Is inflation really receding?

Is inflation really receding?
  • Can the Fed afford to slow down?
  • Europe’s slowdown fears
  • How much risk will the BoE take?
  • China’s cautionary Covid tale
  • The continuing crypto exchange saga 
  • Key data for the coming week

S&P 500   9.92% QTD and  17.31% YTD
Nasdaq 100   4.78% QTD and  29.56% YTD
Dow Jones Industrial Average   16.96% QTD and  7.55% YTD
NYSE   13.65% QTD and  10.79% YTD

Stoxx 600   12.47% QTD and  10.45% YTD
DAX   17.72% QTD and  10.22% YTD
CAC 40   15.59% QTD and  6.88% YTD
IBEX35   12.54% QTD and  4.86% YTD
FTSE MIB   17.40% QTD and  11.36% YTD
FTSE 100   8.64% QTD and  1.42% YTD

MSCI World Index   11.36% QTD and  18.36% YTD
Bitcoin   1.39% MTD and  63.67% YTD
Ethereum   5.21% MTD and  66.71% YTD

Note: As of 5:30pm EST 7 December 2022

What exactly is the Fed’s gambit? Although inflation appears to be slowing, with the annual inflation rate slowing down for a 4th month in a row to 7.7%in October, the lowest since January, and below forecasts of 8%, the labour market remains tight with unemployment remaining at 3.7% and job openings still very high despite falling to 10.1 million in August of 2022, the lowest since June 2021. Wages are continuing to rise with unit labour costs up 2.4% in Q3 and up 5.3% y/o/y. This is continuing to occur despite signs that the economy is slowing: the S&P Global US Manufacturing PMI came in at 47.7 in November, pointing to the first contraction in factory activity since June of 2020. The fall was driven by declines in output and new orders. Fed officials, such as Fed Chair Jerome Powell and Vice Chair for Supervision Michael Barr, have said in that although the pace may slow, the rate will likely remain higher for longer as the Fed remains focused on getting to a sufficiently restrictive rate and staying at a restrictive rate for a long-enough time to bring inflation down to 2%. Markets will be looking closely at the CPI data due next Tuesday for further clues as to whether this hike slowdown may really occur.

The USD bounced around this week on fears that rising interest rates could push the US economy into recession. However, the USD still remains strong, up approximately 9.8% YTD against the GBP, about 7.5% YTD against the EUR, and is up over 18% against the YEN.

This week saw investors turning to more traditional stocks with utilities such as American Electric Power CompanyExelon CorporationSouthern Company, and Evergy, which were all  this week. 

Energy stocks such as Marathon Oil CorporationPhillips 66, SchlumbergerExxon MobilChevron CorporationOccidental PetroleumDevon Energy CorporationEOG Resources and Halliburton were all  this week as oil prices fell to their lowest level this year on Wednesday due to larger-than-expected increases in US distillate stockpiles and despite China’s tentative loosening of Covid policies. According to Refinitiv, the country's crude oil imports in November were up 12% on a y/oy/ basis and reached their highest in 10 months. Oil has been edging downwards over the past few weeks as investors brace for a slowdown in global growth in 2023.

Tech and growth stocks retreated again this week on growth concerns as fears the Fed may continue to tighten and tip the economy into recession came to the forefront. AppleMicrosoftAlphabetMeta PlatformsAmazonNvidia and Tesla were all .

Eurozone recession may not be enough to stop the ECB. Although Eurozone inflation fell to 10% in November, down from October’s 10.6%, it’s still five times the ECB’s 2% target. More importantly, it is still not clear if inflation has truly peaked in the Eurozone. Governor of the Slovak National Bank, Peter Kazimir, in an interview with Bloomberg on Wednesday, said it was too early to declare the worst of an unprecedented spike in prices was over. ECB President Christine Lagarde warned last Friday against expectations of cooling inflationary pressures citing the risks of climate change, geopolitics, and population growth could pose to the global economy. ECB Vice President Luis de Guindos had said that he expects Eurozone inflation to remain at its current level with a slowdown in the first quarter of 2023. Markets are largely expecting the ECB to raise interest rates by 50 basis points when it meets on 15 December.The ECB has already raised rates by three times this year with the deposit rate currently standing at 1.5%.

