BEWARE OF CENTRAL BANKERS NEXT WEEK

MAXIN ADVISORS Weekly Market Review addresses the major issue of the moment, reviews the market moves of the past week and monitors the evolution of the MAXIN GLOBAL FUND

Beware of Central Bankers Next Week

January 2023 has seen a furious rally in global equity markets for now.
China was again the best performing market this month, Europe started a new leg from already overbought levels by mid-month and finally, the US indexes and particularly tech stocks made significant breakouts this week.

Investors are widely bullish again, as testified by the 75 % rally in TESLA in less than a month, and the bullish narrative of investors is based on declining inflation, an early pivot in monetary policies and hopes for a shallow and short-lived recession ahead.

Clearly, inflation have declined faster than most expected, the US and European economies economies have been surprisingly resilient in the 4th quarter.

However, this sharp rally is coming at a time where the macro economic indicators are showing a sharp deceleration since mid-November and corporate earnings are declining for the first time and at the steepest pace in a decade, leading corporations to lay off staff in record numbers.

Investors are not listening to either the FED or the ECB and are looking optimistically over the valley, betting on improved earnings prospects for stocks next year, despite drastic measures that reveal a much deeper or lasting deterioration in business conditions than would be the case with a simple temporary and cyclical downturn.

Deeper into the economies, retail sales and consumption are plunging globally and the real estate bubble bursting is gaining momentum with prices falling and existing home sales plunging to 2008-era lows.

In fact, the January rally is all about renewed hopes for a pivot monetary policies and with declining earnings and rising stock prices, it has translated immediately into a sharp expansion in P/E ratios

As a result stocks are now priced back near the 2021 bubble highs, which makes no sense given that money market funds are now offering a safe 5% yields, while they were yielding close to zero in 2021.

European stocks are trading near, at, or even higher than at their 2021 peak, as if the war in Ukraine did not take place, inflation was not running at close to10 %, strikes and social movements demanding higher wages were not plaguing Europe and energy and food prices were not eating into consumer’s wallets.

The US indexes have now recovered much of the 2022 downdraft, despite rates being much much higher, inflation still running at 5 to 7 %, and earnings declining by the most since the Great Financial Crisis of 2008.

When analysing facts, on the macro front, the decline in inflation since the summer was primarily to used cars, energy prices and food prices falling, but the Fed is rightly worried about rising services and labor costs and a still tight labor market.

Unfortunately, used cars, energy prices and food prices are all giving signs that they may be bottoming out.
Oil and copper are showing positive configurations with the reopening of China, and there are no signs that wage pressures are abating for now.

So the news of the demise of inflation may be premature and fighting the FED or the ECB may not be the most appropriate posture for investors, particularly as monetary policies work through the financial markets and the recent rally has eased financial conditions materially, something that Central Bankers may not be very happy with.

After the blow-off top in December 2021, equity indexes fell between 20 and 30 % by October as the market began to take the Fed’s inflation-fighting credibility seriously, but have rebounded sharply since then, the US dollar has declined sharply against the yen and euro, Oil fell between August and December and is now giving signs of bottoming out and Bond yields have fallen sharply from 4.3 % to 3.5 % and their future direction are becoming uncertain. All these developments are easing monetary conditions materially.

The problem for the FED is that these loosening financial conditions are potentially fuelling the next wave of inflation and therefore pushing the Fed pivot further out of reach.

Next week, will see the FED policy meeting on the 31st and 1st of February where the market expects it to raise rates by 0.25 % and the ECB holding its press conference where Lagarde is expected to re-affrim its stance to raise rates by 0.50 %.

It is not the first time investors hopes for a pivot are disappointed. We are now seeing the third round of Fed pivot mania after the March/ April and massive July/August rallies both petered out.

And when looking at the history of the past inflationary period in the 1970s, the Fed has taken great pains to push back on market expectations that they’ll pivot and cut rates then, and finally resorted to hike rates massively when inflation started rising again.

Today like then, the market continues to ignore the Fed, pumping money into speculative assets and making bets that corporate profits will recover if interest rates fall ahead..

The January 2023 rally is yet another “Pivot Mania” where investors are betting the house on the FED changing its monetary stance.

They already did twice in 2022, in March / April first and in July August second, the latter being quashed by the Jackson Hole symposium on August 19, which sent equity markets tanking.

As was the case with “Transitory Inflation” it took a long time for economists and investors to realise that there is nothing transitory is the trends of inflation, monetary policies and economic downturns, let alone real estate cycles…

This third “Pivot Mania” will end the way the other two ended and the precise timing of its ending will depend on the FED next week.

Despite the recent decline in inflation and the sobering news in economic trends, the FED may well decide to send a strong message to the markets :

Your irrational ebullience works against the goals we are trying to achieve !

When investors become irrational and disconnected from reality, Dangers abound…
And their recent shift to extreme bullishness sets the stage for the next share downturn when their hopes collide with either monetary or economic realities.

From a technical and fundamental standpoint, the problem is that if the October low was the ultimate low of the bear market, this would have been the shortest and shallowest bear market in history with valuations still at bubble levels, despite the sharpest tightening of monetary conditions of the past four decades. An extremely unlikely scenario.

GMO founder Jeremy Grantham recently issued a warning for investors in 2023, calling stocks accidents waiting to happen, and warning about the future economic consequences of the real estate bubble in the US and abroad.

Famous economist Mohammed El-Erian has argued that the Fed should hike by 50 bps in its meeting next week to a 5% Fed funds rate to help stave off a second wave of inflation.

Morgan Stanley chief strategist Mike Wilson has warned that earnings will not live up to expectations and that markets will sell off. JPMorgan strategist Marko Kolanovic, typically the more bullish foil to Wilson – has turned “outright bearish.” Michael Burry also has taken to Twitter to share his thoughts on why the rally won’t last, comparing the current market to the 2000-2002 bear market that was marked by multiple 20% rallies.

