A review of the week’s top global economic and capital markets news.
For the week ending 23 December 2022
As of noon on Friday, global equities fell modestly on the week as resilient US economic data suggest that the US Federal Reserve has its work cut out for it in slowing the economy and bringing inflation back down to target. The yield on the benchmark US 10-year Treasury note rose 0.21% to 3.73% while the price of a barrel of West Texas Intermediate crude oil gained more than $5, reaching $79.50. Volatility, as measured by the Cboe Volatility Index (VIX), declined to 21.65 from 23 a week ago.
BOJ edging toward exit?
On Tuesday, the Bank of Japan unexpectedly widened the band around which it controls the yield on the 10-year Japanese government bond. The yield on that issue soared toward the top of the new band, which limits its movement to a half-percentage point above and below zero. Previously, the 10-year yield was capped at 0.25%, the top of the -0.25% to 0.25% range. Rising global yields had caused the BOJ to intervene repeatedly to maintain the top of its band — which widened interest rate differentials, dramatically weakening the yen — until finally being forced to support the currency in October. Investors had anticipated that any adjustment in Japanese monetary policy would wait until the appointment of a new BOJ governor in April, but this week’s shift, along with the highest core inflation rate in 40 years (2.8%), has raised hopes of earlier action. Since the BOJ’s steps, the yen has strengthened broadly against a basket of currencies while Japanese equities have fallen sharply after losing the tailwind to overseas earnings provided by currency weakness.
US Congress expected to pass giant spending bill
On Friday, just days before the end of the 117th Congress, lawmakers are rushing to pass a nearly 4,200 page, $1.7 trillion omnibus spending bill that funds the US government through the rest of the fiscal year ending in September. Among the provisions in the measure are a nearly 10% increase in defense spending, a 5.5% increase in nondefense government outlays and $45 billion in military and economic aid to Ukraine. Attached to the bill are many unrelated provisions, including a measure aimed at protecting the integrity of the electoral vote count, a ban on the installation of social media app TikTok on government devices and significant reforms to the laws governing retirement savings.
China to go for growth in 2023
Chinese authorities emphasized this week that in 2023 they will prioritize economic growth and help stabilize the property sector. The State Council, China’s cabinet, said it will support major construction projects, private firms and platform companies. The People’s Bank of China said it will strongly support a recovery in consumption and guide financial institutions to support mergers and acquisitions in the property sector. A hoped-for rapid economic reopening after the lifting of years of COVID restrictions will probably be postponed given the prodigious surge in new infections. Bloomberg reported on Friday that Chinese health authorities estimate that as many as 37 million people contracted the virus on 20 December alone.
The Conference Board’s measure of US consumer confidence bounced to 108.3 in December from 101.4 in November as inflation continued to moderate.
US existing home sales declined 7.7% in November from the prior month, the 11th drop in the past 12 months.
South Korean exports contracted 8.8% in the first 20 days of December, an early indicator that global demand remains sluggish as the year draws to a close. In November, Taiwan also saw a sharp decline in exports.
In discussions with former Russian president and current Deputy National Security Advisor Dmitry Medvedev, Chinese President Xi Jinping called for peace talks between Russia and Ukraine.
US GDP grew at an annualized 3.2% in Q3, an upward revision of the previous 2.9% estimate. Personal consumption was revised higher, boosting the upturn.
The Conference Board’s index of leading indicators fell 1% in November, the 10th decline in the past 11 months.
Ukrainian President Volodymyr Zelensky thanked the US Congress for its support in the Ukraine war and appealed for additional aid in an address to a joint session on Wednesday. Earlier in the day, US President Joe Biden announced that the US will send Patriot missiles to Ukraine to help defend against Russian missile attacks.
Europe Union energy ministers reached an agreement to cap natural gas prices in the bloc when they hit €180 per megawatt hour for three straight days. The agreement is scheduled to come into force on 15 February. Natural gas prices reached a high of €340/MWh in August after Russian gas flows to Europe slowed to a trickle.
Data released Thursday showed that the British economy contracted 0.3% in Q3 from the prior quarter as a cost of living crisis continues to take its toll. The handoff to Q4 looks to be poor due to strikes and continued soft consumer spending.
The US released several economic indicators on Friday. The most important among them, the core personal consumption expenditures price index (the Fed’s preferred inflation metric), was in line with estimates, rising 0.2% in November from the month before and 4.7% year over year, to a level meaningfully above the central bank’s 2% target. Real personal spending was flat compared with the prior month while durable goods orders were soft, falling 2.1%. Core capital goods orders, which strip out defense and aircraft orders, rose 0.2%. A monthly survey by the University of Michigan showed that inflation expectations among consumers edged lower in December. Those surveyed expect inflation to moderate to 4.4% over the next year, down from 4.6% last month. Over the next five to 10 years, they expect inflation of 2.9%, down from an earlier 3% view.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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