The numbers for the week – 10 Apr 23
Markets last week
Last week was when a US recession started to get priced in (again!), with many economic statistics pointing downward. The ISM (Institute for Supply Management) manufacturing and services surveys dropped, with services driven by a huge slump in new orders; employment finally seemed to show signs of cracking, with job openings falling below 10 million for the first time in two years, jobless claims surging; and there were softer factory orders, construction spending and mortgage applications. All these numbers seemed to point at least to a slowdown. The most shocking data came from an area that is rarely mentioned: credit, with the biggest drop in US bank loans since records began in 1973 during the last fortnight of March, doubtless caused by the small bank crisis with Silicon Valley Bank in the headlights.
All of these numbers, however, seemed to be challenged by the monthly non-farm payroll data on Friday showing nearly another quarter of a million new jobs being created by the US economy. This will be the last such reading before the next meeting of the US Federal Reserve (Fed) at the beginning of next month where markets are still uncertain whether the Fed will hike one more time before a widely anticipated pause.
In the rest of the world data were not quite so negative, with strong industry and trade numbers in Germany, a higher house price index in the UK, better surveys across the board in Japan, but in particular surging surveys in China confirming that the services activity is picking up strength after the recent reopening. In addition, Chinese inflation kept falling quite sharply resulting not only in enviable consumer price rises but strongly negative producer prices which should help depressed global manufacturers.
Separately, the International Monetary Fund (IMF) announced that the five-year global growth outlook is the weakest since 1990, with a 3% growth vs. an average of 3.8% in the last two decades, driven by an expected slowdown in developed economies.
Central bankers did not spoil the party during the week with no surprises in their limited interventions, but Fed fund futures and bond markets exhibited high volatility, as the slowdown started to sink in. Fed fund futures went back to anticipating more than 1% in Fed rate cuts this year, although this was taken back to 75 bps after the strong employment numbers on Friday and to 60 bps this morning. US treasury bond yields sank during the week, with the US 10-year yield now a full 1% below its late October yield level, when equities started recovering. Despite a recovery on Friday, bond yields fell by an average of 10 bps.
Many markets were closed on Good Friday (US, Europe, Hong Kong) but yesterday the US market re-opened without major moves.
The best performing shares of Q1 began the new quarter on the backfoot, with cyclicals sectors (industrials, consumer discretionary, materials and technology) falling but defensive sectors (healthcare, consumer staples) and energy rising. The recovery in the indices was driven by energy shares benefiting from OPEC’s output cuts and defensive areas reacting to the weaker US data.
The best market was the FTSE 100, mostly driven by the rebound in energy shares, with Japan lagging due to concerns about the first meeting of the Bank of Japan (BoJ) under the new Governor Kazuo Ueda, although Japanese equities recovered today based on a benign BoJ message.
Gold consolidated its March gains whilst crude oil prices surged more than 5%.
The week ahead
Tuesday-Wednesday: US Consumer Price Index (CPI) and Producer Price Index (PPI)
Our thoughts: the Fed is meeting in less than a month to discuss its next move and the market is still unclear on whether it will be another hike. The payroll data are now behind us, but inflation numbers are still ahead. The widely followed CPI coming this week is expected to keep falling, but the core reading ex food and energy may show an upward direction, which could be disturbing the market discourse that inflation has peaked. Also important will be the PPI which normally shows future inflationary pressures. If the core PPI reading falls significantly, the Fed might take it into consideration in looking at core CPI.
Thursday: UK February Gross Domestic Product (GDP)
Our thoughts: UK economic growth has been anything but exciting recently, but the country has so far skirted any recession despite ominous signals late last year. The February data will matter to investors, thanks to the detail by sector. Will it be industry or services leading? Has construction finally turned the corner? Is there any trend anywhere? Most numbers month-to-month have looked somewhat random.
Friday: US University of Michigan sentiment index
Our thoughts: it may be that the US economy is at an important juncture, still enjoying decent growth thanks to consumer savings and the strong jobs market, but possibly poised for a slowdown or even a recession. Surveys take on especial value at that time and the University of Michigan sentiment index is generally considered a bellwether report, with current conditions, expectations and inflation expectations for one year and 5-10 years.
The numbers for the week
Central banks/fiscal policy
There were only limited interventions by central bank officials, none particularly market moving.
Loretta Mester, Cleveland Fed President, said that she did not expect the Fed to cut rates this year, as she reiterated that she did not expect to see inflation at 2% before 2025 and that rates should only be cut when the Fed had confidence that the 2% target would be met soon.
James Bullard, St Louis Fed President, said that the Fed can continue to hike while using other tools to handle financial stress. He also stated that lower bond yields would help the US economy after the recent banking turmoil. “This may help mitigate some of the negative macroeconomic fallout that might otherwise occur in the aftermath of a period of financial stress”.
