- U.S. Equities finished the week higher, the S&P 500 rallied above its 200-day moving average for the first time in over 6 months finishing at 1.19%, and the NASDAQ was the highest performer at 2.12% higher.
- The Dow Jones 30 became the first major index to exit bear market territory after rallying over 20% from the bottom on Wednesday, largely due to exposure in Value sectors such as Healthcare, Financials, and Industrials which have outperformed over in recent months.
- The treasury curve was firmer with the 10-year treasury yield declining to 3.5%, as most maturities 2 years and out saw yields decline around 20 Bps. The 2Y yield ended the week below 4.30% this week, its lowest levels since early October.
- Strong non-farm payrolls for November showed an increase of 263K jobs, a decrease in the labor force participation rate by 20 Bps, and higher than expected wage growth specifically among college educated workers.
- On Thursday the Biden administration and Congress imposed a labor agreement between major railroad companies and their workers, forestalling a potential strike. The package included a 24% pay bump, benefits, and an additional paid sick day.
- Fed Chair Jerome Powell’s speech sparked Wednesday’s market rally signaling a 50 bps hike at the upcoming December meeting. The Nasdaq gained nearly 4.5% as a result.
- Qatar announced an LNG supply agreement with Germany starting in 2026. The DAX index rose 0.08% last week.
- In China, many cities including Shanghai and Hangzhou eased COVID testing requirements to enter public venues following protests from angry citizens. The China Renminbi rallied to 7.05 per Dollar, the best foreign exchange rate since November.
- In Brazil, unemployment fell to 8.3% in October, a seven-year low according to the latest labor data
US Weekly: US equities closed higher this week with the S&P 500 rising above its 200-day moving average for the first time in over 6 months. Wednesday’s rally of more than 2% was impactful enough to cause the Dow Jones Index to move out of bear market territory (an upwards move of 20% from its most recent September 30th low), while the S&P’s rally of more than 3% was enough to help it finish in positive territory, despite closing lower in 5 of the last 6 sessions.
The Dow’s relative outperformance versus the S&P of nearly 7% since September 30th can largely be attributed to more concentrated exposure in value sectors with healthcare, financials, and industrials all gaining more than 15% this quarter.
However, on a weekly basis, growth as a factor outperformed its value counterpart, with growth outpacing value by around 1% for the week. Communication services was the best performing sector with strength across most FANMAG names, especially NFLX +12.2% and META +10.8%.
With US equities largely declining over the past week, the continued decline in consumer discretionary versus consumer staples suggests that fears of an economic downturn are bubbling despite the recent rally. Some have called the discretionary/staple ratio an indicator of economic bearishness, meaning when the ratio declines, there could be bad times ahead. The discretionary/staple ratio has been steadily declining since April 2020 and showcased that consumer discretionary was the only S&P 500 sector in the red (besides energy) at the end of October. While some of the weakness stems from mega-cap tech exposure such as Amazon and Tesla, the hesitancy to jump into the discretionary sector with higher yields, a higher cost of living, and retail earnings which have been squeezed as people spend less on discretionary items has yet to abate.
The treasury curve was firmer with the 10-year treasury yield declining to 3.5%, as most maturities 2 years and out saw yields decline around 20bp. The 2Y yield ended the week below 4.30% this week, its lowest levels since early October.
WTI crude index was up almost 5% on the week to close the just shy of $80/barrel, its largest weekly gain in a month. The rally did not translate through to the energy sector which was the worst performing on the week, declining more than 1%. However, US gasoline prices continued their fall, dropping to the lowest level since just before Russia’s invasion of Ukraine.
It came ahead of OPEC+ decision to respond to surging volatility and growing market uncertainty by keeping production unchanged. The brief meeting on Sunday, and decision by the alliance to maintain production at current levels, only recently implementing the 2mbpd cut agreed upon in October continues to highlight the global oil market that is roiled by Chinese demand and Russian supply. The agreement to not alter output comes as EU sanctions took effect on Monday that would ban crude exports from Russia, at the same time China is attempting to ease their Covid zero measures, that have eroded consumption, despite conflicting reports of continued full city lockdowns.
STRONG PAYROLLS AND WAGE GROWTH
The biggest piece of economic data this week was the release of November’s non-farm payrolls, which was particularly strong. The headline number showed an increase of 263K, which came in ahead of the 200K expectation. Average hourly earnings month-over-month also came in ahead of consensus estimates, while unemployment remained constant at 3.7% as the labor participation rate slipped to 62.1%
versus consensus of 62.3%, with more workers leaving the labor force.
Following the strong report, the case for a soft landing continued to grow given the fact that inflation has continued to come down, while the labor market shows that it remains resilient. The report helped alleviate some growth fears for next year, but there was some commentary that the wage dynamic may complicate the Fed’s policy normalization path as consumers remain particularly strong. As the labor market cools from a position of historic strength, the wage increases that helped underpin the pandemic recovery remain persistently high, as seen in the most recent economic data released. A potential wage price spiral, the phenomenon where runaway wage increases cause inflation to increase, therefore increasing wages even further, is one of the primary reasons that the Fed continues to feel the need to curb inflation aggressively with their rate hike regime (See Powell’s comments on the labor market below).
Despite several high-profile layoffs and hiring freezes, within major US corporations, and in many cases both, the labor market is expected to continue to experience a slowdown in the coming months, helping to avoid the continued gains in wages. Below we outline some corporate actions taken by a number of prominent US employers.
