Pictet North America Advisors

2022 Weekly Views — September 19

Pictet North America Advisors 2022 Weekly Views — September 19
Pictet North America Advisors

2022 Weekly Views — September 19

Pictet North America Advisors 2022 Weekly Views — September 19

Market update

The content of this document is for information purposes only and are not to be used or considered to be an investment recommendation, or an offer or solicitation to buy, sell or subscribe to any securities or other financial instruments. It does not take into consideration the specific investment objectives, financial and fiscal situation or particular needs of the addressee.

All eyes on the Fed

The S&P 500 closed the week at 3,873.33, -4.77% lower. The Dow Jones closed at 30,822.42, -4.13%, with the Nasdaq lower by -5.48%. The volatility index VIX closed the week at 26.30 up from 22.79. The Euro Stoxx 600 slipped -2.89%.

The 10-year UST closed at 3.45% up from 3.31% a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +27bps. US Corporate Bond spreads: Investment Grade tightened 1bp at 189bps and High Yield widened 15bps at 537bps. German 10-year Bunds yield closed at +1.76% up from +1.70% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 213bps and High Yield spreads tightened 11bps at 596bps.

The US Dollar Index (DXY) appreciated +0.70% last week and closed at 109.76. The Euro closed at 1.0016 (-0.26% weekly); the Yen depreciated -0.32%, closing at 142.92 and the Swiss Franc depreciated -0.37%, closing at 0.9650. Gold closed at $1,675.06 depreciating -2.43%. Oil was down, Brent closed at $91.35 (-1.60%) and WTI at $85.11 (-1.94%).

Macroeconomy

Inflation data
US CPI inflation slowed less than anticipated by the market, with a rise of 0.1% m-o-m versus -0.1% expected. The y-o-y print was 8.3%, a modest deceleration versus 8.5% in July. The surprise was the sharp increase in the core CPI print (+0.6% m-o-m, double market consensus). The y-o-y print picked up to 6.3% from 5.9% prior. The increase in core inflation was broad-based, suggesting stubborn inflation in many sectors of the economy. Notably, new vehicles rose 0.7% m-o-m, drugs rose 0.4% m-o-m, medical care rose 0.8% m-o-m. The two categories that stood out were the sharp increase in rents (+0.74% m-o-m) as well as in food prices (+0.75% m-o-m). Regarding energy prices, while gasoline prices fell sharply in August (-10.6% m-o-m), electricity and gas prices both rose (+1.5% m-o-m and +3.5% respectively). The producer price index (PPI) for final demand decreased 0.1% m-o-m and increased 8.7% y-o-y. Excluding the food and energy components, core PPI climbed a larger than forecast 0.4% in August and was up 7.3% y-o-y. While gasoline prices eased in the month, producers faced higher costs for services and some goods as construction equipment and beverages.

US economic data
August retail sales beat on the headline at +0.3% m-o-m (expectations were at -0.1%), but July was revised down (from flat to -0.4%) and the “control group” (which is watched closest) fell short in August (flat vs. consensus at +0.5%) and saw a sharp downward revision to July (from +0.8% to +0.4%). The Sept. Empire Manufacturing survey was strong on the headline at -1.5 (vs. consensus of -12.9 and vs. -31.3 in August). The new orders index climbed 33pts. to 3.7, indicating a slight increase in orders, while the shipments index surged 44pts. to 19.6, pointing to a rebound in shipments after they declined significantly last month. Prices paid were reported lower. The Sept. Philadelphia Fed report was soft at -9.9 (vs. consensus of +2.3 and down from +6.2 in August). The new orders index fell 13pts. to -17.6, and the shipments index fell 16pts. to its lowest reading since May 2020 but remained positive at 8.8. The inflation news in the report were mixed. The Reuters/University of Michigan Consumer Sentiment Index picked up 1.3pts. in the preliminary Sept. survey to 59.5, which was just above the consensus of 59.3. It was its third consecutive increase, lifting the index to its highest level since April, however the 59.5 read remains well below the pre-pandemic high of 101.0, and is still near its lowest level since September 2011. On a y-o-y basis, sentiment is down 18.3%, which remains consistent with a bearish outlook for economic activity. Consumer inflation expectations moderated, yet they also remain at elevated levels still.

Energy in Europe
The European Commission will propose a temporary revenue cap on “inframarginal” electricity producer, which would be set at €180 per megawatt-hour, with surplus revenues above the cap used to support energy consumers. Moreover, there was a windfall tax proposal on other activities in the oil, gas, coal and refinery sectors which would be applied on 2022 profits that are more than 20% above the average profits over the most recent 3 years. Finally, France would be capping the increase in energy prices for households to 15% from January, and the country’s power-grid operator said that they may have to issue alerts to encourage a reduction in energy consumption over the next six months. At the same time, European natural gas futures continued to rebound from their one-month low on Monday, gaining +9.70% to €218 per megawatt-hour.

Highlights

Rates
Yields on US government bonds closed higher across the curve, with yield on 10-year edging up almost 14bps to close at 3.45%. 12-month Treasury bills briefly traded as high as 4% on Friday and closed at 3.93%. US 30-year fixed mortgage rate rose to 6.02%, the highest level since the subprime crisis in 2008. The Federal Reserve is expected to raise interest rates by another 75bps at their meeting next week, marking the third-straight historically large increase. As of last week, futures were still fully pricing in a third consecutive 75bps hike with an 80% probability, but markets were supported by the fact that a bumper 100bps move is now perceived as less likely that it was shortly after the CPI release. Investors will be closely watching the FOMC member’s Dot Plot projections for longer terms rates which currently sit at 2.50%.

Oil market
Oil fell during the week as the US Department of Energy walked back its plan to restock petroleum reserves and China was reported to considering exporting more fuels, which raised the fears that domestic consumption in China could be falling amid Covid-19 lockdowns.

What to watch

Monday: US NAHB index (Sept.)
Tuesday: Sweden Riksbank decision (Sept.); US building permits, housing starts (Aug.)
Wednesday: US existing home sales (Aug.); US FOMC decision (Sept.)
Thursday: Japan BoJ decision (Sept.); Switzerland SNB decision (Sept.); Norway Norges Banks decision (Sept.); UK BoE decision (Sept.); Euro area consumer confidence (Sept.)
Friday: China: PPI, CPI, total financing (Aug.); Euro area, UK, US flash PMI indices (Sept.)
Sunday: Italy general elections

Investment team ― Pictet North America Advisors​​​​​​​