Equities | Europe | FX | Global | Monetary Policy & Inflation
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
Government bonds caught a bid as activity data proved weak (Chart 3). This suggests that markets see the Federal Reserve (Fed) as needing to be less hawkish as weaker activity data will be enough to tame inflation. We disagree. We see the Fed terminal rate closer to 5%, Dominique thinks it could even reach 8%. As a result, we continue to be short rates, seeing best value positioning for higher US real yields.
Equities resumed their sell-off. NASDAQ (-1.3 std-dev) saw the largest vol-adjusted fall across DM indices over the past week, while TSMC (-2.3 std-dev) was the worst in EM. We see the move continuing. John thinks clean energy and homebuilders will see relative outperformance in this environment. Meanwhile, HY credit spreads widened 48bps in the US and 57bps in Europe which we see as reflecting high equity volatility rather than credit risk (Chart 2).
USD saw safe haven flows. Notably, ZAR and NZD saw the largest depreciations, relative to the past year, while they trade near year-to-date lows. Meanwhile, cryptocurrencies saw another leg of weakness, with Bitcoin returning sub-$20,000. Commodities also continued to weaken through the recession fears. The notable exception was natural gas, which spiked higher in Europe on the back of reduced supply from Russia.
The Week Ahead
In a holiday-shortened week for US markets, the RBA will likely hike by 50bps (Tuesday) after which attention turns to central bank minutes and speakers, services PMIs, and non-farm payrolls. Fed minutes (Wednesday) will be a hot watch. Markets will be watching to understand their logic for the 75bps move and whether another will follow later this month. Meanwhile, speakers will be more important than minutes for the ECB. Any mention of a potential economic slowdown or peak in inflation could see market pricing pullback. Final services PMI numbers this week will make the former harder to ignore. In the UK, markets will watch for any hawkish rhetoric from the Bank of England’s Chief Economist Huw Pill, or any indications what the doves are thinking from Deputy Governor Jon Cunliffe. Henry continues to think that the pullback in pricing of hikes for the November meeting has further to go. Lastly, non-farm payrolls (Friday) will close out the week. Right now, the market is looking for a strong 273k rise while Dominique sees scope for an even higher number. This would be the smallest change since last April. Given recent economic data, there may be decent room for a downside surprise. For a full breakdown of the week ahead, read Henry’s views on the week ahead.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.