Insight  |  June 5, 2023

Muzinich Weekly Market Comment

Weekly Update – Boring Summer

June’s start has been positive for assets; government bonds have partially reversed the sell-off seen over the last two weeks, while both corporate credit and equities markets were in positive territory for the week.

The catalysts for falling US yields appear to be the successful completion of the debt ceiling negotiation and further hints from several Federal Reserve governors that a pause in the rate cycle is their preferred option for June. While strong employment data has given investors confidence that a significant economic slowdown is unlikely in the near term, both the JOLTS (Job Openings and Labor Turnover Survey) jobs openings and Nonfarm Payrolls convincingly beat consensus expectations.

For the Eurozone, inflation reductions drove yields lower. The flash consumer price index for the region fell to 6.1% YoY (year-over-year) vs. expectations of 6.3% YoY, and core consumer prices, highlighted in the European Central Bank’s (ECB’s) May meeting as a concern, fell for the second month in a row to 5.3% YoY, below the 5.5% YoY consensus forecast.

In China, the official manufacturing purchasing manager index disappointed, printing just 48.8. This index measures the health of the large private and state-owned manufacturers, and after contracting (below 50) for two consecutive months, has been a reliable signal for pushing Chinese authorities into action. This unofficially may have started, given Friday’s news headlines that the authorities are working on a new basket of measures to support the property sector.[1] China’s economy has become unbalanced. Sectors related to reopening (e.g., tourism, transport, restaurant) or benefiting from current policy support (e.g., new energy, technology) are outperforming, but key areas in manufacturing and real estate investment continue to lag, which this index is picking up. The combination of possible policy support in the pipeline and surprisingly positive news from the Caixin purchasing manufacturing index (an alternative index that we believe is a better gauge of the health of Chinese exporters, which expanded well above market expectations to 50.9, rising from 49.5 in April), led to a strong rally in Chinese assets and may also give supportive evidence that the global manufacturing cycle has bottomed out.

“Sell in May and go away,” could not have been more apt for June 2022 (see table below). Years of ultra-accommodating monetary policy, fiscal policy largesse, and a commodity shock, all combined to amplify global inflationary pressures, leading central banks to act aggressively.  In 2022, the FOMC (Federal Open Market Committee) increased rates by 75 basis points, the largest hike since 1994, and the ECB confirmed that they would hike in July of that year—the first time in a decade—and stop QE (quantitative easing). It was the end of free money; investors expected a harsh recession and panicked. Twelve months forward, central bank policy tightening is all but done, economists continue to kick the imminent recession 6 months further down the road, inflation is trending lower, and commodity prices have normalized. What could go wrong? Most discussions focus on potential sources of financial instability; ranging from commercial real estate with its linkage to regional banks that have concentrated exposure to the asset class, to the Bank of Japan and market expectations that it could issue a policy adjustment over the summer months (which destabilizes government bond markets as domestic investors recycle money back onshore).  The unquantifiable risks cited include the widening of the Ukrainian conflict or a new deadly strain of COVID. But maybe the simplest answer is that a recession does finally begin under the weight of tightened policy, falling profit margins, and contracting consumption as unemployment rises. However, June 2022 is unlikely to be repeated in June of 2023. If we view the VIX index, our preferred measure for volatility and investor sentiment, we are now at levels not seen since all the trouble began (see Chart of the Week). A boring summer anyone?

June 2022 

Chart of the Week: Markets all calm, but for how long?

Source: Data from Bloomberg as of 2nd June 2023. For illustrative purposes only.

1. Bloomberg News, “China Mulls New Property-Market Support Package to Support Economy,” 2nd June 2023


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