The numbers for the week – 05 Jun 23
Markets last week
This was the week when the US debt ceiling deal cleared all the different hurdles through Congress, which was seen as a removal of uncertainty by investors. President Biden signed the debt deal into law over the weekend.
A somewhat contradictory employment report in the US on Friday was interpreted as arch-bullish by markets, hot on the heels of a large increase in job openings. Whereas a massive 339K jobs were created in May with upgrades to the two previous months, the details show a mix of directions and could be pointing to some slowdown ahead for the jobs market.
At odds with the strong data above, expectations for a June rate hike by the US Federal Reserve (Fed) fell from about 60% to 25%, with the consensus now assuming there will be a ‘skip’ rather than a pause for that meeting, followed by a possible hike in July. Government bond yields also fell quite sharply in tow in the expectation of less tightening by the Fed and other central banks. A better eurozone inflation print, both headline and core, also pointed markets towards reduced inflationary pressures worldwide.
Comments from the Chinese government about a possible support package for the beleaguered property sector helped a strong recovery in Chinese markets on Friday.
The Friday rally worldwide flipped returns for the week from negative to positive for most markets, with the FTSE 250 and China doing best and Europe lagging. The sector league table shows real estate, material, industrials and financials leading and consumer staples as the only losing sector. It is notable that the buoyant technology sector did not lead markets during that advance.
The US dollar was weak, in particular against a resurging sterling, meaning that US equity returns were more negative for UK investors. Oil prices once again fell, but copper prices staged a recovery. Over the weekend, Saudi Arabia announced a cut of one million barrels/day for crude and this has increased oil prices this morning.
The week ahead
Monday: US ISM services index
Our thoughts: services have been doing much better than manufacturing globally, but probably nowhere more than in the US. It is indeed the strength in services, led by a tight jobs market, that is mostly behind the sticky core inflation data in the US. As the manufacturing surveys keep falling, are services going to remain as buoyant? The indirect impact of the services economy in the US is on core inflation and hence the ISM (Institute for Supply Management) services index will be dissected for clues on future price rises.
Wednesday: German industrial production
Our thoughts: the eurozone has fallen back from a surprising recovery this year to depressed growth again, in the space of very little time. The eurozone economic surprise index peaked in February near +100 and now seems to be heading towards -100. Germany, as the manufacturing powerhouse in Europe, is an important country to watch. Has the slowdown in China really damaged growth expectations in Europe? German industrial production could be a bellwether.
Thursday: Chinese inflation
Our thoughts: is Chinese exceptionalism in inflation likely to continue? The last Consumer Price Index (CPI) stood at 0.1% and the Producer Price Index (PPI) at -3.6%. The low-price rises point to a sub-par recovery with consumers sitting on their hands rather than spending. Given how unreliable growth statistics are, inflation is a good guide to growth in China. More importantly for the rest of the world, will China continue to export manufacturing deflation, thanks to a heavily negative PPI?
The numbers for the week
Central banks/fiscal policy
Again conflicting comments from Fed officials but Jefferson is being listened to more than the others and he recommends a pause in hikes
Cleveland Fed President Loretta Mester said she didn’t see a “compelling reason” for the Fed to pause its interest rate hikes. Her views were echoed by her colleague Richmond Fed President Thomas Barkin, who said he was looking for signs of cooling demand to make sure inflation is coming down. Philadelphia Fed President Patrick Harker took a different view, saying: “I think we can take a bit of a skip for a meeting” and Fed Governor Philip Jefferson, who is widely assumed to be reflecting Fed Chair Powell’s views, agreed to keep interest rates unchanged in June to assess incoming data, with the comment that: “a decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle.”
European Central Bank (ECB) Governing Council member Madis Muller said the ECB is likely to raise rates at least another couple of times. “It also seems to me that it’s probably too optimistic to expect interest rates to drop by early next year”. ECB Vice President Luis de Guindos said that “a large part of the road” had been completed on rate increases and “the final stretch remains”, with 25 bps expected on an ongoing basis but the final hikes “depend on the data”.
United States
Stonking payroll creation and job openings contrast with a surge in job cuts and increasingly weaker surveys
Housing: the FHFA (Federal Housing Finance Agency) house price index rose 0.6% in March, following 0.7% previously. Also in March, the S&P CoreLogic CS 20-City index (formerly known as Case Shiller) turned negative year-on-year, at -1.15%, with the national home price index up only 0.66%, from 2.13%. MBA (Mortgage Bankers Association) mortgage applications fell 3.7% in the week ending 26 May.
Surveys: the Dallas Fed manufacturing activity index dropped from -23.4 to -29.1 whilst the Dallas Fed services activity index fell from -14.4 to -17.3. The Conference Board consumer confidence survey revised the previous month’s data upward and registered some small monthly falls as a result: consumer confidence was down from 103.7 to 102.3, the present situation from 151.8 to 148.6 and the expectations barely changed from 71.7 to 71.5. The MNI (Market News International) Chicago PMI (Purchasing Manager Index) slumped from 48.6 to 40.4.
The all-important ISM (Institute for Supply Management) manufacturing PMI fell further from 47.1 to 46.9, with new orders slumping to 42.6 from 45.7 and prices paid collapsing from 53.2 to 44.2 whilst employment was actually higher at 51.4 from 50.2.
Employment: the JOLTS (job openings and labour turnover survey) job openings surged past 10 million again, at 10103K vs. 9745K previously, upgraded from 9590, against expectations of a fall. The quits rate, however, fell to 2.4%.
The Challenger, Gray & Christmas job cuts soared from 175.9% year-on-year to 286.7%, driven by large layoffs in the technology sector.
Jobless claims were barely changed, with initial claims at 232K from 230K and continuing claims at 1795K from 1789K.
May non-farm payrolls rose 339K, a large increase from the previous month and way above estimates, with a positive revision of 93K to the last two months. Jobs were created in construction, government and healthcare in particular, but not in manufacturing. Surprisingly, the household survey of employment data showed a drop in jobs, in contradiction to the payroll survey. The unemployment rate (U-3) actually jumped from 3.4% to 3.7% with a labour force participation rate remaining at 62.6% and the underemployment rate (U-6) also rose from 6.6% to 6.7%.
Inflation: average hourly earnings year-on-year fell from 4.4% to 4.3% with the average weekly hours for employees falling from 34.4 to 34.3.
Industry: construction spending was up a strong 1.3% in April. The Wards series of total vehicle sales from 15.91 million (annualised) to 15.05 million.
United Kingdom
Generally weaker data
Surveys: the Lloyds Bank business barometer fell from 33 to 28, with the balance of companies expecting to raise prices still at a high 56%.
Housing: the Nationwide house price index fell 0.1% in May following +0.4% the prior month, for a year-on-year fall of 3.4%, down from -2.7%.
Credit: net consumer credit was unchanged in April at £1.6bn or 7.7% year-on-year but net lending securitised on dwellings unexpectedly dropped £1.4bn and mortgage approvals fell from 51.5K to 48.7K.
Money Supply: M4 money supply was flat in April but grew only 0.3% year-on-year, down from 0.4% and the three-month annualised rate was down 1.9%.
Europe
Better inflation numbers come with weaker data
Inflation: in the eurozone, consumer price expectations (as measured by the European Commission) fell from 15.0 to 12.2, the lowest level since 2020.
The eurozone CPI was better than expected, with the headline down from 7.0% to 6.1% and the core CPI from 5.6% to 5.3%.
Surveys: confidence in the eurozone fell, with economic confidence down from 99.0 to 96.5, industrial confidence from -2.8 to -5.2 and services confidence from 9.9 to 7.0.
Consumer: consumer spending in France fell again in April, down 1.0% after -0.8%. Retail sales in Germany, however, rose 0.8% in April for an 8.6% year-on-year drop.
Money supply: M3 money supply in the eurozone fell from 2.5% year-on-year to 1.9%.
Employment: the eurozone unemployment rate improved from 6.6% to 6.5%.
Surveys mixed in China and some weak data in Japan
China: the official (CFLP) PMIs fell, with the manufacturing PMI down from 49.2 to 48.8 and the non-manufacturing PMI down from 56.4 to 54.5. The unofficial Caixin manufacturing PMI was better than expected, rising from 49.5 to 50.9. The Caixin services PMI was also ahead of estimates, at 57.1 vs. 56.4.
Japan: the consumer confidence index improved from 35.4 to 36.0 but real economy data fell. Retail sales decreased 1.2% in April for a year-on-year growth of 5.0%, down from 6.9%. Industrial production also fell 0.4% in April. Housing starts slumped 11.9% year-on-year from -3.4% the previous month.
Oil/Commodities/Emerging Markets
Oil still falling. Is the copper recovery real?
Oil prices are still depressed, having taken back all the 2022 increases, and then some. On the other hand, copper has staged a rally, which is probably technical, given the depressed growth picture in China as the main consumer. The one million barrel/day output cut from Saudi Arabia over the weekend has yet to have an impact on markets.
Gold tried and failed to hold the US$1,975 level, losing the week’s rally amid the Friday bullish tone.
