Insight | November 21, 2022
Muzinich Weekly Market Comment
Weekly Update – Risk Neutral
In our view, the past week was constructive for capital markets. Chinese policy makers initiated a strong start to the week by announcing plans to loosen China’s zero-COVID policy and provide additional financial support for the property sector. Ever since the rather disappointing closing ceremony of the Party Congress, we believe investors have been searching for signs of pragmatism and softening around its zero-COVID policy, as well as a critical reopening of financial channels for the property sector. This seems to have been delivered, with the execution of these plans likely to be closely scrutinized, especially as COVID cases have increased to over 20,000 amidst policy relaxation1.
In the US, the Producer Price Index fell short of market expectations, confirming last week’s Consumer Price Index which in our view indicated that inflation has peaked. Meanwhile, US consumption remains robust; retail sales beat expectations, and Walmart reported a better-than-expected 3Q and raised financial guidance. The Federal Reserve’s communication regarding incoming data over the last two weeks seems consistent with a “slower” pace of accumulation, but “higher” terminal rate. This has led to a further flattening of the US government bond curve; over the last week the 10-year Treasury yield is unchanged and outperforming the 2-year Treasury, which is 15 basis points higher in yield.
In Europe, we saw what we believe to be further confirmation that economists’ expectations have been too bearish, with Eurozone Industrial Production higher than predicted, rising 4.9% year-over-year.2 Additionally, 12 out of the 18 member countries reported industrial production as expanding,3 and the German ZEW economic sentiment survey improved, as investor confidence returns to Germany’s economic outlook. The ZEW expectations index rebounded to its highest level since June on what we believe to be the hope that record euro-area inflation may be peaking. In our view, Muzinich’s proprietary risk indicator model best summarizes the recent change in market dynamics. Our model has now moved out of the high stress region that it occupied for most of this year, shifting into the neutral environment for risk on the back of an improvement in sentiment concerning interest rates and credit markets (see Chart of the Week).
In light of the upcoming Thanksgiving holiday in US next week, we will be taking a break from publishing, but will return the following week with more market insights.
Chart of the Week – Out of High Stress
Source: Muzinich, Bloomberg, as of 18th November 2022. For illustrative purposes only.
1.BofA Global Research China Watch, Chart book series #70: COVID cases rose after relaxing COVID curbs, 17th November 2022
2.Trading Economics, as of 14th November 2022
3.Eurostat, as of 14th November 2022 (excluding Cyprus who hadn’t reported at time of writing)
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