Recession Ahead ? Most Probably ! But Not Only …

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

Recession Ahead ? Most Probably ! But Not Only …

Most Western equity markets were buoyed in the 4th quarter of 2022 by a global easing of inflationary pressures.

With food prices easing, energy prices sharply lower and real estate prices rolling over, it was only a matter of time for the headline inflation gauges to roll over as well, and the October CPI numbers in the US and China clearly turned down even if the UK and European numbers are still hovering at record highs.

Moreover, we are entering the phase where the base effect is starting to kick-in and will have a naturally dampening effect on price increases ahead.

However, investors should be wary of pinning too much hopes on changes in monetary policy anytime soon; the war agains inflation is far from over…

In the US, the PCE Deflator, the preferred gauge of inflation of the FED is still hovering at 5 % and, more worryingly, the labor market is still strong and labor costs are increasing sharply and surprised economists that were expecting a slowing of the pace of increases.

Labor costs are always a lagging component of inflation, but it is also the most resilient and most difficult to tame. To give a sense of the dangers, Joe Biden signed a bill last week that blocked a planned strike by railroad workers that would have had a devastating impact on the US economy through the paralysis of the logistical chain. The negotiated contract between the Unions and the railroads that has just been passed into law includes a 24% compounded pay increase over five years and five annual $1,000 lump-sum payments for the workers, representing a significant increase in labor costs.

In Europe, inflationary pressures are way more prevalent as can be seen in sharply higher electricity costs across the continent and the prospects of power outages. Europe’s energy complex is heavily disrupted by the war in Ukraine, but the issue has been compounded by the lack of strategic vision of successive Governments who yielded to the pressure of the “Green” parties and sacrificed the energy independence that was at the core of the development of nuclear energy after WW2.

Beyond energy, workers are demanding higher wages almost everywhere to compensate for inflation that is running at double digit rates and the European Central Bank is still way behind the curve in terms of taking interest rates to levels that will make monetary policy restrictive.

in a nutshell, 2023 will probably see lower inflation numbers overall, but also higher interest rates at the same time, and it will probably not be before 2024 that monetary policies will start being eased again.

Equity investors should be far more worried about the looming economic recession …

For now, with relatively strong GDP numbers in the 3rd quarter of 2023, the economic deceleration is still in stealth mode and Strategists and Central Bankers are still hoping that Central Banks will be able to slow inflation without causing a recession. They were also hoping that inflation would be “Transitory” not that long ago…

Unfortunately, all the leading indicators of a looming recession are present, and the writing is on the wall. Actually, they are far more forceful than anything we have seen in the past decades.

Looking at bond markets, the inversion of yield curves has ALWAYS been a leading indicator of economic contractions ahead and the US yield curve is today more inverted than at any time in the past 40 years.
Bond investors may be slow to react, but they are rarely wrong in the direction of the moves and this time around, with inflation numbers at such high levels, long term bond yields at around 3.5 % imply that bond investors expect inflation to collapse from 8 % to 3 % in the couple of years ahead.

Unfortunately, the only way for this to happen is if economic growth collapses brutally, something that very few strategists are daring to predict. With the current rates of growth, unemployment and wages, it is unlikely to see any significant decline in inflation rates any time soon, and some economists are now calling for central banks to revise their inflation targets upwards from 2 to 4 % But even if that was actually done, that would still imply short term rates and bond yields at levels much higher than where we are today.

Either bond investors are totally wrong, and bond yields will rise higher than their 2022 peak in 2023, or economic growth is bound to collapse ahead.

In addition, last week, we had the worst possible leading indicator of a looming recession.

The Chicago MNI Purchasing Managers and Business indicator Surveys measure the sentiment of purchasers at manufacturing, construction and services businesses, and, as such, they are at the very early stage of the economic cycle. Purchasing managers adjust their orders based on what they see happening in overall sales and inventories before the data is published in the economic data or corporate earnings.

Numbers above 50 point to expansion and numbers below 50 represent contractions.

The November figure revealed an extremely sharp collapse to 37.23, way below economists expectations of 47, and a contraction level not seen since the pandemic, a period that saw the US economy contract by 8 % and remain in contraction for three consecutive quarters.

Far more worrying is the fact that the current levels, that are not caused by any exceptional factors such as wars, pandemics or cataclysmic weather, but simply by higher inflation and interest rates, have ALWYAS corresponded to the sharp economic contractions of 2008, 2001, 1983, 1980 and 1974.

En passant, they also corresponded to all the secular bear markets in equities of the past decades.

if purchasing managers and CEO’s are that pessimistic about their businesses ahead, it is because they are already seeing a sharp decrease of sales in VOLUME that is currently masked by the resilience of sales in NOMINAL or Dollar terms, because of inflation.

Whether it is Apple Inc,. Advanced Micro Devices; Amazon or Walmart Mart, revenue growth in DOLLAR TERMS is falling sharply towards 2 to 4 % ahead, meaning that sales in VOLUME are actually declining by 4 to 6 % considering inflation rates at 7 or 8 %.

We are very far from the 29 % revenue growth rates of Apple in 2021 or years before the pandemic where inflation was hovering at 1 to 2 %. This is actually confirmed by the sharp decrease in orders to suppliers that are regularly being announced in the press, or the wave of layoffs that has been hitting not only the tech industry of late, but even more run-of-the-mill manufacturing or service industries.

Purchasing managers adapt their orders, and optimism or pessimism, based on how they see inventories fluctuate. During periods where inventories are stable or decreasing, they tend to be positive. When they are sharply pessimistic, it is because they are witnessing as worrying build-up in inventories due to slower sales, all things that are not yet visible to investors as they are only reported in the quarterly results. This is why those surveys are so important and purchasing managers are the best leading indicator of economic activity

This is the stage where we are at today. The insiders are currently witnessing a sharp decrease in sales in volume and sharp rise in inventories that are not yet being seen by investors. Reducing their orders is a necessity to preserve margins and cash flows.