Like us, most of them have targets of 2’800 to 3’200 on the S&P 500 for 2023 and most of them see a deeper recession coming and cautioning that when the excess savings built up during the pandemic run out, the support for the economy will disappear.

Savings at Record Lows

Despite shrinking for two consecutive quarters earlier in the year, US real GDP grew by an estimated 2.1% in 2022, as the economies caught up with the damage sustained during the pandemic and pushed back toward its pre-pandemic trend.

The real trouble is that the economic strength in 2022 came entirely from US consumers spending the savings accumulated during the COVID era where they could not spend and were receiving the “Helicopter Money” printed by Governments.

This massive increase in savings and its subsequent brutal spending in 2021 is what led the resurgence of inflation, also underpinning economic growth in nominal terms in 2021 and 2022.

Today, the situation has reversed considerably. Consumers have run down all the savings accumulated in 2020 and are now saving the least since 2007. They are spending all of their economic earnings and borrowing more on top to maintain their consumption in the face of rising prices.

This is a macroeconomic time bomb as when savings run out, consumption will decrease sharply as it seems to have started doing in the latter part of Q4 2022.

Consumers spending more than they earn causes inflation in the short run and makes the economy increasingly vulnerable to a deep recession in the future. The only other time the savings rate was this low was 2005-2007, coincidentally during the last real estate bubble, and right before the economy imploded.

Real Estate declines cause recessions

The real estate market moves like an aircraft carrier and takes time to turn, but housing prices are already falling steadily from bubble highs in the US and in most European markets. We have developed the analysis of this dynamic at length since we called the peak of the real estate markets in the summer and the news are full of stories confirming the pace at which real estate is collapsing.

Inflation is not dead yet and the FED knows it

There’s a lot of pent-up demand for used cars. Falling used car prices were helping the Fed’s inflation fight, but this has now reversed, according to data from Mannheim. The latest data from Mannheim shows that used car prices are up 1.5% in the first two weeks of January, partially reversing earlier declines.

The US Dollar is much weaker, which will work to push up import prices in 2023 like clockwork. The dollar held down inflation in 2022, particularly in commodities, and if the Fed is seen as backing off hikes in 2023, the dollar will push inflation back up.

With China reopening, oil and copper are off their lows and soft commodities are also pointing upward.
(see charts in the COMMODITY Section below )

All these elements are closely monitored by the FED and the ECB and, combined with the recent rally in asset prices, will push central banks to err on the hawkish side.

Will The Fed Pivot?

Despite calls from Elon Musk and Cathie Wood, the Fed is unlikely to pivot in the near term, and in the case they do, it will only be because the economy has ground to a halt, in which case stocks will be much lower.

Fed funds futures are pricing about 200 bps in rate cuts starting this summer to the end of 2024. The Fed itself is saying that they are going to raise rates and hold them to assess inflation. The Fed’s summary of economic projections “dot plot” indicates that they may be willing to cut rates in 2024 if inflation comes down, but not in 2023.

Core inflation is still running higher than the Fed funds rate. Furthermore, most of the tightening has not really worked its way through the economy yet. The Fed looks at core inflation, and markets celebrated when that came in at 0.3% for December. Even if core inflation continues to come in around 0.3% per month, that still compounds to 3.7% per year, far above the Fed’s 2% target.

Finally, the factors pushing up core inflation– runaway consumer spending and services inflation are still in place. And now, some of the factors that were pushing inflation down (strong dollar, used car market, China lockdowns) are now reversing. Some nasty inflation surprises are likely coming this spring and summer before inflation is finally crushed.

Even if the Fed is more successful at controlling inflation, 3.5% core annual inflation and 5% interest rates aren’t inconsistent if the Fed is serious about achieving its long-run inflation target.

A large portion of the market seems to believe that the Fed will bring interest rates back down and end its quantitative tightening, as evidenced by the lack of compensation in terms of real yields. Inflation breakevens are rising, and real yields are down to around 1% annually for 10-year Treasuries, after being closer to 2% in October.

Historically, the market sets real yields at 2% or higher, and with the Treasury running big deficits and the Fed running a Quantitative Tightening program, it’s hard to see how bond yields (and mortgage rates) won’t push higher again, ratcheting up the pressure on the economy in the months and years to come.

Powell has an interesting choice here on whether to push back on the market’s forceful rally or to let traders know in no uncertain terms that they cannot expect a bailout from the Fed.

Our analysis is that the Fed is once again forced to crush markets’ dreams of a pivot, and will not make the mistake it did with “Transitory” inflation again. As it did in August at Jackson Hole, the messages delivered by the FED and the ECB next week may be way harsher than the market expects.

The economic conditions for today’s rally were set by tighter financial conditions in the fall that led to better inflation numbers. Conversely, the conditions for the selloff in October were set by the panic rally in risk assets over the summer that the Fed had to crush at Jackson Hole.

The more the market bets on a Fed pivot, the less likely it is to happen, and vice versa.

What Happens if the FED Pivots ?

The most interesting part is historical research on past “fed pivots,” and how they have affected the outcome of asset bubbles in the past.

Contrary to the short-sighted conclusions of the market today, when Central Banks do Pivot, asset prices tend to collapse. This is due to the fact that Central Bank only pivot when the economy truly falls into recession or faces a major financial crisis.

Valuations are back to unsustainable levels

Amazon is sitting at a 90x PE and Tesla has risen by 75 % in three weeks. Microsoft gained 10 % when its earnings declined and its CEO is warnings about the dire conditions in the PC market ( -28 %), its core milk cow and in its growth segment ( Azure ). Apple is clearly overvalued with smartphone sales posting their biggest-ever decline.

But even in the more defensive staples and old economy giants, valuations at 25x 26 x are completely disconnected from the sharp decline in their profits and revenues and the single digit growth prospects of the coming years.

What is weird about the current market rally is that it comes in the face of worsening estimates for earnings. There is a clear cognitive dissonance here.

