Pictet North America Advisors

2021 Weekly Views — November 22

Pictet North America Advisors 2021 Weekly Views — November 22
Pictet North America Advisors

2021 Weekly Views — November 22

Pictet North America Advisors 2021 Weekly Views — November 22

Market update

Confident consumer

The S&P 500 closed the week at 4,697.960, +0.32% higher. The Dow Jones closed at 35,601.98, -1.38%, with the Nasdaq higher by +1.24%. The volatility index VIX closed the week at 17.91 up from 16.29. The Euro Stoxx 600 slipped -0.14%.

The 10-year UST closed at 1.55% down from 1.56% a week before. The yield curve slightly flattened with the yield spread between the 3-month and 10-year UST at +149bps. Corporate Bond spreads: Investment Grade widened 4bps at 120bps and High Yield widened 14bps at 392bps. German 10-year Bunds yield closed at -0.34% down from -0.26% a week before. In Europe, Corporate Investment Grade spreads widened 9bps at 112bps and High Yield spreads widened 6bps at 345bps.

The US Dollar Index (DXY) appreciated 0.95% last week and closed at 96.03. The Euro closed at 1.1290 (-1.35% weekly); the Yen depreciated -0.09%, closing at 113.99 and the Swiss Franc depreciated -0.68%, closing at 0.9278. Gold closed at $1,845.73 depreciating -1.03%. Oil was down with Brent closing at $78.89 (-3.99%) and WTI at $76.10 (-5.81%).

Macroeconomy

Covid-19
Cases are on the rise in Europe and the US. As a result, several European governments are taking stricter measures to tackle the spread such as Germany restricting access to leisure activities to unvaccinated, the Netherlands re-imposing three weeks of partial lockdown as well as Austria which on top will make vaccinations mandatory from February 2022. In terms of double vaccination rate, Spain (79%) and Italy (74%) lead the table, followed by UK (69%), Germany (68%) and finally Austria (64%). In the US, 58% of the population received both doses. The Occupational Safety and Health Administration (OSHA) suspended enforcement of the Biden administration's vaccine mandate for private businesses with 100 or more employees (it required the creation of a roster of vaccinated and unvaccinated with weekly testing for the latter).

Inflation
UK headline CPI came out at +4.2% y-o-y in October, above expectations and above the Bank of England’s projections. The core figure was also strong at +3.4%. October German PPI came in at +3.8% well above expectations at +1.9% and +2.3% the prior month. Canada CPI came in at +4.7% in October, the strongest in more than 15 years. In Japan, October headline CPI came at +0.1% y-o-y versus estimates of +0.2% and core CPI was in line with expectations at +0.1% y-o-y.

Central banks
With the announcement of the next Fed chair expected before Thanksgiving, we had several Fed officials’ comments last week. St. Louis President James Bullard said Tuesday that the Fed should be more aggressive in managing risks from price pressures (member of the Federal Open Market Committee and voting member next year). San Francisco President Daly said that she became more bullish on the economy over the past year, noting that it is still too early to take action on interest rates. Fed's Evans said that rate liftoff could happen "after taper" (i.e. in 2022), a notable development for typically dovish Evans. In Turkey where inflation levels almost reached 20% in October, the central bank lowered interest rates, yet again, by 100bps to 15%, putting even more pressure on an already weakened Turkish Lira. In fact, the Lira has lost around one third of its value against the greenback since a year ago. South Africa raised its benchmark to 3.75% as expected.

Japan stimulus
The fiscal stimulus package might be significantly larger than the previously expected JPY 30trn to reach 55.7trn (~10% of GDP). The package is expected to feature financial aid for businesses and people hit hard by the pandemic, including cash payouts worth JPY 100k ($884) for students, temporary workers and low-income households; cash and vouchers worth JPY 100k to people aged 18 or younger (excluding high-income families); aid to agriculture and fishery industries hurt by the recent spike in gasoline prices; and the resumption of the "Go To Travel" program to prop up the domestic tourism industry.

US-China relations
US and China, the world's two biggest CO2 emitters, unexpectedly issued a joint statement at the COP26 climate summit in Glasgow. The two countries pledged close co-operation on cutting emissions, acknowledging that “there is more agreement between China and the US than divergence (on climate change)”. President Biden and Xi Jinping seemed to agree on vital global issues, including climate change, during the virtual meeting on Tuesday. The meeting yielded no major breakthroughs as expected but pledged to improve cooperation.

Highlights

US consumer
There was a big beat in US retail sales, with the headline up 1.7% m-o-m in October vs. consensus of +1.4%. Excluding autos and gas, sales were up by 1.4% vs. consensus of 0.7%. Higher prices boosted merchant receipts and household demand remained resilient. Several retailers announced Q3 results. Walmart reported strong results with revenue growth at 9.2% y-o-y, 200bps above the consensus which offset some margin pressure and drove earnings higher than forecast. Home Depot reported even stronger results. Revenue growth came in 6.1% ahead of expectations while customer transactions fell 5.5%, but this was more than made up for by a 12.9% spike in average ticket size. Target beat expectations, raised 4Q revenue guidance and highlighted a strong inventory growth into holiday season. Lowe’s results were better than expected, with revenues unexpectedly positive while management said that the positive momentum continues in Q4 and raised guidance. TJX beat and highlighted strong start to 4Q and good inventory positioning.

Energy prices
We saw large moves in energy prices. In natural gas, the German energy regulator temporarily halt the certification of Nord Stream 2, the gas pipeline between Russia and Europe. The result was a massive surge in European and UK gas prices rising more than +17% on the day. In crude oil, Energy Secretary Granholm told CNN that President Biden was evaluating the use of the Strategic Petroleum Reserve (SPR) to mitigate the rise in gasoline prices. The SPR was created in 1975 after the Arab Oil Embargo led to a spike in gasoline prices that scarred the U.S. economy. The reserve currently holds enough oil to meet US demand for more than a month, including about 606M barrels. At the same time, China said that it’s releasing some crude from its strategic reserves after the US invited it to participate in a joint sale of crude oil.

What to watch

Monday: PBoC interest rate decision; Euro Area consumer confidence (Nov. prel.); US existing home sales MoM (Oct.)
Tuesday: US, Euro Area, German & UK manufacturing & services PMI (Nov. prel.)
Wednesday: Japan manufacturing & services PMI (Nov. prel.); US GDP annualized & price index (Q3); German IFO & US Michigan consumer sentiment index (Nov.); US durable goods orders, goods trade balance, personal spending & income, new home sales (Oct.), Initial jobless claims (Nov. 19)
Thursday: US Thanksgiving Day; Bank of Korea monetary policy decision
Friday: Japan CPI (Nov.); Euro Area M3 money supply (Oct.)

Investment team ― Pictet North America Advisors