Weekly View - Super Thursday
Last week saw equities give up some of their recent gains as rate decisions rose up the agenda. This week we will have a ‘Super Thursday’ for central banks, with the Swiss National Bank (SNB), Bank of England and European Central Bank (ECB) all taking decisions that day. A day before, the US Federal Reserve will announce its latest policy move. It will have to deal with increasing evidence of a slowdown in the labour market (although it remains strong) at the same time as sticky inflation, with the month-on-month number for producer prices in November stronger than expected. The consumer price index for November will be heavily scrutinised, especially for signs that services inflation remains an issue. All things considered, while we expect that the Fed will raise rates by 50bps, down from 75bps, communication could remain hawkish.
We also expect 50bps hikes from the SNB and ECB. We look forward to the latter providing some clarification on its plans for quantitative tightening and for unwinding some EUR5 trn worth of bond holdings. We expect European bond yields to rise on expectations of new issuance. While we expect to see spread compression between Europe and US government bonds, we are negative European periphery bonds. Yet as Germany commits to large fiscal spending to deal with tough economic circumstances, even the safe-haven status of the Bund is in question. The ECB was clearly looking to set an example on how to resist wage pressure by offering a 2% pay rise to staff (with the staff union threatening to walk out in protest).
China’s National Health Council last week provided clarity on the direction of re-opening, with important relaxation in the covid controls on access to most public areas and domestic travel. High-frequency indicators are pointing to a gradual recovery in activity. Yet we expect reopening to be challenging as most of the population has yet to be immunised against covid. Meanwhile, Chinese trade data for November were very weak. We expect export growth to soften further on waning external demand while Chinese inflation surprised on the downside in November due to weak domestic demand. Yet on the back of reopening and after several years of underperforming we see opportunity for tactical investment in China. The tripling of Taiwanese chipmaker TSMC’s investment in Arizona to USD40 bn bears out our friendshoring theme for 2023, also reflected in President Xi’s visit to Saudi Arabia and the announcement of trade deals involving Huawei, Saudi Aramco and Sinopec. Failed coup plots in Germany and Peru, together with Vladimir Putin’s comments on the increasing risks of nuclear conflict continue to attract attention.