In a widely watched speech at Brookings Institution in Washington, DC, Fed Chair Jerome Powell was the impetus for Wednesday’s market rally. The head of the Central Bank signaled in his speech that the Fed would downshift the magnitude of hikes to 50bp at the upcoming December meeting. While this had largely been the market expectation for quite some time, the confirmation of this measure caused
equity markets to rally with the Nasdaq gaining nearly 4.5% in Wednesday’s session. Despite the market interpreting the speech as positive, given the shifting of aggressive rate hikes for now, Powell cautioned that the Fed peak rate may end higher than what was initially forecasted at the September meeting (4.4%-4.9%).
RAILROAD STRIKE AVERTED
On Thursday the Biden administration and Congress imposed a labor agreement between major railroad companies and their workers as the deadline approached. This agreement forestalls the potential strike that would have had major ramifications for domestic shipping and caused direct damage to both the US economy and consumers, as rail carries over 40% of freight in the U.S. Although the package included improved compensation, including a 24% pay bump, and benefits, the agreement included only 1 of the additional 7 sick days requested, and was missing the changes to the time-off scheduling process that had been requested. With this agreement The Biden administration was forced to balance their pro-union rhetoric in exchange for preserving the economy. This agreement removes a potential major stumbling block for US consumers, who would have had to handle the brunt of product delays, and higher prices, which would have only exacerbated the inflation issue as we head into one of the busiest times of the year.
The Bloomberg World index closed the week up 1.38%, with growth up 1.81% and value up 0.42%. Emerging Markets currencies rallied after Fed Chairman Jerome Powell announced a possible slowdown of the pace of rate hikes. The dollar index eased to 104.54, the lowest spot since June 2022. The Bloomberg Commodities index fell 0.39% last week, despite the 2.3% rally in oil amid the report that China plans to ease COVID testing requirements. The JPMorgan Global Manufacturing PMI deteriorated to 48.80 in November, from 49.40 a month earlier. This is the third consecutive month that this reading is below 50.0. Global services PMI decreased to 48.10 during the same period, the lowest level since June 2020.
In Germany, inflation eased to 11.3% year-over-year in November, but remains higher than the Euro area average of 10%. In comparison, Spain consumer prices slowed to 6.6% year-over-year during the same period after peaking at 7.3% in July. The German government entered into an agreement with commodities trader Trafigura Group to extend a $3 billion loan for gas supply. This type of deal is not unprecedented between both parties, as in October the government lent $800 million to Trafigura for metal supply. Chancellor Olaf Scholz has been active in trade negotiations with Saudi Arabia and Qatar to secure alternative sources of energy. Last week, Qatar announced an LNG supply agreement with Germany starting in 2026. The DAX index rose 0.08% last week.
European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau said the ECB should moderate the pace of rate hike to 50bps this month as he expects inflation to peak in the first half of 2023. This forecast is in line with what markets are pricing in for the December 15th monetary policy announcement. He added that it may soon become appropriate for the ECB to start reducing its $5.3 trillion in bonds on its balance sheet. The Italy-Germany 2-year yield spread narrowed to 49bps last week as markets see an increased likelihood of a recession next year in Germany. The Eurozone Manufacturing PMI ticked up to 47.10 in November, a modest improvement from the 46.10 print in October. The Euro STOXX index gained 0.31% last week.
In China, many cities including Shanghai and Hangzhou eased COVID testing requirements to enter public venues following protests from angry citizens. The Chinese Vice Premier said that pandemic controls have entered “a new phase” and that the country will slowly transition to optimize COVID measures. The Hang Seng China Enterprises index jumped 29% in November, locking its best monthly performance since 2003. Airlines, restaurants and casinos surged the most as they are the most exposed to the reopening of the economy. The China 10- year bond yield rose to 2.91% on Friday, adding 0.8% for the week on revised short-term inflation expectations. The China Renminbi rallied to 7.05 per dollar, the best foreign exchange rate since November.
In Japan, Manufacturing PMI fell below 50.0 for the first time since January 2021. Indeed, factory output fell for a second consecutive month as producers tried to mitigate slowing demand caused by a weakening currency and rising inflation. The yen rallied last week after hitting its weakest level in three decades as markets bet on slower interest rates hikes from the Federal Reserve going forward. Bank of Japan policy maker Naoki Tamura told Bloomberg that the Central Bank should conduct a monetary policy review “at the right time”. Markets are now speculating that this policy review could take place before Governor Haruhiko Kuroda steps down next year and possibly contain measures to strengthen the yen. Last week, the NIKKEI 225 index dropped 1.79%.
In Brazil, unemployment fell to 8.3% in October, a seven-year low according to the latest labor data. Last year at the same period, unemployment stood at 12.1% primarily due to COVID-19 disruptions. In the third quarter, Brazil’s GDP expanded for the fifth consecutive quarter as Bolsonaro’s fiscal stimulus boosted the economy. Furthermore, consumer prices fell back to single digits although it remains above target amid consistent rate hikes and falling shipping costs. Lula’s team filed for a $32.6 billion exemption on the country’s fiscal cap to finance Lula’s first spending plan. The Brazilian real has weakened since this plan was announced as investors are concerned about inflation. Brazilian stocks gained 2.7% last week.
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