As they reduce their purchases, all the suppliers down the line see their revenues decline, their margins compress, their cash flow diminish, and ultimately those suppliers also end-up resorting to laying off staff.

People losing their jobs consume less, and even less when they have to pay more for their mortgages or their basic staples such as food or gasoline. And the entire economic cycle turns down until monetary policy eases again helping to boost economic growth again.

Adding to that higher mortgage rates that are pushing real estate prices down, making consumers feel less wealthy and therefore less willing to spend, – the negative wealth effect – and a potential debt spiral at Government levels that could mean higher taxes ahead for both households and corporations, and the economic picture becomes extremely bleak…

The ugly Purchasing managers surveys published last week were obscured by the release of good Q3 economic numbers published at the same time and by the more dovish tone of Jay Powell…

But equity investors should not be fooled by the recent rise in equity markets and hopes that monetary policy will lend a helping hand, they should instead focus on the hard numbers and the harsh realities of the macro dynamics at play to try to fathom the environment ahead

2023 will unfortunately see the WORST POSSIBLE COMBINATION OF MACRO ECONOMIC FACTORS FOR CORPORATE MARGINS AND EQUITY VALUATIONS :

. RISING INTEREST RATES
. DECLINING LIQUIDITY
. ECONOMIC CONTRACTION
. DECLINING REVENUES
. HIGHER LABOR COSTS
. HIGHER FINANCIAL COSTS
. DECLINING FREE CASH FLOWS
. DECLINING EARNINGS

and

DECLINING VALUATIONS as short term bonds provide a safer alternative and higher interest rates decrease the value of future earnings in discounted cash flow models.

The bear market rally that we predicted accurately for the fourth quarter is nearing its end…

We may see another weak attempt at higher equity prices but we actually put a very low probability on its occurrence.

Rather, the Fed and ECB meetings of December 2022, economic data for November and December and, more than anything else, the earnings season of the 4th quarter of 2022 will probably send Western equity markets much lower in the first quarter of 2023.

Weekly Market Review
4 December 2022

MACRO HIGHLIGHTS

World Food Prices Fall again in November
The FAO Food Price Index fell slightly further to 135.7 in November of 2022 from 135.9 in October, sharply below a record high of 159.7 hit in March and above the pre-Ukraine invasions levels as a decline in the cost of cereals, meat and dairy products offset higher prices for vegetable oils and sugar. Cereal prices were down 1.3%, amid a 2.8% decline in wheat prices as Russia rejoined the Black Sea Grain Initiative. Also, prices fell for dairy (-1.2%), namely milk powder; and meat (-0.9%) as increased export supplies of bovine meat from Australia added to already high supplies from Brazil, notwithstanding China’s continuing strong import demand. On the other hand, the cost of vegetable oil was up 2.3%, due to higher international palm and soy oil prices. Finally, sugar surged 5.2%, the first increase in seven months, amid prevailing tight global sugar supplies due to harvest delays in key producing countries and the announcement by India of a lower sugar export quota.

US Wages Growth at 10-Month High, Tops Forecasts
Average hourly earnings for all employees on US private nonfarm payrolls rose by 18 cents, or 0.6 percent, to $32.82 in November of 2022, following an upward revised 0.5 percent increase in October and above market estimates of a 0.3 percent gain. This was the strongest increase in average hourly earnings in ten months. In November, average hourly earnings of private-sector production and nonsupervisory employees rose by 19 cents, or 0.7 percent, to $28.10. Over the past 12 months, average hourly earnings have increased by 5.1 percent, after an upwardly revised 4.9 percent rise in the prior month and well above market forecasts of 4.6 percent.

US Non Farm Payrolls Top Forecasts at 263K
The US economy unexpectedly added 263K jobs in November of 2022, beating market forecasts of 200K, and following an upwardly revised 284K in October. It is the lowest job gain since April last year, as the labour market is normalizing after the pandemic shock. Still, it continues to signal a healthy and tight market, above the pre-pandemic average of 150K-200K jobs created per month. Notable job gains occurred in leisure and hospitality (88K), including a gain of 62K in food services and drinking places; health care (45K); and government (42K), mostly in local government (32K). In contrast, employment declined in retail trade (-30K), namely general merchandise stores (-32K), electronics and appliance stores (-4K), and furniture stores (-3K); and in transportation and warehousing (-15K). Monthly job growth has averaged 392K thus far in 2022, compared with 562K per month in 2021.

US Jobless Rate Unchanged at 3.7% in November
The unemployment rate in the US was unchanged at 3.7 percent in November 2022, matching market expectations and remaining close to September’s 29-month low of 3.5 percent. The jobless rate has been in a narrow range of 3.5 percent to 3.7 percent since March, suggesting that the tight labor market will likely continue to contribute to inflationary pressure in the world’s largest economy for some time to come. The number of unemployed persons rose by 48 thousand to 6.01 million in November, while the number of employed decreased by 138 thousand to 158.5 million.

US Mortgage Rates Fall for 3rd Week
The average rate on a 30-year fixed mortgage decreased for a third straight week to 6.49% as of December 1st 2022, the lowest since mid-September and compared to 6.58% in the previous week, according to a survey of lenders by mortgage giant Freddie Mac. The 15-year fixed-rate mortgage averaged 5.76%, also lower than 5.90% in the previous week. Still, mortgage rates remain more than double the levels a year ago when the 30-year FRM averaged 3.11% and the 15-year one 2.39%. “Mortgage rates continued to drop this week as optimism grows around the prospect that the Federal Reserve will slow its pace of rate hikes. Even as rates decrease and house prices soften, economic uncertainty continues to limit homebuyer demand as we enter the last month of the year”, said Sam Khater, Freddie Mac’s Chief Economist.

