Major market events 28th Nov – 2nd Dec
Highlights for the week
Mon: relatively quiet
Tue: DE CPI, US Case/Shiller Housing Index
Wed: NZ Building Permits, AUD CPI, China NBS PMI, CHF Leading Indicator, US ADP Employment, Powell speaks
Thur: China Caixin PMI, UK Housing Prices, US PCE, US ISM PMI
Fri: Canada Employment Data, US Employment Data
Watch US employment and US PCE the FED’s favorite inflation measure.
Last week was a bit slow due to the US Thanksgiving holiday. Nonetheless, RBNZ was able to surprise with a hawkish 75bps, while markets were also contemplating the possibility of a 50bps hike. Furthermore, continued lockdowns in China due to Covid were a cold shower for markets which were betting – including myself – on a gradual reopening of the economy.
The data this week will be crucial!
On Thursday the Bureau of Economic Analysis (BEA) will release PCE and Core PCE. The Federal Reserve of Cleveland, which provides daily nowcasts of the two most popular inflation indices (CPI/PCE), expects core PCE to rise +0.41% MoM and +4.91% YoY.
The feeling here is that inflation will come down. Some large retailers (Walmart, Amazon, Costco & Home Depot) have been hitting the headlines, flashing warnings that they are through paying higher prices to suppliers. It really looks like they are starting to seriously push back hard against price increases.
Employment on Friday
Consensus looks for +208k jobs created in November. That’s lower than last October’s +268k and below the 3M, 6M, and 12M averages. Alternative data is also leaning towards a softening of the job market. On top, there have been recently a few headlines of large tech companies announcing layoffs. Meta had to let go of 11,000 employees, Amazon has said it could cut 10,000 corporate jobs. HP will shed between 4k and 6k jobs by the end of 2025. Not to mention Twitter. That has become a House of Cards saga with Elon initiating mass layoffs and giving remaining staffers cryptic ultimatums. In summary, I think market expectations are already gloomy with regard to the employment data. There is again some risk of disappointment for the job market bears. In fact, according to Goldman Sachs, there are three key reasons why the huge tech layoffs are not necessarily a sign of a tanking economy. First, the tech industry only makes up a tiny part of the broader job market. Second, job openings in tech are high and job seekers have a lot of opportunities to find alternative jobs. Last, mass lay-offs in the tech industry have already been observed in the past but did not always point to job cuts across other sectors. I can be certainly wrong – been so many times in the past – but I would be surprised to see a lot of job cuts ahead of the winter, where there is always a material tail risk of lockdowns, which would make very hard to find a replacement for the needed staff. Let’s also not forget that the US economy is doing better now, than in the last couple of quarters, at least according to the GDPNow of the Atlanta FED.
At the time of writing, the GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in Q4 of 2022 is 4.3%, up from 4.2 percent on November 17. After recent releases from the US Census Bureau and the National Association of Realtors, the nowcast of fourth-quarter real gross private domestic investment growth increased from 0.4 percent to 1.0 percent.
I am not sure how accurate this estimate really is, but one thing is clear: the US economy is not weak at all.
The last FED’s minutes have signaled the need to moderate the aggressive monetary policy stance. “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate”. My main concern here is that FED’s Chairman JH Powell, speaking at Brookings this week, won’t like this:
The inverted curve at the front end. The market again is not fully believing the “high for longer” narrative and it is pricing now 200bps cumulative cuts by mid-2025. There is a high chance that Powell will try to lean again against market pricing. But, there is a big BUT this week: P.C.E. ! The market will focus on the data. If the data will provide further evidence of a further slowdown in inflation – no matter what JH says – that will be a clear green light for the year-end rally in bonds and equities, despite they may both look technically a bit stretched here.
I would give it a go. Get tactically long for both US bonds (10y Treasuries) and US equities (Nasdaq). I would trade with a stop, 4% below Friday’s close for stocks and 2% below Friday’s close on 10Y Treasuries. If stop levels are reached: get out. No time for regrets and look forward to the next trades!
Have a great start to the week
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