Equity markets finished the month of November on a very positive note. US markets rallied by 5-6% on average, while Europe keeps outperforming, despite all the cassandras forecasting a horrible year for the region. Germany was the biggest gainer with an 8% rise, closing at the highest level since early June. China also moved higer by 7% on average, after a series of good news with regard to Covid19 restrictions and measures taken to help the real estate market made investors revisit the region. In terms of sectors, most of them rose by 6-8%, with Materials outperforming (13%) and Energy posting almost zero growth and in the US negative. Of course, Energy has been generating significant returns in the previous 11 months, and it is only natural that investors are starting to take some profits.
The FED's Chief, Mr. Powell, finally makes a small pivot i.e. he provided a hint that they intend to slow down the rise in interest rates, as soon as next week. The full pivot will be when they decide to stop raising interest rates, which could happen in early 2023. Mr Powell said in a speech for the first time that "we do not want to overtighten" and that it looks that most of the tightening has already been done. This "stealth guidance" means that next week the FED is prepared to raise by 50bps to 4.50%, abandoning the 75bps steps it had taken during the previous three meetings. And that the terminal rate should be close to 5%, hence one more 50bps rate hike in early February or two 25bps in February and March. We have finally reached the "peak-hawkishness", which we claimed that it is coming a few weeks ago and which is expected to help primarily the bond market recover significantly.
The US labor market data were stronger than expected, but also confirming the slow down. The November non-farm payrolls rose by 263'000 vs expectations of 200'000, but the October number was revised up by almost 20'000 while the September number was revised down by almost 60'000. The details showed another sizeable increase in government employment, which expanded 42K in November after a 36K increase in October. Private employment rose 221K in November, still strong, but it was the smallest increase since April 2021, reflecting ongoing slowdown. The 3-month moving average for private employment sits at 241K compared to the 527K during the first three months of this year, a marked deterioration. The unemployment rate remained at 3.7%. Wages moved higher by 0.6% on a monthly basis, double the rate of what was expected and 5.1% on annual basis, up from 4.9% of last month. From an inflation point of view these data poured some cold water on the enthusiasm after J. Powell's comments on Thursday.
But the US housing market continues to deteriorate, which is bad news for the economy but good news for the inflation problem. The S&P/Case-Shiller home price index fell by 1.2% for September, which is the third consecutive price drop on a monthly basis, something that has never happened in the last 10 years. The spike in mortgage rates as well as the drop in affordability has brought the housing market almost to a standstill. At the same time and even more importantly for core inflation. apartment rents seem to have fallen further in November, according to an index compiled by Apartment List (www.apartmentlist.com), which is an online platform for housing which also collects data and analyses them.
The October Eurozone Inflation data showed the first slowdown this year. With Spain and Germany surprising positively, but Italy and France posting worse than expected numbers, the composite Eurozone CPI moved lower to 10.0% on an annual basis, vs 10.6% in September. Core CPI which excludes food and energy remained unchanged at 5.0%. One month does not constitute a trend of course, but at least we can now start seeing perhaps the light at the end of the tunnel. We should also keep in mind the "base effect", which means that starting in January of next year the prices will have to be compared with already high prices of last year, in order to announce the annual rate of inflation. Things are starting to look better on a 6-month horizon, unless a major event shakes again the Eurozone region.
China is making more steps towards a more relaxed Covid19 strategy. It all started with the comments by senior health officials about the need to fine-tune the existing Covid19 strategy in order to take into account the impact on society and the economy, after the demonstrations. Then during the weekend, several cities eased controls, even as Covid continues to circulate. Shenzhen and Shanghai scrapped the requirement for commuters to present PCR test results to travel on public transport, following similar moves by Tianjin, Chengdu and Chongqing. Some apartment complexes in Beijing indicated to residents over the weekend that if they test positive they could quarantine at home rather than at a centralised quarantine facility, marking a significant relaxation of the curbs. Still, there is no official announcement by the government that a major change is about to happen, but all these small steps point to the same direction: the re-opening of the Chinese economy which will drive local equities even higher.
China also announced measures to support the real estate market. In particular, the regulators lifted the ban which was in place since 2019 and did not allow property developers to raise equity in order to pay down debt or proceed with acquisitions. At the same time, the largest banks were ordered to provide loan facilities to the developers in order to be able to pay in full the offshore bonds which are maturing in the next months. These developments show that China at last has resorted to pragmatism and the fears of a turn to more communism appear now to have been grossly overestimated.
Fireworks from Japan, not only as the national team made it to the 16 of the World Cup but primarily because the new board member of the Bank of Japan, Mr. Tamura, laid out the case for a revision of the current monetary policy. We remind that Japan, despite the recent spike in inflation, which however is still almost one third that of the Eurozone, has remained with interest rates close to zero. This has been the main reason behind the significant fall of the JPY since the start of the year, but this is changing fast. Traders with short positions were running for the exits and the JPY has already gained 10% from its recent low against the USD. There is more JPY strength to come ahead.
Bond yields moved lower, to the lowest levels since mid-September. The US 10-year fell to 3.50%, down almost 60bps from the highs and 4% higher in price. The move is even more important as on Friday the strong jobs report made yields spike higher to 3.65%, only for buyers to step in and yields dropped again to a new low. The 10-year German Bund yield fell to 1.85%.
Commodities also rallied significantly, with Gold returning above 1800$. The sell-off in te USD (EURUSD is now closer to 1.0600) and the drop in yields has made Gold more attractive. But once again it showed that this year it has been more correlated with equities (both moving in the same direction) than investors would want the yellow metal to be. It has also provided almost no protection against inflation, as textbooks used to say. For now the price of God will move in tandem with interest rates and the USD, which means also with equities. Oil prices also rallied, with WTI Crude moving past the 80$ handle.
Chart of the Week :
Two positive months in a row for the first time in 2022.
What a year it has been for financial markets and who knows what is in store for the last 20 or so trading days. The above chart shows the monthly price return of the S&P500 for 2022. The monthly swings have been enormous, in both directions. After the slump in late summer (August, September) the market had two positive months, for the first time this year. And the positive returns were quite significant. As we are approaching the end of the year, we highlighted in our previous weekly review that we could see some weakness, especially if 2002 is our guide, which is the last time that the market was behaving similarly. But we should note that the two-month rally came with positive developments with respect to the inflation front, the central bank rhetoric and China. What is not sure is how much of this positiveness is already in equity prices or there is more room for them to run. We would chose to go back in the cautious camp and wait for valuations to normalize again to more attractive levels.
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• Sources: Chart of the Week : KSH, Facset