2023-11-20 15:48:36
Last week, the United States and China took center stage, providing investors with positive political and economic headlines.
Risk on. The rise in government bonds continued for the second week; since the start of the month, 30-year yields have fallen by 50 basis points in the United States and Germany. Corporate credit markets continued to keep pace with government debt, with US dollar-denominated credit performing better. Global equity markets saw prices rise, the VIX fell below 14 (a sign of a return of risk appetite) and the US dollar depreciated. The only exception to this trend has been energy prices which continue to fall – the Brent and WTI price trend is now negative year-to-date.
Last week, the United States and China took center stage, providing investors with positive political and economic headlines. President Biden signed the “Staggered” Continuation Resolution (CR). This pushed back spending deadlines to January 19 and February 2, avoiding a government shutdown. Mr. Biden also spoke at length with Chinese leader Xi Jinping at the Asia-Pacific Economic Cooperation summit in San Francisco. In a symbolic gesture allowing investors to assess relations between the two superpowers, the leaders agreed to begin negotiations on renewing the science and technology agreement. It was the first major pact signed by the United States and China when they established relations in 1979 under the Nixion administration.
On the economic front, the news regarding inflation is positive: consumer prices remained unchanged in October and core prices increased by only 0.23% month-on-month, both indices being lower than the expected consensus. Core inflation now stands at 4%, its lowest level in two years. When looking at price indices, economists will be encouraged by the extent of disinflation within the subcomponents; the very important owners’ equivalent rent continued to moderate, and the prices of hotels, airline tickets and new vehicles also experienced downward surprises. In China, retail sales continued to recover led by the service sectors, and industrial production surprised, exceeding investors’ expectations. Only investments in fixed assets disappointed, driven by weakness in the real estate sector. However, it has been reported that China now plans to provide at least 1 trillion yuan in low-cost financing to the national urban village renovation and affordable housing program to help support the sector.
To take a broader perspective, beyond the weekly flow of positive news and price movements, we can use economic surprise indices (see chart of the week). For the United States (white line), we see that investors have always been surprised by the robustness of the economy. It was only from November that the positive surprise began to dissipate, which could help explain investor confidence in a soft landing and the end of the political cycle. For China (red line), the trough in activity relative to economic expectations was reached during the summer. The index has now turned positive, suggesting that investors are too pessimistic about real activity – this could explain the cheap valuations found in China. For the euro zone (blue line), as for China, the peak of negative surprise was reached during the summer; economists have recalibrated their expectations but are still surprised by the level of weakness in the region. This partly explains the reassessment of ECB (European Central Bank) policy over the past month. The OIS (overnight interest rate swap) market estimates that the ECB should start easing policy in June and reduce it by a total of 100 basis points in 2024.
Chart of the Week: Economic Surprise Indices
Source: Bloomberg, November 17, 2023. For illustration purposes only.
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