Consumers are very pessimistic about the economy, but they’re collectively spending over 100% of their monthly income. Similarly, a recession is widely expected, but the way stocks are priced is indicating near-exuberance about future earnings prospects! Stocks are priced as if the Fed pivot has already happened.

Stocks like Kimberly Clark have reported that sales are up, costs are up, and volumes are down, indicating pressure on profit margins and unit sales. Microsoft laid off 10,000 and warned about the macroeconomy in its quarterly conference call, leading to whipsawing action in the stock after hours.

The S&P 500 trades for about 18x 2023 earnings estimates, which has only happened twice in the last 50 years, during the tech bubble and during the 2019-2022 bubble. As these earnings estimates are including consumers spending excess savings, and exclude the prospects of any recession, they are most probably completely off the mark..

 If we add to the above the structural trends of public deficits, debt, and demographics that are going to drag down earnings growth going forward, valuations and expectations are irrational.

The S&P 500 should earn about $195 for 2023 as margins continue to shrink without fiscal stimulus propping them up. This sets up the conditions for the S&P to fall by at least 20-25% in 2023.

Finally, and contrary to 2019, 2020 and 2021, Money markets are paying 4.5% now and will be paying 5% or more soon. Investors don’t need to take the risks of over valued stocks by lack of alternative. Today, their is a much better risk/reward alternative.
.

In Conclusion,

There is no doubt that the strength of the rally has taken a lot of investors including ourselves by surprise, not really in the major US indexes which are still trading below their December High, but primarily in US tech and in European Markets.

But when looking at the situation objectively,

THE ONLY REASON WHY EQUITIES ARE RISING IS BECAUSE THEY ARE GOING UP…

And they are going up against the fundamentals and against the logical path of the FED..

And they are back to speculatively High valuation levels…

The SP500 may push higher towards 4’300 at best – another 5 % from current levels – but is setting itself up for a sharp bear leg later in the year…

Far from chasing this irrational rally, investors should take any strength to take profits and even go short in the coming two months.

The FED may even bring that timeframe forward this coming week …

WEEKLY MARKET REVIEW
28 Jan 2023

MAXIN ADVISORS Technical Analysis
Weekly Summary Equities

USA

Europe

Japan

China

Macro Highlights

US Economy Grows More than Expected in Q4
The US economy expanded an annualized 2.9% on quarter in Q4 2022, following a 3.2% jump in Q3 and beating forecasts of 2.6%. Consumer spending rose 2.1%, below 2.3% in Q3 and forecasts of a 2.5% increase. Spending on goods jumped 1.1% led by motor vehicle and parts and spending on services slowed (2.6% vs 3.7%), with health care, housing and utilities, and personal care services leading the rise. Meanwhile, private inventories added 1.46 pp to the growth, after a drop in the previous two quarters, led by petroleum, coal products, chemicals and utilities. On the other hand, the contribution from net trade declined (0.56 pp vs 2.86 pp in Q3), as exports fell 1.3%, led by nondurable goods and imports went down 4.6%. Also, fixed investment declined faster (-6.7% vs -3.5%), led by equipment (-3.7% vs 10.6%). Residential investment continued to contract (-26.7% vs -27.1%), led by new single-family construction and brokers’ commissions. Considering full 2022, the GDP expanded 2.1%. 

US Consumer Spending Falls More than Expected
Personal spending in the US dropped 0.2% month-over-month in December of 2022, worse than market forecasts of a 0.1% fall, and following a revised 0.1% decline in November. High-interest rates and rise in inflation levels started to impact consumer behavior. Spending fell on goods, namely gasoline and motor vehicle and parts and services, mainly housing, air transportation and health care. Adjusted for inflation, personal spending dropped 0.3%.

US PCE Rises 0.1% in December
The PCE Price Index in the United States rose by 0.1 percent month-over-month in December of 2022, the same as in the previous month. Services prices increased (0.5 percent vs. 0.3 percent) while those for goods declined further (-0.7 percent vs. -0.4 percent). Meantime, food prices went up 0.2 percent, following a 0.3 percent gain in November. Year-on-year, the PCE Price Index rose by 5 percent, the least since September 2021.

US Core PCE Inflation Cools in December
Core PCE prices in the US, which exclude food and energy, went up by 0.3% month-over-month in December of 2022, compared to a 0.2% increase in the prior month and in line with market estimates. The annual rate, the Federal Reserve’s preferred gauge of inflation, fell to 4.4% from 4.7% in November, marking the slowest increase in 14 months. Meanwhile, the headline index edged up 0.1% last month, the same as in November. In the 12 months through December, the index increased by 5.0%, the least since September of 2021, and below 5.5% in November.

US Personal Income Up 0.2% in December
Personal income in the United States went up 0.2 percent from a month earlier in December of 2022, following a downwardly revised 0.3 percent increase in November and in line with market expectations. It was the smallest gain since April. The increase primarily reflected increases in compensation and proprietors’ income. The increase in compensation reflected increases in private wages and salaries in both services-producing industries and goods-producing industries. The increase in proprietors’ income reflected an increase in nonfarm income that was partly offset by a decrease in farm income. 

US Consumer Sentiment Revised Higher
The University of Michigan consumer sentiment for the US was revised higher to 64.9 in January of 2023, the highest since April, from a preliminary of 64.6. The gauge for expectations was revised higher to 62.7 from 62 while the current conditions subindex was revised lower to 68.4 from 68.6. Meanwhile, inflation expectations for the year were revised lower to 3.9% from 4% in the preliminary estimate and the 5-year outlook was revised lower to 2.9% from 3%.

US Pending Home Sales Unexpectedly Rise
Pending home sales in the US unexpectedly rose 2.5% month-over-month in December of 2022, the first rise since May, and beating market forecasts of a 0.9% drop. Sales were up in the South (6.1%) and the West (6.4%) but fell in the Northeast (-6.5%) and Midwest (-0.3%). Still, year-on-year, pending home sales sank 33.8%. “This recent low point in home sales activity is likely over. Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market. The new normal for mortgage rates will likely be in the 5.5% to 6.5% range”, said NAR Chief Economist Lawrence Yun. 

