Most markets were soft but stable last week while US markets were down a more significant 3%, led by the large US tech stocks. Various data releases raised some doubt over whether inflation might really have peaked in the US, with jobs data proving a little more resilient than expected earlier in the week, followed on Friday by a slightly higher rise in producer prices for November than expected. This underscores the current nervousness around next week’s CPI print which will probably set the tone heading into the Christmas break. China, up 6% last week, was the best performing market as the authorities flagged a tentative reopening and relaxation of COVID restrictions. There is also some evidence that the large Chinese tech stocks are unwinding some of the cross holdings that they have accumulated in smaller companies as well as their peers. Investors may be seeing some value being crystallised, along with a positive sentiment around the country’s reopening. It may also help that most Western investors have already left the share registries of many former favourites like Alibaba and Tencent, which are now both up around 50% in the last six weeks. 

Market participants are clearly obsessed with the inflation and interest rate outlook, and with good reason especially in the lead up to tomorrow’s US CPI print. This means that data on wages, employment, producer prices or consumer expectations that are usually a market side show are all getting their time in the limelight and moving markets. What is perhaps more interesting is the extent that this volatility is being channeled almost exclusively through the US market (and especially tech stocks) while the intraday volatility of markets like Europe, UK, Japan and Australia has actually been quite subdued. Emerging markets have also been on edge recently which is also understandable given the headwinds faced by China and the uncertainty around reopening. 

‍

Unfortunately, both in Australia and the US, conflicting signals abound and during the week the Australian 3rd quarter GDP report also reflected trends in the US where consumer sentiment seems to be waning, but consumption remains high as does upwards pressure on wages. In the corporate sector the widely followed US Institute for Purchasing Managers Manufacturing Index dipped last month as some companies hunker down for recession, but the Services version of this index actually surprised on the upside with quite a high number, pointing to ongoing labour supply constraints and excess demand in the economy. Commodity markets also gave off mixed signals, with energy prices falling and industrial metals remaining solid, with soft commodities also mixed. 

Lastly, government bond market yield sticked upwards around the world even as implied inflation actually ticked down a bit in the US. This ties in with commentary we have received from our associate company Hunt Economics, who have flagged the tightening of economic conditions after the surprisingly loose financial conditions seen in November. Bond markets seemed to concur and credit spreads started to ease outwards after6 weeks of contraction. All of this seems to add up to a noisy data environment and perhaps a turning of the tide that we have seen over the last 6 weeks. Once we get the next US inflation print out the way, we have a feeling that these more arcane measures of financial liquidity might be worth watching into the year end, and the latest US Government Bond auction being fairly undersubscribed is perhaps ominous.    

‍