Macro Pulse - November 23, 2023
PL Capital Group (Prabhudas Lilladher)
We are one of India's leading research based financial services organisation.
KEY MACRO HIGHLIGHTS:
U.S. Labor Market Remains Resilient Amid Economic Uncertainties:
The U.S. labor market exhibits resilience, as evidenced by a significant drop in unemployment claims to 209,000 last week, defying expectations of a slowdown. This decrease, indicative of fewer layoffs, suggests a robust employment landscape, contrary to the notion of a cooling labor market. Despite the Federal Reserve's aggressive interest rate hikes, unemployment rolls are nearing yearly lows, reflecting strong labor demand and economic vitality. However, economic demand appears mixed, with constrained business spending on equipment signaling cautiousness in the corporate sector.
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Hedge Fund Bets on Tech Giants Spike to Record Levels:?
Despite a general slowdown in inflation, U.S. consumers' inflation expectations have risen for the second consecutive month. The University of Michigan's survey revealed an increase in expected inflation to 4.5% over the next year, the highest since April, and a 3.2% average over five years, the highest since 2011. This uptick occurs even as the Federal Reserve's aggressive interest rate hikes have cooled inflation from its peak in mid-2022. While the Fed's preferred inflation gauge shows a reduction to 3.4%, from 7.1% in June, inconsistencies in progress and the risk of reversal keep policymakers vigilant. The Fed, emphasizing the importance of anchored public inflation expectations, remains cautious, as unanchored expectations historically lead to difficulty in managing consumer behavior and controlling price increases. Contrarily, other measures like the New York Fed survey and market-based inflation expectations indicate a moderation, presenting a complex picture for Fed policymakers.
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U.S. Market Rally Viewed as Short-Lived Amid Economic Headwinds:
Investors see the recent U.S. stock market rally, with a 10% rise in the S&P 500 and a 13% surge in Nasdaq, as a temporary rebound rather than a sustained turnaround. Despite initial optimism from cooling inflation and job growth, concerns persist about the impact of the Federal Reserve's significant interest rate hikes, totaling 525 basis points since March 2022, and the looming presidential election in 2024. The tech-driven rally, boosted by lowered Treasury yields and AI enthusiasm, faces scrutiny over its sustainability amid broader economic challenges. Strategists predict only a 3% increase in the S&P 500 by next year's end, reflecting caution over potential economic slowdown or recession.
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U.S. Mortgage Rates Decline as Economy Cools, Boosting Home Loan Applications:?
The average rate for a 30-year fixed mortgage fell to 7.41% in the week ending Nov. 17, down from near 8% highs in October, influenced by lower Treasury yields. This decrease, marking a 45 basis point drop over two weeks, aligns with signals that the Federal Reserve may halt further interest rate hikes. Consequently, mortgage applications increased, with the MBA's Market Composite Index rising 3.0% to a six-week high and the Purchase Composite Index up 3.9%. However, purchase applications still lag typical levels, and tight housing inventory persists as sellers retain low-rate mortgages.
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Goldman Sachs Foresees Steeper U.S. Treasury Curve Amid Fiscal Spending:
Goldman Sachs projects a steeper U.S. Treasuries yield curve, driven by continuous fiscal spending and a lack of fiscal discipline, despite high employment. Co-head Ashok Varadhan notes that long-term rates are unlikely to decrease significantly. This year, concerns over fiscal deficits and increased government bond issuance pushed 10-year Treasury yields to 5%, a level last seen in 2007. Central bank shifts from quantitative easing to tightening, and reduced demand from U.S. regional banks and sovereign wealth funds, particularly in China, have influenced Treasury market dynamics. With the Federal Reserve nearing its rate-hike peak, analysts see bond yields, which peaked recently, making fixed income assets more appealing as central banks may start cutting rates next year.
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UK Budget Sparks Mixed Market Reactions Amid Stagflation Concerns:
UK Finance Minister Hunt's latest budget, focusing on stimulating business investment, received a mixed response, reflecting concerns about stagflation risks in the UK economy. Despite offering tax reliefs and investment incentives, like making full expensing on investments permanent, the budget didn't significantly alter market forecasts, with the FTSE 100's valuation remaining low compared to U.S. stocks. Investors remain wary, doubting these measures can offset high financing costs and sluggish productivity growth. The bond market reacted to a smaller-than-expected cut in gilt issuance plans, pushing yields higher. Meanwhile, the pound struggled, with markets still considering a potential UK rate cut by mid-2024, indicating low inflationary concerns from the budget's fiscal measures.
