The numbers for the week – 06 Feb 23
Markets last week
Predictability ought to be a desirable feature of financial markets and yet last week’s action defied all forecasts. Three of the most systemically important central banks in the world: the US Federal Reserve (the Fed), the Bank of England (BoE) and the European Central Bank (ECB) raised rates, all but promised future hikes and clearly stated that their rates were not going to be cut for quite some time. Many market participants agreed that the messages were designed to convey no let-up in the inflation fight until the 2% target for all these central banks is in sight.
Financial markets did however reply with renewed scepticism that these central banks, in particular the Fed, really mean to deliver on this policy. Long-term bond yields fell sharply in the UK and the eurozone in the expectation that policy rates would not be raised as much as promised. Equities, in particular the US technology sector, continued to assume that the Fed would cut rates late this year and soared accordingly.
Granted, each central bank delivered a slightly different type of communication, and it is quite likely that central bankers were not appointed for their skills in dealing with the press, but the message seems to have got lost in translation across the board.
The Fed is the most advanced in its rate hikes and is seeing the fastest drop in inflation rates. Fed Chair Jay Powell made it clear that there were to be ongoing rate hikes, meaning that the so-called ‘terminal’ rate would be above 5% and that they saw no cuts in these rates for at least the balance of this year. The BoE had a more complicated task ahead, given the recent forecast by the IMF (International Monetary Fund) that UK growth in 2023 would be the lowest among the top 15 world countries. Governor Andrew Bailey had to temper the desire to beat inflation with concerns for a potential year-long recession, albeit a mild one, so 4% could well be seen as the peak rate, depending on future events. The ECB President, Christine Lagarde, then took the mantle of ‘last hawk standing’, delivering an unabashed promise to hike by another 50 bps at the next meeting.
US treasury bond yields fell after the Fed’s comments but did climb back on Friday when an amazingly strong jobs report highlighted how difficult it would be to keep bringing inflation down with such a tight US employment sector. Following the meetings of the BoE and ECB, UK and European bond yields feel sharply, near 30 bps on Thursday. In line with these relative moves, the US dollar bounced back from its recent slump.
On the equity side, a bevy of high-risk areas, in particular in the US, experienced massive surges: meme stocks, ‘profitless technology’ shares, crypto currencies, etc.
Other factors did not necessarily get the attention they deserved. Corporate earnings are not beating estimates as much as in previous quarters, especially in the US vs. Europe. Economic data continue to be mixed and confusing in the US, with the UK appearing to be the most depressed and Europe recovering from previous lows. Chinese data are providing an incipient reaction to the reopening from lockdowns and indeed, Purchasing Managers’ Index (PMI) surveys have soared, notably for services.
At the end of the week, the US market was the clear leader, followed closely by Europe with China and Hong Kong correcting from their recent run. Within American equities, the so-called FAANGs (originally Facebook, Apple, Amazon, Netflix and Google, but now an acronym for the largest US companies) were the most buoyant, up almost 10% in sterling terms and 30% year to date, without necessarily deriving those gains from earnings announcements. The energy sector fell sharply and other sectors were also negative (materials, utilities, healthcare), an odd combination of defensive and cyclical sectors. Within UK shares, smaller firms did better with the FTSE 250 and AIM beating the FTSE 100.
The movements within other asset classes were also momentous. Gilt yields collapsed by 27 bps for the 10-year maturity, unlike other global bond markets which were more stable. Maybe the BoE was perceived as the least hawkish of the trio of central banks last week.
The US dollar recovered from its long downward streak and sterling was the weakest developed currency. Fittingly, a stronger dollar led to falls in commodity prices, whether industrial metals or precious metals, but the biggest drop was in oil prices on the back of a jump in crude inventories.
The week ahead
Thursday: Chinese Consumer Price Index (CPI) and Producer Price Index (PPI)
Our thoughts: once again, we will be trying to divine the impact of the reopening in the Chinese economy on Chinese and global forces. Is the presumed surge in consumption and hence services likely to add to Chinese CPI? More importantly for the rest of the world, is PPI going to be affected by the reopening? The PPI has a direct effect on global wholesale and import prices. China has managed to get away with very modest inflation due to a weak economy during the extended lockdowns. The CPI is expected to rebound somewhat, but the PPI is still expected to be negative, which would be good news for the rest of the world.
Friday: UK Gross domestic product (GDP) for December
Our thoughts: with the IMF projecting that the UK will have the weakest growth among the top 15 world economies during this year, UK GDP will be a big focus for markets. Unfortunately, we get the data one full month late, but the December numbers will guide us to the direction this year. Industry is expected to suffer from the strikes, and services are also forecast to be weak. Will anything surprise on the upside and provide a ray of light? Markets will notice.
