Fixed income rallied despite few major macro releases at the start of a busy week for key economic updates on both sides of the Atlantic. Like this time last year, the consensus view for the coming year is a strong rally for bonds as economic activity slows, but the main difference in the forecast this time is a soft landing that keeps earnings growth intact.
Fragile industrial recovery in China
Industrial profits in China were 2.7% higher in October than a year earlier, but that comparison is with a time the economy was struggling to restart growth at the end of the zero-Covid regime, and the improvement marks a sharp slowdown from the 11.9% increase in September. For the first ten months of this year, profits were still 7.8% lower than the same period last year, highlighting the absence of any dramatic post-Covid industrial recovery.
Signs of UK retail recovery
The British Retail Consortium’s November survey showed a strong improvement from the gloom in October, with its headline sales volume for the time of year jumping from -36 to -11, the highest since June.
BoE Governor Bailey warned it was “too soon” to discuss monetary easing and claimed he had “pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future”. His comments came on a day the House of Lords reported on the Bank’s conduct, recommending significant reform to its governance and appointments process after its “complacency” in 2020 and 2021 over the threat of rising inflation.
Lagarde warns against declaring victory
ECB President Lagarde spoke at the European Parliament yesterday of labour market resilience despite economic growth that has been close to non-existent for the past four quarters, but she warned “job growth may lose momentum toward the end of the year”. She expects inflationary pressures to continue weakening although “headline inflation may rise again slightly in the coming months, mainly owing to some base effects” and it “is not the time to start declaring victory”.
Mortgage rates put the brakes on US home sales
In the US, new home sales were weaker than expected in October as the steep increase in mortgage rates that peaked just over a month ago stopped some homebuyers in their tracks, although rates have since declined sharply and should support sales in November. The pace of new home sales slowed in October to an annual selling rate of 679K from a pace in October that was revised 40K lower to 719K. Inventory of homes for sale ticked up to 7.8 months’-worth at the current selling pace and the median price dropped for a second consecutive month, from $422K to $409K. This mainly reflects a change in the mix of homes, with fewer homes costing more than $500K sold last month, while the number of sales priced below that level was unchanged.
Despite the rise in mortgage rates this year, prices for new and existing homes have been resilient but the recent slowdown in sales points at a softer price environment going forward, despite overall inventory remaining relatively lean.
Dallas Fed fails to shine positive light on manufacturing
The Dallas Fed manufacturing survey slipped a little in November, with its headline falling from -19.2 to -19.9, but the internals painted a gloomier picture. The New Orders index sank from -8.8 to -20.5 and production plunged from +5.2 to -7.2. Employment growth was still positive, but hours worked fell at a faster pace than last month and the backlog of orders slipped to -18.1 – the lowest since the pandemic.
The regional Fed surveys have been mixed this month but still point to an improvement in the nationwide manufacturing ISM survey, although they proved unreliable ahead of last month’s plunge in the ISM.
Portfolio update
As discussed in the weekend note, we executed the following trades yesterday.
- Bought a risk-reversal on the March treasury futures, paying seven sixty-fourths for the 109-¼ calls and selling the 107-¾ puts expiring this Friday.
- Paid 6.75 for regular December 4450/3375 put spreads, risking .25% of portfolio capital
The short position in Schatz futures looked good heading into the weekend but has reversed and wiped out all the profit. We will pare back a third of the position today.
Markets
Fixed income
Month end rebalancing out of equities provided a plausible explanation for yesterday’s relentless rally in fixed income, with the S&P 500 up nearly 9% during November and the Nasdaq over 11% higher. Tepid demand in the Treasury auctions of two- and five-year notes failed to reverse the day’s trend, and the yield on the ten-year note closed 8bps lower at 4.39% with the two-year at 4.89% (-6bps).
Equities
Commodities
Gold bugs have the bit between their teeth now, with the price climbing further above $2000/oz and closing at $2014.13./oz (+.7%) as the dollar extends this month’s weakness.
Today’s macro agenda
UK BRC shop price index November
Germany GfK consumer confidence December
US FHFA and S&P CoreLogic house price indices September, Richmond Fed manufacturing index November
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