Canada Jobless Rate Falls More Than Expected
The unemployment rate in Canada was at 5.1% in November of 2022, decreasing slightly from the 5.2% in the prior month and beating market estimates of 5.3%, signaling that the Canadian labor market remains tight. The number of unemployed individuals fell by 23.8 thousand to 1,049,000, largely due to lower joblessness for women aged lower than 24 years and men aged older than 50. Still, the number of individuals facing long-term unemployment was steady at 174,000. In the meantime, the number of employed individuals rose by 10.1 thousand to 19,114,000, especially among the core working ages. Employment grew in finance, insurance, and rental and leasing (+1.6% to 1,359,600), and information, culture, and recreation (+1.9% to 815,000), offsetting the decline for wholesale and retail trade (-0.8% to 2,863,900). Meanwhile, the labor force participation rate fell by 0.1 percentage point to 64.8%. 

Brazil Industrial Output Unexpectedly Rebounds in October
Industrial production in Brazil rose by 0.3% month-over-month in October of 2022, after two consecutive months of decreases and better than market expectations of no change. In October, only 7 out of 26 industrial branches recorded growth, mostly food products (4.8%) and metallurgy (4.6%). On the other hand, the main negative contributions came from automotive vehicles, trailers and bodies (-6.7%); machinery and equipment (-9.1%) and beverages (-9.3%). Year-on-year, industrial output grew 1.7%, faster than a 0.4% rise in the previous month and slightly above market forecasts of a 1.6% advance. Industrial output in Brazil is still 2.1% below its pre-pandemic level in February of 2020 and 18.4% below the record level reached by the sector in May 2011.

Eurozone Producer Inflation Eases More than Forecast
The producer price inflation in the Euro Area slowed sharply to 30.8 percent year-on-year in October 2022, down from September’s 41.9 percent and August’s all-time high of 43.4 percent, and coming in below market expectations of 31.5 percent. Still, it continued to indicate inflationary pressures across Europe remained high amid a weakening economic outlook and a deepening energy crisis, suggesting there is a need for continued monetary tightening. Energy cost was up 65.8 percent from a year earlier (vs 108.0 percent in September) and intermediate goods prices increased 17.4 percent (vs 18.9 percent in September). Meanwhile, inflation was little-changed for capital goods (7.5 percent vs 7.6 percent) and for durable consumer goods (at 9.8 percent), while picked up for non-durable consumer goods (16.0 percent vs 15.2 percent). Without energy, producer prices rose 14.0 percent year-on-year in October, decelerating from 14.5 percent the month before.

Germany Import Prices Ease in October
Import prices in Germany increased by 23.5% year-on-year in October of 2022, slowing from 29.8% in September and compared to market forecasts of 23.3%. Cost of imported energy surged by 84.1%, mainly natural gas (151.4%), coal (55%) and crude oil (32.6%). Excluding petroleum and petroleum products, prices of imports rose by 21.8%, namely fertilizers & nitrogen (83.2%), paper & cardboard (41.2%) and aluminum & semi-finished products (23.5%). Prices of imported consumer goods increased 14.2%, mainly due to food (25.3%) and capital imported goods were 7.9% more expensive than a year earlier, largely machines (8.8%) and motor vehicles (7.8%). On a monthly basis, import prices fell 1.2%, compared with market forecasts of a 1.7% decline.

German Trade Surplus Narrows in October
The trade surplus in Germany declined to €5.3 billion in October of 2022 from €12.5 billion a year earlier. Exports were up 9.8% year-on-year to €133.3 billion while imports rose at a faster 17.6% to €128.0 billion. On a seasonally adjusted basis, the German trade surplus increased to €6.9 billion from a downwardly revised €2.8 billion in September, as exports fell 0.6% to €133.5 and imports went down 3.7% to €126.6 billion, the biggest fall since January. Sales fell 2.4% to the EU while those to countries outside the EU went up 1.6%, namely the UK (4.1%). On the other hand, shipments to the US declined 3,9% and to Russia 6.0%. Meantime, exports to China showed no growth. Imports from the EU decreased 3.0%, while purchases from non-EU countries grew (4.3%), namely from the US (2.7%), China (0.8%). Imports fell from Russia (1.0%).

Ireland GDP Extends Growth Momentum
Ireland’s gross domestic product grew by 2.3 percent on quarter in the three months leading to September of 2022, picking up slightly from the upwardly revised 2.2 percent expansion in the previous quarter. Growth was supported by a 91.8 percent surge in gross domestic fixed capital formation, extending the 20.2 percent increase in Q2, driven mostly through investment in intangible assets. In the meantime, household consumption expanded by 0.3 percent, more than offsetting the 0.3 percent decline in government expenditure. On the other hand, net foreign demand contributed negatively to the economy as imports jumped by 27 percent, largely due to high energy prices, while exports grew by a slower 4.8 percent. On a yearly basis, the Irish GDP expanded by 10.9 percent, easing from the 12.4 percent increase in Q2.

Spain Unemployment Drops in November
The number of people registering as jobless in Spain fell by 33,512 people, or 1.2 percent, to 2.88 million in November 2022, the lowest in a month of November since 2007. By economic sector, unemployment fell in services (-25,083 people), agriculture (-4,507), industry (-3,783), and construction (-1,924). By region, the biggest declines were reported in the Valencian Community (-15,330), Andalusia (-11,169), and Madrid (-7,757). Compared to November 2021, unemployment has decreased by 301,307 people. Spain added 78,695 net formal jobs to 20.32 million jobs in November, according to seasonally adjusted data, making it the 19th month of job creation in a row, a separate report from the Social Security Ministry showed.

France Industrial Output Lowest Since February 2021
Industrial production in France shrank by 2.6 percent from the previous month in October of 2022, following an upwardly revised 0.9 percent decline a month earlier. It was the lowest reading since February 2021, as output decreased for mining & quarrying, energy, water supply, waste management (-5.6 percent), transport equipment (-1.9 percent) and manufacturing (-2 percent), namely manufacture of coke & refined petroleum (-46.3 percent). Conversely, production increased for construction (1.1 percent). Year-on-year, industrial production went down 2.7 percent, after a 1.6 percent rise in the previous month.

