After an exhausting year and two consecutive months in the green for global equities on the back, investors were probably expecting a visit from Santa Claus in December.
They instead saw how a cat-like face, cantankerous, demented Grinch visited one last time their broken house. The curmudgeonly protagonist of Dr. Seuss’ “How The Grinch Stole Christmas!” (1957), unable to stand our risk-on attitude, decided to destroy once for all our portfolios.
It all started well, though, and we were about to open our Christmas presents. China finally decided to relax its Covid-Zero policy. The U.S. CPI report showed that inflation was moderating further (headline +0.1% in November vs. +0.3% estimates, after a 0.4% jump in October). Several Fed officials (e.g., Evans, Barr, Bowman, Powell, Cook) signaled that the central bank’s pace of increases was likely to slow soon.
Yet, several events excited our Grinch. The U.S. ISM Manufacturing PMI dropped into contraction territory for the first time in two and a half years to 49.0% in November, down from 50.2% in October, reflecting companies’ preparing for future lower output. U.S. PPIs surprised to the upside amid a jump in the costs of services (+0.3% in November vs. consensus +0.2%, and data for October revised up to +0.3% instead of +0.2%). The EU and G7 members implemented a price cap on Russian oil, sparking fears of retaliation. U.S. retail sales fell sharply at the start of the key holiday shopping season (-0.6% in November vs. -0.1% expectations, the biggest drop since December 2021), suggesting that higher borrowing costs and the threat of an imminent recession were starting to have an impact on household spending.
The coup de grâce came from our central banks, with the FOMC, the ECB, and the BoE eventually, increasing their respective lending rates by 50bp, while emphasizing that their fight against inflation was far from being over, thereby suggesting additional rate hikes well into 2023. The Fed’s SEP Head showed significant negative revisions. The median projection for real GDP growth for 2023/2024 came in at 0.5%/1.6% (from 1.2% and 1.7%), respectively. The median unemployment rate forecast has been adjusted to 4.6% (4.4%) for 2023 and 4.6% (4.4%) in 2024. On inflation, the median estimate for core PCE was assumed to be 3.5% (3.1%) in 2023 and 2.5% (2.3%) in 2024. As a consequence, the median projection for the fed funds rate has been lifted to 5.1% (4.6%) in 2023 and 4.1% (3.9%) in 2024.
The Grinch took notice. Global equities pulled back significantly on the last month of 2022 (S&P 500 -5.9%, Nasdaq-100 -9.1%, Stoxx Europe 600 -3.4%). Credit spreads widened again (iTraxx XOVER 5yr 474bps i.e. +15bps, CDX 5yr 484bps i.e. +31bps). WTI and Brent futures declined, too (-0.5% and -1.2% to $80.3/bbl and $85.9/bbl respectively). The only positive news is perhaps that we close, once for all, this turbulent year. Crippled by the war in Ukraine, runaway inflation and unprecedented monetary tightening policies compressing valuations, a weakening outlook for corporate earnings amid recessionary fears, as well as China’s failing Covid strategy, most gauges have finished deep in the red (S&P 500 -19.4%, Nasdaq-100 -33.0%, Stoxx Europe 600 -12.9%, Nikkei 225 -9.4%, HSCEI -18.6%).
Wishing you a happy and (more) prosperous year.