The numbers for the week – 03 Apr 23
Markets last week
We had another good week in risk markets and a poor week for bonds. A lull in central bank activity and comments, as well as the lack of additional news on banking issues enabled investors to be more positive. End-of-quarter position squaring was also apparent.
US Federal funds futures continued clawing back their aggressive expectation of more than 1% cuts in the Federal funds rate by year end, finishing the week near 60 bps of anticipated rate reductions in the second half of 2023 (after being below 50 bps at some point). Government bond yields progressively went back to the pre-Silicon Valley Bank levels, with the US 2-year treasury bond yielding 4.03% and the 10-year 3.47%, despite a last-minute drop on Friday afternoon. European and UK government bonds also rose in yield by 16 bps and 21 bps, respectively.
Economic data seemed to be secondary. Inflation was generally lower but mostly at the headline, rather than core level. Eurozone inflation fell from 8.5% to 6.9%, chiefly driven by cheaper energy prices, but the core reading actually edged up from 5.6% to a record 5.7%.The balance was slightly better in the US where the Personal Consumption Expenditures (PCE) inflation measurement fell from 5.3% to 5.0% and the core PCE (ex food and energy) from 4.7% to 4.6%.The core PCE is the US Federal Reserve’s (Fed’s) inflation gauge, with a 2% target. The small drop in the core PCE on Friday triggered a strong equity rally in the US.
Economic surveys were mixed, both in the US and Europe. The UK stood out because of a poor house price index, the worst since 2009, but the comparison with the soaring numbers a year ago is probably inappropriate.
The one part of the world where data were unequivocally better was China, with surging services and sustained manufacturing in the official purchasing manager indices (PMIs), although it didn’t particularly benefit Asian markets.
At the end of the week, European equities were up 4.5%, followed by UK and US shares and Japan at the bottom of the league, with more than 6% returns for energy, followed by materials, real estate, industrials, technology and financials. As per normal risk-on rallies, the US dollar weakened meaningfully. Oil prices bounced back sharply but copper and gold were more subdued.
The closing quarter saw European equities way ahead of all other regions against a backdrop of falling bond yields, a weak US dollar, slumping oil prices and strong gold and copper returns, an unusual mix of conditions. The US technology-heavy NASDAQ index rose by more than 17% in Q1, its best quarter since Q2 2020 during the pandemic bounce-back, although only a handful of companies contributed to that overall return.
The week ahead
Monday: US ISM manufacturing
Our thoughts: this week, most of the data will come out of the US, with other parts of the world having a shorter week or publishing fewer statistics. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) is always a very instructive survey, not just because of the headline level, but thanks to the underlying details. Manufacturing in the US, and indeed globally, has been weak, but is it getting better or worse? The ISM tends to be a forerunner of moves in industry. Prices paid, employment and new orders are probably the three most important areas to follow.
Wednesday: US ISM services index
Our thoughts: services have been very strong in the US and the tightness in the jobs market, mostly for the services economy, has been behind the sticky inflation data recently. There doesn’t seem to be any let-up in the employment numbers, but will the services survey point to a slowdown? This will matter mostly for inflation, with the prices paid index standing at more than 65 last month (with 50 being the threshold between increase and decrease). New orders and employment will also have an impact on markets.
Friday: US employment report for March
Our thoughts: will the US print another nonfarm payrolls number that is way ahead of the country’s non-inflationary level? The Fed has been signalling that 100,000 new jobs are all the economy can afford and yet the trend is still for 250,000 each month, driven by services. Will average hourly earnings fall further? What will the labour force participation rate be, i.e., are there new people coming into the jobs market?
The numbers for the week
Central banks/fiscal policy
A few comments by Fed officials amid generally silent central banks after their big meetings the prior week
Fed officials spoke in the last few days. Boston Fed President Susan Collins said: “we should remain highly data dependent.” Richmond Fed Thomas Barkin said he had not yet come to a view on the May Fed meeting. Minneapolis Fed President Neel Kashkari said that there is “more work to do” to get inflation back down to 2%. Regarding the banking crisis, he stated that: “what’s unclear right now is how much of the banking stresses of the past few weeks is leading to a sustained credit crunch, which would then slow down the US economy.”
In reference to the recent turmoil in various US regional banks, US Treasury Secretary Janet Yellen warned that bank deregulation had gone too far: “These events remind us of the urgent need to complete unfinished business: to finalise post-crisis reforms, consider whether deregulation may have gone too far and repair the cracks in the regulatory perimeter that the recent shocks have revealed.”
European Central Bank (ECB) President Christine Lagarde referred to the lower eurozone headline inflation and said that underlying inflation remains “significantly too high,” and that the ECB still has “ground to cover” to bring inflation back down to 2%.
United States
Strong jobs, better inflation and, as usual, mixed surveys
Surveys: the Dallas Fed manufacturing activity index fell from -13.5 to -15.7, with the Dallas Fed services activity index dropping from -9.3 to -18.0. The Richmond Fed manufacturing index rose from -16 to -5 with the Richmond Fed business conditions falling from -6 to -17.
