Weekly Market Update

Source: Bloomberg

Though receding from their levels a month ago in December, both the ISM Manufacturing Index as well as the ISM Services Index are still reflecting strong growth momentum in the US. In addition, there are more and more signs that price pressure is starting to abate. The ISM Manufacturing’s Report on Business Prices, which has been a good indicator for changing trends in inflation in the past, fell to its lowest level since November 2020. We expect headline inflation to slow markedly over the course of the year as supply chain disruptions should continue to be resolved and base effects are kicking in. Meanwhile, the employment situation improved further in December. Although the number of new payrolls was below expectations (particularly as they have been revised up significantly for the two months before) the unemployment rate dropped to 3.9% from 4.2% in November ⎯ not far from prepandemic levels. While the general economic environment remains supportive for stocks, investors were spooked by the FOMC’s hawkish tone in the latest Fed minutes. An earlier end of the tapering process and a number of expected rate hikes in 2022 were well digested by the market, but the potential for an accelerated balance sheet reduction injects new uncertainty and is likely to lead to more volatile markets this year.

Markets: Bonds and equities take a hit as investors reappraise Fed actions

US data and Fed minutes spooked investors last week, with bond yields surging and stocks coming under pressure. While we do think volatility will be a defining characteristic of 2022, we are more upbeat on the overall direction for stocks. That noted, with higher rates and the Fed’s balance sheet potentially shrinking faster than expected, the start ofthe year has already been challenging. The tech heavy Nasdaq fell 4.5%, with Apple momentarily hitting a record USD 3tn market cap on Tuesday before big tech also came under pressure. With the MSCI World Index off 1.7%, the UK FTSE100 was one of the few markets to post positive gains, following a number of years of disappointing performance. Bonds were also under fire based on still disturbing inflation prints and shifting sentiment on rates. While 10yr Treasuries surpassed March highs to close at 1.76%, Europe also saw a similar move, with the Swiss 10yr back in positive territory for the first time since 2018.

Eurozone: Services sentiment weakens, inflation touches another record high 

The final Eurozone Composite PMI was virtually unchanged from the flash estimate, at 53.3 in December, down from 55.4 in November. The fall was mainly due to a lower services PMI, 53.1 in December down from 55.9 in November, due to Omicron news and increased restrictions, while manufacturing confidence remained strong. Overall, the survey suggests that growth in the region slowed around the turn of the year, but is maintaining a decent pace. Meanwhile, Eurozone headline inflation was stronger than expected in December, rising a further tenth of a percentage point to 5.0% YoY from 4.9% in November, while core inflation was unchanged at 2.6%. Although energy and services inflation fell, non-energy industrial goods inflation rose. We expectthat inflation will fall back early this year, especially with the German VAT hike fallingout of the annual comparison, but headline inflation will likely remain above the ECB’s target for most, if not all, of this year.

Asian PMIs: A mixed bag, but overall still robust

Asian headline Manufacturing PMIs moderated, but remain at a healthy level, which is exemplified by India and Indonesia. Both PMIs contracted, but from a high level. The exception is Thailand’s PMI, which contacted below the boom-bust line of 50. It is encouraging that Vietnam’s PMI keeps creeping higher despite the difficult Covid environment. Taiwan’s Manufacturing PMI remains brisk at 55.5, with relevant sub-indicators improving markedly, suggesting that supply chain issues are abating. Export momentum remains solid. In South Korea, both the output and new export order components reveal some weakness. Export growth is already slowing, though vessel exports may be distorting the statistics. At first glance, China’s economy seems to be recovering as both the NBS and Caixin PMIs advanced further above the 50 boom/busline. However, small companies continue to struggle, and the weak new order and employment subcomponent of the NBS Non-manufacturing PMI suggest that challenges remain.

China: Policy support should help to spur housingdemand

China’s ailing property sector reveals a mixed picture. Following last year’s default by Evergrande and Kaisa on overseas listed bonds, Shimao Property failed to repay aloan due to liquidity constraints last week. Shimao’s bonds and equity prices tumbled on Friday but bounced back today. Overall, Hong Kong listed property heavyweight shave rallied recently on policy support by China’s authorities. While avoiding direct assistance to ailing property companies on moral hazard concerns, the government has implemented measures to spur housing demand by easing financing restrictions. Potential home buyers will have easier and cheaper access to mortgages, while banksare encouraged to extend loans to property companies. The next four months will be critical as the loan repayment schedule is challenging, with more company failures expected. However, we believe that policy easing will encourage home buyers to apply for mortgages and that housing demand will slowly recover and then gain traction into the second half of 2022.

LatAm: The central bank of Argentina (BCRA) raisesthe policy rate amid IMF negotiations

In Argentina, the BCRA hiked the benchmark rate (28-day Leliq rate) by 200bps to 40%. They also implemented some changes to its policy framework, adding a new 180-day Leliq instrument, aiming to extend the central bank’s remunerated liability maturities. While helpful, these measures are not enough to adjust the macro economic imbalances in regard to the fiscal path required by the IMFto reach an agreement on the stand-by facility. Considering the low net reserves, which only cover a couple of additional months of public debt payments, we expect a deal with the IMF in March. Headline inflation in Mexico and Chile reached 7.4% and 7.2% respectively in 2021, both above target, and continues to pressure the monetary authorities to tighten. In Brazil, industrial production declined 0.2% MoM in November, suggesting a downside risk for the Q4 2021 GDP. The drop was driven by capital goods production, partially offset by a recovery in the auto sector and durable goods production.