Insight  |  November 20, 2023

Muzinich Weekly Market Comment - November 20th 2023

Weekly Update: Only Positive News

Risk on. The rally in government bonds continued for a second week; month-to-date, 30-year yields were 50 basis points (bps) lower in both the US and Germany. Corporate credit markets continued to keep pace with government debt, with US Dollar denominated credit outperforming. Global equities markets were higher in price, the VIX fell below 14 (an indication that risk appetite has returned), and the US Dollar depreciated. The one exception to this trend was energy prices that continue to fall—the price trend of both Brent and WTI is now negative year-to-date. 

Last week US and China took center stage, providing positive political and economic headlines for investors. President Biden signed the “laddered” continuing resolution (CR) into law. This has kicked the spending deadlines out to January 19th and February 2nd, averting a government shutdown. Biden also had an extensive meeting at the Asia-Pacific Economic Cooperation summit in San Francisco with the Chinese leader Xi Jinping. In a symbolic gesture for investors to gauge the relationship between the two superpowers, the leaders agreed that negotiations will start on renewing the science and technology agreement. This was the first major pact to be signed by the US and China when they established relations in 1979 under the Nixon administration. 

On the economic front, there was positive news regarding inflation as US headline consumer prices remained unchanged in October, and core prices only rose 0.23% month-over-month (MoM), with both indexes below the forecasted consensus. Core inflation is now at 4%, a 2-year low. Digging into the pricing indexes, economists will be encouraged to see the breadth of disinflation within the subcomponents; the all-important owners’ equivalent rent continued to moderate, and there were also downside surprises to hotel prices, airfares, and new vehicle prices. In China, retail sales continued to rebound led by its service sectors, and industrial production surprised to the upside of investor expectations. Only fixed asset investment disappointed, dragged down by the weak property sector. However, it was reported that China now plans to provide at least 1 trillion Yuan of low-cost financing to the nation’s urban village renovation and affordable housing program to help support the sector1.

To take a broader perspective beyond the weekly positive news flow and price movements, we can use economic surprise indexes (see Chart of the Week). For the US (dark blue line), we see that investors have consistently been surprised by the robustness of the economy.  It is only from November that the positive surprise has started to dissipate and could help explain the confidence investors have in a soft-landing and the end to the policy cycle. For China (light blue line), the bottom in activity vs. economic expectation occurred over the summer. The index has now turned positive, suggesting that investors are too pessimistic vs. actual activity—this may explain the cheap valuations to be found in China. For the Eurozone (grey line), like China, the peak in negative surprise was over the summer; economists have recalibrated their expectations but are still being surprised by the level of weakness in the region. This helps explain the repricing of ECB (European Central Bank) policy over the last month. The OIS (overnight interest rate swap) market is pricing the ECB to start loosening policy in June and cutting by a total of 100bps in 2024. 

Chart of the Week: Economic Surprise Indexes

Source: Bloomberg, as of 17th November 2023. For illustrative purposes only.

1.Bloomberg News, “China Mulls US$137 Billion of New Funding to Boost Housing Market,” 14th November 2023


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