French Government Deficit Narrows in Jan-October
France’s government budget deficit decreased to EUR 143.2 billion in January-October of 2022 from EUR 171.6 billion in the corresponding period of the previous year. Revenues jumped 15.3 percent to EUR 281.2 billion, while government spending rose at a softer 2.9 percent to EUR 424.8 billion. Meanwhile, the Treasury special accounts, which track the balance of inflows and outflows for targeted revenues and outlays, for example receipts from local government, posted a EUR 0.5 billion surplus, compared to a EUR 2.7 gap in the same period a year ago.

Germany Electricity Prices Surge on Lower Speed Wind
Electricity prices in Germany were at €280/MWh in early December, almost 300% higher than the €72 in early November, boosted by wind speeds and colder weather. Hamburg hit the minimum wind speed required for electricity generation at around 5 meters a second, or about 11 miles an hour. At the same time, natural gas prices also rose as stockpiles started to withdraw along with lower temperatures. Elsewhere, France continues to struggle with maintenance works in nuclear power plants while river levels dropped to multiyear lows after the continent experienced a scorching summer. On the political front, Germany announced that it will cap household prices at 40 cents per kWh for 80% of actual consumption. Comparatively, for industrial consumers, electricity will be limited to 13 cents per kilowatt-hour, applied for 70% of the previous year’s consumption.

Italian Electricity Prices Rise to €400
Electricity prices in Italy approached €400 per megawatt hour in December, rebounding by 250% since hitting the 15-month low of €110 on November 1st amid the upswing in European natural gas prices ahead of the winter. Expectations of a colder front and dependency on alternative sources due to the supply halt from Russia drove up natural gas prices for delivery in Italy, ramping up the cost of electricity distributors. Until the first half of 2022, natural gas was responsible for 56% of Italy’s electricity production. Still, demand for energy in households remained robust as Italy’s new right-wing government pledged €30 billion to support households with soaring energy costs, adding to the €75 billion in energy aid from the prior government and reducing people’s propensity to cut back on consumption. Previous shortage concerns due to the natural gas supply halt from Russia lifted Italian electricity prices to a record-high of €650 at the end of August.

Irish Construction Sector Contracts in Q3
Construction output in Ireland fell 4.5 percent from a year earlier in the third quarter of 2022, after two quarters of growth. A decline in production for both residential (-20.4 percent vs 12.5 percent in Q3) and non-residential (-4.5 percent vs 6.9 percent) building offset a rebound in civil engineering works (4.8 percent vs -6.5 percent). On a seasonally quarterly basis, construction output decreased 2.7 percent, following a 2.8 percent drop in each of the previous two quarters.

Portugal Industrial Production Falls the Most in 8 Months
Industrial production in Portugal declined 2% year-on-year in October of 2022, the biggest drop since February, prompted by decreases in non durables (-1.7%), intermediate goods (-2%) and energy (-4.6%). On the other hand, production increased for durable (0.8%) and investment goods (0.7%). Compared to the previous month, industrial output shrank 1.8%. 

Jobseekers in Norway Tumble to 14-Year Low
The number of people registered as out of work in Norway tumbled to 58,007 in November 2022 from an upwardly revised 58,540 a month earlier. The reading pointed to the lowest level of unemployment since September 2008, as jobseekers declined again in most occupational groups led by shop and sales work which fell by 300 persons, followed by office work and service occupations, each with 200 people less. On the other hand, the largest increase in jobseekers was seen from industrial work and people without professional background, both up by 100 persons, respectively.

Cyprus Inflation Rate Eases to 8.7% in November
The annual inflation rate in Cyprus decreased to 8.7 percent in November of 2022, from 8.8 percent in the previous month. Prices slowed for transport (10.7 percent vs 11.9 percent in October); housing & utilities (17.3 percent vs 21.1 percent) and miscellaneous goods & services (4.1 percent vs 3.9 percent). Meanwhile, inflation was steady for restaurant & hotels (at 9.1 percent) and education (1.8 percent) and cost decreased further for communication (-2.4 percent vs -2.3 percent). On the other hand, prices advanced faster for food & non-alcoholic beverages (15.5 percent vs 13.2 percent); furniture & household equipment (7.1 percent vs 6.7 percent); health (0.8 percent vs 0.7 percent); recreation & culture (6.5 percent vs 5.8 percent) and alcoholic beverages & tobacco (1.1 percent vs 1 percent). On a monthly basis, consumer prices went up 0.5 percent, after a 0.8 percent rise in October.

Singapore Factory Activity Shrinks for 3rd Month
The Singapore Manufacturing PMI edged higher to 49.8 in November of 2022 from 49.7 in October, but continued to point to a small contraction in factory activity. Also, the PMI for electronics increased to 49.2 in November from 49.1 in October. “The weaker global demand and China’s Covid-19 containment measures are weighing on domestic demand despite the year-end festive seasons, although there was some respite from lower cost pressures on local manufacturers. Anecdotal evidences suggest that local manufacturers are less optimistic of the economic outlook going forward into the first half of next year”, Sophia Poh, vice-president of industry engagement and development at SIPMM said.

South Korea Inflation Slows to 7-Month Low
Consumer prices in South Korea increased 5% year-on-year in November 2022, rising at the slowest pace since April and coming in slightly below expectations of 5.1% as global energy prices trended lower and the economy slowed. November’s figure also followed a 5.7% gain in October and posted more than 1% below a 24-year high of 6.3% hit in July, in a sign that the Bank of Korea may consider slowing or pausing its tightening campaign. The BOK opted for a smaller 25 basis point rate hike to 3.25% in November after delivering a half-percentage point increase in October, as policymakers try to balance the fight against inflation with economic risks. The central bank has now lifted interest rates by a total of 275 basis points since August last year, and Governor Rhee Chang-Yong said they would continue to hike rates as needed “for some time” which he later clarified as a period of three months.

