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
Past performance is not a reliable indicator of current or future results.
Index performance is for illustrative purposes only. You cannot invest directly in the index.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of 17th November 2023 and may change without notice. All data figures are from Bloomberg as of 17th November 2023, unless otherwise stated.
Muzinich & Co.”, “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above. United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC. Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.