The Conference Board consumer confidence survey improved from 103.4 to 104.2, driven by expectations moving from 70.4 to 73.0. The Market News International (MNI) Chicago Purchasing Managers’ Index (PMI) was slightly up at 43.8 vs. 43.6.
The widely followed University of Michigan sentiment index was revised down from 63.4 to 62.0, driven by lower expectations.
Housing: the FHFA house price index rose 0.2% in January. The S&P CoreLogic (formerly known as Case-Shiller) 20-city index fell -0.43% in January for a year-on-year growth of 2.55%, down from 4.62% the previous month. Mortgage Bankers Association (MBA) mortgage applications rose 2.9% for the week ended 24 March, following +3.0% the prior week. Pending home sales increased 0.8% in February, from 8.1% the prior month.
Inventories: wholesale inventories rose 0.2% in February, up from -0.5% the prior month with retail inventories up 0.8% from 0.1%.
Employment: initial jobless claims rose from 191K to 198K for the week, with continuing claims up from 1685K to 1689K.
Inflation: the Personal Consumption Expenditures (PCE) inflation reading fell from 5.3% to 5.0%, with the core PCE (ex food and energy) down from 4.7% to 4.6%. The Core PCE is the gauge that the Fed is following as a gauge with a 2% target. The University of Michigan embedded inflation forecast was revised down from 3.8% to 3.6% for one year but up from 2.8% to 2.9% for 5-10-year inflation.
Consumer: personal income increased 0.3% in February and personal spending 0.2%.
United Kingdom
Poor house price growth stands out among otherwise contradictory data
Surveys: the Confederation of British Industry distribution surveys were better than expected, with the total distribution reported sales moving from -12 to +8 and the retailing reported sales from +2 to +1.
Inflation: the British Retail Consortium shop price index rose from 8.4% year-on-year to 8.9%.
Housing: the Nationwide House Price Index fell 0.8% in March for a 3.1% year-on-year decrease, the worst number since 2009, but the comparison is with last year where growth was very strong and hence the drops are not necessarily indicative of activity.
Credit: net consumer credit fell from £1.7bn to £1.4bn in February, with a year-on-year growth of 7.7%. Net lending securitised on dwellings dropped sharply from £2.0bn to £0.7bn, whereas mortgage approvals actually rose from 39.6K to 43.5K (although the number of mortgage approvals is still on a downtrend from its peak in late 2020).
Money supply: M4 money supply rose 1.0% year-on-year in February, down from 2.6% the previous month.
Europe
Better headline inflation but sticky core amid confusing surveys and data
Money supply: M3 money supply in the eurozone fell from 3.5% year-on-year to 2.9% in February.
Surveys: the bellwether Institut für Wirtschaftsforschung (IFO) survey in Germany improved, with the business climate up from 91.1 to 93.3, the current assessment from 93.9 to 95.4 and the expectations from 88.4 to 91.2. The GfK consumer confidence survey for Germany was a touch higher at -29.5 vs. -30.6.
French confidence surveys were a tad weaker, with business confidence from 104 to 103, manufacturing confidence from 105 to 104, consumer confidence from 82 to 81 and the production outlook indicator from 0 to -1.
Confidence fell slightly in the eurozone, with economic confidence from 99.6 to 99.3, industrial confidence from +0.4 to -0.2 and services confidence from 9.5 to 9.4.
Retail: German retail sales in February fell 1.3% following a barely positive 0.1%.
Employment: the eurozone unemployment rate for February remained at 6.6%.
Inflation: the eurozone consumer price index (CPI) fell quite sharply for the headline number, from 8.5% to 6.9%, but the core CPI (ex food, energy, alcohol and tobacco) was sticky, rising from 5.6% to a record 5.7%. German imported inflation dropped sharply, from 6.6% to 2.8% in February.
China/India/Japan/Asia
Chinese services soaring and solid Japanese numbers
China: the official (CFLP) manufacturing PMI fell from 52.6 to 51.9, albeit ahead of expectations, but the non-manufacturing PMI soared from 56.3 to 58.2, the highest level since 2011. This was backed up by the publication of the Caixin manufacturing PMI, which came in at exactly 50, markedly weaker than expected.
Japan: the jobless rate surprisingly increased from 2.4% to 2.6% and the job-to-applicant ratio remained very low at 1.34 vs. 1.35. Retail sales in February rose a strong 1.4%, up from 0.8%. Industrial production in February had a blow-out month. Housing starts, however, slumped to 0.3% year-on-year from a high +6.6%. Meanwhile the Tankan survey, like the Chinese equivalent, came in weaker than expected at +1 compared with +7 last time.
Oil/Commodities/Emerging Markets
Petroleum prices soared last week after a long period of downdraft. At the end of the week, Brent crude was up more than 6% and the US gauge WTI up more than 9%.This came as Saudi Arabia led OPEC production cuts of 1 million barrels of oil/day in the name of enhancing “stability”, but in effect to bolster the price. Gold and copper were more subdued, but bullion just finished its best month since November.
