Equities Start Soft in Europe, IMF Predicts Growth Recovery in 2024 

Bill Gates has a good quote - 'Most people overestimate what they can do in one year and underestimate what they can do in ten years.' I feel this pertains to markets too – we tend to overestimate our ability to guess where a particular market will be in 12 months (or one week!), but underestimate our ability to figure it out longer term. Sometimes it’s best to ignore the noise. 

Anyway, equities got off to a soft start in Europe as we await the return of US traders to their desks later in the session following Monday’s holiday. Not too much movement at the open with data from China weighing a bit, whilst on the other hand German inflation figures are arguably helping sentiment. The World Economic Forum in Davos gets into full swing today with the IMF saying growth will bottom out this year and pick up in 2024. Germany’s ZEW economic sentiment report is due soon and later we hear from the Fed’s John Williams and the Empire State manufacturing index. Goldman and Morgan Stanley continue bank earnings on Wall Street later.  

 Fund managers think inflation expectations have peaked but CPI is still seen higher for longer this year, according to the latest BofA survey. FMs are the most underweight the US since 2005 and most bullish on EZ equities in a year; bullish yen bets most since 2007. Overall remain underweight global equities and overweight cash and bonds. Recession fears are at a six-month low and growth optimism at a one-year high.  

UK Inflation  

Employees are getting paid more. That’s good if you’re a worker, less good if you are a central banker trying to tame inflation. And truth be told it’s not that good for the worker when inflation is rising faster than your wages and higher wages only exacerbate this situation. UK average earnings rose 6.4% in the three months to the end of November – in the private sector it was 7.4%. outside of the pandemic this was the fastest rate of pay in 20 years – too bad inflation is at a 40-year high. In real terms, this is still a pay cut: inflation is running in excess of 10%. But it does not help the central bank cause as it leads to more persistent elevated inflation.   

Is this a wage price spiral? Not quite, but close enough to warrant attention. Remember the same people who told you inflation would be transitory were telling you there are no signs of a wage price spiral and it’s not something to worry about. Wages at +6% and inflation at +10% is stagflation.   

No wonder then that Bank of England chief economist Huw Pill warned as much last week when he said that “we have seen evidence of tight labour markets and a strengthening of corporate pricing power, which threaten inflationary pressure”. Pill argument was there is a risk that the tight labour market will keep inflation elevated for longer – regular readers will know this is my thesis, too. Today’s wage and unemployment (3.7%) data do not confound this view.  

Ocado Down; China Growth Slows 

Talking about inflation – Ocado shares slipped around 7% as it reported pretty soft Q4 trading at its UK retail business. Retail revenues fell 0.3% in the fourth quarter, with a notable decline in average basket value of 1.3%: +7.6% in price offset by 8.3% decline in volume. Full-year revenues fell 3.8% to £2.2bn. Management noted current headwinds related to inflationary costs, capacity investments to support future growth and higher marketing costs that continue to weigh on profitability. For the full year, the company expects close to break-even EBITDA, in line with guidance. Growth is sluggish and well below peers like Tesco and Sainsbury’s. A return to more normal shopping habits will not have helped but there could be deeper issues here for management to address. Growth in 2023 is expected in the mid single digits and profits are seen being ‘marginally positive’. 

 Zero Covid policies – since abandoned in an abrupt about-turn – sent Chinese economic growth to the lowest since the 1970s, except for the 2020 pandemic year. Economic growth cooled to 3%, well below the official target of 5.5%. It was the slowest outside the pandemic since 1976. Meanwhile data showed the Chinese population fell for the first time in decades, marking a sea-change in the structural growth of the world’s second largest economy. You can’t keep building, you will have to drive productivity growth. That will make it harder and harder for China to catch the US. In terms of the near future, though, the exit from zero covid policies is encouraging investors at the start of 2023.  

Baba stake; German inflation   

Meme stocks are like old soldiers. They never die, they just fade away. Bed Bath and Beyond is a case in point. There are flurries of activity but the trend seems to be one way. BBY was up 136% last week, tumbled 30% on Friday, and is still about 90% below its 2021 peak. Meanwhile, Ryan Cohen of Chewy and GameStop fame, has built a multimillion-dollar investment in Alibaba (BABA), calling on the firm to do more buybacks. It’s interesting to see a US activist investor target a Chinese company in this way – does it pave the way for more of US-style activism in Asia? It also comes about a thawing in relations between Beijing and the tech sector. China’s tech crackdown is basically over, a top central bank official said last week.   

 After a decline in wholesale price inflation, Germany’s consumer inflation rate is also cooling. CPI inflation declined to 8.6% in December with month-on-month –0.8%. Consumer prices in Germany rose by 7.9% in 2022 on an annual average compared with 2021. This is unlikely to dissuade the European Central Bank from further sharp rate hikes in Q1.  

BoJ tonight  

Do nothing, raise the ceiling, or scrap the yield curve control policy entirely? Traders have been front-running further changes to BoJ monetary policy since the bank raised the ceiling on its target for the 10yr government bond yield to 0.5%. The Bank of Japan convenes overnight Wednesday morning and we await any signals of further tweaks to monetary policy that may be viewed as a precursor to actual tightening.  

Yesterday I forgot to talk about Japanese inflation data – which is kind of relevant if you think the BoJ might actually be data dependent and not just wedded to ZIRP and YCC ad infinitum. Japanese factory gate inflation grew 10.2% in December, well above the 9.5% expected and above the 9.7% in the prior month. On a monthly basis PPI inflation rose 0.5%, a slight cooling from the +0.8% reported in November, but nevertheless pointing to ongoing pricing pressures. This is already feeding into higher consumer inflation. Tokyo core consumer price index rose 4% in December, up from 3.6% in the prior month and the highest level since 1982. Front running by currency traders to push up the yen might make see inflation cool, however, which might be fine as far as the BoJ is concerned.   

Oil – spot WTI holds the 50-day line now after making a higher low, signalling easing in selling forces. 

US futures trade a little lower with the S&P 500 still oscillating between huge resistance at 4,000 and its 200-day average around 3,960.