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RBI Cautions Against Excessive Lending in Consumer Credit:?
RBI Governor Shaktikanta Das has advised caution to banks and NBFCs against over-lending in consumer credit, following the central bank's move to increase capital requirements for personal and NBFC loans. This measure aims to curb risks in fast-growing consumer credit sectors and is expected to slow down the pace of loan growth. Das emphasized sustainable lending practices and prudent use of algorithms in decision-making. He also highlighted potential interconnectivity risks between banks and NBFCs, advising them to diversify funding sources. Additionally, he called on microfinance institutions to ensure their high-interest loans remain affordable for lower-income consumers.
*Disclaimer - https://bit.ly/46agtHy
Equities
Domestic Equity
Indian blue-chip indexes witnessed a modest rise on Wednesday, primarily driven by gains in IT and pharma sectors, responding positively to soft U.S. inflation data. The NSE Nifty 50 and S&P BSE Sensex both rose by 0.14%. IT companies, with substantial revenue from the U.S., saw a 6.3% increase over six sessions, while the pharma index gained 0.63% on the day, buoyed by favorable trends in the U.S. generics market. However, financials, including banks and NBFCs, faced headwinds, losing between 0.2% and 1.2% due to the RBI's stricter lending rules. In contrast, small-cap stocks retreated, reflecting a shift of investor focus to upcoming IPOs.
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Global Equity
Global stock indices displayed mixed performances. In the U.S., markets rebounded, with the Dow Jones leading gains, closing up by 0.5% at 35,273.03. The S&P 500 and NASDAQ also saw increases of 0.4% and 0.46% respectively. This uptick aligns with the S&P 500's 8% gain in November, amid reduced market volatility as indicated by the VIX reaching its lowest since mid-September. Conversely, key Asian indices experienced declines; China's SHCOMP and SZCOMP dropped by 0.8% and 1.2%, while Taiwan's TWSE dipped 0.6%. Southeast Asia saw mostly negative trends, except for Singapore's STI, which counteracted the trend with a 0.6% gain. These shifts reflect ongoing adjustments to recent economic data, with the U.S. markets closed for Thanksgiving, leaving little immediate directional guidance for Asian equities
Currencies
The U.S. dollar experienced a broad strengthening against major global currencies, with the Dollar Index (DXY) rising by 0.3% in response to lower-than-expected U.S. jobless claims. This data suggests a continued tightness in the labor market, influencing currency dynamics. The Euro and Pound depreciated against the dollar, with the EUR/USD and GBP/USD pairs closing lower. The Japanese Yen saw a significant decline of 0.8%, while the Australian and New Zealand Dollars also weakened. In Asia, currencies like the South Korean Won, Taiwanese Dollar, and Malaysian Ringgit receded against the USD, reversing their recent gains.
Bonds
In the UK, the 10-year yield increased by 5 basis points, responding to the government's announcement of a smaller-than-expected reduction in borrowing. Conversely, Germany and India saw declines in their 10-year yields, with India's dropping by 3 basis points amid falling oil prices. In the US, yields mostly ascended as investors adjusted positions in response to mixed economic data, including a decline in durable goods orders and rising short-term inflation expectations. The 10-year U.S. Treasury yield edged up by 1.2 basis points to 4.404%, while the 2-year yield increased by 2.7 basis points, leading to a slight widening of the yield curve inversion. In Singapore, the 10-year yield dropped by 6 basis points, while the overnight SORA added 8 basis points, reflecting ongoing market adjustments.
Commodities
Oil prices experienced a decline on Wednesday, primarily influenced by OPEC+'s unexpected postponement of its meeting from November 26th to the 30th. This delay, reportedly due to a disagreement over output quotas among African members, cast doubts on the organization's ability to tighten supply, contributing to the price drop. Compounding the downward pressure, the U.S. Energy Information Administration reported a significant weekly increase of 8.7 million barrels in U.S. crude inventories, reaching the highest level since July 2023. Consequently, Brent crude fell by 0.6% to $81.96 per barrel, and WTI crude decreased by 0.9% to $77.10 per barrel. Additionally, gold prices also saw a decrease of 0.4%, settling at $1,990.17 per troy ounce, amid a broader strengthening of the U.S. dollar.