US equity has swung up and down this week. S&P500 jumped over 4% after the lower-than-expected inflation data but ended lower due to the recession concerns after the release of economic data like retail sales. Major central banks such as the Fed, BoE and ECB each raised their rate by 50bps. 10Y treasury yield dropped by 10bps, bringing rate-sensitive financials down 3% this week.
CPI: US inflation data for November reported below expectation. The headline inflation is 7.1% versus the consensus of 7.3%. Core inflation is 6%, lower than the expectation of 6.1%. Although inflation is going in the right direction, it is still far from the Fed’s target of 2%. Fed emphasized that fighting inflation is still the top priority but not economic growth.
Retail Sales: The retail sales figure in the US came in weaker than forecast. The declining figure is a signal that the demand from consumers is stalling, as about 70% of the economy in the US is driven by consumer spending. It could be an important indicator to evaluate the likelihood of an imminent recession or soft landing.
ECB: The benchmark rate is hiked by 50bps with hawkish comments. With the expectation of the inflation in the eurozone is not going to drop significantly before the second half of next year, the hiking cycle is still far from over. The ECB also mentioned that they will reduce their holdings in Asset Purchase Program (APP) next year, exerting upward pressure on the peripheral spreads.
Asia Monetary Policy: As the pace of tightening in the US is slowing down, the trajectory of monetary policy in Asia is likely to be similar to the timeline of the Fed. However, it is believed that North Asia will be dovish relative to the US, while Southern Asia will be less so. China is an exception, which is expected to ease over the next year. We will probably see a spillover in the onshore A-shares equity market.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Bank of America: Investors should shift their focus on stocks in the second of next year. Equities will outperform during recoveries, and we expect that the second half of 2023 will be the end of the cyclical bear market. The dollar and the interest rate will peak, Fed will pause further hikes and inflation will drop further. It will be a great time to look at equities.
Standard Chartered: Our sector preferences are more pro-cyclical in terms of region. We overweight on Asia ex-Japan, especially China and India. Communication services and consumer discretionary sectors in China are expected to benefit from policy support and the lifting of mobility restrictions. Financial, industrial and consumer staples in India are recommended due to the strong domestic demand.
Morgan Stanley: Historically, the fed fund rate peaked when it is above the inflation gauge, which is the core Personal Consumption Expenditures Index (PCE). Fed still has more work to do after raising 50bps as PCE is at around 5%.
Standard Chartered: Given the recent recession outlook, investors are recommended to prepare for the downside surprises. High quality government bonds could mitigate such surprises as yield would drop in such scenario, which means bond prices would jump.
Morgan Stanley: The policy effects usually come with a lag, and the historic tightening is increasing the likelihood of economic slowdown. The market participants and company management are underestimating the effect of declining pricing power and volume.
J.P. Morgan: The high-frequency data such as layoffs announcements and initial job claims are suggesting a cooldown in the labor market. The job market is typically the last one to change in an economic cycle, and this weakness will be reflected soon.
Standard Chartered: We expect recessions in US and Europe, and a recovery in China. It is likely that global inflation will slow down in the coming year. From our forecast, there will be a pause in rate hike in the first half of next year, and a rate cut in the second half.
Citibank: USD remains strong in short term but will depreciate significantly in the second half of next year. As we expect a resumption of risky assets underperformance, mainly via the earnings for stocks. The bid of the dollar will still be strong as there is a strong inverse correlation between risk assets and the dollar.
Standard Chartered: The dollar is expected to weaken in the next 12 months. USD has benefited from the high bond yield and rapid rate hikes this year. The currency will be volatile but rangebound in short term as markets are still debating whether fed fund rate will peak.
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