US Building Permits at Lowest in 31 Months
Building permits in the United States fell 1.0 percent from a month earlier to a seasonally adjusted annual rate of 1.337 million in December 2022, the lowest level since May 2020, as high inflation and rising mortgage rates hit demand for new housing, revised data showed. Single-family authorizations declined 6.4 percent to a rate of 731 thousand, the lowest since April 2020, while the volatile multi-segment rose 6.3 percent to 606 thousand. Permits were down in the South (-1.7 percent to 740 thousand), Midwest (-12.1 percent to 175 thousand) and Northeast (-2.5 percent to 115 thousand), but were up in the West (9.3 percent to 307 thousand)

Canada Government Budget Deficit Widens in November
Canada’s government budget deficit widened to CAD 3.4 billion in November 2022 from CAD 1.4 billion in November 2021. The government posted a budgetary deficit of CAD 3.6 billion for the April to November period of the 2022-23 fiscal year, compared to a deficit of $73.7 billion reported for the same period a year earlier partly due to higher debt charges. Year-to-date revenues were up 14.8% on a broad-based improvement in income streams. Program expenses were down 13.9%, largely reflecting lower transfers to individuals and businesses as COVID-19 support wound down. Public debt charges increased 35.8% this fiscal year, primarily reflecting higher interest rates and higher inflation adjustments on real return bonds, which have a coupon that is linked to the level of the consumer price index.

Mexico Trade Surplus Widens in December
Mexico’s trade surplus widened to USD 0.984 billion in December of 2022 from USD 0.603 billion in the same month of the previous year, compared with analysts’ expectations of a USD 1.157 billion surplus. Exports increased 3.4 percent from a year earlier to USD 49.323 billion, of which non-oil sales rose 3.5 percent to USD 46.479 billion, and oil exports increased 1.5 percent to USD 2.844 billion. Non-oil exports to the US increased by 2.0 percent, and those to the rest of the world expanded by 11.2 percent. Meanwhile, imports advanced 2.6 percent to USD 48.339 billion on non-oil purchases (3.4 percent to USD 43.254 billion) and a drop in oil imports (-3.8 percent to USD 5.085 billion). For the full year of 2022, the trade account deficit widened by 141.5 percent to -26.421 billion.

Household Lending in Euro Area Continues to Slow 
Loans to households in the Euro Area rose 3.8 percent year-on-year in December of 2022, slowing for a fourth consecutive month to mark the weakest gain since May of 2021 as rising borrowing costs and stubbornly high inflation hit demand. Lending for house purpose went up 4.4%, below 4.6% in November while credit for consumption rose slightly more (3.1% vs 3%). Meanwhile, credit to companies advanced 6.3%, much lower than 8.3% in November. Private sector credit growth including households and non-financial corporations slowed to 4.2% from 5.1%.

Spain Q4 GDP Growth Above Forecasts
The Spanish economy expanded by 0.2% on quarter in the three months to December of 2022, the same pace as in the prior quarter and slightly above market estimates of 0.1%, preliminary estimates showed. Government spending continued to rise (1.9% vs 1.6% in Q3), but both household consumption (-1.8% vs 1.8%) and fixed investment (-3.8% vs -0.6%) declined sharply, reflecting tightened financial conditions and an ongoing cost of living crisis. Regarding net external demand, exports (-1.1% vs 0.4%) fell less than imports (-4.2% vs 3.1%). On a yearly basis, the GDP rose 2.7%, the least in almost two years, but topping market forecasts of 2.2%. Considering the full year of 2022, the Spanish economy grew by 5.5%. The Spanish government predicts expects the GDP growth will slow down to 2.1% in 2023, though analysts expect lower growth between 0.9% and 1.2%.

France Consumer Confidence at 4-Month Low
The consumer confidence in France fell to 80 in January of 2023 from downwardly revised 81 in December of 2022, below market forecasts of 83. It was the lowest reading since September of 2022, as consumers were more pessimistic regarding the personal financial situation in the future (-24 vs -22), the outlook for the standard of living (-64 vs -63) and the propensity to make major purchases (-42 vs -41). Also, the proportion of households considering that prices will be on the rise during the next twelve months decreased (-3 vs -1). On the other hand, unemployment concerns slightly rose (25 vs 24) and future savings capacity is seen lower (-1 vs 1).

Italy Industrial Sales Rebound in November
Industrial sales in Italy rose by 0.9 percent from a month earlier in November of 2022, rebounding after the 0.8 percent decrease in the previous month and a 1.1 percent decline in September. Demand for industrial goods rebounded both for the foreign market (1.3 percent vs -0.2 percent in October) and the domestic market (0.6 percent vs -1 percent). On a yearly basis, industrial sales rose by 11.5 percent, easing from the 12.5 percent jump in October.

Austria Manufacturing PMI Contracts at Softer Pace in January
The Unicredit Bank Austria Manufacturing PMI remained in contraction at 48.4 in January of 2023, pointing to sixth consecutive month of contraction although showing stabilization towards the start of the year. New orders continued to decline notably in January but recorded as weakest in six months, due to tight financial conditions and economic uncertainty among clients. Input cost inflation retreated sharply to its lowest in over two years, while output was moving closer to stabilization due to improved lead times on inputs and a slower fall in new orders. Meanwhile, employment continued to show more ongoing job creations across manufacturing sectors as firms looked to fill job vacancies. Looking ahead, manufacturers turned positive for the first time in eight months.

Irish Retail Sales Stall in December
Retail sales in Ireland stalled from the prior month in December of 2022, holding the downwardly revised 0.9 percent decline in the previous month. Sharp declines in retail activity were recorded for clothing, footwear, and textiles stores (-16.8 percent), electrical goods (-7.7 percent), and furniture and lighting (-5.7 percent). To offset the losses, increased turnover was seen for motor trades (4 percent), and non-specialized stores including supermarkets (1.4 percent). On a yearly basis, retail sales rebounded 0.5 percent from the 3.6 percent decline in November, marking the first growth in retail since April.

Norway Retail Sales Fall 3.6% MoM in December
Norway’s retail trade dropped 3.6% from a month earlier in December of 2022, after a downwardly revised 0.8% gain in the previous month, and surpassing market expectations of 0.7% decrease. Sales declined for most sub-indices, namely ICT-equipment (-15.6% vs 1.2% in November), other household equipment (-8.7% vs 1.8%), automotive fuel (-2.9% vs 3.5%), cultural and recreation goods (-5.2% vs 3.4%), trade not in stores (-1.8% vs 3.6%), other goods (-3.4% vs -1.1%) and non-specialized stores (-2.3% vs -0.1%). Meanwhile, there was no growth in the sales of food, beverages and tobacco. On a yearly basis, retail sales went down by 7.7%, following a 3.6% fall in November. 

Sweden Retail Sales Fall for 8th Month
Sweden retail sales decreased 8 percent year-on-year in December of 2022, following a 7 percent fall in the previous month, and marking the eight straight month of decline in retail activity. Sales continued to decline for both durables (-10.5 percent vs -9.1 percent in November) and consumables (-5 percent vs –3.9 percent). On a monthly basis, retail sales fell 1.8 percent in December, shifting from a 1.5 percent growth in November

Swedish Jobless Rate Falls to 6.9% in December
Sweden’s unemployment rate fell to 6.9 percent in December 2022 from 7.3 percent in the same month last year, as the number of unemployed decreased by 20 thousand to 380 thousand and employment increased by 63 thousand to 5.1 million. The labor force participation rate went up to 73.1 percent from 72.9 percent, while the employment rate rose to 68.1 percent from 67.6 percent. Seasonally adjusted, the unemployment rate was at 7.5 percent in December. 

Brazil Bank Loan Growth Quickens in December
The value of loans in Brazil increased by 1.3% month-over-month to BRL 5.326 trillion in December of 2022, following a downwardly revised 0.9% rise in the prior month. On an annual basis, the value of loans advanced by 14% in December. A broad measure of Brazilian consumer and business default ratios came in at 4.2%, unchanged from the previous month. Outstanding loans in Brazil rose 14% in 2022, down from 16.3% in 2021. 

Argentina Consumer Confidence Rises to 7-Month High
Argentina’s consumer confidence indicator rose for the second straight month to 39 in January of 2023, from 36 in the previous month. It was the highest reading since June last year, as households were a bit less pessimistic about the macroeconomic situation (44.6 vs. 40.3 in December) and their personal condition (40.9 vs. 40.1). Also, the propensity to purchase durable goods increased slightly (30 vs 27.4).

Japan Core Inflation Tops Expectations
The core consumer price index for the Ku-area of Tokyo in Japan jumped 4.3% in January 2023, accelerating the most since 1981 and exceeding forecasts of a 4.2% rise amid broadening inflationary pressure. Tokyo’s core inflation rate, a leading indicator for nationwide price trends, also followed a revised 3.9% gain in December and surpassed the Bank of Japan’s 2% target for the eighth straight month, signaling that upward price movements in the country have not reached their peak yet. This fact added pressure on the central bank to exit its ultra-easy monetary policy through yield target adjustments. Still, BOJ Governor Haruhiko Kuroda continued to deny speculations of a hawkish tilt, highlighting the body must keep supporting the economy until the current cost-push inflation turns into a demand-driven one accompanied by wage growth.

New Zealand Business Confidence Improves
The ANZ Business Outlook Index in New Zealand bounced 18 points to -52 in January 2023, rising from a record low of -70.2 in December as the November rate hike shock and talk of a “deliberately engineered” recession appear to have worn off. However, indicators remained at very subdued levels. Activity measures saw a partial recovery from their December falls, led by manufacturing, services, and retail. Meanwhile, inflation and pricing pressures kept their strong grasp, with pricing intentions and cost expectations moving higher and inflation expectations holding at around 6%. Most indicators improved in January, including Own Activity Outlook (-15.8 in Jan vs -25.6 in Dec), Export Intentions (-5.4 vs -10), Investment Intentions (-13.7 vs -20.5), Employment Intentions (-11.1 vs -16.3) and Profit Expectations (-42.6 vs -52.7).

Australia Producer Prices Rise the Least in 1-1/2 Years 
Australia’s final demand producer price index increased by 0.7% qoq in Q4 2022, slowing from a 1.9% advance in Q3. It was the tenth straight period of growth in the index but the lowest print since Q2 of 2021 amid rising cost pressures. The main positive contributors were the output of building construction (1.6%), expanded thanks to supply chain issues and high demand for finishing stage materials and skilled labor shortages; heavy and civil engineering construction (1.5%), driven by increased costs of diesel and strong demand for skilled labor; and computer and electronic manufacturing (4.2%), influenced by exchange rates. Offsetting the rise were price falls in petroleum refining and fuel (-10%); other agriculture (-7.4%) amid a drop in costs of select commodities after flood events in Q3; and electricity supply, gas supply, and drainage services (-2.6%). Through the year to Q4, producer prices grew 5.8%.

Baltic Exchange Dry Index at 2020-Lows, Posts 4th Weekly Fall
The Baltic Exchange’s main sea freight index, which measures the cost of shipping goods worldwide, was down for the ninth straight session to 676 points on Friday, close to levels last seen during June 2020, amid the seasonal low demand during the Lunar New Year Holiday in China. The capesize index, which tracks iron ore and coal cargo of 150,000 tonnes, lost 15 points, or 2.7%, to a near five-month low of 534 points. Meanwhile, the panamax index, which tracks about 60,000 to 70,000 tonnes of coal and grains cargoes, rose about 0.9% to 1,054 points; and the supramax index added five points to 650 points. The benchmark index slipped 11.4% for the week, notching its fourth consecutive weekly decline. 

