Consumer data from the US out at the end of last week showed that activity is still holding up well alongside elevated prices. Personal spending rose by 1.1% m/m in real terms in January, reversing some of the 0.3% monthly declines recorded in both November and December 2022. Income levels also gained, up by 0.6% m/m in January compared with a rise of 0.3% in December. However, the PCE deflator, the inflation gauge that the Fed targets, also moved higher in January with a rise of 5.4% y/y compared with 5.3% a month earlier. The core PCE measure of services ex-housing picked up more substantially, rising to 4.6% y/y in January from 4.3% in December. The turnaround in prices will push against the disinflation trend that the headline CPI is showing and could prompt further re-evaluation in how high policy rates need to go in the US this year.
The strong consumption data was matched with better than expected housing data with new home sales up by 670k in January from 625k a month earlier and also outperformed market expectations. The gain in sales was highly concentrated in the southern states of the US. New home prices dropped year/year, down by 0.7% and representing the first annual decline in mid-2020.
A revised estimate for Q4 2022 GDP showed Germany’s economy contracted by more than initially estimated. Total GDP fell by 0.4% q/q compared with a 0.2% decline in the initial estimate. Private consumption dropped by 1% q/q while investment fell sharply, down 2.5%. Overall trade declined with imports down by 1.3% and exports declining by 1%. Recent data from Germany have been relatively positive though the country is still likely close to a recession. Another quarter of contraction would mean that the Eurozone’s largest economy will have officially moved into recession.
Today’s Economic Data and Events
- 13:00 EC economic sentiment Feb
- 17:30 US durable goods orders Jan: forecast -4%
- 19:00 US pending home sales Jan: forecast 1%
- 19:30 Dallas Fed manf. Activity Feb: forecast -9.3
Fixed Income
- The resilience of US data, including inflation, helped to sink US Treasuries again last week. Yields on the 2yr UST closed on Friday at 4.8136%, their highest level since mid-2007. The 2yr UST has fallen five weeks in a row with yields up almost 20bps last week. Yields on the 10yr UST rose by 13bps last week, settling at 3.9432%.
- Market pricing for rate hike expectations has risen considerably in the last week with OIS implied policy rates getting up to nearly 5.5% by mid-year with three more 25bps hikes at the March, May and June FOMC meetings.
- European bond markets also closed weaker on Friday with yields on 10yr bunds up 6bps to 2.532% and 10yr French yields up 6bps at 3.01%. Gilt yields pulled higher by 7bps to 3.655%.
- There will be a flurry of ECB and Bank of England speakers this week with markets attuned to more doubling down of hawkish rhetoric.
FX
- The dollar strength story continues with the broad DXY index rising for a fourth week in a row, up by 1.3% last week. The index has now gained by 1.6% since the start of the year with most of the gains due to a weaker yen (down 4% ytd) while the euro has also steadily weakened, falling by 1.5% ytd. EURUSD fell every day last week, down by 0.5% on Friday to settle at 1.0548. USDJPY rose by 1.3% on Friday to close at 136.48 while GBPUSD settled below 1.20, down by 0.6% on Friday.
- Commodity currencies also closed the week on a softer footing. USDCAD added 0.5% on Friday to 1.3611 while AUDUSD dropped 1.2% to 0.6726 and NZDUSD fell 1% to 0.6165.
Equities
- Equity indices for the most part closed lower w/w after markets finally seemed to ‘get the message’ from hot US data and constant hawkish commentary from Fed officials that rates would be higher for longer. Despite some brief respite on Thursday, US equities were under pressure for most of the week, with the Dow Jones, the S&P 500, and the NASDAQ ending the week down 2.6%, 2.9%, and 3.9% respectively. This was the biggest weekly loss for the broad-based S&P in over two months, with sharp losses on Friday for all three on the back of the hot PCE inflation data.
- Losses in Europe, where there is a greater preponderance of value rather than more interest rate sensitive growth stocks, were somewhat lesser than those seen in the US, but all the key indices ended the week lower nonetheless. The composite STOXX 600 ended Friday down 1.4% w/w, with the DAX dropping 1.8% and the CAC 2.2%. In the UK, the FTSE 100 lost 1.6% w/w.
- Locally, the ADX ended Friday down 1.2% w/w while the DFM lost 1.7% w/w, despite both indices having enjoyed a modest 0.2% gain on Friday. Saudi Arabia’s Tadawul ended Thursday down 4.0% w/w, while Egypt’s EGX 30 lost 2.8% w/w despite a 1.4% gain on Thursday.
- In East Asia, the Shanghai Composite was an outlier last week as it ended up 1.3% w/w on Friday, buoyed by proposed stimulus. By contrast, the Hang Seng lost 3.2% w/w. In Japan, the Nikkei ended Friday down 1.0% w/w despite a 1.3% gain on the day.
Commodities
- Oil prices had a two-way week that ultimately left prices near unchanged. Brent futures settled Friday at USD 83.16/b, up by 1.2% though only up 0.2% for the week. WTI closed at USD 76.32/b, up 1.2% on the day but near unchanged for the week. Another week of large commercial inventory builds in the US weighed against expectation that China’s economy, and oil demand, would recover strongly.
- The US oil drilling rig count fell by 7 to 600 rigs. That brought the total rig count down to 753, a drop of 7 as there were no declines in the gas rig count.
