If there is a prize for the most boring week of the year in financial markets, then I think we have our winner. It’s been an exceptionally quiet week; I can say with certainty the most animated discussion across the desks was on “your top 5 biscuits”. For what it’s worth, McVities products featured heavily. Financial markets are not quite in Christmas shutdown mode yet though, as next week will bring a wave of central bank meetings, in which the policy shifts and messaging will dictate the market mood for the remaining trading sessions of the year.
This week has seen US equities in particular drifting lower; after the second-best single day of the year last week we’ve seen more data that points to the resilience of the US labour market and the anticipated slowdown in the services sector failing to materialise for now. While good economic news should be a good thing, financial markets see more positive data as a reason why the Federal Reserve will keep interest rates higher for longer. So good news is bad news, so to speak. The monthly jobs report showed a further 263000 jobs created, well ahead of expectations. The unemployment rate held steady at 3.7%. Meanwhile, after the weak ISM Manufacturing PMI report last week, the equivalent report for the service sector was much stronger than expected – higher than every one of the 60 economists surveyed by Bloomberg. The terminal expected rate for US interest rates, expected to be reached in June next year, climbed back above 5% on the news flow. Elsewhere in the PMI data the services data for the UK and eurozone was in line with the flash data and consistent with economies in contraction. The Chinese data fell to a six-month low, also in the contraction zone, as a result of Covid restrictions weighing on activity.
There were further hopeful signs of China easing back on Covid restrictions even as case number remain elevated. Home quarantine will now be allowed for people testing positive but without symptoms, and requirements for negative tests to gain access to public buildings will be removed. The city of Urumqi, where the anti-lockdown protests began, reopened restaurants and shopping malls. The government announced further measures, including the acceleration of vaccination programs for the elderly and stopping local offices from designating large areas at high risk, leading to lockdown type curbs. Bloomberg reported the Chinese government was considering a 5% growth target for 2023, reporting that the Politburo would seek a turnaround in the economy and to significantly boost market confidence. While the GDP target won’t be known until March, achieving 5% growth will require a combination of further progress on Covid, support for the housing market and broader economic stimulus. Hong Kong equities rallied on talk of further easing in terms of the removal of outdoor mask mandates and further reductions in quarantine times, but the market response overall has been relatively muted. Given the strong upwards moves we’ve already seen in the past six weeks or so in Hong Kong and China it seems like a lot of the good news on reopening was already priced in.
The political news has been pretty quiet though we did see the EU agree a price cap on Russian oil, at $60/barrel, which is above the current market rate. The plan was agreed last weekend and endorsed by the G7 and Australia and came into effect on Monday. The agreement prohibits western firms from insuring, shipping or trading Russian oil unless it is sold below the price cap. This should have a significant impact on shipping, as uninsured ships won’t be going anywhere. But the ban does not impact pipelines, so the bans impact is not all encompassing. President Putin told a televised meeting that the war in Ukraine would be a “long process” but the invasion had yielded “significant results” and he did not plan to mobilise more troops. Putin noted a growing risk of nuclear war but said Russia would only use nuclear weapons if it was attacked.
As I said at the start, don’t assume this quiet week means 2022 is done with us quite yet. Next week’s US CPI data and central bank meetings are very important in setting the tone for what comes next in terms of policy. The Federal Reserve, Bank of England and European Central Bank are all expected to hike rates, but at a lower pace than recently. The messaging that accompanies these hikes will likely determine whether markets begin to feel festive or more grinch-like as Christmas looms on the horizon….