Australia Retail Sales Fall for 1st Time in 2022
Retail sales in Australia declined by 0.2% mom to AUD 35.02 billion in October 2022, unrevised from the flash data, reversing from a 0.6% gain in September. This was the first drop in retail trade so far this year, as cost pressures and rising interest rates started to weigh on consumer spending. The fall ended a run of nine straight monthly rises, with sales in department stores down the most (-2.4% vs -0.4% in September). Also, trade fell for clothing (-0.6% vs 2.0%), household retailing (-0.5% vs -0.8%), cafes restaurants, and takeaway food (-0.4% vs 1.3%), and other retailing (-0.2% vs 0.2%). Food retailing went up further (0.4% vs 1.0%), however, boosted by flood-related spending and high food prices. Among states, sales fell in the Northern Territory (-1.8%), Tasmania (-1.7%), the Australian Capital Territory (-1.4%), Queensland (-0.4%), New South Wales (-0.1%) and Victoria (-0.1%). Queensland and New South Wales had small falls but saw the largest drops in dollar terms. 

Australia Home Loans Drop 2.9% in Oct
The value of new loans granted for owner-occupied homes in Australia fell 2.9% to A$ 17.2 billion in October 2022 from the previous month, milder than market forecasts for a 4.5% decline and following a revised 4.8% drop in September. Construction of dwellings fell 3% and purchase of existing dwellings dropped 3.8%, while purchase of newly erected dwellings rose 2%. On a geographical basis, the value of new loan commitments for owner-occupier housing fell in New South Wales (-3.4%), Victoria (-2.1%), Queensland (-3.3%), Australian Capital Territory (-10.5%), South Australia (-3.2%), Tasmania (-5.6%) and Northern Territory (-3%), while it rose 1.5% in Western Australia. 

Baltic Exchange Dry Index Falls for 2nd Day
The Baltic Dry Index, which measures the cost of shipping goods worldwide, fell about 1% to 1,324 points on Friday, extending losses for the second straight session. The capesize index, which tracks iron ore and coal cargos of 150,000 tonnes, slumped 3.3% to 1,519 points; and the supramax index, extended its decline for a fifth straight session, shedding 3 points to 1,162 points. Meanwhile, the panamax index, which tracks about 60,000 to 70,000 tonnes of coal and grains cargoes, was up for the seventh day, rising 1% to 1,618 points. The Baltic Dry Index advanced by 11.4% for the week, its biggest rise since October 7th.

THE WEEK AHEAD

As December rolls out, next week will see the release of the US ISM Non-Manufacturing PMI, which is expected to show the services sector activity growth slowed down further. PPI inflation data will be in focus with consensus showing an overall decline to 5.9 %. Investors will also follow factory orders, external trade, and the University of Michigan’s consumer sentiment with a focus on the five-year inflation expectations reading. Finally, earnings season is coming to the end with AutoZone, Broadcom, and Costco Wholesale reporting.

Elsewhere in America, the Bank of Canada is set to hike the borrowing cost by another 50bps while the Central Bank of Brazil will likely keep the rates steady at 13.75%. Canada will also publish the latest trade balance and business confidence data. In Brazil, the inflation rate will be in focus as well as retail sales, business confidence, and S&P Global Services and Manufacturing PMIs. Finally, Mexico will post inflation data and business confidence.

In Europe, final Q3 GDP data is expected to confirm the Euro Area economy expanded the least in the current six-quarter sequence of growth. Also, retail sales across the bloc are set to fall the most in ten months in October and factory orders in Germany are due to drop for the third month in a row. Elsewhere, the inflation rate is set to decrease in both Russia and Turkey. Other data to follow include Global S&P Services PMI for major economies including Spain and Italy; France’s balance of trade; and Switzerland’s unemployment rate. In the United Kingdom, the Halifax house price index, alongside BRC retail sales monitor and S&P Global PMIs will be in the spotlight.

In China, fresh trade data for November is expected to show that both exports and imports have contracted for the second month in a row, deepening concerns of a slowing economy as authorities mull easing strict lockdown rules. The world’s second-largest economy will also publish its November CPI and PPI prints.

In Japan, the spotlight will be on October’s current account and the final result for the third quarter’s GDP.

In Australia, the RBA’s December meeting is expected to bring a third consecutive quarter-point increase in the cash rate. Investors also await third-quarter GDP growth data, set to point to a fourth consecutive quarter of steady growth and October’s trade balance. 

In India, the RBI is expected to deliver a fifth consecutive rate hike, with forecasts expecting a slower 35bps raise after three consecutive 50bps increases. Elsewhere, the Philippines will release inflation data for November and the unemployment rate for October.

INFLATION

BONDS

USA

US Treasury Yields Rise Following NFP
The yield on the US 10-year Treasury note rose above the 3.6% mark from the two-month low of 3.5% touched on December 1st, as a stronger-than-expected US jobs report added to Federal Reserve’s leeway to continue tightening monetary policy. The US economy added a net 263 thousand jobs during November, well above market forecasts of 200 thousand and showing further evidence that the labor market remains tight. On top of that, average hourly earnings surpassed expectations and grew 0.6% on the month, adding to the central bank’s room to fight inflation. Still, US bond yields are set to close the week sharply lower after Fed Chairman Powell said that it may be appropriate to slow the pace of interest rate increases as there are recent data points to a slowdown in the US economy. 

