Week on 7 Charts (June 13)

Each week, Charles-Henri Monchau, CIO at Syz Bank, presents 7 graphs that highlight the main events of the past week.

Chart 1: US inflation at its highest level since 1981

Charles-Henri MonchauxThe most expected indicator of the week was, of course, data on consumer prices in the US. While the market thought that the peak of inflation was over, the statistics for May dispelled all hopes. In fact, inflation increased by 8.6% year on year against the forecast of 8.3%, the highest level since 1981; Core inflation (excluding energy and food) rose by 6% against the forecast of 5.8%.

The gap between the two inflation rates is also the highest in 10 years. Headline inflation driven by rising oil and food prices has increased significantly in recent months, while core inflation has shown signs of a very gradual slowdown.

2022.06.13.Base CPI
Source: Bloomberg.

Chart 2: US household sentiment at the bottom

Rising prices are starting to take a toll on household morale in the United States. Indeed, the US Consumer Confidence Index, calculated by the University of Michigan, is at its lowest level since 1952. The feeling, which is explained by the fact that the increase in consumer prices offsets the increase in wages. Since February 2020, U.S. wage growth has reached +11.9% in nominal terms, but adjusted for inflation shows a decline of -0.6%.

2022.06.13.Consumer well-being
Source: Charlie Bilello.

Chart 3: Fed rate hike expectations for 2022 are exploding. The number of rate cuts in 2023 is also.

The Fed’s rate hike forecast for 2022 rose 30 basis points on Friday due to rising inflation in May. At the same time, expectations for rate cuts after 2022 are also rising as the market believes the Fed will once again have to resort to expansionary monetary policy to pull America out of a hypothetical recession in 2023. The market is now betting on 10 more rate hikes by the end of 2022, followed by three rate cuts.

A 50 basis point rate hike at the June and July meetings was expected prior to the publication of inflation data. Markets are currently estimating a 62% chance of a 0.50% rate hike and a 33% chance that the Fed will act even more aggressively with a 0.75% rate hike.

2022.06.13.Fed rate hike
Source: Bloomberg, www.zerohedge.com

Chart 4: Double Bear Market

New bloodbath in the bond markets. In the United States, 2-year bond yields rose 40 basis points in a week, breaking the 3.00% threshold for the first time since 2008… Meanwhile, 30-year bonds rose only 10 basis points. The U.S. 5-30-year yield curve flipped for the first time in a month on fears that the Fed’s overly restrictive policies could push the U.S. economy into recession…

Despite a good start to the week, stocks recorded a significant weekly decline (-5.1% for the S&P 500). Note that the main US stock index recorded a 10-week decline in the last 11 weeks, which is the worst bearish streak since the Great Depression.

This is the fourth-worst start to the year in the history of the S&P 500, which is down 18.2% in its first 111 trading days. At the same time, US bonds are preparing for the worst year since the release of market statistics. The simultaneous decline in the stock and bond markets makes the task of multi-asset managers much more difficult.

2022.06.13. Bear market
Source: Charlie Bilello.

Chart 5: ECB ready to introduce more restrictive measures than expected

Key takeaways from last week’s European Central Bank (ECB) meeting: 1) The central bank is ready to introduce more restrictive measures than the market expected: the ECB left the door open for a 50 bps rise in July, flattening the curve due to short-term gains. returns are greater than long-term returns; 2) Increase in inflation forecasts. The central bank notes that inflation is three-quarters dependent on energy, but also admits wage pressure; 3) Main absentee from the conference: Christine Lagarde did not mention the creation of a tool to combat the fragmentation of the bond market in Europe. Indeed, some market rumors indicated that measures to prevent the dispersion of yields between German bonds and bonds of the “periphery” (Italy, Spain, Portugal, Greece, etc.) would soon come into force.

Consequence #3: Periphery bond yield spreads (Italy, Spain, Portugal, etc.) widened compared to German bond yields last week. Greece’s 10-year bond yield hit its highest level since 2018.

Tensions in bonds that had repercussions for European equities. They broke through important support levels.

Italy, the weak link in European stock markets, lagged behind the rest of Europe, with the index down 5% on Friday.

2022.06.13.State profitability
Source: Bloomberg, www.zerohedge.com

Chart 6: Trafigura is targeting a price per barrel of crude oil at $150.

Oil showed a slight decline on Friday but remains firm at around $122 per Brent. Earlier this week, commodity trader Trafigura warned that crude oil prices could rise to $150 or more as supply and demand imbalances continue to support crude oil prices.

2022.06.13.Trafigure
Source: Bloomberg, www.zerohedge.com

Chart 7: Light at the end of the tunnel for Chinese stocks?

After quarters of lagging and a bear market, Chinese equities are clearly rebounding. What are the reasons?

1) Covid-19 lockdown restrictions eased;

2) Foreign investors have become more optimistic about Chinese stocks: from May 27 to June 8, a net buying flow of 51 billion yuan (7.6 billion US dollars) was recorded;

3) The best macro news. China’s exports jumped 16.9% in May compared to last year. Imports also came in better than expected, rising 4.1% against forecasts of a 2% increase;

4) China is planning to restart the IPO of Ant Group, the financial company of the Alibaba group founded by Jack Ma and Alipay, the mobile payment operator. Beijing is said to be issuing a license that will pave the way for an IPO.

2022.06.13.China
Source: Bloomberg.

Have a good week everyone!