Weekly View - Little room for small hikes

The November purchasing manager index (PMI) for US manufacturing dropped well below the 50 level that divides expansion in business activity from contraction, with the new orders subindex dropping to its lowest level in two and a half years. The services PMI was even feebler. The data point to a near-term recession even though Thanksgiving weekend sales showed record-breaking online spending. Minutes from the November Federal Open Market Committee meeting confirming that Fed members are leaning towards a slower pace of rate hikes brought 10-year US Treasury yields down to 3.67% last week, while the US dollar index declined and the S&P500 rose. Data also showed resilience in the European economy, with the final reading for Germany’s Q3 GDP higher than initial estimates. While still showing contraction, the flash composite PMI for the euro area in November was above consensus expectations, led by manufacturing. In a situation of generally better-than-expected data, 10-year Bund yields declined slightly. Investment- and noninvestment-grade bonds alike performed positively last week. Key data this week in the US include October personal consumption expenditures (PCE) inflation, as well as the ISM manufacturing PMI and nonfarm payrolls for November, while in Europe we will have November consumer inflation figures. The latter could well determine the size of the next European Central Bank (ECB) rate hike in December, with ECB executive board member Isabel Schnabel saying there was “limited” room for smaller rate hikes. Both ECB president Christine Lagarde and her Fed counterpart Jerome Powell will speak this week, with the latter set to stick to a hawkish tone. Believing inflation in Europe will be more persistent, we prefer US Treasuries over core European bonds.  

In China, social unrest at covid restrictions this weekend came just as daily new cases rose to record levels. Although lockdowns appear more of an issue in the big cities than smaller centres, the authorities have no good options when it comes to dealing with growing intolerance for their ‘zero covid’ policies. The move toward full re-opening we expect early next year could prove chaotic and imperil our central forecast of 4.5% GDP growth in 2023. In the short term, the authorities will need to continue to pour policy support into the economy, with the People’s Bank of China cutting the required reserve ratio (RRR) for financial institutions by 25bps at the end of last week to its lowest level since mid-2007. Nonetheless, Chinese equity indexes declined over the week, led by tech. With industrial profits down 3% for the first 10 months of the year, November PMI figures for China this week will come under particular scrutiny. 

Western governments continue to negotiate the details of a Russian oil price cap. Meanwhile the US government has authorised Chevron to resume oil production in Venezuela in a major relaxation in the Americans’ attitude towards Venezuela, helping spur a decline in crude oil prices.