Market 11/24: Market stabilizes after holiday week

Germany proposes temporary suspension of Debt brake rule for 2023.

Amid scandals over fiscal spending and contracting economy, German Finance Minister Christian Lindner proposes government's supplemental spending budget plan, and also proposes temporary suspension of Debt brake in 2023.

• Scandal: Last week, German court ruled that the government violated public spending rules—by transferring COVID-19 pandemic support budget to climate change fund…

  • …causing this country's finances to be short -60 billion EUR.

• Thus, Lindner proposes supplemental budget.

• However, Germany's 2023 budget deficit is already at 2.5% GDP.

• If supplemental budget, Germany will have to issue more debt and violate Debt brake rules (limiting federal government deficit to 0.35% GDP).

• Therefore, Lindner also proposes temporary suspension of Debt brake in 2023.

=> However, this proposal has stirred the global bond market:

• In Europe: Possibility of excessive budget deficit in the largest Eurozone economy brings back risk of sovereign debt crisis in Europe.

  => European bonds' yields rise across the board:

• In the US: Germany potentially issuing more bonds than usual causes substitution effect—raising concerns about T-bond demand weakening as investors have alternatives

  => US Treasury yields also rose early today.

  • However, 10Y T-bond yield remains capped at 4.5% due to positive market expectations on Fed's interest rate policy.

Market has optimistic view that US interest rates have peaked

• Hope that Fed has stopped hiking rates (interest rates have peaked) still drives investors to flock to stocks at the fastest pace in nearly two years.

• Similarly, investors reduce USD holdings thinking interest rates have peaked.

  

S&P Global US Manufacturing preliminary PMI unexpectedly falls to contraction territory

• FYI: Preliminary PMI (Flash PMI) is an incomplete PMI report (when survey is only ~85-90% done), so only for reference. Flash PMI shows:

  • Manufacturing PMI falls more than expected to 49.4 from 50.0 in October - back to contraction territory (below 50.0).

  • Services PMI unexpectedly rises from 50.6 to 50.8 (expected 50.3).

Input price inflation has eased, cost burden rising at slowest pace in over 3 years.

• Thus, the impact of rising oil prices may gradually diminish in the manufacturing sector

Europe Update: Signs of recovery in Eurozone and UK economies

Eurozone Flash PMI shows signs of recovery: up to 6-month high

November composite PMI up +0.6% to 47.1 - but still below 50 warning threshold.

• Eurozone November preliminary manufacturing PMI recorded at 43.8 - 6-month high.

• Preliminary services PMI at 48.2, higher than estimate 47.8 - 2-month high

Eurozone economy shows signs of bottoming out and turning around soon, raising hopes for upcoming economic recovery.

• UK composite PMI also recovers to 50.1 (from 48.7 in October), above 50 and much higher than Eurozone.

ECB President: This is the right time to observe

At Euro20+ event, ECB President Christine Lagarde states views on ECB policy:

• The battle against inflation is not over yet.

• ECB may “stand pat” to observe economic data.

Cyber Week spending expected to hit record in 2023

Although Black Friday and Cyber Week discount programs have been spread both before and after Thanksgiving, both days are expected to have record spending levels.

• Cyber Monday will be the biggest sales day in the holiday shopping season, boosting online spending to up to 12 billion USD, +6.1% Y/Y (according to Adobe Analytics).

• Online sales on Black Friday are expected to increase +5.7% to 9.6 billion USD, of which Thanksgiving Day sales are expected to increase +5.5% to 5.6 billion USD.

Clothing, electronics, and footwear are the most purchased items this holiday season.

Some retail categories depend more on the holiday season than other businesses:

• Toy and hobby stores earned 34.5% of annual revenue in just the last 3 months of 2022.

• Department stores also have more than 33% of revenue from the holiday season.

Nvidia delays launch of AI chip H20 for China

Nvidia has announced the delay of the launch of the artificial intelligence chip H20 exclusively for the Chinese market (produced according to new US export regulations) until Q1/2024.

• H20 is being delayed due to issues that server manufacturers are facing in integrating the chip.

Other news

1. Up to 211,000 Put Options on Brent oil were traded on Wednesday this week, the largest volume in history.

2. For the first time in history, China may allow banks to issue short-term unsecured loans to qualified construction companies…

   — one of the efforts to rescue the real estate market.

   

3. China is expected to keep current interest rates until early 2024

   

4. According to Financial Times: KPMG temporarily suspends salary payments for 12,000 British employees and cuts bonuses — due to recent UK economic difficulties.