Notable macro data

European inflation surprising mostly to the downside

Spanish Nov. CPI 6.8% YoY vs 7.4% expected / German Nov. CPI 10.0% YoY vs 10.4% expected / French Nov. CPI 6.2 YoY as expected / Italian Nov. CPI 11.8% YoY vs 11.3% / Overall Eurozone Nov. CPI 10% YoY vs 10.4% expected

European / Australian growth

German Nov. Unemployment Rate 5.6% vs 5.5% expected / Eurozone Nov. Manufacturing PMI 47.1 vs 47.3 expected. / UK Nov Manufacturing PMI 46.5 vs 46.2 expected / UK Oct. Mortgage Approvals 58.98K vs 60.20K expected, lowest monthly approvals since May 2020 / Australia Oct. Building Approvals -6.0% MoM vs -1.8% MoM expected.

US: macro weakness…

US consumer confidence declined again in November (although less than expected by consensus). The Conference Board Consumer Confidence Index was down to 100.2 (1985=100), from 102.2 in October. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell to 75.4 from 77.9. A reading below 80 usually suggests a strong probability of recession.

Nov. Chicago PMI 37.2 vs 47e. US Nov Manufacturing PMI 47.7 vs 47.6e / US Nov. ISM Manufacturing PMI 49.0 vs 49.8 (price sub-index down 3.6pts to 43, employment sub-index down 1.6pt to 48.4)

… but resilient labor market, especially in services

US Nov. ADP Nonfarm Employment Change 127K (vs 200k expected): the largest drop occurred in Manufacturing (-100k) and the largest gain in Leisure and hospitality (+224k) / US JOLTs Oct. Job Openings 10.334m, vs. 10.300m expected and down from 10.687m the prior month. Quits were little changed at 4m, largest drops in job openings occurred in state and local government, excluding education (-101k) and nondurable goods manufacturing (-95k) and largest gains in other services (+76k) and in finance and insurance (+70k) /

US Nov. Nonfarm Payrolls 263k (vs 200k expected, in line with average growth over the prior 3 months of +282k). Notable job gains were in leisure and hospitality, health care, and government. Employment decreased in retail trade and in transportation and warehousing. /

Average Weekly Hours declined further to 34.4 (= pre-pandemic level). Average Hourly Earnings re-accelerated to 5.1% YoY in November from 4.9% in October. /

The US unemployment rate was unchanged at 3.7% and participation was down 10bps MoM to 62.1%, this is 80bps below pre-pandemic levels. /

US Oct. core PCE Index 5.0% YoY (as expected)

Asian growth on the weak side

Chinese Nov. PMIs: Manufacturing at 48 vs 49e, and Non-manufacturing 46.7 vs 48e / China Caixin Nov Manufacturing PMI 49.4vs 48.9e / South Korean Nov. exports -14% YoY vs -11% expected

Nansen’s take

Sharp slowdown in the cyclical sectors of manufacturing and housing, with the US “catching down”

Last week’ data confirmed that manufacturing had entered recession territory (South Korean exports double-digit contraction YoY) and that housing activity was cooling sharply across DMs (see mortgage approval chart in the UK and Australia). Those are cyclical areas of activity and rate-sensitive in the case of housing, and it makes sense for those to slow first in a period of global monetary tightening.

As observed in our prior newsletters, US manufacturing activity seems to be deteriorating sharply and converging with the rest of the world. This is probably one of the drivers of the recent US dollar’s weakness. The US Chicago Manufacturing PMI fell to a level only reached during prior US recessions including during the inflationary 1970s-80s (2008, 2000, 1979, 1974, see chart). The average of the S&P and ISM US PMI was +1.3pts higher than the Eurozone PMI, in November, down from +2.5pts in October, illustrating that convergence.

But robust labor markets

In contrast, the US services economy remains resilient, with the leisure and hospitality sectors responsible for the largest employment gains in November. Possibly driving this strength are:

• A catch-up effect following the pandemic: Employment in leisure and hospitality is below its pre-pandemic February 2020 level by 980k, or 5.8%. Employment in other services (ex-government and ex-healthcare) is below its February 2020 level by 186k, or 3.1%.
• Demand from US households seems to have shifted to services from goods (restaurants sales were up 23% YoY on Thanksgiving weekend according to Mastercard https://www.mastercard.com/news/press/2022/november/mastercard-spendingpulse-u-s-thanksgiving-weekend-retail-insights/). The US consumer has already drawn on his savings (saving rate down to 2.3% from 7.3% a year earlier) but the labor market is tight and wages are growing by ~5% YoY.

Implications for Monetary Policy

Fed Chair Powell’s speech and Q&A at the Brookings Institute last week acknowledged that goods inflation was slowing and that housing inflation was very likely to decelerate in early 2023 (existing rents in US CPI follow new rents, which are declining, with a lag).

Indeed, our preferred leading indicator for the US CPI rent index, the Case-Shiller YoY house price growth (leading by 1 year) fell further (see chart). This confirmed a likely sharp slowdown of shelter inflation (a third of the CPI basket) from April 2023 on.

However, Fed Chair Powell flagged the risk of wage-price spiral in the services sector (the most robust sector of the US economy) and signaled that the Fed was now especially focused on tackling non-housing service inflation, by containing the growth of its main input cost, wages.

