Welcome back at the weekly recap, as usual at the end of the week. As always if you like my job/analysis please subscribe below and share it and I remember you that I am also on twitter at @Credit_Junk. And now let’s see what happened this week.
MACRO/NARRATIVE: the focus of the week was once again around the same two/three themes we focused in the past week. It is well known that the market can concentrate on a maximum of 2 or 3 narratives each time. These are:
Chinese government continued to ease covid-related restrictions. Shangai and Hangzhou reduced testing requirement to access variuos activity in an effort to gradually shifting away from their 0-covid policy. Remaining here, data regarding import remained weak in November (-10.6% YoY, strongly impacted by lockdown) while on inflation factory gate prices (PPI) contracted -1.3% YoY this month, while consumers inflation eased from +2.1% to 1.6%. This could give central bank more room to ease to support economy.
In the USA we had an other strong macro data (ahead of the last FED decision of the year). November ISM services was stronger than expected (from 54.5 to 56.5 vs expectation for 53.5). The employment component was up to 51.5 from 49.1 while some weakness remained in the leading part of order (that declined again). This data, together with the good/tight job market suggest that economy remain resilient for the moment and that FED need to do more job.
This was confirmed by the stonger than expected PPI US for November out today. Headline data was up 0.3% MoM (estimate was for 0.2% increase) with a YoY increase of 7.4%. Also the “core data” was higher than expected, despite falling versus the October data. The surprise was driven by services (especially the medical services) and by the stickiness of inflationary pressure.
Finally we had BOC (Bank of Canada), that raised interest rated by 50bp (as expected) but confirmed to be ready to act more guided from economic data, and RBA (Bank of Australia) that increased rates “only” 25 bp as expected due to the fragile domestic housing market.
MARKETS: Going into next week central banks week (FED 14th December and ECB 15th December) and after the stong ISM print the estimates for the terminal rate of the FED returned near 5% for mid 2023, despite a slowing from 75 to 50bp for both FED and ECB (priced by OIS curves).
In the rates market (below the G4 rates decomposition) the move in rate was muted for the week, with an unjustified move at the beginning of the week, netted by the move of today (below the 10Y Germany). The breakdown shows a fall in breakeven and and increase in real yield.
Passing now on risky assets of credit, HY spread widened 10bp on cash index, more looking at ETF implied spreads (+35bp) following the weakness in equity index (-1% SXXP, -2.8% SPX at the time of writing).
HY total return, as said followed SXXP down but weakness was confirmed also by IG/Govt ratio (calculated using ETF). The HY/IG ratio started to correct down incorporating more growth risk and less duration/inflation risk. Here I have to admit I took wrongly the message from this indicator and overreading the divergence we had.
Passing on equity, last week I showed some divergence inside the market (between cyclical and defensive). In bull market, usually, cyclicals need to perform better to confirm the uptrend. Recently the up trend in SPX was not confirmed, with defensive performing better than the most sensitive sectors.
At the same time the fall in real rate from the peak (that helped financial conditions) give the credit market (below the ratio is using US index) a boost vs government rate and signals more upside is possible, considering positioning not yet crowded on the long side but almost neutral. Also the breadth indicates a clean-up of positioning with “only” 37% of members trading above moving average 10 days.
Closing with commodities, from a subindex point of view we had Energy falling from the sky (with oil, gasoline and diesel down -10%) while Industrial metals strongly up (with Steel +2.8% and Aluminium +1%). After China reopening news, there was a confirmation of increase of imports of commodities, while in the second chart is possibile to see the continued weakness in global copper inventories (let the price sensitive to any supply shock).
MICRO:
BIOGRP: weakness continued also this week after last week report showed net sales -8.3% and operating income down 30.4%
TEREOS: good operating result with revenue climbing 35% yoy thanks to high sugar and ethanol prices
It’s all for today. I hope you enjoyed my job/analysis. Feel free to forward it to friends/colleague and remember to subscribe to the newsletter.