China opens up

A good week for

• Equites mostly rose, with Europe leading the way (+4%)
• Bonds advanced +1-2% in local currency terms

A bad week for

• The oil price fell -9% in US dollar terms
• Japanese bonds slipped -1.4% in sterling terms

China health policy

China has accelerated the pace of easing health restrictions over December, allowing domestic and now international travel. As expected, the relaxation of controls has precipitated a surge in Covid-19 cases, with officials confirming outbreaks across urban areas. An end to the strict testing regime makes it difficult to assess the health situation, but a surge in internet searches for Covid-19 symptoms and a decline in social mobility suggests that cases peaked in late December. Cases are expected to remain high into February, with travel over the Lunar New Year likely to spread the virus further, though there are signs of mobility recovering in cities hit earliest, like Beijing. While official data shows low mortality, other sources indicate a higher death toll, though there are no signs of the government reversing. Nonetheless, crowd scenes were shared on social media from several cities, suggesting consumer behaviour is returning to normal relatively quickly. An end to the zero-Covid-19 policy makes it possible for China’s economy to rebound in 2023, with many growth estimates around 5%, compared to below 3% in 2022. This would provide a tailwind to global demand, as well as helping to ease supply chain pressures.

Bond markets

Nominal bonds are no longer offering negative yields, with Japan’s 2024 government bond crossing into positive territory last week. Negative yields became common from 2014, in the wake of the Global Financial Crisis and Eurozone Sovereign Debt Crisis. At this time, the Bank of Japan (BoJ) and European Central Bank (ECB) introduced negative policy rates, with Denmark, Switzerland and Sweden following suit. The amount of negative-yielding bonds peaked at $18.4trn in December 2020, falling to $2.5trn by May 2022. In December 2022 the BoJ relaxed its Yield Curve Control policy, effectively raising the policy rate. Because of this, the yield on the last remaining negative-yielding Japanese bond has now crept above zero. This marks the end of a sustained period where investors were guaranteed a negative nominal return on assets they held to maturity.

Eurozone inflation

Eurozone inflation slowed by more than expected in December, pulled down by energy prices. Headline annual consumer price inflation rose by 9.2% in December, compared to 10.1% in November, with energy prices rising by 25.7% compared to a year ago, versus 34.9% in November. This is in part due to a mild European winter so far, with gas prices falling below the levels seen in January and February 2022, when Russia invaded Ukraine and energy prices surged higher. Inflation is expected to slow further as the sharp energy price increases seen in 2022 fall out of the observation period. However, core inflation, which strips out volatile energy and food costs, accelerated to 5.2% from 5% in November, pushed up by services prices and non-energy industrial goods. For this reason, the ECB reiterated a plan to continue hiking at a “steady pace” to levels where monetary policy is restrictive. Futures markets anticipate the ECB raising the refinancing rate by a further 1.5% to a peak of 4% in late summer.

US employment

US labour market data remained strong last week, though there were some signs of easing. Despite a rise in labour participation, the unemployment rate fell to 3.5% in November, from 3.7%. The number of workers on company payrolls also rose in December, albeit by less than in November. Pay growth also slowed to 0.3% month-on-month from 0.4%. Nevertheless, the Job Openings and Labour Turnover survey continued to paint a resilient picture. While both openings and hires declined in November, the ratio of openings to unemployed workers remains elevated at 1.7X, compared to 1.2X before the pandemic. However, weakness in business surveys points to a slowdown in activity, which could cause the labour market to ease further. The minutes of the December meeting of the Federal Reserve’s Open Markets Committee reiterated the committee’s desire to see labour markets easing, and the likely need for a slowdown in growth to achieve this.

UK economy

Data shows UK households becoming more cautious in November. Households increased liquid assets by £5.4bn in November, above the 2018-19 average of £4.8bn. Credit also increased at a faster pace than the average, though not enough to offset weak growth in prior months. Mortgage approvals also slowed dramatically to 46,000, versus 58,000 in October. Spending is likely to slow if households are not willing to dip into savings, while a weaker housing market could weigh on confidence.

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