Europe

German 10-Year Bond Yield Rises Back Above 1.8%
Germany’s 10-year bund yield rose back above 1.8% at the start of December, rebounding from a near three-month low of 1.76% hit earlier in the session, after better-than-expected US jobs data trimmed bets that the Federal Reserve will soon slow its aggressive interest-rate hikes. In Europe, the European Central Bank will likely continue its policy tightening path despite the ongoing recession risks. President Christine Lagarde warned that some European governments’ fiscal policies could lead to excess demand, which in a supply constrained economy, might force monetary policy to tighten more than would otherwise be necessary. Recent data showed the rates of consumer and producer price inflation in the Euro Area slowed sharply, but remained well above the ECB’s target. The European Commission expects the Eurozone economy to shrink in Q4 2022 and Q1 2023 amid surging energy prices and rising interest rates.

UK 10-Year Bond Yield Holds at 3.1%
The yield on the UK’s 10-year Gilt hovered around 3.1% at the start of December, remaining close to its lowest level since early September, on hopes that the Bank of England might not end up hiking as aggressively as feared and as the UK’s budget announced last month helped calm the markets following the turmoil triggered by Liz Truss’s mini-budget. Last week, Bank of England Deputy Governor Ramsden said he was backing more interest rate hikes, but would consider cutting rates if the economy developed differently to his expectation. In addition, MPC member Tenreyro said earlier in the month she saw rates on hold next year and then falling in 2024, while Dhingra has warned that an over-tightening of policy could stoke a deep recession. Markets are betting on a 50 to 75 bps increase at the next December meeting. Elsewhere, better-than-expected US job data in November poured cold water on investor expectations of the Fed easing its aggressive monetary policy tightening.

Asia

China 10-Year Bond Yield Pulls Back from One-Year Highs 
The yield on China’s 10-year government bond eased to 2.90%, moving away from a one-year peak of 2.92% reached on November 30th, as hopes increase that China will pivot away from its strict COVID-19 stance following massive unrest. The number of infections has started to decrease, while the authorities announced plans to boost covid vaccination to older people. Meanwhile, the PBoC lowered the reserve requirement ratio for the second time this year on November 25th. However, concerns mount over the country’s outlook and the ability of monetary policy to boost economic recovery effectively. 

EQUITIES

World Indexes

USA

US Stocks Regain Ground
The Sell-off driven by stronger-than-expected jobs reports faded in the afternoon trading on Friday, with the Dow Jones crossing into the positive territory and the S&P 500 and the Nasdaq closing down only 0.2% and 0.1% respectively. On one hand, the Labor Department’s closely watched employment report showed that the economy added 263,000 jobs last month while average hourly earnings unexpectedly rose more than expected cooling expectations that the Federal Reserve will soon slow its tightening campaign. On the other hand, investors took a respite from Fed Chair Jerome Powell’s remarks that confirmed rate hikes would slow starting as early as December. On the corporate side, Marvell Technology tumbled as much as 5% after the semiconductor company missed quarterly revenue and earnings estimates.

For the week, the Dow ended 0.1% higher, while Nasdaq rose 2.1% and the S&P was up 1%. 

Americas

Toronto Cuts Losses
The S&P/TSX Composite index closed down only 0.2% at the 20,500 level on Friday, as investors were reassessing the monetary policy path. On one hand, stronger-than-expected labor data increased bets that central banks could move more aggressively to tighten policy. The Canadian unemployment rate unexpectedly fell by 0.1 percentage point to 5.1% in November, as unemployment fell by over 20 thousand people and over 10 thousand jobs were added, In the meantime, US payroll data showed that 263 thousand jobs were added to the US economy, well above expectations of 200 thousand.

Brazilian Equities Up 6.2 %
Brazil’s benchmark Bovespa stock index rose about 1.5% to above the 112,500 level in a choppy session on Friday, mainly pushed up by shares of real estate companies and Petrobras. Investors continued to monitor negotiations around the Transition PEC, while awaiting ministerial announcements and any developments regarding China’s Covid-19 policy. Meanwhile, a stronger-than-expected US jobs report for November lowered expectations of a softer monetary policy stance by the Federal Reserve. On the domestic data front, industrial output unexpectedly rebounded in October, after two consecutive months of declines and better than market expectations of no change, though still below pre-pandemic levels.
The Ibovespa booked a 6.23% weekly gain.

China

China Stocks Ease on Profit-Taking
The Shanghai ShenZhen Composite fell 0.64 % easing from an 11-week highs as investors took some profits off the table following a strong rally driven by China’s softening stance on Covid. In the latest developments, a top Chinese official hinted at a more moderate approach in fighting the virus, while Beijing announced that it would allow low-risk patients infected with the virus to isolate at home. The Shanghai and Shenzhen indexes ended the week 1.76% and 2.89% higher, respectively. Property stocks led the retreat following a sharp rally in the sector, with notable losses from China Vanke (-3.2%), CCCG Real Estate (-10%) and Poly Developments (-2.5%). Other index heavyweights also declined, including Chong Qing Changan (-1.2%), Guangdong Zhongshe (-7.9%) and China National Software (-6.4%).

Japan

Japanese Shares Fall in Broad Decline
The Nikkei 225 Index dropped 1.59% to close at 27,778 while the broader Topix Index tumbled 1.64% to 1,954 on Friday, hitting their lowest levels in three weeks and resuming this week’s decline, with all sectors finishing in negative territory. Investors also digested mixed US economic data and turned cautious ahead of a key US jobs report that could influence the rates outlook. Meanwhile, markets continued to track Covid developments in China after authorities signaled slight easing of their strict Covid rules. Healthcare and consumer stocks led the retreat, with losses from Eisai Co (-2.3%), Takeda Pharmaceutical (-1.6%), Olympus (-3.2%), Sony Group (-1.3%) and Nintendo (-1.4%). Other index heavyweights also declined, including Fast Retailing (-1.7%), Toyota Motor (-1.4%), Nippon Yusen (-1.2%), Keyence (-2.6%) and Mitsubishi UFJ (-1.2%).

