Weekly house view | The Pandas are back
US President Joe Biden and his Chinese counterpart Xi Jinping met for constructive talks last week, marking an easing in tensions between the superpowers in a welcome development for markets. The meeting was capped by Xi indicating China will send new pandas to the US as “envoys of friendship”. This week brings purchasing manager indexes (PMIs) and Thanksgiving – a fresh consumer health check – after a US retailing giant said last week it saw a “sharper fall-off” in sales during the second half of October and would have to “rethink the health of the consumer”. A smaller-than-expected fall in retail sales last month showed US consumers remain resilient but that consumption growth is slowing. The latest CPI report showed both headline and core year-on-year inflation below expectations in October. This was not the “all clear” for the Fed but it was a step in the right direction and probably closes the door on further rate hikes. Economic slowdown was also apparent in the NFIB October small business survey, which showed a 22nd consecutive decline in its optimism index. The US and other economies are clearly slowing; the key issue is whether they can avoid recession. On the political front, Congress passed a short-term funding bill to fund part of the government until 19 January and other parts until 2 February, 2024. The news flow supported equities, with the S&P 500 gaining 2.3%i (in USD) on the week on the back of 10-year Treasury yields declining to 4.4%. The small cap Russell 2000 index surged 5.5%ii (in USD), helped by the decline in funding costs. In credit markets, investment-grade names rallied, with riskier names lagging. We maintain our preference for high-quality investment-grade bonds.
In Europe, Germany’s top court struck down a 60bn euro budgetary move, dealing another blow to the ruling coalition and raising questions about the feasibility of Berlin's medium-term green spending plans. GDP growth for the wider euro area was confirmed at -0.1% quarter-on-quarter in Q3. We like Bunds given the weaker growth momentum in Europe, and recently added duration. European equities gained 2.9% on the week (in euros). In the UK, inflation declined sharply in October to 4.6% from 6.7% in September, reinforcing our view that the BoE will cut rates at some point mid next year. This week brings the UK government’s fiscal statement.
In China, strengthened momentum continues to be driven by fiscal support. New government bond issuance came in at RMB1.6 trn in October amid the issuance of special refinancing local government bonds and the front-loading of special local government bonds. We continue to look forward to additional policy support from the Chinese government as the recovery is fragile. In Latin America, Argentina is having its “Trump moment” as libertarian Javier Milei won the presidency with 56% of the vote. It remains to be seen whether he can implement promised economic reforms.