Treasury Yield Rises, Purchasing Manager Data May Show Contraction
Last Week Review
Global equities declined 0.4% last week, led by a 0.8% decline in U.S. stocks. The two-year Treasury yield increased 0.20% to 4.53% as Federal Reserve leaders warned against premature policy easing. The expected peak Fed funds rate is now close to where it was before the prior week’s positive inflation data. High yield credit spreads fell and are about 1% below September highs.
China-U.S. G-20 Meeting Exceeds Low Expectations
U.S. President Joe Biden and China President Xi Jinping met at the G-20 summit of nations last week. The meeting somewhat exceeded low expectations with both leaders depicting a desire to avoid “redline” scenarios, though there was no major change to the existing tense U.S.-China relations. G-20 leaders met for an emergency meeting after a missile strike in Poland killed two people. Initial fears that NATO would need to retaliate dissipated after announcements that the cause was likely one of Ukraine’s defense missiles. G-20 countries still condemned Russia for the war.
U.S. Midterm Elections Result in Divided Government
Media projections show that Republicans clinched a slim majority in the House last week, leaving the U.S. with a split government that should limit the potential for market-moving policy. Attention has started to turn toward the 2024 presidential race. Former President Donald Trump announced his candidacy last week.
China’s Economic Indicators Weak
China’s industrial production and retail sales data both fell short of consensus expectations. Zero-COVID-19 policies — still broadly in place albeit adjusting — continue to weigh on economic activity. Policymakers recently announced more support for property developers, but the property sector continues to be a key growth headwind.
U.S. Earnings Trending Positively
Walmart (WMT) reported upbeat results last week while Target (TGT) missed estimates and lowered financial guidance. While U.S. consumers face challenges, they remain on decent footing overall as retail sales rose 1.3%, beating expectations. With 95% of S&P 500 Index companies reporting third quarter earnings, aggregate sales rose 10.9% year-over-year and earnings increased 2.3%, both ahead of expectations. For 2023, earnings estimates have fallen about 7%. However, this was broadly expected and may ultimately pave the way for an improvement in investor sentiment on equities.
This Week Preview
Europe Combats High Energy Prices
Russia and Ukraine reached an agreement to extend the Black Sea grain deal for 120 days, helping alleviate the rise in global food prices for now. The Russia-Ukraine war remains at risk of further disrupting global economic activity. On Wednesday, European countries are scheduled to meet to discuss ways to mitigate the economic impact of high energy prices.
U.S., European Purchasing Manager Data May Show Contraction
The U.S. flash services Purchasing Managers’ Index is expected to improve but remain below 50, indicating contraction, with manufacturing expected to fall to 50. The index in Europe may decline, remaining below 50 along with the U.K. The U.K.’s fiscal plan released last week includes significant fiscal tightening that may help restore longer-term stability. However, the plan projects challenging economic conditions over the near term.
Fed Meeting Minutes Set for Release on Wednesday
November Federal Reserve meeting minutes are scheduled for release on Wednesday. They may provide additional color around future policy as the Fed eventually looks to slow its pace of rate hikes. On Thursday, the European Central Bank is expected to release details of its October meeting.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of November 20, 2022.
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