Week ended Nov 10, 2023
“Fiscal risks are exacerbated by entrenched political polarization underscoring rising political risk” –
extract from Moody’s report affirming the US AAA rating but putting the rating on credit-watch negative, Nov 10, 2023
[GO STRAIGHT TO THE TABLES]
Traditional asset classes bounced around last week, a bit up here, a bit down there, but not a lot of movement week-over-week in most markets. Naturally, US equities were the exception although it was not a straight-forward charge forward.
The most excitement during the week came from a poor 30-year UST bond auction on Thursday, which caused long yields to spike. Investors were reminded that higher yields are likely going to be with us a while longer, and this sent equities tumbling, ending an eight consecutive day advance in the S&P 500. However, concerns around yields were short-lived as US stocks resumed their march higher on Friday, accelerating into the close. The catalyst in this case was weaker-than-expected (preliminary) UMich Consumer Confidence data (lower for the fourth month running) released Friday morning, suggesting that in fact economic growth is slowing and pressure on yields might subside as a result. You know that old chestnut that often characterises sentiment swings these days: “bad news is good news”.
Economic data released by major economies during the week was more or less on script, suggesting a slowing economy most pronounced in the UK and Europe, alongside ongoing price declines in China. Both Goldman Sachs and Moody’s released their rather divergent global growth estimates for 2024. Goldman is suggesting that global economic growth will be 2.6% in 2024 (report here) while Moody’s believes global growth will be a more conservative 2.1% (summary here).
The difference in expected US economic growth between Goldman and Moody’s is especially noteworthy, although both see US economic growth slowing in 2024. Recall that last year at this time, nearly all economists and strategists were expecting sharply slower global economic growth in 2023 with a recession being a real possibility. However, they (and include me in that camp) were all ultimately proven wrong because the expected negative effects of higher interest rates were muted by gobs of leftover pandemic-related savings. Lags are difficult to predict, especially ones influenced by once-in-a-century events like a global pandemic. But surely, the day that higher interest rates begin to bite is growing nearer.
Even though stocks raced ahead on Friday, Moody’s poured a bit of cold water on risk assets after the close, announcing that the US’s last remaining AAA-rating had been put on “negative” credit watch. It’s hard to argue that this is not deserved given that the fiscal well-being of the US is heading in the wrong direction as deficits soar and the political quagmire is only worsening, as Moody’s covers in their report (here). The latter will be tested by the end of this coming week when the stopgap 2023-24 budget, which was passed at the end of September, expires. The US is fortunate to have the benefit of there being no viable alternatives yet to the US Treasury market and US Dollar, giving politicians a free option on mismanagement and fiscal ineptitude. My guess is that financial assets don’t move in response to this news because it was telegraphed (as is the almost-certain pending downgrade). Nonetheless, it might provide some interesting grist to kick off the week – let’s see.
My trades this week occurred in the second half of the session on Friday. Right or wrong, it’s feeling slightly toppy to me, inspiring me to write some out-of-the-money covered calls on a sliver of my AAPL and MSFT holdings, both companies I love but that have been on a real tear as investors with FOMO pile into the Mag 7 stocks.
MARKETS THIS WEEK
The S&P 500 has had only had one down day since October 27th (this past Thursday), racking up a 7.2% gain in this two-week period. The return on USTs in the belly of the curve – measured by the 7y-10y Total Return Index (ICE) – has also been decent in spite of yield volatility, with the index gaining 2.8% since hitting a low on October 19th.
European equities did less well last week, as stagnant economic growth and stubborn inflation continues to weigh on stocks. Japanese equities were the big winner as the Bank of Japan signals that its dovish monetary policy is unlikely to change anytime soon. The Yen continued to weaken too, not surprising given the BoJ’ policy stance.
Corporate credit wasn’t materially changed on the week, continuing to demonstrate surprising resiliency in the face of growing evidence that the US economy might be showing some cracks.
The prices of gold and oil both declined, continuing their recent trends, and the US Dollar strengthened. Bitcoin continued its march higher and has now more than doubled in price this year.
You can find detailed information on the indices and asset prices that EMC tracks in the section “The Tables” below.
WHAT MATTERED IN MARKETS THIS WEEK
The second week of the month is often devoid of much economic news, and this week was no exception.
Mr Powell stayed on script during an IMF-sponsored monetary policy research panel discussion on Thursday (#CNBC video of speech here, opening comments from Fed website here), reminding us all once again that the Fed might not be completely done. Having said this, the CME FedWatch tool (here) says that there is a 91% probability the Fed does nothing at the December FOMC meeting. It is also suggesting three 25bps reductions in the Fed Funds rate in 2024: one in June, September and December. Still, the “higher for longer” mantra resonated as yields at the short end of the curve ended the week sharply higher.
China released inflation data with CPI contracting (deflation) more than expected, and PPI negative for the 13thmonth running, collectively suggesting tepid demand and raising more questions about growth in the world’s second largest economy. NBS of China official data can be found here.
WeWork finally bit the dust, even after SoftBank and its ill-fated Vision Fund(s) threw good money after bad, with the only winner really being the company’s founder Adam Neumann who walked away as a cool billionaire. It continues to amaze me that the Vision Fund even still exists given its poor track record. According to Bloomberg, the fund has cumulative losses over the last two years of $53 billion.
Retail sales declined in the Eurozone in September (Eurostat release here), suggesting that the economic bloc remains tormented by the combination of slowing growth and stubborn inflation.
UK growth flatlined in the third quarter (Q-o-Q), with most economists expecting a prolonged period of stagnation even as inflation remains the highest of any G7 country. The ONS release from Friday is here.
The auction of $24 billion of 30-year UST bonds did not go well on Thursday, causing yields to gap out at the longer end of the curve. Even so, the yield on the 30y UST was 4bps lower on the week, closing at 4.73%. Earlier in the week, auctions of $48 billion of three-year UST notes and $40 billion of 10-year UST notes went much better.
The preliminary Michigan Consumer Confidence read released on Friday was one more datapoint that suggested a slowing US economy, declining for the fourth consecutive month (even as inflation expectations ticked higher).
WHAT MATTERS IN THE WEEK AHEAD
Things to watch:
2023-24 US budget: The interim 2023-24 budget – extended at the last minute in late September – expires on Nov 17th. There will either need to be Congressional approval for a 2023-24 budget by then (unlikely) or another interim extension (more likely) to avoid a potential shutdown.
Uncertainty in the Middle East: Direction of and contagion associated with the Israeli-Hamas conflict is ongoing and uncertain, heading in the wrong direction and increasing concerns that the conflict could broaden.
US: inflation data (CPI, PPI), retail sales, some housing data
UK: inflation data (CPI, PPI), retail sales
Eurozone: 3Q23 GDP, CPI
China: industrial production, retail sales
Japan: GDP, trade data
Upcoming central bank meetings:
Federal Reserve (FOMC): Dec 12-13
Bank of England: Dec 14
ECB: Dec 14
Bank of Japan: Dec 18-19
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets