Each week, Charles-Henry Monschau, CIO of Syz Bank, presents 7 graphs that describe the main events of the past week.
Chart 1: US inflation is highest since 1981
Of course, the most anticipated figure of the week was consumer prices in the United States. While the market thought that the peak of inflation was behind, the statistics for May dashed all hopes. In fact, inflation rose by 8.6% year on year against 8.3% of the forecast, the highest since 1981; core inflation (excluding energy and food) increased by 6% against the forecast of 5.8%.
The gap between these two inflation rates is also the largest in 10 years. Core inflation, driven by rising oil and food prices, has risen sharply in recent months, while core inflation has shown signs of a very gradual slowdown.
Chart 2: Attitudes of American households at the bottom
Rising prices are beginning to affect the morale of households in the United States. In fact, the American Consumer Sentiment Index, calculated by the University of Michigan, has been at its lowest level since 1952. The feeling, which is explained by the fact that rising consumer prices are erasing the growth of wages. Since February 2020, wage growth in the United States has reached + 11.9% in nominal terms, but shows a decrease of -0.6% after adjusting for inflation.
Chart 3: Expectations of a Fed rate hike in 2022 explode. The number of rate cuts is also in 2023.
The Fed’s forecast for an increase in the rate for 2022 on Friday rose by 30 basis points due to a surge in inflation in May. At the same time, expectations of lower rates after 2022 are also growing, as the market believes that the Fed will again have to resort to expansionary monetary policy to bring America out of a hypothetical recession in 2023. Now the market is betting 10 times higher rates by the end of 2022, and then three lower rates.
The increase in rates by 50 basis points at the meetings in June and July was expected before the publication of inflation data. Currently, markets estimate a 62% probability of a rate increase of 0.50% and a 33% probability that the Fed will act even more aggressively, with a rate increase of 0.75%.
Graph 4: Double “bear market”
A new bloodbath in the bond markets. In the United States, the yield on 2-year bonds rose 40 basis points in a week, exceeding the 3.00% threshold for the first time since 2008.… Meanwhile, 30-year bonds rose only 10 basis points. The US yield curve has changed in 5-30 years for the first time in a month due to fears that excessively restrictive policies by the Fed could push the US economy into recession «
Despite a good start to the week, shares recorded a significant weekly decline (-5.1% for the S&P 500). Note that the main US stock index recorded a 10-week decline over the past 11 weeks, which is the worst bearish band since the Great Depression.
This is the fourth worst start to the year in the history of the S&P 500, which lost 18.2% in the first 111 trading days. At the same time, US bonds are in the worst year of market statistics. The simultaneous decline of stock and bond markets greatly complicates the task of managing many assets.
Graph 5: The ECB is ready for more restrictive measures than expected
The main conclusions of last week’s meeting of the European Central Bank (ECB): 1) The Central Bank is ready for more restrictive measures than expected by the market: the ECB left the door open to increase by 50 basis points in July, which led to a smoothing curve due to growth short-term profitability is greater than long-term profitability; 2) Increasing inflation forecasts. The central bank notes that three-quarters of inflation depends on energy resources, but also acknowledges the pressure of rising wages; 3) Major in absentia at 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 have reported future measures to prevent the spread of yields between German bonds and “peripheral” bonds (Italy, Spain, Portugal, Greece, etc.).
Consequence of point №3: spreads on the yield of peripheral bonds (Italy, Spain, Portugal, etc.) compared to the yield on German bonds increased last week. Greece’s 10-year profitability has reached its highest level since 2018.
Tensions in bonds, which had consequences for European stocks. They violated important levels of support.
Italy, a weak link in European stocks, lost to the rest of Europe, the index fell 5% on Friday.
Graph 6: Trafigura focuses on the price per barrel of crude oil at $ 150
Oil fell slightly on Friday, but remains stable 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 oil prices.
Chart 7: Light at the end of the tunnel for Chinese stocks?
After quarters of low efficiency and a bear market, Chinese stocks are clearly recovering. What are the reasons?
1) Quarantine restrictions are relaxed through Covid-19;
2) Foreign investors have become more optimistic about Chinese stocks: a net purchase of 51 billion yuan ($ 7.6 billion) was recorded from May 27 to June 8;
3) The best macro news. China’s exports grew by 16.9% in May compared to a year earlier. Imports were also higher than expected, up 4.1% against growth forecasts of 2%;
4) China plans to restore the IPO of Ant Group, a financial company of the Alibaba Group, founded by Jack Ma and which manages the Alipay mobile payment system. It is said that Beijing is going to issue a license that will pave the way for an IPO.
Have a nice week everyone!