Will the BoE risk a deeper and longer recession? With inflation running at 11.1% in the year to October, the highest level in 41 years, the pressure is on for the Bank of England to continue to hike rates. However, given signs of economic slowdown with GDP falling by 0.2% in Q3 likely to fall again for a second consecutive quarter, policymakers such as Swati Dhingra are saying higher rates could lead to a deeper and longer recession, Nevertheless, markets seem to expect the BoE to raise rates by another 50 basis points when it meets next Thursday. The BoE has raised rates from 0.1% to 3% so far this year. Markets are currently pricing in a peak of around 4.5% in 2023 with the economy in recession until mid 2023. However, BoE Governor Andrew Bailey has said that the rate rises will likely be less than what financial markets expect. 

China’s slow reopening. The Chinese government finally appears to be easing Covid restrictions in a bid to calm demonstrators and after the impact of these tight restrictions on the economy have hit both domestic demand and the trade balance. Exports in dollar terms fell 8.7% year on year to $296bn, the biggest drop since the start of the Covid pandemic and well above market expectations of a 3.5% drop. Chinese imports declined 10.6%, the most in two and a half years. Investors are starting to hope that the removal of the harshest restrictions, including quarantine and testing requirements, means that the government will begin to really reopen the constrained economy early next year. However, as Beijing struggles with a fresh Covid outbreak, new modelling revealed by the Financial Times this week showed that as many as 1mn people could die during a “winter wave” of infections given the low efficacy of the Chinese vaccinations which are not based on messenger RNA technology. Chinese authorities are likely to be concerned about the possible impact the easing of restrictions may have on the countryside as million of people are expected to travel back to their rural homes during next month’s lunar new year holiday.

The Crypto exchange implosion is still hitting investors. The consequences of the collapse of FTX are still being felt after Orthogonal Trading, a hedge fund, said it had been “severely impacted by the collapse of FTX,” making it unable to repay on a $10 million crypto loan. According to Bloomberg news, that prompted the entity that runs the lending pool on DeFi protocol Maple to issue a notice of default for all the fund’s active borrowings. FTX founder Sam Bankman-Fried has said he couldn’t explain what happened to billions of dollars that customers sent to the bank accounts of Alameda Research nor could he rule out the possibility that money deposited by FTX customers was in fact lent to Alameda.The US Senate Banking and House Financial Services Committees are holding hearings on FTX's collapse next week and have threatened to subpoena him if he does not appear voluntarily. US Securities and Exchange (SEC) Gary Gensler, in an interview with Yahoo Finance, said that he isn’t waiting for new powers from Congress to enforce securities laws against crypto companies. He also said that FTX may have violated securities laws by not properly segregating customer funds and using customer assets to trade at its affiliated hedge fund, Alameda Research. Meanwhile, a US bankruptcy judge has ordered bankrupt crypto lender Celsius Networks to return crypto worth $50 million to users of custody accounts.

Key data to look out for this coming week 

Tuesday: German Harmonized Index of Consumer Prices data, Eurozone ZEW Economic Sentiment Survey, German ZEW Current Sentiment and Economic Sentiment Surveys.
Wednesday: Eurozone Industrial Production data. 
Thursday: EU leaders summit and ECB Monetary Policy Decision.

Friday: Bank of England’s Consumer Inflation Expectations.
Monday: GDP, Industrial Production and Manufacturing Production data.
Tuesday: Average earnings, claimant count rate and claimant count change, ILO unemployment rate, and Bank of England Financial Stability Report.
Wednesday: CPI, PPI and RPI data, Core Consumer Price Index and PPI Core output data.
Thursday: Bank of England Interest Rate Decision and Minutes.

In the US:
Friday: Michigan Consumer Sentiment Index, PPI data, and University of Michigan 5 year inflation expectations survey
Tuesday: CPI and CPI ex food and energy data.
Wednesday: Fed Interest Rate Decision, Monetary Policy Statement and FOMC Economic Projections.
Thursday: Initial jobless claims, Continuing jobless claims, Retail sales data and the Philadelphia Fed Manufacturing Survey.

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