Market movers today
We have no tier-1 data today but will get euro M3 growth, Norwegian retail sales and some Fed speakers tonight.
This week focus turns to Euro Flash CPI for November on Wednesday, which will be important for the size of the ECB hike at the 15 December meeting, see Weekly Focus – Euro inflation key to size of next ECB hike, 25 November.
US payrolls on Friday will be important for the Fed’s rate decision on 14 December. We expect US job growth to decline from 261k to a still decent 220k (consensus 200k). US ISM manufacturing, core PCE inflation and house prices are also due this week.
The 60 second overview
New Global Outlook: This morning we published Big Picture – Recession with different undercurrents in which we present new forecasts for the global economy. Various shocks challenge the global economy, with different undercurrents driving the economic outlook across regions. The euro area and the US are headed for recession, while the Chinese growth engine is sputtering. However, the outlook starts to brighten in 2024, once China leaves its zero-Covid behind and the US economy exits from its downturn. Inflation pressures will slowly recede, allowing central banks to gradually exit their tightening mode and rate cuts could return to top the central bank agenda in early 2024. Risks primarily stem from renewed geopolitical tensions, energy shocks and a return of the pandemic through new variants.
Chinese protests widen over zero-Covid policy: Protests spread to more big cities across China after mourning ceremonies over a fire that killed 10 people in Xinjiang turned into protests against the government and the zero-Covid policy. Normally protests in China are aimed at local governments but a crowd in Shanghai directed their protest against the Communist Party and Xi Jinping. The protests come as the recent tweaks in the zero-Covid policy seems to have backfired as it led to rising cases across the country that subsequently triggered new restrictions being implemented. We do not expect China to abandon zero-Covid policy before a vaccination campaign has been rolled out but if protests widen, we could very well see some relaxation and an earlier exit from the zero-Covid policy than our baseline scenario of second half of 2023. The Communist Party’s mouthpiece People’s Daily reiterated the need for “timely detection and control of infected persons” but refrained from using the ‘dynamic zero-Covid policy’ phrase. Xinhua, another key news outlet for CCP, called on the country to stick “unswervingly” to the principle of putting the people’s lives first” and prevent a domestic rebound, phrases that are associated with the zero-Covid policy.
The challenge for China’s government now is that it is unlikely it can ease rules without seeing sharply higher cases and more difficulties in reining in outbreaks. It seems to be closer to a cross roads where it has to choose between allowing the virus to spread more or implement tighter restrictions which could lead to even more protests.
Oil prices lowest since January: The rising uncertainty in China led to another drop in oil prices, with the spot Brent price falling below USD80 for the first time since January.
Equities: A quiet session on Friday and equities little changed and without a clear direction. US saw a small preference for defensive sectors on Friday but with minuscular differences between sectors. The lower conviction in markets comes from lower support from positioning: VIX ticked slightly higher on Friday close to the important 20-level. Previous bear market rallies this year have always ended when VIX hit 20. Dow +0.45%, S&P500 (0.03%), Nasdaq (0.52%), Russell 2000 +0.30%.
FI: The hit to risk sentiment sent US bond yields lower in Asian trading falling to 3.63%, the lowest in close to two months. We are likely to see German yields open lower as well reversing some of the increase on Friday.
FX: CNH declined overnight following the Chinese protests. USD/CNH jumped from 7.19 to 7.26 on the open. The cross came back down to 7.21 during the night, though. The development in protests and the government’s response will be key to watch over the coming week. The multi-week rally in EUR/USD, which brought the cross to new five-month highs, has taken a breather and is back below 1.04. USD/JPY testing lows around 138.50. After a 30-figure drop EUR/NOK is off lows at 10.30. EUR/SEK starts the week around 10.85.
Credit: The credit market ended the strong performance last week on a more tempered note, with iTraxx main widening 1.5bp to 89.1bp and Xover widening 10.4bp to 452.0bp. Primary activity also took a breather with only minor local currency deals being announced. As we are approaching the December lull, we remain optimistic that we will see a good deal of primary activity in the coming couple of weeks ahead of investors closing down for the year.
Nordic macro
Norway releases retail sales, which is expected to decline -0.5% m/m. Later this week we get preliminary GDP and NIER confidence indicators out of Sweden while Norway releases unemployment numbers.
