Insight | November 6, 2023
Muzinich Weekly Market Comment - 6th November 2023
Weekly Update: End of the Cycle
Last week capital markets were strong, except for energy prices, which fell. Government bonds rallied, with longer tenors outperforming; the 30-year US Treasury was -30 basis points (bps) lower for the week. Corporate credit spreads tightened, there was a melt up in equities led by the US, and the US dollar depreciated against most currencies. A short-term relief rally—probably due after an awful October for investors—undoubtedly led to bearish positioning becoming stretched? Or are strong seasonals kicking in? November is historically a positive month for investors; as a bellwether for seasonals, the S&P generated positive returns in 9 out of the last 10 years, with the November 10-year average as the largest calendar monthly average.1 Or was this the long-awaited price rally expected on completion of the monetary tightening cycle by major central banks?
The purchasing managers’ index data from China confirmed that more loosening of policy may be required. Although both the official and Caixin composite indexes remained in expansionary territory, their manufacturing components contracted, and the service components printed below expectations—investors expect a further 50bps cut to the reserve requirement ratio before year end. In Europe, last week’s dovish pause by the European Central Bank was confirmed by incoming data; 3Q growth was further revised down to -0.1% quarter-over-quarter (QoQ) and consumer prices fell greater than expected, with headline consumer prices now only rising at 2.9% year-over-year (YoY), falling from a peak of 10.7% YoY in October 2022. For the second month in a row, the Bank of England left policy rates unchanged at 5.25%. The Bank’s governor, Andrew Bailey, explained in the press conference that interest rates would “remain where they are now for an extended period of time2.” The overnight interest rate swap market is now pricing the next policy rate adjustment to be a cut in July 2024. However, the US had the largest influence over markets this week as the Federal Open Market Committee kept policy rates unchanged with Chairman Powell imparting a dovish tilt at his press conference on policy adjustment: “Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.3” The dovish angle coincided with a softer set of employment data and weaker than expected ISM manufacturing and service indexes.
With a few exceptions in emerging markets such as Turkey, Russia, and perhaps the Philippines, the central bank policy tightening cycle looks to be complete. Economists will likely now spend more energy on predicting the order in which major central banks will blink and loosen policy first. However, there is one major central bank that has followed a different script; the Bank of Japan (BOJ), which has kept policy rates unchanged at -0.1% throughout the global tightening cycle, remained unconvinced that domestic inflation is sustainable and stable at 2%. In its policy meeting last week, the BOJ did add further flexibility to its yield curve control policy by removing a hard cap from its 10-year JGB upper bound of 1%. At the same time, the government, facing a low approval rating driven by the rising cost of living, announced a stimulus package worth US$113bn to support low-income households (and the government’s standing). Could the BOJ finally start tightening policy just as other major central banks are loosening? The Japanese yen at multi-decade weak levels should be the release valve if that does occur. Or will rates in Japan remain at just -0.1%, with the BOJ proven correct that inflation in Japan is not sustainable at 2%?
Chart of the Week: Yen Multi Decade Weakness
Source: Bloomberg, as of 3rd November 2023. For illustrative purposes only.
1.Bloomberg, as of 2nd November 2023
2.The Independent, 2nd November 2023
3.Bloomberg News, “Powell Hints Fed Is Done with Hikes in Pivot Cheered by Markets,” 1st November 2023
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