Weekly View - Powell ready to slow

Markets chose to interpret Fed Chairman Jerome Powell’s speech at the Brookings Institute last Wednesday as pointing to readiness on the part of the Fed to slow rate hikes. However, Powell reiterated that the jobs market remained tight, with far more job openings than unemployed workers, and said that the Fed needs “substantially more evidence” that inflation is declining.  Numbers released the following day showing that core PCE inflation rose 0.2% month-on-month in October (and 5.0% year-on-year) would seem to justify Powell’s prudence. While job openings may continue to fall gradually, wage growth will likely continue in the near term, meaning we expect the Fed to continue to hike rises in Q1 2023. Our forecast is for +50bps rate increases in December and February, followed by a +25bps rise in March (to bring the fed funds rate to 5.0-5.25%). US consumer spending for October increased in line with expectations, personal income increased more than expected, and the savings rate dropped to 2.3% (the lowest level since 2005) as consumers spent more money than they earned. With the ISM manufacturing survey for November entering contraction territory for the first time since the onset of covid, this week we will be watching the services ISM for further indications of the US economy’s health. The yields on US Treasuries (on which we are overweight) declined last week, with the 10-year yield ending the week at 3.5%. Last week, Blackstone’s decision to limit withdrawals from its real estate investment fund after a surge of redemption requests and crypto lender BlockFI’s bankruptcy filing served as reminders of the risks out there as tightening financial conditions lead to heightened liquidity concerns.

Headline inflation in the euro area came in at 10.0% year-on-year in November, down from 10.6% in October, fuelling hopes that inflation may have peaked there. But most of the decline was attributable to energy prices, while core inflation remained unchanged at an uncomfortably high 5%. Meanwhile, euro area unemployment fell to a record low of 6.5% in November (at least partially reflecting the EUR200 bn spent on fiscal support). Today, along with an EU ban on seaborne imports of Russian crude, G7 countries the EU plus Australia introduced a USD60/per barrel price cap on Russian oil. Russian is threatening not to sell oil to countries that agree to the cap while OPEC+ has reiterated its plans to reduce oil production by 2 million barrels per day from November until the end of 2023. We are positive on the oil sector. Swiss GDP expanded by 0.2% quarter-on-quarter in Q3, up from 0.1% in Q2. We are neutral Swiss equities. 

Despite further signs of weak business activity, Chinese equities shot up last week on signs that the Chinese authorities were moving faster than planned to dial back on their ‘zero covid’ policy after a wave of protests. However, we expect the path to full re-opening to be bumpy, as a possible surge in infection cases in the near term could overwhelm the health system.

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