Pictet North America Advisors

2022 Weekly Views — January 17

Pictet North America Advisors 2022 Weekly Views — January 17
Pictet North America Advisors

2022 Weekly Views — January 17

Pictet North America Advisors 2022 Weekly Views — January 17

Market update

US-China decoupling

The S&P 500 closed the week at 4,662.85, -0.30% lower. The Dow Jones closed at 35,911.81, -0.88%, with the Nasdaq lower by -0.28%. The volatility index VIX closed the week at 19.19 up from 18.76. The Euro Stoxx 600 slipped -1.05%.

The 10-year UST closed at 1.78% up from 1.76% a week before. The yield curve was unchanged, the yield spread between the 3-month and 10-year UST sat at +166bps. Corporate Bond spreads: Investment Grade widened 5bps at 126bps and High Yield tightened 6bps at 377bps. German 10-year Bunds yield closed at -0.05% down from -0.04% a week before. In Europe, Corporate Investment Grade spreads widened 3bps at 114bps and High Yield spreads widened 6bps at 344bps.

The US Dollar Index (DXY) depreciated -0.58% last week and closed at 95.16. The Euro closed at 1.1411 (+0.45% weekly); the Yen appreciated +1.19%, closing at 114.19 and the Swiss Franc appreciated +0.52%, closing at 0.9140. Gold closed at $1,817.94 appreciating +1.19%. Oil was up with Brent closing at $86.06 (+5.27%) and WTI at $83.82 (+6.24%).

Macroeconomy

US inflation
December CPI came in at +7% y-o-y as expected, the highest reading since June 1982. Core CPI reached +5.5% y-o-y. Inflation is still amplified by supply-chain disruptions, especially the new cars / used cars category. Rents is another area of focus, but they rose 0.4% m-o-m, broadly in line with the average in the past four months. Services ex. energy rose in line with the average gain in 2021. In general, US inflation is about to peak in y-o-y terms, but the descent (driven by easing supply chain bottlenecks and commodities' base effects) is likely to be slowed by the ongoing firmness in services inflation. Most market participants expect headline CPI inflation to edge below 3% y-o-y by year-end. The December PPI came in at 0.2% m-o-m versus expectations at +0.4% marking the slowest gain since November 2020. The y-o-y reading was +9.7% below expectations at +9.8% and +9.8% in November. The core PPI measure came in at +0.5% in-line-with expectations, or at +8.3% y-o-y versus consensus at +8.0%.

The Fed
At his Senate confirmation hearing, Fed Chairman Jerome Powell said high inflation was a severe threat to a full US economic recovery and the Fed was preparing to raise interest rates because the US economy no longer required emergency support. Other Fed officials had hawkish declarations indicating a March interest rate hike. Fed funds futures moved to price a 93% chance of a rate hike in March, which marks the highest closing probability to date.

China economy
The December inflation report shows easing for both CPI and PPI inflation. December Headline CPI inflation eased to 1.5% y-o-y vs. 2.3% in November, staying flat m-o-m. PPI eased notably to 10.3% y-o-y vs. 12.9% in November, falling 1.2% m-o-m. The easing in the headline CPI was led by: easing in food prices (-0.3% m-o-m), with steady pork prices (+0.4% m-o-m) and easing vegetable prices (-8.3% m-o-m); and easing energy prices (vehicle fuel prices fell 5.2% m-o-m). Core CPI remained modest in December, rising 1.2% y-o-y or 0.1% m-o-m, as domestic consumption recovery stayed modest. Chinese exports went up +20.9% y-o-y slightly above markets expectations at +20.0%, while imports in December rose to +19.5% y-o-y versus the +28.5% forecasted. It resulted in a trade surplus of $94.46bn well above consensus at $74.50bn. Overnight, the PBOC lowered its policy rates, 7-day reverse repo rate (from 2.2% to 2.1%) and 1-year MLF, medium-term lending facility, interest rate (from 2.95% to 2.85%). This is the first policy rate cut since April 2020, and shortly after the 5bps reduction of loan prime rate (LPR) by banks on December 20, 2021.

US-Russia talks
After a full week of security talks between Russia, NATO and the OSCE, negotiations reached a dead-end. Positions are seemingly irreconcilable, especially regarding Russia’s demand that NATO does not accept any new member states (in particular Ukraine). If tensions escalate, possible additional US sanctions against Russia range from a strengthening of the existing measures against individuals and firms in specific sectors (energy, defense and banks) to attempting to cancel Nord Stream or cutting Russia off from the SWIFT payment system. Markets reacted strongly to the news and European natural gas futures moved +13.71% higher.

Highlights

Banks earnings
The Q4 2021 earnings season kicked off with the Financial sector. As usual, some of the large banks reported first. JP Morgan reported a net profit of $9.9bn for the quarter, 10% ahead of consensus on investment banking and asset management revenues along with provisions releases. The negative note was on an 8.6% increase in costs ($77bn vs 71 in 2021) on higher compensation driven by inflation and investments. Citigroup reported a Q4 2021 net profit of $2.9bn, 8% below expectations, after taking charges on Asian divestments. Wells Fargo reported core EPS better than consensus with Net Interest Margin ahead and company guiding for NII up by 8% in 2022, while largely in line expense guide a bright spot.

Commodities
Oil set a record fourth week of rising prices, with a barrel of Brent at $85, up from $71 on December 20th. European gas prices remained low on the back of mild weather conditions during the end-of-year holidays and strong LNG imports (despite ongoing weak flows from Russia). Recent colder temperatures could trigger new spikes in European gas prices as inventories appear very low. Industrial metals were in the spotlight. The price of nickel increased sharply (+7% ytd) after the Indonesian authorities announced their intention to shift away from shipping raw materials in order to move up value chain. Indonesia is the world’s biggest producer of nickel. This decision could affect China as it is a big importer of Indonesian ferronickel used in the car industry. Iron ore was also up due to weather conditions. Heavy rain in the Minas Gerais region of Brazil has forced Vale to halt some operations. The region accounts for 40% of Vale’s output. Copper was also up, albeit with no clear trigger. Oil prices were also supported by low US inventories. The US shale oil industry added 0.8mbd in 2021, it is now just 0.7mbd below the 2019 high. The potential for higher supply is likely to be limited once this high is reached.

What to watch

Monday: Martin Luther King’s day, no-USD settlement
Tuesday: UK Unemployment & Jobless claims (Dec.); Germany ZEW survey (Jan.); US Empire manufacturing (Jan.)
Wednesday: UK CPI (Dec.); Germany CPI (Dec.); US Housing starts (Dec.) 
Thursday: Euro zone CPI (Dec.); US Weekly Jobless claims; US Existing home sales (Dec.)
Friday: UK Retails sales (dec.); US Leading index (Dec.)

Investment team ― Pictet North America Advisors