The head of the Dutch central bank, Klaas Knot, said that the European Central Bank (ECB) is not done raising rates: “core inflation in the eurozone is now almost 6% and you can’t fight that with an interest rate of 3%”.
United States
Surveys down, mortgage loans down, bank credit slumping, job openings falling, factory orders dropping, but the US economy still creates 236,000 jobs in March.
Surveys: the S&P Global services PMI was revised down substantially from 53.8 to 52.6. The ISM manufacturing PMI fell further from 47.7 to 46.3, driven by employment down from 49.1 to 46.9 and new orders down from 47.0 to 44.3, but also showing prices paid below 50 again. The ISM services PMI dropped from 55.1 to 51.2, with the details showing new orders slumping to 52.2 from 65.6, prices paid falling from 65.6 to 59.5 and employment from 54.0 to 51.3.
Housing: MBA (Mortgage Bankers Association) mortgage applications fell 4.1%, from +2.9% the previous week.
Employment: The JOLTS (job openings and labour turnover survey) job openings fell below 10 million for the first time in two years, down to 9,931K from 10,563K. The initial jobless claims series, which has been stuck around 200K per week, rose to 228K but the previous week was revised up sharply, from 198K to 246K, due to an update in seasonal factors. Continuing claims were also revised up from 1,689K to 1,817K and moved to 1,823K the week ending 25 March. The Challenger, Gray & Christmas job cuts fell from 410.1% to 319.4%, meaning fewer job cuts, albeit still at a very high level.
Finally, the March employment data were still very strong, with non-farm payrolls rising 236K after an upward revised 326K the previous month. Unemployment (U-3) fell to 3.5% from 3.6%, mostly driven by an increase in the labour force participation rate from 62.5% to 62.6%, and underemployment (U-6) also fell to 6.7% to 6.8%. Average hourly earnings were better behaved, falling to 4.2% year-on-year vs. 4.6% the prior month, with the average weekly hours slightly lower at 34.5 from 34.4.
Industry: the Wards series for total vehicle sales was stable at 14.82 million from 14.89 million. Factory orders for February fell 0.7%, after -2.1% the prior month. Construction spending fell 0.1% in February, from +0.4%.
Credit: bank lending fell sharply during the last two weeks of March, slumping US$105bn in the fortnight leading to 29 March, due to a fall in loans from small banks. This was the biggest drop since records began in 1973.
United Kingdom
Limited data, with somewhat contradictory numbers between housing and construction.
Industry: new car registrations fell in March from 26.2% year-on-year to 18.2%.
Housing: the S&P Global/CIPS construction PMI slumped from 54.6 to 50.7. The Halifax House Price Index rose 0.8% in March, which is the third positive return after a string of down numbers last year.
Retail: BRC (British Retail Consortium) sales like-for-like were unchanged, up 4.9% year-on-year.
Europe
Industry seems to be recovering
Inflation: the eurozone PPI fell from 15.1% to 13.2%.
Trade: German exports were up 4.0% in March with imports up 4.6%.
Industry: German factory orders had a strong month in February, up 4.8% after a small 0.5% uplift the prior month. Industrial production in Germany rose 2.0% in February, after 3.7% previously. French industrial production rose 1.2% in February after a negative -1.6% month.
Construction: the German S&P Global construction PMI slumped from 48.6 to 42.9.
China/India/Japan/Asia
Confirmation from the unofficial services PMI of the strong reopening in China, whilst inflation keeps falling, a great combination. Much better surveys in Japan.
China: the unofficial Caixin services PMI soared from 55.0 to 57.8, the highest level since the post-pandemic recovery. Chinese foreign exchange reserves rose by US$50bn, probably due to the weaker dollar, from US$3.133trn to US$3.183trn. The CPI fell from 1.0% to 0.7% whereas the PPI went further into deflation, at -2.5% down from-1.4%.
Japan: the monetary base fell 1.0% year-on-year in March, from -1.6% the previous month. The Leading Index CI rose from 96.6 to 97.7 and the coincident index surged from 96.4 to 99.2. The consumer confidence index improved from 31.3 to 33.9. the Eco Watchers Survey was also stronger, with the current reading at 53.3 from 52.0 and the outlook at 54.1 from 50.8.
Machine tool orders were less buoyant, falling 15.2% year-on-year, down from -10.7%
Oil/Commodities/Emerging Markets
Oil prices continued their better run after the recent output cut by OPEC, up more than 5% over the week. Global economic growth, however, was not expected to accelerate, weighing on copper and industrial materials prices.
Gold consolidated around US$2,000 after its strong rally in March. Yesterday bullion prices fell below US$2,000.
