At some point, growth will replace inflation as the main concern of the markets, and this in the not too distant future.
Last week, three events captured the attention of US inflation watchers, which is pretty much everyone’s attention right now. First President Powell giving a speech at the Brookings Institution in Washington D.C. on Wednesday, then the release of US PCE inflation data on Thursday (the Fed’s preferred measure) and finally US jobs data. Friday.
Powell’s speech was the main driver of the market. Powell cited reasons for optimism regarding goods and housing inflation, but noted that wage inflation remained a concern, which all but ensured a moderation in rate hikes for December. On Thursday, the consumer price index figures were relatively weak, at 5.0% yoy and 0.2% mv, compared to 0.5% the previous month. These two events had a positive impact on market sentiment. Sentiment was, however, somewhat dulled on Friday as monthly non-farm payrolls figures came in stronger than expected, with 263,000 jobs vs. 200,000 estimated and wage growth of + 0.6% once morest +0.3% expected, which does not correspond to the Fed’s expectations. However, when it came to risky assets, two out of three factors were enough and equity markets ended the week strong despite some hesitation following Friday’s employment numbers. Excluding the United States, European preliminary headline inflation was also weaker, dropping from 10.6% to 10%, posting its first decline in 16 months, which helped to improve the mood.
With inflation remaining the main macro driver across all asset classes, correlations remained elevated, with the S&P 500 returning 1.2% and 10-year yields dropping below 3.50% for the first time since September. Implied volatility also declined, with the Vix index falling below 20, a sign that investors are more optimistic for the end of the year, thanks to the weaker dollar. When it comes to inflation and monetary policy, the next big thing will be the US CPI release on December 13, followed by the Fed’s rate decision on December 14.
Despite this slight improvement in inflation, the other side of the equation continued to deteriorate. The US ISM manufacturing PMI came in at 49, its first contraction since 2020. The European manufacturing PMI now sits at 47.1, clearly in recessionary territory, with the UK showing particular weakness at 46 .5, slightly better than expected, but below 50 for the fourth month in a row. German exports were also significantly weaker than expected, pointing to further difficulties for Europe’s largest economy. While macro data from developed markets remains firmly tilted towards recession, growing signs of an easing of China’s stance on COVID restrictions have led to higher prices for some commodities and other assets linked to the crisis. China. A significant pick-up in Chinese economic activity in 2023 would help improve the global growth picture, but caution is still warranted as China’s reopening path is far from clear.
Looking ahead, we believe that at some point, growth will replace inflation as the main concern of the markets, and this in the not too distant future. The rhetoric from central banks is starting to go in this direction, but we won’t be sure until the peak of inflation is clearly behind us. For now, all eyes are on CPIs and growth remains in the background.
