Week ended July 8th, 2022
Updated: Aug 2
Boris out but investors focus on US jobs report
SUMMARY OF MARKETS
There was all sorts of news in this (US) holiday-shortened week, both from a market and geopolitical perspective. The latter seemed to move markets very little, although both the resignation of UK Prime Minister Boris Johnson and the assassination of Japan’s former Prime Minister Shinzo Abe were very unfortunate events (although admittedly the resignation of Mr Johnson was overdue).
Investors were focused mainly on combing through the minutes of the June 14-15 FOMC meeting (released Wednesday) and the June 8-9 ECB meeting (released Thursday) for any nuggets of information as to the direction of these two central banks. US investors were also focused on the US jobs report.
The minutes from the June Fed and ECB meetings were not particularly insightful as far as new information, with both central banks not surprisingly reiterating their hawkish approach in order to ensure that inflation is brought under control even if it comes with an economic cost. First-time unemployment insurance claims in the US, released on Thursday, rose slightly, continuing the steady increase since early April, but the June nonfarm payrolls report released Friday indicated that the US labour market remains robust. The strong jobs report took the sting out of recent concerns over a possible recession, pushing inflationary concerns back to the forefront. As a result, US Treasuries sold off on Friday as the 10-year UST yield moved back above 3% (close 3.09%, +21bps wider W-o-W). US equities gyrated back and forth on Friday looking for direction, but even though they finished lower on the day, US equities managed to hold onto much-welcomed gains for the week. The global equity indices I track were all positive on the week with the exception of the Shanghai Composite, which – as an aside – was the best performing index in 2Q2022 (and the only index that was positive).
Corporate bonds also rallied this week, with USD-denominated HY credit spreads tightening sharply although Euro-denominated HY credit spreads were largely unchanged. The US Dollar continued its ascent, with Sterling and the Euro being the casualties although Sterling rallied briefly following the resignation of Mr Johnson. The Euro is knocking on the door of Dollar parity, and try as I may, I can’t find much optimism around Sterling either. Although cryptocurrencies continue to struggle as brokers and hedge funds fall by the wayside, Bitcoin staged a rally this week, gaining 12.8% to close at $21,731. Gold and oil were both lower on the week.
I am in the “recession is coming” camp, which brings us to the questions of “when?” and “how deep?” In spite of the jobs report, the UST 2-10y curve is signalling the possibility with stronger conviction of a weaker US economy ahead. The strong jobs report increases the likelihood of a 75bps increase at the July FOMC meeting, and this in turn perhaps perversely increases the likelihood of a hard landing for the US economy. You can also interpret lower oil prices as a sign of potentially weaker demand, and declining gold prices as a reflection of diminishing inflationary concerns (as the economy cools). The reality though is that the signals are mixed, and sentiment swings back and forth based on the latest economic news. With earnings kicking off this week, and with CPI and other economic data set to be released, nothing is certain except ongoing volatility.
ECONOMIC AND GEOPOLITICAL NEWS THAT MATTERED THIS WEEK
Boris Johnson resigns as UK prime minister
Pressure has been building for many weeks now on Boris Johnson, who finally resigned from his position as Prime Minister of the UK on Thursday. Recall that Mr Johnson survived a “no confidence” vote by his party just four weeks ago. However, further revelations about his misstatements (or outright lies – you be the judge) finally were enough to undo Mr Johnson, who faced a wave of departures from his cabinet that began as a trickle but really accelerated starting on Tuesday with the resignations of well-regarded cabinet members Rishi Sunak, Chancellor of the Exchequer, and Sajid Javid, health secretary. You can read Mr Johnson’s resignation speech in the BBC here, or watch his resignation speech here. Markets brushed it off as “UK politics as usual”, and Sterling even had a relief rally, closing up 0.8% ($1.2024/£1.00) on Thursday after Mr Johnson’s resignation was announced.
The FOMC meetings from the last Fed meeting on June 14-15 were released on Wednesday, which you can find here. I didn’t see any real surprises in the minutes. The strong US labour market was well noted, as was the expectation that US GDP would bounce back to positive in 2Q2022. As you might recall from last week’s weekly update, the view of the FOMC is out of line with the forecast from the Atlanta Federal Reserve Bank’s “GDPNow”, which you can find here. Last week, the Atlanta Fed forecast was that the US economy would shrink 2.1% in 2Q2022, and this was revised to negative 1.9% on July 7th. This is an improvement, but still there remains a material difference between the FOMC and the Atlanta Fed forecasting tool.
Jobs report for June (US)
The BLS released the jobs report of Friday for June which you can find here. Unemployment in the US remained at 3.6% for the fourth month running. Nonfarm payrolls increased by 372,000 in June, considerably more than consensus expectations of 268,000 for the month. In spite of the modest add to unemployment claims released on Thursday, Friday’s data suggested that the US labour market is still very tight. US Treasuries sold off on the news and equities wobbled most of the day on Friday, finally finishing lower on the day.
Unemployment insurance weekly claims (US)
According to the DoL report here, “In the week ending July 2, the advance figure for seasonally adjusted initial claims was 235,000, an increase of 4,000 from the previous week's unrevised level of 231,000.” The initial claims data is the highest since mid-January, and well off the early April low of 166,000. This is another potential indicator that the US economy is slowing, although the increases are modest.
The ECB released minutes from its last meeting on June 8-9, which you can find here. There were no surprises. The ECB is set to raise the overnight bank borrowing rate 25bps (to 0.25%) at its next meeting on July 21st, and to consider larger increases at subsequent meetings (following one in September) should inflation prove to still be problematic, which it likely will. Also, the ECB ended its QE programme as announced earlier on July 1st.
OTHER STUFF THAT CAUGHT MY EYE
Twitter/E Musk: Elon Musk has abandoned his bid for Twitter, using a “too many bots” out. If I were Twitter management, an employee, or a shareholder, I would be absolutely livid, because Mr Musk has a history of wriggling out of situations like this that leave others holding the bag. Whether or not his credibility takes a beating remains to be seen, because he seems to escape from these situations time and time again unscathed. Matt Levine has penned an excellent synopsis of where this situation stands in Bloomberg Opinion, which you can find here: “Elon’s Out: Musk lost interest in pretending to buy Twitter.”
ARK/Cathie Wood: ARK Innovation (ARKK, twitter here), Cathie Wood’s flagship actively-managed ETF, had $2.2 bln of inflows in the 1H2022 (through July 7th, source ETF Database), in spite of the fund being down around 50% YtD. There’s nothing wrong with this really, as investors are better off buying these sort of disruptive companies now when they are 25% - 50% of the price they were 12-15 months ago!
Vision Fund/R Misra: Softbank Vision Fund’s Rajeev Misra, former chief of the beleaguered fund, apparently has raised $6 billion from Middle Eastern investors (presumably some of the same investors in Vision Fund I, including UAE-controlled Mubadala, ADQ and Royal Group) to start a new fund. That is shocking given the high-profile misses in Vision Fund I (and II), including WeWorks, Wirecard and Greensill Capital, and the portfolio markdowns of names like Coupang and Didi.
July might see volumes slow, but there will be plenty of data released in the coming days to stir sentiment, starting with CPI for June and the kick-off of S&P 500 earnings. Here are some of the key dates on which to focus.
June US CPI to be released July 13th;
S&P 500 2Q earnings releases start the week of July 12th, with the banks as is customary being the first to release (JPM and MS on June 14th);
The next FOMC meeting is July 26th-27th; and
The Governing Council of the ECB will meet on July 21st.
Corporate bonds (credit)
Safe haven and other assets