The Week Ahead

INFLATION

BONDS

US Treasury Yields Rise After Key Data
The yield on the US 10-year Treasury note trimmed its sharp increase back to the 3.5% mark in late January, but held its increase to hover at the highest level in one week as investors assessed a batch of economic data for hints on whether the US economy may be able to achieve a soft landing as the Federal Reserve is set to continue its tightening campaign. Core PCE price inflation fell to a 14-month low on an annual basis, extending the decrease in consumer prices. Meanwhile, the US GDP expanded by 2.9% in the fourth quarter, beating market expectations of a 2.6% increase and underscoring the resilience of the US economy, adding leeway for the Federal Reserve to extend its hawkish momentum. Still, money markets expect the Federal Reserve to raise its key rate by a softer 25bps next week and end its tightening campaign at 5% in March before cutting the rate in November, compared to the central bank’s pledge of a 5.25% terminal rate for the whole year.

Italian Bond Yields Rise Further
The yield on the Italian 10-year BTP extended its rise to 4.23%, the highest in three weeks, as expectations of aggressive tightening by the European Central Bank continued to pressure bonds in the currency bloc. Money markets widely expect the bank to raise its key rates by 50bps in its policy decision next week. Furthermore, high underlying inflation ramped up bets on another 50bps hike in March. Investors also await signals of a pickup in the pace of quantitative tightening. The bank has already stated it would reduce its EUR 5 trillion bond portfolio by EUR 15 billion per month in the second quarter, and economists anticipate the cap on roll-offs to increase by EUR 5 billion at the start of the third quarter. The closely watched spread between the 10-year BTP and its German counterpart widened past 180bps from the seven-month-low of 175bps in mid-January, indicating the risk in Italian debt has been perceived as smaller.

CURRENCIES

Dollar Steadies
The dollar index steadied near 101.9 on Friday as better-than-expected fourth quarter US GDP numbers raised hopes of a soft landing in the world’s largest economy, while investors cautiously await US PCE data for cues on the Federal Reserve’s interest rate path. The US economy expanded annually by 2.9% in the fourth quarter, beating forecasts for a 2.6% growth. However, there were some signs of challenges to the economy, with most analysts expecting a mild recession by the second half of 2023, supporting bets for a less aggressive tightening from the Fed. Easing US inflation also reinforced the case for a smaller rate hike, with money markets now pricing an over 95% chance of a 25 basis point increase at the next policy meeting. Investors now look ahead to US PCE data, the Fed’s preferred inflation measure, with a lower-than-expected reading likely to pressure the dollar further.

Australian Dollar Hovers 8-Month High
The Australian dollar traded around $0.71, hovering near its highest levels in almost eight months as surging inflation in the country bolstered bets for further central bank policy tightening and as China’s reopening from Covid curbs lifted the global economic outlook. Australia’s annual inflation jumped 7.8% in the December quarter, the biggest increase since 1990 and above market forecasts of 7.5%. The strong reading was more than twice the pace of wage growth and cemented expectations for a 25 basis-points interest rate hike in February. Some analysts previously suggested that the RBA might pause its hawkish campaign after it raised the cash rate by an aggregate of 300 basis points in eight consecutive meetings in 2022, bringing borrowing costs to a 10-year high of 3.1%.

CRYPTO CURRENCIES

EQUITIES

World Indexes

USA

Wall Street Ends Week on Positive Note 
The Dow finished marginally higher on Friday, while the S&P 500 and the Nasdaq 100 were up 0.2% and 0.9% respectively, as investors weighed a batch of economic data ahead of next week’s Federal Reserve meeting.
The US Core PCE inflation, the Fed’s preferred inflation measure, increased by 4.4% in December and marked its smallest annual rise since October 2021, paving way for smaller Fed hikes. US personal spending fell by 0.2% for the second consecutive month in December, due to higher borrowing costs. On the corporate side, American Express soared 10.5% and Visa gained almost 3%, while Intel and Silvergate Capital plunged 6.4% and 3.7%, respectively. Tesla soared 11% on Friday for a 31% weekly gain on its quarterly reports.
For the week, the Dow added 1.6% and the S&P 500 was up almost by 2% while Nasdaq 100 gained 3.3%. Next week, investors await earning results for Meta on Wednesday, and Apple, Google, and Amazon on Thursday. 

US SP 500 Volatility

Americas

Canadian Shares Rise for the 4th Week
The S&P/TSX Composite index closed slightly higher at 20,714 on Friday, the highest since last June, and the fourth straight weekly gain by adding almost 1% on the week. The support came from energy and technology stocks. Cenovus Energy(1%), and Canadian Natural Resources (2%) advanced, while Suncor Energy was muted. Technology added 1.5%, and healthcare was up 0.9%. On the other hand, base metals and financials fell 0.3% and 0.2%, respectively. 

Brazilian Equities Down on Friday
tBrazil’s Ibovespa stock index fell over 1% to below the 113,000 level on Friday, as investors closely watched more economic data from the US while also monitoring the ongoing earnings season. The latest data supported expectations that the Federal Reserve could slow its tightening campaign next week. Locally, the Minister of Finance, Fernando Haddad, created a special group to take care of the tax reform, with representatives from all areas of the ministry. On the business front, the earnings season kicked off on Thursday with the release of Cielo’s upbeat fourth-quarter results, though its shares turned negative (-3.5%). Petrobras was also among the worst performers, down over 2%, with traders still digesting the approval of Jean Paul Prates for the company’s presidency. On the opposite side, SLC Agricola, Taesa and Magazine Luiza were advancing firmly. For the week, the Ibovespa was set to rise roughly 1%

Europe

European Stocks Close Week on Positive Note
European equity markets closed slightly higher on Friday, with the benchmark Stoxx 600 up 0.2% and the German DAX rising a meager 0.1% as investors continued to follow corporate earnings and adopt a more cautious approach ahead of an important week for monetary policy. The BoE and the ECB will provide an update on Thursday and are set to stick with a 50bps increase. Fashion retailer H&M reported a much weaker-than-expected operating profit. Meanwhile, steelmaker SSAB proposed to raise dividends.
On the week, the DAX went up 0.6% and the STOXX 600 added 0.8%.

