A further slowing in growth
The single biggest piece of market-moving economic news overnight has come via the US S&P Global PMIs, which slumped to 47.6 from 50.4, well below the 50.0 consensus.
It’s been a busier day and night than on Tuesday, both in terms of news and market price action, even as the US heads into its Thanksgiving holiday. Tuesday’s ‘Happy (for markets) Thanksgiving theme has extended, with stock markets globally ending in, or currently in the green, though none by very much. The USD is smartly lower as the market focuses on the bad incoming US economic news at the expense of some good.
One drag (on the S&P500) has been the Energy sub-sector on sharply lower oil prices (down more than 4%) on the view that the proposed cap on Russian oil export prices – not yet agreed but $65 or $70 is being discussed – will not be binding on output, given its exports already sell at more than $20 below global benchmarks, below the proposed cap and which is well above Russian production costs. November FOMC Minutes just out confirm support for stepping down the size of rate hikes at future meetings, and too expectations that Fed official saw a higher terminal Funds rate than previously. Markets have focused on the former and ignored the latter, seeing US bond yields and the USD both a little lower post Minutes (and the NASDAQ higher).
The single biggest piece of market-moving economic news overnight has come via the US S&P Global PMIs – despite their chequered history in foreshadowing the subsequent longer-established and regarded as more credible ISM surveys. The manufacturing PMI slumped to 47.6 from 50.4, well below the 50.0 consensus, and more eye-catching Services reading down to 46.1 from 47.8 and against a small rise to 48.0 expected. This contrast with European PMI data that, while uniformly weak (i.e., sub-50) were, except for France, better than expected (Germany, pan-Eurozone, and UK). The Composite French reading fell to 48.8 from 50.2 (49.4 expected); Germany 46.4 from 45.1 (44.9 expected); Eurozone 47.8 from 47.3 (47.0 expected); and the UK 48.3 from 48.2 and an expected fall to 47.5.
Also catching the market’s eye was latest weekly jobless claims, where new claims rose to 240k from 223k and 225k expected and continuing claims to 1,551k from 1,503k and 1,520k expected. The latter hints that recently unemployed workers are not jumping back into new jobs as easily or quickly they were previously. It should prove a reliable indicator – amongst some others – that a turn in the US labour market is now underway.
Summarily ignored by market were somewhat better than expected readings on US durable goods orders (the best underling measure +0.7% vs 0.0% expected), October new home sales (632k from 588k but very hard to square with the (much weaker) mortgage applications data) and final University of Michigan November Consumer Sentiment (56.8 from the 54.7 preliminary, but where the 5-10 year inflation expectations reading came in unchanged on the preliminary at 5.1% and 1-year expectations dropped back to 4.9% versus the 5.1% preliminary read).
FOMC Minutes just out have seen 2-year US Treasury yield revisit the (4.47%) low seen soon after the PMI data and the DXY dollar index fall to the day’s lows (currently just above 106 to be more than 1% low on the day. Choice sentence in the Minutes, courtesy of our friends at Pantheon Economics, include:
“Participants observed that…. the recent data on inflation provided very few signs that inflation pressures were abating.” As a result, at least some FOMC members have raised their estimate of the terminal rate: “…various participants noted that, with inflation showing little sign thus far of abating, and with supply and demand imbalances in the economy persisting, their assessment of the ultimate level of the federal funds rate that would be necessary to achieve the Committee’s goals was somewhat higher than they had previously expected.”
This was balanced though by comments such as that, “some noted that lower commodity prices or the expected reduced pressure on goods prices due to an easing of supply constraints should contribute to lower inflation in the medium term. Several participants remarked that rent increases on new leases had been slowing in recent months, but participants also noted that it would take some time for this development to show up in PCE inflation.” As result, “a substantial majority of participants judged that a slowing in the pace of increase [in rates] would likely soon be appropriate.”
The net effect of the US data and FOMC minutes has been to see pricing for the December 14 FOMC meeting unchanged at 52bps while for the next (1 February 2023) meeting cumulative pricing across the two meeting has come in by one basis point or so to 91bps. So, markets still effectively banking on 50bps at each of these meeting, but some chance they will step down to 25bps in February, depending on the intervening data flow of course. 2-year Treasury yields are coming into the US close down 3bps and 10s down 5bps.
In FX, US dollar selling has bene quite indiscriminate, with only the CAD failing to benefit from USD weakness, on the slide in oil prices. The 0.9% rise in EUR/USD makes, as is usually the case, the biggest contribution to the 1.1% fall in the DXY index, but bigger currency gains have been seen for AUD/USD (+1.2%) JPY +1.3%) GBP (+1.5%) and NZD also +1.5%, with a small part of that down to yesterday’s more hawkish OCR track following the RBNZ’s 75bps rate hike. All these gains are topped by 1.8% rises for SEK and NOK, the latter on a day when oil is off more than 4%. Go figure.
AUD (and NZD) strength has come in the face of a modestly weaker RMB in the past 24 hours, when one influence was the reports of violent protests at Apple’s main iPhone plant in Zhengzhou. As my BNZ colleague jason Wong nots, social unrest is becoming more prevalent under varying COVID restrictions and there are inconsistencies over how local authorities are interpreting the government guidelines to contain the virus but without unnecessarily harming the economy. Also, to note overnight, China’s State Council has pledged support for the economy by measures including cutting banks’ reserve requirement ratio “at an appropriate time”, which some are picking could come as early as this week.
Coming into the last half hour of NYSE trade, US stocks are rallying with the S&P500 now up 0.6% and, doubtless boosted by lower bond yields out of the FOMC Minutes, the NADAQ a bigger 1.2%.
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