Week ended April 7, 2023
MIXED MARKETS, SIDEWAYS DRIFT INTO LONG WEEKEND
As we are in / around a slew of holidays (Easter, Passover and Ramadan) that are shortening trading weeks and lowering trading volumes, I will keep the weekly update short. In any event, there wasn’t much exciting or influential news this week aside from the bookend data of OPEC+ announcing it would curtail supply last Sunday evening, and the release of the US March jobs report on Friday (which as an aside was a holiday for the US stock market and a shortened half-day session for the US Treasury market).
First, have you noticed how expensive certain things have gotten? I know – this old chestnut known as “inflation” been going on for some time, but I am really seeing and feeling it most acutely around groceries and travel. It seems prices of groceries have gone up much faster in the US (at least around NYC) than in the UK (around London). And have you booked your summer travel plans? If not, I pity you because air travel has gotten insanely expensive. The reason I am leading with these comments on inflation is that the ISM data in the US was very mixed this week but “on trend” in that manufacturing is continuing to decline but services are racing ahead, a somewhat mixed picture on inflation. This is the world in which we find ourselves as we try to understand where we might go from here.
The OPEC+ announcement regarding supply cuts came as a shock to markets, with the cartel announcing on Sunday evening that it would reduce supply by 1.16 million barrels per day starting in May. An announcement of the production cuts on #Reuters is here (as I could find nothing official on the OPEC website). Oil prices had been stuck in a rut since the bank crisis, with WTI crude trading in the range of $65/bbl to $75/bbl. The announcement immediately pushed the price of WTI crude higher by around $5/bbl, which then firmed at $80/bbl (WTI crude) and remained there the rest of the week. Although a surprise to investors, the damage into the equity and bond markets was immaterial as both bonds and stocks ended Monday higher. Yes, oil prices gapped up, but no one seemed to care.
The US jobs report for March (here), released Friday morning, was nearly bang-on as far as expectations of the number of non-farm new jobs added (236,000), representing a decline over the February number (which was a decline over the January number), as you can see in the graph below.
This report suggests that monetary policy is working as far as slowing jobs growth at an orderly pace although the fact is that jobs are still increasing. The last JOLTS report (up to February, here) indicates that there are still nearly 10 million available jobs in the US.
The March jobs report also showed that wage growth continued albeit at a slower pace, and the unemployment rate actually fell (to 3.5%) even as wage growth slowed. Overall, this report was not particularly market moving on the surface, although naturally markets did react albeit in different ways:
UST yields headed higher immediately (suggesting the fight to reduce inflation has a ways to run), most pronounced not surprisingly at the short end of the curve which is a better proxy of expectations regarding changes in the Federal Funds rate, and
US equity futures turned from negative to positive, perhaps cheering that job growth deceleration was not worse, a sort of “relief rally”.
I hate to use the term Goldilocks (“neither too hot nor too cold”) since it’s massively overused, but I can’t help myself. Based on investors’ reactions, the jobs report seemed fairly benign, showing job growth is trending down but so far at no visible cost in terms of economic growth.
As we look to this coming week, all eyes will be on the March CPI release in the US (expectation +0.3% MoM headline, +0.4% MoM core) on Wednesday. We also have retail sales data in the Eurozone (Monday) and the US (Friday), and the always pored-over FOMC minutes from the last meeting in March (released Wednesday). Several large US banks kick off the 1Q23 earnings season next Friday, so here we go again!
Risk assets were mixed this week, with Chinese and UK equities registering gains and the US (S&P 500) sliding sideways. As another indicator of risk sentiment, US credit spreads tightened in high yield, as investors seem to slowly be shedding their concerns over credit following the mini-bank crisis in early March.
The only US index that was positive this week was the large-cap and concentrated DJIA. The worst performer was the Russell 2000, adding to the woes of value investors this year.
Gold continued to be bid higher, and oil prices were also higher following the OPEC+ announcement. Bitcoin moved sideways, holding its anchor in the $28,000 context.
Corporate bonds (credit)
Safe haven and other assets