FTSE 100 Ends Week Flat 
Equities in London were barely flat on Friday, with the benchmark FTSE 100 closing around 7,770 points, as gains among real estate and energy offset losses in the heavyweight materials sector. It was a quiet day on the economic front in the UK. J Sainsbury rallied more than 5% after convenience store retailer Bestway Group said it had purchased or agreed to buy a 3.45% stake in the supermarket giant. On the flip side, Rolls-Royce Holdings and Antofagasta were among the biggest losers, down roughly 3% and 2%. The FTSE 100 stuck in a tight range this week, ending virtually unchanged. 

French Stocks Flat at Near 1-Year High
The CAC 40 index closed virtually unchanged at a near one-year high of 7,097 on Friday, with investors digesting a new batch of corporate earnings and fresh economic data from both the US and Europe. The focus is now turning to the highly-anticipated monetary policy decisions from the Fed, the ECB and the BoE scheduled for next week. On the corporate front, Societe Generale outperformed, rising 4.5%, followed by Saint Gobain (+2.9%), Alstom (+2.8%) and STMicroelectronics (+2.4%). Shares of LVMH ended almost flat after the company’s quarterly results showed flat margins and a 9% rise in sales in the fourth quarter. On the other hand, Airbus slumped 3.6%, after Jefferies downgraded the share from “buy” to “keep” and reduced its price target from 135 to 130 euros. The CAC 40 added about 1.4% this week.

Spain Stocks Muted in Early Trade
The Ibex 35 traded almost flat at 9040 on Friday, following the cautious mood of its European peers, as investors continued to monitor recent data, corporate earnings and braced for important monetary policy updates next week. The Spanish economy grew by 0.2% in Q4 and beat the forecasts. The biggest gains came from Acerinox (2.20%) after the company announced the investment of 244 million dollars in its stainless steel factory in the US. Solid wins were also registered by Banco Sabadell (2.12%) because of yesterday’s positive report and ArcelorMittal (1.37%) because of the company’s $120 million investment round in Boston Metal. The index is on track to gain 1.31% over the week. 

Italian Shares Outperform on Friday
The FTSE MIB index closed a choppy session 0.8% higher at 26,436 on Friday, outperforming other European bourses to notch a 2.6% jump on the week and stretch its rally to the highest in over 11 months with support from tech shares, energy producers, and banks. STMicroelectronics extended Thursday’s 8% surge with a 2.3% jump in the session, continuing to benefit from its guidance upgrade despite the negative results for competitor Intel. At the same time, heavy-weighing banks erased early losses to close firmly in the green ahead of corporate reports for major lenders to be released next week. 

Japan

Japanese Shares lose momentum on Friday
The Nikkei 225 Index rose 0.07% to close at 27,382 while the broader Topix Index added 0.22% to 1,983 on Friday, recovering losses from the previous session and taking cues from a strong lead on Wall Street, as better-than-expected fourth quarter US GDP numbers raised hopes of a soft landing in the world’s largest economy. Investors also digested data showing Tokyo inflation exceeded expectations in January, adding pressure on the Bank of Japan to adjust its policy of ultra-low interest rate further. Strong gains were seen from index heavyweights such as Mitsubishi UFJ (2.7%), Sumitomo Mitsui (2.7%), Shin-Etsu Chemical (4.1%), Fast Retailing (1.5%) and Nippon Steel (1.3%). Meanwhile, shipping firms lagged behind the market, with losses from Mitsui OSK (-3.7%), Nippon Yusen (-4%) and Kawasaki Kisen (-3.1%). The benchmark indexes advanced for the third straight week amid a global equity rally and the BOJ’s firm commitment to massive stimulus.

China

Hang Seng Ends Week on Upbeat Note
Equities in Hong Kong rose 0.54% to finish at an 11-month peak on Friday after trading lower in the morning session, ahead of the reopening of China markets Monday after a week-long Lunar New Year holiday. The Hang Seng posted a 2.7% jump weekly, the fourth straight gain, boosted by growing hopes that the US Fed will slow its tightening path in the coming months amid plenty of risks following faster-than-expected Q4 GDP figures. However, news that Japan and the Netherlands were poised to join the US in limiting China’s access to advanced semiconductor machinery tempered the rise, while investors also focused on the selloff in India’s Adani Group following a short seller’s report from US Hindenburg Research. The tech sector, consumers, and property were higher, while financials traded in the red. Sands China jumped 4.6%, followed by Techtronic Inds. (3.5%), Chow Tai Fook Jewellery (2.5%), Tencent Hlds. (1.6%), KE Hlds. (1.3%), and Meituan (1.2%). 

India

Indian Shares Plummet Amid Adani Scandal
The BSE Sensex sank as much as 1,230 points before closing 830 points down at a three-month low of 59,373 on Friday, booking its worst session in over one month and extending the slide from Wednesday as the fallout for Adani Group shares triggered a broad-based sell-off for Indian equities. Short-selling-focused firm Hindenburg Research published on Wednesday a report detailing accounting fraud and soaring debt levels for companies in the Adani Group conglomerate, driving its shares to plummet and erasing over $50 billion in value. Banks led the losses within the Sensex, pressured by their exposure to Adani Group’s corporate bonds with the State Bank of India sliding over 5%, while ICICI Bank and IndusInd Bank sank 4.5% and 3.3%, respectively, even though brokerages said lender exposure was within manageable limits. Looking forward, investors await the publication of the Union Budget next week

Asia

Singapore Shares Hover at 10-Month High
The STI Index added 15 points or 0.46% higher to 3,393 around midday on Friday, trading at its highest level in nearly 10 months and heading for a 3% jump weekly which would be the second straight gain, buoyed by a positive lead from Wall Street overnight after data showing a resilient US economy boosted sentiment ahead of next week’s Fed policy meetings. A boost to global growth from China’s swift reopening continued to feed risk appetite for riskier assets, amid hopes that Beijing will roll out more fiscal and monetary measures to help the recovery of the economy. Meantime, local data showed that private home prices in Singapore grew by 8.6% last year after increasing by 10.6% in 2021, on the impact of rising mortgage rates and property curbs. Utilities led the gains, jumping around 2%, amid notable rises from real estate, tech, and financials. Mapletree Commercial Trust surged 2.2%, followed by Sembcorp Ind. (2%), Fraser Logistics (1.6%), and Singapore Telecommunications (0.8%). 

