It was difficult to find a scapegoat for many of yesterday’s market moves other than a retracement of over-enthusiastic positioning for a soft-landing scenario, as fixed income reversed some of last week’s rally, and front month yields jumped, despite a slow day for economic news. Gold spiked 3% briefly to a record $2,135/oz in the thinly traded Asian session before sinking and closing 2.1% lower on the day at $2029.42/oz, while an unusually high SOFR fixing on Friday - with the rate jumping 6bps to 5.39% - was difficult to blame on anything beyond poor liquidity.
Higher rates slowing durable goods purchases
Wards Automotive late on Friday evening reported US light vehicle sales that were weaker than expected, with the annualised selling pace slowing to 15.32m in November from 15.5m in October. November sales were still more than 8% higher than a year earlier when low inventories left showrooms looking sparse, but higher rates and tighter financing conditions are now biting, and sales have gone roughly sideways for most of this year.
The only US data release yesterday was new factory orders for October which fell 3.6% on the month following 2 months of increases, mainly due to an almost 15% monthly decline in transportation equipment, likely related to the UAW strike.
More optimistic signs for Europe
The Sentix survey of German investors’ optimism for the eurozone climbed almost 2 points to the highest level since May, in a further sign the region may have moved beyond peak pessimism. The headline index level of -16.8 still represents a downbeat outlook, but it is the highest since May, while expectations component improved for a third consecutive month, although only fractionally, to -9.8.
Tokyo inflation keeps pressure off BoJ
Late last night, Japan reported Tokyo CPI inflation that slowed to 2.6% in November after a downward revised 3.2% in October, pulled down by much lower electricity and gas charges to the lowest rate in over a year. Excluding fresh food, inflation was 2.3% but the more conventional core rate excluding fresh food and energy was 3.6%, just a tenth below expectations.
Tokyo inflation provides a reliable indication of the nationwide rate due in just over two weeks’ time and will reinforce the BoJ’s caution over making any changes to its stimulus policies.
UK retailers still struggle in November
Early this morning, the British Retail Consortium reported total sales values in November were 2.7% higher than a year earlier, a slight acceleration from the 2.5% increase in October but mainly representing higher prices rather than volume increases.
Portfolio Update
These are not trading recommendations – just an update of our own portfolio positions.
In the weekend note, we said it was time to “take a stand against the madness in the rates market with a sale of the Dec24/Dec23 SOFR futures spread at anything above 125 on Monday” and have sold Dec 23 futures to buy Dec 24 at a spread of -135 ticks. This has been scaled quite aggressively so that 10 ticks (one tenth of a percent change in the implied rate) will impact the portfolio P&L by 1%. In addition, with sterling weaker on the day, we purchased the March 4th $1.30 calls for .52% in a notional equivalent to the portfolio capital.
Markets
Fixed income
The two-year treasury note reversed most of Friday’s 14bps plunge in yield to close at 4.64% (+10bps) with the ten-year at 4.25% (+6bps).
Equities
US indices were dragged lower by Telcos (-1.4%) and Tech (-1.3%) but Europe was steadier, with dispersion among the sector indices. The pan-European (SX7P) index closed .6% higher and within striking distance of the five-year high reached prior to the collapse of SVB.
Commodities
The weekend rally in Bitcoin extended, with the price hitting a 19-month high above $42,000 while most commodities were under pressure from higher rates and a stronger dollar.
Today’s macro agenda
Tuesday 5th
China Caixin services and composite PMI November
Japan Tokyo CPI November
UK BRC retail sales November, new car registrations November
France industrial production October, Italy and Spain HCOB services PMI November, eurozone PPI October
US JOLTS job openings October, ISM services index November
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