Insight | September 18, 2023
Muzinich Weekly Market Comment - September 18th 2023
Weekly Update: Certainty
Last week was largely positive for asset prices in a key week for data and central bank activity. Government bond yields were higher for the week, with the noticeable exception of UK yields—which fell aggressively after the release of monthly growth data showed that the UK economy shrank by -0.5% month-over-month (MoM) in July—the fastest contraction year-to-date. Although this data point may have been affected by industrial action and bad weather, the negative surprise revived recession fears in the UK.
At the same time, global corporate bond markets had a solid week with high yield credit outperforming. Commodities continued to climb higher, propelled by supply fears. Oil prices took a further boost with WTI (West Texas Intermediate) prices passing US$90 per barrel after OPEC indicated that the supply shortage for the fourth quarter will be 3.3 million barrels per day1. Meanwhile, agriculture prices adjusted higher due to supply risks from El Nino and a lack of progression on the Black Sea Grain Initiative that expired on July 17th.
After absorbing the incoming data, equity markets were buoyant across the globe as demonstrated by our preferred measure of macro uncertainty, the VIX index, which hit a year-to-date low—a level of indicated certainty not seen since prior to the global pandemic (see Chart of the Week). This leads us to the question: what in the weekly data is making the equities market so confident about the near future?
China started the week by cutting the reserve requirement ratio rate by 25 basis points (bps)—an estimated injection of liquidity into the banking system of CNY 500bn2. The effectiveness of continued policy stimulus has started to become evident in August’s credit and activity data. Credit growth surprised investors by rebounding in August, with aggregate financing rallying to CNY 3.12tn, beating consensus of CNY 2.7tn. At the same time, on the activity front, both retail sales and industrial production strongly rebounded from July and were well above investor consensus. This seems to be leading economists to conclude that growth in China bottomed out in the third quarter. We believe the size and sustainability of the rebound will depend on the stabilization of property sales, the expected pickup in infrastructure investment, and continued consumption recovery.
Probably the most important event for the week was the European Central Bank (ECB) meeting. The central bank surprised investors by hiking its key interest rates by 25bps, taking the deposit rate to 4.0% while the Bloomberg consensus was for no change. The revised staff macroeconomic forecasts were gloomy, with inflation revised higher for 2023 and 2024 by 0.1% and 0.3%, respectively, and failing to reach the 2% target by 2025. Meanwhile, the economy is now only expected to grow at 0.7% this year with growth for 2024 revised down by -0.5% to 1.0%. However, investors reacted positively to comments from ECB President Lagarde who said, “The focus is probably going to move a bit more to the duration, but it is not to say — because we can’t say— that now that we are at peak3.” This was interpreted as a signal that the hiking cycle is likely completed; a green light for investors to buy European assets.
In the US, headline consumer prices rose +0.6% month-over-month (MoM), with rising gasoline prices as a major contributor to the pickup as year-over-year inflation jumped to +3.7%. Core price inflation—subdued in the last two months, with prices growing by just +0.16% MoM—re-accelerated in August to +0.278% MoM driven by airfares rising 4.8% MoM. On the activity side, retail sales grew at 0.6% MoM, significantly above market expectation of 0.1% MoM, forcing economists to upwardly revise growth forecasts for the third quarter. Investors are considering the pricing pressures from energy to be short-lived—expectations are for the FOMC (Federal Open Market Committee) to look past the temporary pickup. Confidence in a soft landing—or maybe no landing—continues to grow. This was best demonstrated by this week’s initial public offering for Arm Holdings Plc, which climbed +25% in its trading debut4. Ray Dalio had an alternative view expressed in an interview this week, suggesting that the biggest mistake most investors make is “believing that the markets that performed well are good investments, rather than more expensive5.”
Chart of the Week: Certainty
Source: Bloomberg as of 15th September 2023. For illustrative purposes only. The Volatility Index or VIX is the annualized implied volatility of a hypothetical S&P 500 stock option with 30 days to expiration.
1.Bloomberg, “OPEC Oil Data Show 3 Million-Barrel Shortfall on Saudi Supply Squeeze,” 15th September 2023
2.J.P. Morgan, Asia Pacific Economic Research, 14th September 2023
3.Bloomberg, ECB Delivers 10th Hike as Lagarde Won’t Quite Confirm Rate Peak,” 14th September 2023
4.Bloomberg, “Chip Designer Arm Jumps 25% in Debut Win for Owner SoftBank,” 14th September 2023
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