Each week, Charles-Henri Monchaux, CIO of Syz Bank, and Valerie Noel, Head of Trading, present 7 charts depicting the main events of the past week.
Chart 1: US macro data that saved the week
The data on inflation in the US once again surprised with its growth and is the main reason for the volatility observed in the markets last week. Indeed, on Wednesday we learned that the price increase in the United States in June reached 9.1% over the current 12 months, which is higher than forecast and the highest level since November 1981. The data sent markets down, with the S&P 500 index hitting its lowest level since June 22 during Thursday’s session. However, US stocks edged higher on Friday on the back of quarterly results from some major banks, as well as the publication of a study by the University of Michigan, which showed that long-term inflation expectations fell 2.8% in June from 3.1% earlier. This indicator is now at its lowest level in a year and has fallen sharply from a high of +3.3% reached in the 2ndth trimester. Although major stock indexes ended the week in the red, this data likely helped to avoid a more significant weekly decline.
Chart 2: More rate hikes expected this year, but bigger cuts expected next year…
The likelihood of a 100 basis point Fed hike in July has increased over the week, but remains below levels reached after the release of inflation data on Wednesday. As explained in the previous paragraph, the University of Michigan study appears to have somewhat reassured investors about the future path of inflation and interest rates. So while 2022 rate hike forecasts are overpriced, the same is true for 2023 rate cut forecasts… CME Group’s Fedwatch tool shows that futures are now forecasting rate cuts as early as February 2023.
Chart 3: US stocks: leadership change?
The yield on 10-year US bonds ended the week below 3.00%. The 2- to 10-year US bond yield curve is currently at its most inverted level since 2000. Exceeding the long end of the curve and falling commodity prices appear to have shifted style leadership into the US market. As shown in the chart below, the worst-performing YTD style indexes (example: growth style, which includes tech stocks in particular) performed best in July—and vice versa, starting with the style value (which specifically includes shares of oil companies). clearly lagging behind in performance in July, while this style was much better by 1uh semester.
Chart 4: Commodities decline for the fourth straight week
Last week, the Bloomberg Commodity Index returned to pre-Russian incursion levels in Ukraine… Continued declines in industrial metals prices have contributed to the index’s decline to -7% since the start of the month. Industrial metals are down 37% from their peak earlier this year. The main reason for this sharp correction in commodities is that markets expect that the tightening of monetary policy by many countries will have a negative impact on demand and, consequently, on prices.
Graph 5. Italian bond yields continue to deviate from German bond yields after the new political crisis in Italy.
Italian Prime Minister Mario Draghi has resigned after one of the coalition’s member parties, the populist Five Star Movement, withdrew its support for the government in a vote of confidence in parliament. However, the president has (so far) refused to accept his resignation.
As a result of this new political crisis, Italian 10-year bond yields continue to deviate from German bond yields. Are markets counting on an increase in the likelihood of Italexit? The fact that Italian bond yields remain relatively well correlated with the rest of the eurozone seems to indicate that the market is currently attributing very low probability to this systemic risk.
Chart 6: What will the European Central Bank do?
Last week, the euro reached parity with the dollar. This is thus the lowest level since 2002. While the current energy crisis currently facing the EU is one of the main catalysts for the euro’s fall, it is probably not the only one. Indeed, the ECB was very late in adjusting its monetary policy, which certainly explains part of the euro’s weakness. Could higher short-term rates partially offset currency weakness? In Switzerland, the SNB rate hike helped strengthen the franc. However, in Europe the situation is more complicated, as some countries (eg Germany) may already be in recession. Answer this week with the long-awaited ECB meeting on Thursday.
Chart 7: Is it likely that China will devalue its currency and increase stimulus?
The Chinese yuan is currently at its highest level in 30 years against the Japanese yen. With China’s only source of growth in 2022 expected to come from exports and Japan as one of its main competitors, Beijing is facing mounting pressure to devalue the yuan.
As property developers are in dire straits and Chinese bank stocks continue to fall to a two-year low (amid fears that massive mortgage defaults could cause contagion in the banking sector), the Chinese authorities also have strong incentives to provide additional monetary and fiscal support.
Have a good week everyone!