Friday: University of Michigan sentiment index
Our thoughts: the US economy is stuck halfway between expectations of a recession and a soft landing. Looking at services and employment you could be mistaken for assuming that the Fed has never raised rates, whereas the manufacturing sector is clearly going down. The balancing factor may well be the consumer. The University of Michigan consumer sentiment index is a bellwether in that respect. It bottomed in the middle of last year. Can it keep recovering and what does that tell us for the economy as a whole? Also, the University of Michigan gives us a 1-year inflation forecast and a 5-10-year forecast. Both have been reasonably well behaved recently. What will they tell us about the path of future inflation?
The numbers for the week
Central banks/fiscal policy
Fed hikes by 25 bps, BoE and ECB by 50 bps. All emphasise the fight against inflation, but their message seems to have been interpreted differently by markets
The Fed hiked its Fed funds rate by 25 bps to 4.50-4.75% range in a unanimous vote. Chair Jay Powell said that ‘ongoing rate hikes’ were expected and did not change expectations for the terminal rate.
The comments from Powell were seen as dovish, but he was probably somewhere in between dovish and hawkish. He pushed back on cuts that markets had priced in for this year by saying that the Fed was not expecting to cut rates this year, but the Fed funds futures are still expecting 50 bps cuts in the second half of this year. He said that markets were expecting price pressure to cool much faster than the Fed, but the Fed is open to adjusting their plans if the market expectations are right, i.e. the Fed is data dependent. He did not make hawkish comments regarding the ongoing easing in conditions in financial markets. He also said that the ingredients for a soft landing were falling into place.
“We can now say I think for the first time that the disinflationary process has started”
“We have inflation moving down, you know, into somewhere in the mid-3s or maybe lower than that this year. We will update that in March. That is what we thought in December. Markets are past that. They see inflation coming down in some cases much quicker than that, so we will have to see. We have a different view, a different forecast really. Given that, I don’t see the rates coming down; as I mentioned, if we do see inflation coming down much more quickly, that will play into our policy-setting, of course.”
The market reaction to the Fed’s announcement was muted, but during Chair Powell’s press conference and afterwards, equities soared and treasury bond yields fell sharply.
The BoE raised rates by 50 bps to 4% in a 7-2 vote. BoE Governor Andrew Bailey answered questions in great detail, leaving the door open to different potential outcomes in the future depending on how inflation behaves. It is quite true that the plight of the British economy and the current strikes are making normal monetary policy more complicated, but he left no doubt as to the importance of beating inflation.
Lastly, the ECB was seen as the ‘last hawk standing’, hiking by 50 bps with ECB President Christine Lagarde talking unabashedly about the need to keep tightening and even promising another 50 bps at the next meeting. In addition, the ECB will be selling €15 billion a month of market assets (quantitative tightening or QT) between now and June and then review the policy.
The reaction to the BoE and ECB meetings was felt mostly in government bond markets, with long-term bond yields collapsing by as much as 30 bps on Thursday, although there was a small recovery the next day.
United States
Jobs are still on fire, despite technology sector layoffs, amid mixed surveys and a still weakening housing market
Surveys: the Dallas Fed manufacturing activity index rebounded from -20.0 to -8.4. The Dallas Fed services activity index was also better, at -15.0 vs. -20.5.
The Institute for Supply Management (ISM) manufacturing PMI fell to 47.4 from 48.4, indicating a downtrend in manufacturing.
ISM new orders continued to weaken (42.5 down from 45.1), so did production. The employment component was almost unchanged at 50.6 and there was a small move up in prices to 44.5 from 39.4.
The ISM services survey, on the other hand, surged from 49.2 to 55.2, with new orders leading, up from 45.2 to 60.4, prices paid almost unchanged at a high 67.8, and employment edging up from 49.4 to 50.0.
The Market News International (MNI) Chicago PMI eased from 45.1 to 44.3.
The Conference Board consumer confidence survey weakened from 109.0 to 107.1, with the present situation rising from 147.4 to 150.9 but the expectations component dropping from 83.4 to 77.8.
Inflation: the employment cost index eased to 1.0% in the fourth quarter (Q4) from 1.2% the previous quarter.
Employment: the Job Openings and Labor Turnover Survey (JOLTS) job openings surprised on the upside, climbing from 10.44 million to just above 11 million, less than 1 million below the all-time high in March last year. The Challenger, Gray & Christmas job cuts soared to 440% year-over-year in January, up from 129% the previous month, mostly driven by the well-advertised technology sector layoffs.
Jobless claims once again showed a tight jobs market, with initial claims easing from 186K to 183K and continuing claims declining by from 1666K to 165Kk.
