1H January Global Market Recap
1st January 2022 – 15th January 2022
FULL REPORT ACCESS LINK: First Plus Market Update 1H January 2022
Hiring in the United States slowed sharply in December compared to November, although the jobless rate fell to a new pandemic-era low. Nonfarm payrolls increased by 199,000 compared to the Dow Jones expectation of 422,000. The unemployment rate dropped to 3.9% in December from 4.2% in November, a new pandemic-era low level and close to the 50-year low of 3.5% in February 2020. The U.S. CPI index increase by 7% YoY in December, the fastest rate in 40 years and the third month in a row that inflation topped 6%. The Federal Reserve has ceased referring to inflation as “transitory” and is planning to raise interest rates to combat the high inflation. The market has priced in three rate hikes in 2022, possibly starting as early as March.
China’s PPI grew 10.3% YoY in December down from 12.9% in November, as China's efforts to expand supply and stabilize prices continue to take effect, while US monetary policy tightening impacts on international commodity prices. YoY CPI was 1.5% in December, down from 2.3% in November, thanks to lower prices for vegetables, meat, and non-food consumer goods caused by the pandemic. China's exports maintained a robust growth rate in December from a high base and the trade surplus reached a record high of US$94.5 billion. We expect China’s exports to remain resilient as the Omicron variant may have less of an impact on global supply chains than the Delta variant.
The U.S. stock markets have experienced a significant selloff in expectation of tighter Fed policy in 2022. Many former Fed officials believe the Fed is behind the curve on inflation and will need to raise short-term rates more aggressively in the near term. The blue-chip S&P 500 index fell 2.2% in the first half of January. The tech-heavy Nasdaq Composite index dropped 4.8% and The Dow was down 1.2% in the first half of the month.
The A-share market has dropped for two weeks in a row, as investors’ concern about the speed of stabilization policy implementation and sluggish economic growth, expectations for US monetary policy tightening and US stock market volatility also weighed on risk appetite. In the first half of January, the CSI 300 fell 4.3%, the SHCOMP declined 3.3% and the ChiNext Index plunged 6.1%. The market turnover remained high, with the daily average being above Rmb1 trillion. Northbound trading has registered net inflows for two consecutive weeks. In our view, we believe the market sentiment would improve with the gradual implementation of stabilization policies and favorable valuation. The impact of U.S. monetary policies and market volatility on A share market may be limited.
The 10-year U.S. treasury yield increased by 27.4bps in the month as market participants begin to price rate hikes earlier and at a faster pace, with speculation about a 50-basis point move in March creeping into discussions, according to Bloomberg. The market is expecting the Bank of England (BOE) to raise the base interest rate as soon as February from 0.25% to 0.5%. The People’s Bank of China cut the rate on its one-year policy loans by 10 basis points to 2.85%, the first reduction since April 2020. It also cut the rate on the seven-day reverse repurchase rate by 10 basis point to 2.10% and net injected 200 billion yuan ($31.5 billion) of medium-term cash into the financial system.
The Covid-19 recession had spurred the most credit-rating downgrades in the US since the 2008 financial crisis, but corporate balance sheets have improved markedly since then. The amount of investment-grade debt being evaluated for an upgrade has swelled to $203 billion, the most since 2010, as reported by Bank of America. China called on banks to boost real estate lending in the first quarter and eased a key debt restriction for developers, a sign that authorities are becoming increasingly concerned about the industry’s liquidity crisis. The offshore dollar bond market remains effectively shut for refinancing as record pace of defaults and downgrades for Chinese borrowers has recently sent junk dollar bond yields to a record high.
The Dollar Index fell by 0.5% to a 2-month low as the dollar came under pressure after the Federal Reserve’s Chairman speech, which investors saw as too cautious. Further disappointment came from December’s CPI numbers coming at forecasted level although inflation rose to the highest in nearly four decades. The Chinese onshore yuan rallied to a three-year high against the dollar as robust export growth and solid investor flows supported the currency.
Brent and WTI crude oil prices rose by 10.6% and 11.4% as consumption has held up despite the spread of the Omicron variant of the coronavirus and possible supply disruption after attacks in the Mideast Gulf added to an already tight supply outlook. The U.S. Energy Information Administration (EIA) forecasted that oil prices will drop in 2022 and 2023 while OPEC has a different view and expects global oil markets to remain “well-supported” this year by robust demand. US natural gas prices rose by 14.7% as the market is predicting a cold snap over the next 2 weeks. US Gasoline prices rose by 8.7% as the Omicron variant appears to be milder, keeping gasoline consumption high.