Indonesia Stocks Trade at 1-Month Peaks
The equity market in Indonesia rose 46 points or 0.6% to 6,908 in early deals on Friday, hovering at one-month highs and extending gains from the prior session, boosted by a strong Thursday’s session on Wall Street after data showed the US economy prove to be more resilient than expected in Q4 of 2022. The JKSE index is also pointing to the third straight weekly advance following news that Indonesia’s 2022 foreign direct investments jumped 44.2% from the prior year to USD 45.6 billion, linked to inflows to base metal and mining sectors. Meantime, Jakarta said it had in the pipeline a plan by Germany’s BASF and French miner Eramet to invest between USD 2 billion to 2.6 billion in an electric vehicle battery ecosystem and they may break ground this quarter. Financials, utilities, and real estate contributed the most to the gains, with Bank Central Asia jumping 2.4%, while Sumber Alfaria Trijaya, Chandra Asri Petrochemicals, and Vale Indonesia climbed 1.8%, 0.8%, and 0.7%, respectively.

Middle East

Commodities

Energy

WTI Crude Falls Below $80
WTI crude futures reversed earlier gains and fell more than 1% to below $80 per barrel on Friday, as prospects of still strong Russian supply offset better-than-expected Q4 US GDP numbers and hopes of continued demand recovery in top crude importer China. Oil loadings from Russia’s Baltic ports are set to rise by 50% from a month earlier in January as sellers try to meet strong demand in Asia and benefit from rising global energy prices. Traders noted that Urals and KEBCO crude oil loadings from Ust-Luga over Feb. 1-10 may rise to 1.0 million tonnes from 0.9 million in the plan for the same period of January. Meanwhile, OPEC is expected to maintain current oil production levels when they meet next, keeping supply tight. For the week, the US oil benchmark is down more than 2%.

Natural Gas Prices in Europe Down 20% Weekly
European natural gas prices fell for a fifth consecutive session to below €55/MWh on Friday, extending the weekly loss to 20% and holding close to levels not seen since September of 2021, amid hopes of further LNG imports from the US, while milder temperatures are expected to return to Europe next week and storage facilities are about 74% full. Freeport LNG, the second-largest US LNG exporter which has been shut since June 2022 after a fire, started receiving small amounts of pipeline natural gas on Thursday. At the same time, supplies from Norway remained subdued due to planned and unplanned outages while wind-power generation fell in some parts of Europe. Traders also weigh risks of a rise in Asian demand as a cold snap is hitting the Korean Peninsula, northern China and Japan while China’s reopening is seen raising energy demand and competition on the LNG market, thus lifting prices.

Copper

Precious Metals

Gold Edges Down from 9-Month High
Spot gold prices erased gains from the session and dropped to $1,929 per ounce, extending the retreat from the nine-month high of $1,945 touched on January 25th as investors further digested the latest economic data for hints on whether the Federal Reserve will maintain its hawkish stance. The PCE core price index, the Fed’s preferred inflation gauge, rose firmly from the prior month in December. In the meantime, the US GDP growth surpassed expectations in the fourth quarter and weekly unemployment claims fell to a nine-month low, adding tightening leeway for the US central bank. The Fed is expected to scale back the pace of its rate hikes to 25bps next week from 50bps in December, while both the ECB and the BoE are set to stick with a 50bps increase. Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion and vice versa.

Silver Rolling Over
Spot silver closed at $23.6 per ounce after briefly touching a nine-month high of $24.4 on January 16th. Besides increasing the appeal of non-interest-yielding bullion, lower borrowing costs raise demand for silver as an industrial input for goods with high electricity conduction needs, reflected in the recent advance of solar energy equities. Supply concerns also supported silver prices, as COMEX inventories remained under pressure and LBMA stockpiles dropped considerably amid outflows to India.

Palladium Extends Losses to 18-Month Low
Palladium futures extended losses to around $1,620 per ounce, the lowest since December 2021. The metal’s price surge has driven automakers to replace it with cheaper platinum. In fact, Anglo American Platinum said last year that up to a million ounces of palladium could get switched with platinum over the next five years. Data also showed that platinum substitution is estimated to have reached 340 koz in 2022. For 2023 it’s expected to rise to over 500 koz, more than double the figure in 2021 (240 koz). Bank of America forecasted palladium to trade at $1,865 per ounce in 2023, down from $2,126 last year; while ANZ Research projected palladium to pick up to $2,150 by December 2023 from $1,927 in December 2022, helped by better auto growth prospects, and before the drop to $1,600 by December 2024.

Soft Commodities

Lumber Hits Three-Month High
Chicago lumber futures crossed above the $500 per thousand feet mark, the highest since October 2022, supported by tight supplies and prospects of a demand recovery. Last year, a sharp drop in prices and sluggish demand forced North American producers to curb production, leaving inventories low and sparking concerns about a supply shortage during the construction season this spring and early summer. At the same time, homebuilder sentiment showed signs of bottoming out after climbing in January for the first time in a year, mainly due to lower mortgage rates. Signaling what could be a recovery in demand, sales of new homes in the US increased 2.3% month-over-month to a seasonally adjusted annualized rate of 616K in December of 2022, the highest value in four months. Still, the benchmark remains down roughly 70% since its May 2021 peak of around $1,700, when supply chain issues compounded strong demand.

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