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 again on central banks and monetary policy. Tuesday a Bloomberg report said that ECB was pondering for the March meeting a downshift to 25bp hike, after a 50bp in February. Clearly this type of news boosted the “pivot narrative” with money market starting to price new cuts in deposit rate after mid years. Immediately some members of board started to oppose to the report:
Viceroy: ..”surprised by the report, Lagarde forward guidance still valid”
Knot: …”we are planning 50bp hike multiple times”
Lagarde: ..”several rate hike ahead, no support to a downshift to 25bp immediately”
Always Tuesday we had the most awaited BOJ meeting. Going into the meeting the 10y government rate climbed above 0.50% (the upper bound) with increasing betting of a new change of the YCC program. But BOK kept the interest rate stable, with bands intact (+0.50%/-0.50%). Kuroda announced also that they see more downside risks to growth and will mantain a dovish stance, with a ramp up of market operation tools.
From a macro point, while Europe continue to be resilient thanks to weak gas prices, US economic momentum continue to be weak. Below in blue we can see the Citi Surprise index. But something started to change (it’s early to say if is a new trend o only noise, but make sense to pay attention on it). In white I added the surprise index only on the “hard data”. So while for now the weakness was only about surveys and forward leading indicators, now the weakness arrived also on hard data. This week, in fact we had a bad news trifecta (paraphrasing Mr Risk with soft PPI, retail sales and industrial production.
For people with Bloomberg terminal I invite you to look at ECSU (Economics surprise monitor). In the top panel you can see that surprise index track perfectly equity return (or yield movements), while in the bottom panel you can see where comes the positive/negative surprises. It’s not a surprise to see strong labor market, but now are in red Housing, Industrial, Retail other than surveys.
MARKETS: Below an overview of what happened during the week. Basically lower rates (with bonds starting to price seriously the downside risk to growth, once inflation continue to slow down), while equity closed the week weak due to central bankers (both ECB and FED) confirming that the battle against inflation needs more rate hikes, so no dovish pivot despite weak data (“bad news are bad news”).
In rates the week was a two-sided medal. In the first part of the week rate decreased (I talked above of the Bloomberg piece talking of a possible downshift in hike from 50 to 25bp) and with trader looking more at “bad data” on growth in the USA and the softening inflation. Below in white 10y german yield tracked perfectly the 1y1y Eonia (a proxy of forward central bank action). After the hawkish words of Knot, Villeroy and Lagarde (at Davos) the rates returned up.
A chart that help to understand well also the medium term price action in rates is positioning in bond futures. Market entered the year short on expectation of high supply and started to cover it after the data and looking at momentum.
In the credit market going into reporting season we had softening in new issue (especially in IG names, while we had some HY issuers like Telecom Italia, Limacorporate, Eurobank and Tereos). This helped the cash market to tighten vs CDS (IG tightened 7bp outperforming HY that tightened only 3bp on average).
The equity market is divided between weak macro data (especially forward looking indicator as PMI, ISM, LEI, etc) and liquidity that despite being in a downtrend, in the last months remained stable thanks to TGA (treasury general account withdrawn offsetting FED’s asset sold.
This week I wrote a thread about this:
While equity sentiment was soft (and also positioning) helping some short covering, from a technical point of view ES1 arrived at historical trend line. Price passed from below the 200 day moving average but was rejected there and in 2 days cutted the the 50 days moving average and now is flirting with the 100 days moving average.
I want to speak also about commodities. Below two ratio that I use for growth (copper to gold) and inflation (oil to gold) proxies. Clearly the China exit from 0-covid policy is a positive change for both industrial metals and energy products but path will no be an easy one (we could have supply chain problems, shipping problems, etc).
After a strong rebound, indeed, copper paused while thanks to the stronger demand for oil from China (below internal flight from Beijing and Shangai returned to growth) interest returned in energy products (gasoline is up 26% from the bottom of December).
MICRO:
Going into reporting season what moved the market this week was supply and LME.
On the positive performer we have EDPPL (with a tender on some hybrid), while on negative we have TITIM (issuing today a new 5Y with yield around 7% area) and EOFP (issuing a note to complete the refinancing of HELLA purchase).
Also FRIGOG (Frigoglass) issued a TAP of the SSN 2023 for 10M.
TIFSLN (TI Fluid) announced full-year trading update for 31 December 2022, expecting revenue increase of 10% YoY.
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.
cheers to that, thank you!