Europe

European Stocks Post 7th Weekly Gain
European equity markets closed slightly lower on Friday, with the benchmark Stoxx 600 down 0.2% due mainly to declines in oil & gas stocks and tech companies which fell 1% and 0.5%, respectively. On the other hand, retailers added 0.6% and chemicals rose 0.4%. For the week, however, the pan-European STOXX 600 climbed 0.6%, the seventh consecutive week of gains. The week was marked by optimism that the Federal Reserve would slow the pace of interest rate hikes, though on Friday a stronger-than-expected US jobs report kept investors on edge. In the Euro Area, both consumer and producer price inflation slowed more than expected. Meanwhile, the German DAX was little changed after data showed the country’s exports fell more than forecast amid soaring inflation, weakening foreign demand and strained supply chains. 

FTSE 100 Ends Posts Third Consecutive Weekly Gain
Equities in London ended Friday’s session virtually flat, with the blue-chip FTSE 100 hovering around the 7,550 level, as gains in the real estate sector offset losses in energy. The index hit a session low of 7,500 points after a stronger-than-expected US jobs report dashed some hopes of a policy pivot. However, it recovered some ground amid a rebound in heavyweight materials shares. Associated British Foods jumped over 4% to lead the FTSE 100, while Harbour Energy and BP were among the biggest laggards, down roughly 2%. The FTSE 100 rose approximately 1% his week, posting a third straight weekly gain. In November, the export-oriented index rallied almost 7%, the best monthly performance since November 2020.

French Stocks Close Higher
The CAC 40 index was down 0.2% to close at 6,743 on Friday, with investors digesting a stronger-than-expected US jobs report for November, which could complicate the Fed’s plans to slow down the pace of interest rate hikes. On the corporate front, Teleperformance was the best performer, rising nearly 3.3%. The French office services and call center company, which has come under pressure in Colombia over its employee relations, said on Thursday it had signed an agreement with UNI Global Union to strengthen workers’ rights to form trade unions and engage in collective bargaining. On the opposite side, Worldline (-2.3%), Stellantis NV (-2.1%) and Sanofi (-1.9%) posted the biggest losses. The CAC 40 index managed to end the week about 0.4% higher.

Madrid Stocks End Lower
The IBEX 35 index fell about 0.3% to close at 8,383 on Friday, halting two straight sessions of gains, in line with its regional peers. Market sentiment weakened after a stronger-than-expected US nonfarm payrolls report dashed hopes of policy easing by the Federal Reserve in the coming months. The latest data indicated the labour market remains strong, however, faster wage growth could put further pressure on inflation. At the same time, the latest economic data for Germany and France raised worries about the eurozone’s economic outlook. Among single stocks, utility and energy shares were the top losers, while Indra outperformed. The IBEX 35 index closed the week 0.4% down.

Italian Stocks Extend Losses
The FTSE MIB index closed 0.3% down to at 24,620 on Friday, declining by the same extent on a weekly basis as stronger-than-expected US payroll data added more room for the Federal Reserve to remain hawkish and pressured world equities. Energy shares led the losses in Milan as investors continued to monitor talks between EU states regarding a price ceiling on Russian seaborne oil services ahead of the start of the embargo on Monday. Tenaris drove the losses for the sector with a 1.6% decline. Policy-sensitive consumer discretionary brands also extended their losses during the session, with Moncler down 3.2%. On the other hand, heavy-weighing banks traded on the green, with Finecobank and Banca Generali adding over 2%. UniCredit underperformed the sector to close near the flatline after announcing some higher labor costs in line with its accord signed with unions this week.

Middle East

India

Indian Shares Retreat from Record
The BSE Sensex closed 420 points lower at 62,870 on Friday, halting an eight-session rally and easing from the record-high hit last session as investors took profits ahead of the US jobs report after the closing bell. Indian equities were also pressured by crude oil prices holding their gains for the week, driving import inflation higher and hampering demand for Mumbai’s heavyweight auto manufacturers. Mahindra & Mahindra led the losses in the sector with a 2% drop, and Hero Moto and Maruti Suzuki followed with 1.5% declines. Meantime, the Reserve Bank of India is set to revise downward the country’s GDP growth for FY 2023 to between 6.5 to 7%, from currently at 7%, amid softening exports and an expected global slowdown next year. On the policy front, economist polls show that the central bank is expected to raise its key rate by 35bps next week, as the RBI’s bulletin signaled expectations that inflation was slowing. Still, the benchmark index ended the week 1% higher.

Asia

CURRENCIES

DXY Jumps after Jobs Report But Closes Lower on the week
The dollar index jumped to 105.5 on Friday, after a strong jobs report renewed expectations for higher interest rates. The US economy unexpectedly added 263K jobs in November of 2022, beating market forecasts of 200K, and following an upwardly revised 284K in October. For the week however, the greenback is still down more than 0.5%, as data released on Thursday showed US PCE inflation slowed to a ten-month low in October and the Fed Chair Jerome Powell said on Wednesday that the Fed could moderate the size of rate hikes as soon as December. Still the gains were short lived.

Sterling Closes at new recent High
The British pound closed at $1.28 at the start of December after gaining more than 5% in November, despite a strong US jobs report. The data showed US employers added more jobs than expected in November, while wage growth picked up to a 10-month high, trimming bets that the Fed will soon slow its aggressive interest-rate hikes. Domestically, investors believe the Bank of England might not end up hiking as aggressively as feared. Last week, BoE Deputy Governor Ramsden said he was backing more interest rate hikes, but would consider cutting rates if the economy developed differently to his expectation. In addition, MPC member Tenreyro said earlier in the month she saw rates on hold next year and then falling in 2024, while Dhingra has warned that an over-tightening of policy could stoke a deep recession. Still, the pound remained close to a recent five-month high of $1.23, as investors welcomed the UK’s budget announced last month.