The January non-farm payrolls spiked to 517K from 260K the prior month, with the net revision for the last two months up +71K. Most of the new jobs came from leisure and hospitality as well as education, which more than offset the layoffs in the technology sector. Very few new jobs were created in manufacturing. Together with that stonking job creation, the rest of the employment data also depicted a sizzling jobs market. The unemployment rate (U-3) fell from 3.5% to 3.4%, a 53-year low, despite an increase in the labour force participation rate from 62.3% to 62.4%, and the underemployment rate (U-6) rose marginally from 6.5% to 6.6%. There was a significant increase in the average weekly hours worked by all employees from 34.4 to 34.7, which probably showed that companies would like to employ more staff but can’t get their hands on them. The average hourly earnings were more subdued, at 4.4% year-on-year vs. 4.8% previously.
Housing: the Federal Housing Finance Agency (FHFA) house price index fell 0.1% in November from 0% the previous month. The S&P CoreLogic 20-city price index (known as Case Shiller) continued its downward trend, with a -0.54% fall in November resulting in a year-on-year growth of 6.77% vs. 8.64% before. The Mortgage Bankers Association (MBA) mortgage applications series had a bad week, down 9.0% vs. +7.0% previously. Construction spending in December fell 0.4% after +0.5% the prior month.
Industry: the Wards total vehicle sales series bounced back from 13.31 million annualised to 15.74 million in January. Factory orders rose 1.8% in December from -1.9%, although ex transportation, factory orders had a similar month at -1.2%.
United Kingdom
Weaker across the board
Housing: the Nationwide Building Society house price fell 0.6% in January after -0.3% the prior month, a 6-month losing trend and the longest since 2008. Prices remain 1.1% higher than a year ago, with the average price at £258,297.
Credit: net consumer credit dropped from £1.5 billion to £0.5 billion in December, although still up 7.2% year-on-year. Net lending securitised on dwellings fell from £4.3 billion to £3.2 billion.
Money supply: M4 money supply had another negative month in December, down 0.8% and up only 1.6% year-on-year, down from 2.5%.
Prices: the British Retail Consortium (BRC) shop price index rose to 8.0% in January from 7.3%.
Europe
Mixed data but better surveys
Surveys: eurozone confidence bounced back: economic confidence rose from 97.1 to 99.9, industrial confidence from -0.6 to +1.3 and services confidence from 7.7 to 10.7.
Inflation: inflation in the eurozone eased but only at the headline level. The CPI dropped from 9.2% to 8.5% but the core CPI remained unchanged at 5.2%. The PPI for the eurozone rose 1.1% in December against expectations of a drop, with the year-on-year increase falling from 27.0% to 24.6%.
Employment: the eurozone unemployment rate stayed at 6.6%.
Consumer: German retail sales collapsed in December, down 5.3% after a positive 1.9% the prior month. French consumer spending was weak in December, down 1.3% from +0.6% previously.
Industry: French industrial production rose a strong 1.1% in December for a 1.4% annual growth, up from 0.7% the prior month.
China/India/Japan/Asia
Soaring Chinese surveys and solid Japan
China: the PMIs soared. The official China Federation of Logistics & Purchasing (CFLP) manufacturing PMI rose from 47.0 to 50.1, but most importantly, the non-manufacturing PMI jumped from 41.6 to 54.4, way above estimates. Manufacturing suppliers’ delivery time improved to 47.6 in January from 40.1. Services activity on its own surged to 54 from 39, due to the reopening of the Chinese economy. Non-manufacturing employment improved from 42.9 to 46.7. The unofficial Caixin manufacturing PMI was more stable, edging up from 49.0 to 49.2 and the Caixin services PMI also jumped from 48.0 to 52.9.
Industrial profits fell 4% in 2022 compared to the year before, vs. -3.6% the previous month.
China’s 100 biggest real estate developers announced that new home sales dropped 32.5% year-on-year.
Japan: the jobless rate was unchanged at 2.5%, as was the job-to-applicant ratio at 1.35. Retail sales rose 1.1% in December for a 3.8% year-on-year increase. Industrial production fell slightly in December, down -0.1% after +0.2% for a -2.8% year-on-year decrease. Housing starts were weaker in December, down 1.7% year-on-year vs. -1.4%. The consumer confidence index improved from 30.3 to 31.0. The monetary base was stronger in January, down 3.8% year-on-year vs. -6.1%..
Oil/Commodities/Emerging Markets
US dollar strength hits commodities
The weekly report of the Energy Information Administration (EIA) showed US crude oil inventories surging by 4.14 million barrels in late January.
Gold hit the highest level since April on Thursday, before collapsing on Friday after the strong payroll number in the US.
A very strong rebound in the US dollar drove all commodity prices down, with oil down almost 8%, and copper and gold falling 3% in dollars.
