pressures easing, but services inflation held steady at 6.3%. Although inflation may now have peaked, especially as core inflation fell from 6.5% October to 6.3 % in November, the cost of living crisis continues for many as the decline in inflation reflects some of the increases in prices a year earlier dropping out of the annual calculation. As noted by BoE Governor Andrew Bailey, the risks around the projection for inflation peaking are on the “upside” and price growth will remain very high in the next few months. It will take time for some prices to come down; food price rises reached new 45-year highs of 16.5% in November. But with the UK facing the worst growth outlook of the large economies, with the OECD expecting the UK's economy to shrink by 0.4% in 2023 with growth of just 0.2% in 2024, and persistent inflationary pressures, the decision was based on balancing the risk of inflation becoming entrenched against future growth as the economy is now, according to the BoE, in recession. “The majority of the committee judged that, should the economy evolve broadly in line with the November Monetary Policy Report Projections, further increases in bank rate may be required,” Bailey wrote in a letter to Chancellor of the Exchequer Jeremy Hunt. Markets are expecting a peak interest rate of 4.52% in August 2022.

The pressure is now on regulators to protect client money. The collapse in FTX and other crypto exchanges is now being viewed by some as the fault of regulators failing to ensure that the segregation of customer assets and the custody of these assets is clear. However, regulators are saying this is a cross-border jurisdictional issue highlighted by the arrest in the Bahamas this week of FTX co-founder Sam Bankman-Fried who faces allegations of eight criminal violations: conspiracy to commit wire fraud and securities fraud, individual charges of securities fraud and wire fraud, money laundering, and conspiracy to avoid campaign finance regulation, However, even though there will likely be uncertainty surrounding crypto exchanges for the foreseeable future, Binance Holdings Ltd. founder Changpeng “CZ” Zhao has, according to Bloomberg, tried to reassure the crypto market by saying that outflows from Binance, the largest cryptocurrency exchange by trading volume, have “stabilised” while warning employees that the industry’s recovery from FTX’s collapse will be “bumpy.” Binance has sought to reassure investors that it was debt free. It released a proof of reserves report last week that showed it having sufficient crypto assets to balance its total platform liabilities. The report also acknowledged that it wasn’t  a full financial audit that would give a clear view of Binance’s overall financial health.Like FTX, the main arm of Binance is largely unregulated and, according to Coindesk, tracks customer holdings on its own servers rather than on public blockchains.

Key data to look out for this coming week 

Friday: EU leaders summit, German S&P Global/BME Composite, Manufacturing and Services PMI, Eurozone S&P Global Composite, Manufacturing, and Services PMI, Eurozone Harmonised Index of Consumer Prices, Eurozone Core Harmonised of Consumer Prices, 
Monday: German IFO Business Climate, Current Assessment and Expectations surveys, Eurozone labour cost data.
Tuesday: German PPI data. 
Wednesday: German GfK Consumer Confidence survey.

Friday: GfK Consumer Confidence, Retail sales data, S&P Global/CIPS Composite, Manufacturing and Services PMIs.
Thursday: GDP.

In the US:
Friday: S&P Global Composite, Manufacturing, and Services PMI.
Tuesday: Building permits and Housing Starts data. 
Wednesday: Consumer Confidence survey, 
Thursday: Chicago Fed National Activity Index, GDP, Initial jobless claims, Continuing jobless claims, and Personal Consumption Expenditures Prices.

DISCLAIMER: While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

This article is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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