Canadian Dollar Under Pressure
The Canadian dollar weakened to 1.35 against the dollar, as investors digested the latest jobs report and await the Bank of Canada monetary policy meeting on Wednesday. Data from Statistics Canada showed the economy added 10.1K jobs in November, compared with market expectations of a 5K gain while the jobless rate unexpectedly fell to 5.1%. Money markets expect the Bank of Canada to raise interest rates by 25 bps next Wednesday, after delivering a 50 bps rate hike in October. The central bank unexpectedly slowed the pace of interest-rate hikes as the economy showed signs of a sharp slowdown. The latest data showed that the Canadian economy grew an annualized 2.9% in the third quarter of 2022, beating expectations for a modest 1.5%, but still the weakest reading since Q2 2021.

CRYPTO CURRENCIES

COMMODITIES

Energy

Oil Falls Ahead OPEC+ Meeting, Books Weekly Gain
WTI crude futures fell to $80 per barrel on Friday, as investors await the OPEC+ meeting on Sunday. Despite some speculation that major oil producers could cut output further, the cartel is expected to stick to its latest target of reducing oil production by 2 million barrels per day. The latest data from Baker Hughes showed US oil rig count, an indicator of future production remained unchanged this week. Poland agreed to the EU’s deal for a $60 per barrel price cap on Russian seaborne oil, allowing the bloc to move forward with formally approving the deal over the weekend. For the week, oil rose about 5%, the first weekly gain since early November, benefiting mainly from China’s softening stance on Covid that sparked hopes for a rebound in demand from the world’s top crude importer. On the supply side, the latest data showed that US crude inventories fell by nearly 13 million barrels last week, the most since June 2019. 

US Natural Gas Down 5% 
US natural gas futures extended losses to over 5% to $6.3/MMBtu on Friday, the lowest since November 14th and were set for an over 13% weekly fall, after Freeport delayed the restart of its LNG export plant to the end of the year from mid-December, leaving more gas in the domestic market. Natural gas futures were already lower on forecasts for less cold weather and lower demand which should allow utilities to leave more gas into storage. Also, average gas output in the US Lower 48 states rose to a record 99.5 bcfd in November, up from 99.4 bcfd in October. At the same time, the US government is stepping up efforts to reduce the risk of a railroad worker strike that could disrupt coal deliveries and force power generators to burn more gas.

Copper

Copper Approaches 4-Month High
Copper futures rose above $3.8 per pound, approaching the 4-month high of $3.9 hit November 11th, supported by hopes of a pickup in industrial demand and looming supply concerns. Expectations of demand for industrial inputs in the US improved after Fed Chair Powell signaled that the central bank may slow the pace of rate hikes this month, while the PBoC cut its reserve ratio by 25bps to stimulate the economy. In the meantime, Chinese authorities lifted a ban on equity refinancing for listed property developers, shortly after the country’s top banks extended $162 billion in fresh credit lines for the sector. On the supply side, lower output in South America continues to raise concerns of shortages in the near future, as top producer Chile mined 6% less copper in 2022, and mine protests in Peru hamper production. Commodity trader Trafigura warned that global copper stocks have fallen to record lows, with current inventories enough to supply world consumption for just 4.9 days.

Precious Metals

Gold End Week Sharply Higher
Gold reached $1,800 per ounce on Friday to end the week sharply higher, benefiting mainly from a weak dollar on expectations that the US Federal Reserve would slow the pace of interest rate hikes. On Wednesday, Fed Chair Jerome Powell said that “slowing down at this point is a good way to balance risks,” and that the Fed could moderate the size of rate hikes as soon as December. It confirmed market expectations that the Fed would deliver a smaller 50 basis point rate hike this month, after raising rates by 75 basis point in the last four meetings. Market pricing also indicated that the Fed funds rate will peak below 5% in May 2023 following Powell’s comments, lower than previous expectations for a peak above 5% in June.

Silver Hovers at 7-Month High
Silver futures rose to above $22.6 per ounce at the start of December, hovering at levels not seen since May amid expectations for a slowdown in monetary tightening by the Federal Reserve. Fed Chairman Powell stated that it is likely that the US central bank will slow the aggressiveness of rate hikes this month, easing demand for the dollar and driving investors toward bullion. Besides bullion, softer rate hikes in the US and a cut in the reserve ratio by the PBoC supported expectations of higher demand for industrial silver usage as electricity conductors, tracking the rebound for copper. Signs of low supply also supported prices, as New York’s COMEX inventories fell 70% in the last 18 months to just over 1 million tonnes. Also, the London Bullion Market Association stockpiles fell for the 10th straight month to a record-low 27.1 thousand tonnes in November. 

Soft Commodities

Soybeans Ease from 10-Week High
Soybeans futures traded around $14.3 per bushel, below a 10-week high of $14.8 hit on November 30th, as optimism about demand prospects from top importer China were offset by the US government proposal of smaller-than-expected biofuels blending requirements. The US Environmental Protection Agency will call for overall blending mandates of 20.82 billion gallons in 2023, 21.87 billion gallons in 2024 and 22.68 billion gallons in 2025. Elsewhere, news that China was ramping up its vaccination programs to quash Covid numbers renewed expectations of solid demand from the top oilseed consumer. The US Department of Agriculture said US exporters sold 136,000 tonnes of soybeans for delivery to China during 2022/23.

Wheat Falls to 1-Year Low
Chicago wheat futures fell further to $7.4 in early December, the lowest since October 2021, amid strong supply from the world’s major producers and signs of lower demand. Top exporter Russia achieved a record-high harvest in the current marketing year, extending competition into the US as poor export data divulged by the USDA without any production problems drove bids to decline in price. In the meantime, shipments from Ukraine through Black Sea ports continued after Russia agreed to extend the UN-brokered deal that guarantees a trade corridor for vessels carrying Ukrainian grain in the Black Sea for another four months. According to Ukrainian authorities, the country was able to export more than 11 million tonnes of grain by ships since the start of the deal on August 1st, significantly easing shortage concerns in the next marketing year. 

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