We seem to have arrived at an interesting time, where, despite central banks announcing that they will not be slowing down interest rate rises and fighting by all means against global inflation, analysts are outdoing themselves by already mapping out the first possible interest rate cuts. However, there is a black sheep in this game in the form of the Bank of Japan, which is not changing its policy despite rising inflation. How could this end for the Japanese currency and economy?
Macroeconomic data
Monday was the Martin Luther King holiday in the United States, for which reason the biggest market was closed. On the same day, Bank of England Governor Andrew Bailey spoke to the government. "The core goods numbers do seem to be now beginning to come off." - this was the Governor's comment on UK inflation, a reading we could expect on Wednesday. On the same day, we learned of China's GDP reading, which positively surprised analysts at 2.9% y/y. (1.8% y/y was expected). Nevertheless, we can see a slowdown from the previous reading of 3.9% y/y. Despite the positive surprise, it was only towards the end of the week that we could see gains on the Hang Seng China Enterprises Index (CHINAH).
Source: Conotoxia MT5, CHINAH, Daily
Tuesday's important news includes Germany's CPI inflation reading, which has now been falling for three months. Inflation for the world's fourth largest economy now stands at 8.6%, which was in line with expectations (previously 10%). The day also saw the reading of the ZEW index for Germany, which surveys expectations for the next six months among banking professionals. The value of the index reached a positive 16.9 points for the first time since February 2022 (minus 15 points were expected), a sizable increase on the previous reading: minus 23.3 points. We wrote more about the results of this survey in a separate commentary. In the evening, there was a meeting of the Central Bank of Japan. Despite inflation rising to 4%, interest rates in Japan remain drastically low at minus 0.1%. Immediately after the BoJ's decision, we saw the Japanese currency suddenly weaken against the US dollar by 2.7%. However, the exchange rate immediately returned to previous levels.
Source: Conotoxia MT5, USDJPY, H4
Wednesday started with the previously mentioned UK CPI inflation reading, which fell slightly to 10.5% (previously 10.7%). Inflation for this economy appears to be falling more slowly relative to, for example, the Eurozone, for which the reading for the day was 9.2% (previously 10.1%). Also important on the day seems to be the US PPI producer inflation result. The monthly decline of 0.5% m/m (minus 0.1% y/y was expected) is the highest since the 2020 crisis. It seems that just as quickly as we have seen inflation rising, we may see it falling.
At the conference on Thursday, European Central Bank President Christine Lagarde said: "We shall stay the course until we can return inflation to 2% in a timely manner". The German DAX index (DE40) appears to have fallen by more than 1% in reaction to the news.
The number of new building permits for December 2022 in the US was below expectations at 1.33 million (1.37 million expected). This is another downward reading since March 2022. The number of new claims for unemployment benefits in the US was 190,000 (214,000 expected). We continue to see a strong labour market in this economy, where crude oil inventories also rose by 8.4 million barrels (a drop of 0.6 million b. was expected). This is the 4th week of rebuilding stocks of this crude in the US.
Source: Conotoxia MT5, DE40, H4
The stock market
After last week, in which almost all sectors in the United States seemed to gain, there was a resurgence of gains. The utilities sector lost the most this week, falling 3.6%, declines we could see in the Utilities Select Sector SPDR Fund (XLU). In second place was the consumer defensive sector (down 3.3%) and in third place was the industrial sector (down 3.1%).
Source: Conotoxia MT5, XLU, Daily
On Tuesday, we received results from two of the world's largest investment banks after the start of the new Q4 2022 earnings season. Morgan Stanley (Morgan) reported earnings per share EPS that were in line with expectations at $1.31 ($1.29 was expected). In contrast, Goldman Sachs' (GS) results were the negative surprise of the day, as EPS missed analysts' expectations by 40% at US$3.32, while US$5.56 was expected. Following the announcement of the report, the value of the bank's shares fell by more than 6%.
Source: Conotoxia MT5, GS, Daily
Financial industry giant Charles Schwab (Charles), which specialises in brokerage, investment and banking services for individual investors and businesses, reported its quarterly report on Wednesday. Earnings per share were US$1.07 (US$1.09 was expected). Warehouse property management and investment conglomerate Prologis (Prologis) had better-than-expected EPS of US$0.63 (US$0.61 expected).
On Thursday, the multinational corporation that specialises in the manufacture and sale of daily necessities P&G (ProcterGmb) reported earnings per share of US$1.59 (US$1.58 was expected) and a 1% year-on-year decline in revenue. The results of this company historically could reflect the situation in the economy quite well. We could therefore infer that the US economy is indeed experiencing a slowdown. The negative surprise of the day was the report of the streaming service Netflix (Netflix), whose earnings per share were 80% worse than expectations at USD 0.12 (USD 0.59 was expected). The company's share price has since fallen by 3%.
Source: Conotoxia MT5, Netflix, Daily
Currency and cryptocurrency market
Among currencies, the pound sterling seemed to gain the most this week, rising by 1% against the US dollar. The GBP's strengthening may be linked to announced interest rate rises in the UK. The second currency that strengthened the most was the Swiss franc. CHF quotations against the USD strengthened by 0.7%. The Japanese yen was the worst performer. The USD/JPY pair appears to have risen by 1.4% following the lack of a decision on an interest rate hike and continued loose monetary policy in Japan.
Source: Conotoxia MT5, USDCHF, Daily
The prices of most cryptocurrencies appear to be holding fairly steady after returning to pre-FTX collapse levels. The value of bitcoin (BTCUSD) rose by 1.2% over the course of this week (previously up 22%). The cited 'quantity of money' indicator for this market in the form of stablecoin capitalisation does not yet seem to herald sustained increases for this market. The market value of stablecoin cryptocurrencies fell by almost 2% m/m.
Source: Conotoxia MT5, BTCUSD, Daily
What can we expect next week?
Next week may bring a bit of a breather from macroeconomic data. It would start with the New Year in Asian countries such as South Korea, China and Singapore. Therefore, the stock exchanges of these economies will only open on Wednesday. On Tuesday, we will learn the values of the PMIs for industry in Germany and the UK. For the former, analysts expect the index to rise to 47.8 points (previously 47.1 points). On Wednesday, we will learn the weekly reading of oil stocks, and on Thursday, the value of quarterly GDP for the United States. Analysts expect an increase of 2.8% q/q. (previously 3.2% q/q).
The earnings season continues. After the banks, it's time for technology companies. On Tuesday, we will learn Q4 2022 results from technology giant Microsoft (Microsoft), on the same day semiconductor manufacturer Texas Instruments (TexasInst) or computer subsystems maker Radeon (Radeon) will report. On Wednesday, we will learn the results of the largest electric car manufacturer Tesla (Tesla), among others. On Thursday, the two largest payment service providers Visa (Visa) and Mastercard (Mastercard) will tell us how much we spent over the festive period. We'll close the week with a report from oil giant Chevron (Chevron).
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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