Week in 7 charts (July 18)

Each week, Charles-Henri Monchaux, IT Director of Syz Bank, and Valerie Noël, Head of Trading, present 7 graphs that characterize the main events that took place during the previous week.

Chart 1: US macroeconomic statistics that saved the week

2022.07.18.  Lowering expectationsInflation rates in the US have again impressed with growth and are the main reason for the volatility seen in the markets last week. Indeed, on Wednesday we learned that US price growth in June reached 9.1% over the current 12 months, which was better than forecast and the highest level since November 1981. The data sent markets lower, with the S&P 500 index hitting its lowest level since June 22 during Thursday’s session. However, US stocks rose on Friday on the back of quarterly results from some major banks and the release of a University of Michigan survey that showed long-term inflation expectations fell to 2.8% in June from 3.1% earlier. This indicator is now at its lowest level for the year and has fallen sharply from a high of +3.3% reached in 2thousand trimester. While the major stock indexes ended the week in the red, the data likely helped avoid a larger weekly decline.

Chart 2: More rate hikes expected this year, but more rate cuts expected next year too…

Charles-Henri MonchauxThe odds of a 100 basis point hike by the Fed in July rose during the week, but remains below the level reached after the release of inflation data on Wednesday. As explained in the previous point, the University of Michigan survey seems to have reassured investors somewhat about the future path of inflation and interest rates. So, while forecasts for a rate hike in 2022 are rising, forecasts for a rate cut in 2023 are also rising… CME Group’s Fedwatch tool shows that futures are now predicting a rate cut as early as February 2023.

2022.07.18.  Waiting for the Fed
Source: S&P Dow Jones, CME

Chart 3: US Stocks: A Change of Management?

The yield on the US 10-year bond ended the week below 3.00%. The 2- to 10-year U.S. Treasury yield curve is now at its most inverted level since 2000. Getting ahead of the long end of the curve and falling commodity prices appear to have caused a shift in style factor leadership’ into the US market. As the chart below shows, the worst year-to-date style indices (example: the growth style, which includes tech stocks in particular) were the best performers in July – and vice versa, starting with the style value (which includes oil stocks in particular) clearly lags behind in performance in July, while this style was by far the best at 1Er semester.

2022.07.18.SP500 leadership
Source: Charles Schwab

Chart 4: Commodities fall for the fourth week in a row

Last week, the Bloomberg Commodities Index returned to pre-Russian invasion of Ukraine levels… Continued weakness in industrial metals helped push the index down to -7% since the start of the month. Industrial metals are down -37% from the peak reached earlier this year. The main reason for this sharp correction in commodities is that markets anticipate that the tightening of monetary policy by many countries will have negative consequences for demand, and therefore for prices.

2022.07.18. Raw materials
Source: Bloomberg

Chart 5: Italian bond yields continue to diverge from German yields after new political crisis in Italy

Italian Prime Minister Mario Draghi resigned after one of the coalition parties, the populist Five Star Movement, withdrew its support for the government during a confidence vote in parliament. However, the president (so far) refuses to accept his resignation.

As a result of this new political crisis, the yield on Italy’s 10-year bond continues to diverge from that of the German Bund. Does market pricing increase the likelihood of an Italexit? The fact that Italian bond yields remain relatively well correlated with the rest of the Eurozone seems to indicate that the market currently assigns a very low probability to this systemic risk.

2022.07.18.  Spread of Italy

Figure 6: What will the European Central Bank do?

Last week, the euro reached parity with the dollar. Therefore, it is the lowest level since 2002. While the current energy crisis that the EU is currently facing is one of the main catalysts for the euro’s decline, it is probably not the only reason. Indeed, the ECB has been very late in adjusting monetary policy, which probably partly explains the euro’s weakness. Can higher short-term rates offset currency weakness? In Switzerland, the increase in the SNB rate made it possible to strengthen the franc. However, the situation is more complicated in Europe, as some countries (for example, Germany) may already be in recession. Answer this week with the highly anticipated ECB meeting on Thursday.

2022.07.18.  Inflation in the Eurozone

Chart 7: Can China Devalue Its Currency and Increase Stimulus?

The Chinese yuan is currently at a 30-year high against the Japanese yen. Given that China’s only source of growth in 2022 will be exports, and Japan is one of its main competitors, Beijing faces increasing pressure to devalue the yuan.

With property developers struggling and Chinese bank stocks continuing to fall to two-year lows (amid fears that massive mortgage defaults could contagion the banking sector), Chinese authorities also have strong incentives to provide additional monetary and fiscal support.

Have a nice week everyone!