The Fed is now, paradoxically, seeking labor market weakness. Fed Chair Powell added another “soft target” to the well-known target of job-openings-to-unemployment back to 1, the pursuit of employment cost index and average hourly earnings slowing by 1.5% to 2%, to ~3-3.5% YoY.

US employment growth is actually slowing: the average workweek for all employees on private non-farm payrolls declined by 0.1 hour to 34.4 hours, and average non-farm payroll growth has moved to 282k over the prior 3 months, from 392k in 2022, compared with 562k per month in 2021. However this pace is not yet satisfactory for the Fed which sees an ongoing “imbalance between labor supply and demand”: indeed, the ratio of unemployed-to-job-openings remains close to all-time-highs at ~1.7. November average weekly earnings is also likely to have disappointed the Fed as it accelerated to 5.1% YoY, 1.6% to 2.1% above its soft target.

The Fed has communicated that it would hold rates high until employment deteriorates and some time after. As a result, we see the Fed Fund rate likely to be high (5% ?) for longer.

Impact on asset prices

This reaction function to lagging macro indicators means that US cash and bills are likely to stay attractive for longer, as they deliver low-risk returns of 5% to investors.

We observe however that pockets of non-US cash assets have started to outperform in the past weeks, namelynon USD currencies, Chinese equities and base metals associated with China economic activity such as copper.

Increasing domestic economic and social pressures in the shape of deteriorating demand (see Chinese PMIs) and anti-covid demonstrations seem to be pushing China to re-open its economy. The government-initiated programmes to support lending to real estate developers should also help alleviate the economy, although execution is key. As a result, H-shares are up 11.6% week-on-week (our momentum indicators had already been flagging Chinese equity improvement in ranking two weeks ago, see https://research.nansen.ai/article/405/nansen-macro-newsletter-november-21-2022 and https://research.nansen.ai/article/428/nansen-macro-newsletter-november-28-2022). We acknowledge that the developments in China can be a positive driver for some categories of risk assets (e.g. Chinese domestic assets and base metals) for longer.

Overall we note that sentiment has improved among US equity investors: our measure of the S&P00’s risk premium as measured by options is down to 7% on 2 December 2022, down 2%pts from 9% three weeks ago. It is at the limit of a positive moving average, meaning that if the pattern of the past few months holds, the risk premium should increase from here (eg negative S&P 500).

More difficult to determine is the question of whether the US dollar has peaked. Low-yielding currencies such as the JPY are among the top performers vs the USD, which suggests that markets are betting on lower US yields. As analyzed above, we see US short-term rates stay high for longer so the US dollar’s peak pricing seems somewhat premature. Turning to Japan, as long as Governor Kuroda stays at the helm at the BoJ, we see the Yield Curve Control scheme being maintained, but this could change as soon as April 2023, with Kuroda’s successor. So JPY weakness could be justified by such a governance change, but this pricing seems a bit early as of November 2022.

What about Europe? As discussed in the prior newsletters, the Europeans have benefited from decreasing natural gas prices. Recently, prices have stopped decreasing and local temperatures have started to fall. So far natural gas storage capacities are close to full-capacity but the relation weather-energy prices-economy- european currencies bears monitoring. This means no clear sustainable bullish drivers for the EUR yet.

Turning to crypto assets, the price momentum remains negative: if we look at an average indicator over several time horizons, for BTC and ETH, we see that momentum can remain negative for several months (last bear market from August 2018 to June 2019, see chart). This matches our view that BTC and ETH are likely to hover around the current levels and only recover once US monetary policy shifts (US yield curve re-steepens as a main indicator).

What to pay attention to this week: Light week, watch services PMIs, as services are the new focus of the Fed

Monday 5: Taking the pulse of services activity: Eurozone Services PMI (consensus 48.6) / US Services PMI (consensus 46.1) / US ISM Non-Manufacturing PMI (consensus 53.1) /

RBA interest rate decision in the context of slowing inflation but solid wage growth (consensus 3.10%, from 2.85%)

Tuesday 6: Chinese Nov. exports (consensus -3.6% YoY) / Indian RBI interest rate decision (consensus 6.25%, from 5.90%) / Bank of Canada meets (expected interest rate at 4.25% from 3.75%)

Friday 9: US Nov. PPI (expected at 7.2% YoY) / December Michigan Consumer Expectations (consensus 55.3)

Charts that matter

Mortgage lending sharply down in the UK: Housing markets cooling across DMs

South Korean export growth deeply negative and one among many indicators showing a global manufacturing slowdown

Chicago PMI sunk to level reached during 8 prior US recessions

US Manufacturing "catching down" with Europe

Fed's "Soft Target 1": US-job-openings-to-unemployment ratio needs to be back to 1, from 1.7 currently

Fed's "Soft Target 2": Wage growth (average weekly earnings and employment cost index) needs to grow by ~3-3.5%, vs ~5% currently

Germany: natural gas prices climbing higher, needs monitoring

Germany: natural gas storage still close to full-capacity

China re-opening trades: HSCEI and Copper

Appendix, on-chain and market indicators: Equity risk premium down to 7% (August 2022 low) and BTC & ETH price momentum still negative