Weekly View - Trick or treat!
Last week saw two major central banks confirm policy expectations. The Bank of Japan (BoJ) elected to continue with its ultra-loose monetary easing on the same day as prime minister Fumio Kishida announced a new stimulus package worth JPY71.6 trn (USD490 bn). The apparent coordination between the BoJ and government means we believe it unlikely the BoJ will change course in the near term – and certainly not before governor Haruhiko Kuroda’s planned exit in April 2023. Yet the pressure on the BoJ’s yield-curve control means that that we are long the Japanese yen for its medium-term potential.
While the European Central Bank (ECB) hiked rates by another 75 basis points last week, there was a discernible change in tone. The bank emphasised the “substantial progress” its monetary policy had achieved already as well as the downside risks to economic activity. There was an absence of any firm commitment to further hikes over the “next several meetings” and, significantly, a decision on quantitative tightening was postponed until December. But while European economic numbers continue to point to lower growth, inflation indicators remain obstinately high (consumer inflation rose to an annual 7.1% this month in France and to 11.6% in Germany, well above forecasts). Thus, despite its somewhat dovish statement, the ECB’s fight against inflation has a way to go. We are therefore short duration and euro periphery bonds.
US markets may have found some relief in a deceptively good US GDP figure last week (+2.6% annualised in Q3), but the rally in US equities last week owes more to the drop in bond yields that was triggered by renewed speculation over a possible inflexion in the pace of Fed rate hikes in December. Last week’s signalling from the ECB, as well as the Bank of Canada’s move from 75 bps rate hikes to 50 bps, have fuelled this speculation. But we would caution that the personal consumption expenditures price index excluding food and energy, a key measure for the Fed, was still an annual 5.1% in September, and it remains to be seen whether the Fed is happy with the loosening of financial conditions as stocks rise and yields fall. The Q3 earnings season is turning out to be the worst since 2021, with some Big Tech firms turning in particularly worrisome numbers. While oil companies have reported good results, US companies complain of the negative effects of the rampant dollar. With 2023 earnings estimates gradually being revised lower, we could even see negative earnings growth next year. In addition, last week saw inversion of the yield curve between three-month and 10-year US Treasuries—generally a prelude to recession. For these reasons, we are underweight equities overall. Finally, Lula da Silva’s presidential victory could well trigger a short-term rally in Brazilian stocks. But the new president has yet to present a clear economic agenda and Brazil’s finances are increasingly strained.