Insight | February 12, 2024
Muzinich Weekly Market Comment - 12th February 2024
Weekly Update: Enter the Dragon
Month-to-date (MTD), government yields were higher at the end of last week, as investors scaled back the timing of policy loosening by Western central banks. In contrast, Latin American central banks, the first to tighten, continue to remove restrictive measures. Year-to-date, Brazil, Chile, Colombia and Peru have all cut policy rates. Additionally, at its policy meeting last week, the Mexican central bank opened the door for cuts to begin in March: “In the next monetary policy meetings, it will assess, depending on available information, the possibility of adjusting the reference rate1.”
Credit markets remain resilient — outperforming government bonds — and carry continues to work. MTD, high yield is outperforming investment grade, and emerging markets are the best-performing asset class within credit. Energy prices continue to swing on geopolitical announcements, and the peak to trough range is over 8% (MTD). Equity markets continue to grind higher, driven by a solid earnings season in the US; MTD, 77% of S&P 500 companies have now reported, with 80% delivering positive surprises to earnings estimates2. The Magnificent Seven tech giants have rallied in price by over 8%3.
Ahead of the start of the Lunar New Year — the year of the Dragon — there was a string of important announcements and data releases from China. Trading restrictions on equities were further tightened, and the head of the securities regulator was replaced — a clear sign of the Communist Party’s displeasure at the excessive price volatility seen in its equity markets.
Meanwhile, President Xi Jinping, who rarely comments on the economy, was quoted by state television as targeting a further strengthening of the economic recovery this year. Key economic data released included headline consumer prices, which fell -0.8% year-over-year (YoY), as prices trailed the market consensus of -0.5%. The inflation index was affected by the start of the Lunar calendar falling in January in 2023, which caused a negative base effect on a 12-month basis, as month-on-month prices rose 0.3% and food prices fell 5.9% YoY. Excluding food and energy, core prices remained positive, but slowed to 0.4% YoY from 0.6% in December.
Key credit data released showed new aggregate social financing surged to a historic high of 6,500bn yuan, beating the consensus of 5,600bn yuan. Seasonally, January credit growth data is always strong, reflecting banks’ tendency to increase lending at the start of each calendar year. However, the PBoC (People’s Bank of China) will be encouraged that its loosening measures are starting to take effect, as seen by the narrowing of the gap between M1 and M2 money supply and new corporate funding, which expanded to 5,085bn yuan, mainly through long-term loans. These results demonstrate the effectiveness of government-led infrastructure investment as new household mortgages jumped to 627bn yuan from 148bn yuan, an encouraging sign for the property sector. We are now starting to see green shoots in the data and expect further supportive measures to be announced after the Standing Committee of the National People's Congress (NPCSC) at the end of February.
Away from Asia, Turkey’s central bank governor Hafize Gaye Erkan resigned for personal reasons. The fact that one of her chosen deputies was immediately appointed, suggests President Erdogan continues to support the adoption of orthodox monetary policy. In Argentina, President Milei’s reform package was withdrawn, as there were not enough votes for it to be pushed through the lower house. Depending on your interpretation, this either highlights the government’s political inexperience or, possibly worse, its unwillingness to negotiate with opposition blocks.
In the US, the Federal Reserve released its Senior Loan Officer Opinion Survey (SLOOS) covering bank lending conditions for the fourth quarter. Historically, this has been a good lead indicator for economic activity. The overall pattern from the survey seems to be that banks are still tightening, but the pace of tightening has significantly slowed from the third quarter (see Chart of the Week).
The common thread tying all markets together right now is the confidence that any policy adjustment going forward is supportive — in other words, investor friendly. The timing and size of support is what is being debated and recalibrated. Market bears may cite the pending negative effect from Japan — the world’s third largest economy — once it starts its policy normalization. However, as Governor Ueda explained during parliamentary questioning last week: “Even if we end minus rates, the accommodative financial conditions will likely continue4.”
Chart of the Week: The pace of tightening has slowed
Source: January 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices, 5th February 2024. For illustrative purposes only.
1.Bloomberg First Word, “MXN Extends Losses After More Dovish Banxico: Inside Mexico,” 8th February 2024
2.Bloomberg equity dashboard (BI STOXN), as of 9th February 2024
3.Bloomberg Magnificent 7 Total Return Index (BM7 T), as of 9th February 2024
4.Bloomberg News, “Ueda Says BoJ to Keep Policy Easy in Post-Negative Rate Era,” 9th February 2024
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