The numbers for the week – 10 Jul 23
Markets last week
Markets were in thrall to higher interest rates last week. The two-year US treasury bond yield rose to over 5%, the highest level since 2007, as the 10-year and 30-year yields breached 4%. UK and eurozone bond yields also soared during the week, with the 10-year gilt yield reaching 4.65% on Friday, up almost 1% from the beginning of the year.
As a result, the dividend yield for the FTSE 100 index fell below the 10-year gilt yield for the first time since 2011. The UK government issued gilt-edged notes due 2025 with an average yield of 5.668%, the highest two-year yield this century and the highest gilt level since June 2007. The swaps market is now pricing a 6.4% top Bank of England rate by March 2024.
Economic surveys were mixed, with services once again looking stronger than manufacturing and the worst surveys hitting the construction sector. Chinese data looked softer across the board, with inflation numbers continuing their slide. In addition, the global manufacturing purchasing managers’ index (PMI) fell from 49.2 to 48.8, the lowest reading since December 2022, with contraction in new export orders and output prices.
Employment in the US has been a source of confusion for some time now, with questions as to whether the tight jobs market would finally show signs of cracking. Data last week showed a moderate slowdown in employment, with payrolls creating 209K jobs (compared to 325K/month this year), job openings falling by half a million (although still 50% higher than jobseekers), job cuts reducing significantly, and jobless claims resuming their slow, upward trend. The net result seems to be that the US Federal Reserve (Fed) may well be getting its hoped-for cooling in the jobs market, but at a snail’s pace so far. Federal funds futures are therefore still showing an extra 35 bps of Fed hikes this year.
US bond yields fell on Friday following the June payroll number in the US below estimates, but yields ended up more than 20 bps higher during the week in most government bond markets, challenging dividend and earnings yields for shares.
The few comments made last week by central bank officials tended to be hawkish, boosting higher rate expectations from the Fed, the European Central Bank (ECB) and the Bank of England.
Equities had a poor week, but there were stark differences in regional performance, with Europe and the UK at the bottom and Japan being one of the most resilient markets. The worst sectors were a strange mix of healthcare, industrials, materials and information technology, whereas real estate was flat, and energy and financials fell less than 1%.
Currencies were driven by bond yields. As gilt yields rose more than US and eurozone yields, sterling picked up a bid vs. the US dollar and euro, although the strongest developed currency was the Japanese yen. Oil prices finally seemed to respond to another attempt by Saudi Arabia and Russia to support crude oil through the extension of their output cuts, with the major oil gauges up almost 5% in US dollars. Gold softened early in the week but recaptured its losses on Friday with the US payroll data.
The week ahead
Tuesday: ZEW survey for eurozone and Germany
Our thoughts: after a strong recovery late last year due to the mild winter, surveys have fallen this year, both in the eurozone as a whole and in Germany specifically. But the question remains: at which point are they going to bottom? Europe, and in particular Germany, has been held back by the unexpected softness of the Chinese economy due to European exports to the Far East. The Zentrum für Europäische Wirtschaftsforschung (ZEW) survey originally started in Germany, outlining economic expectations and current situation; this has now been broadened out measure expectations for the entirety of the eurozone.
Wednesday: US CPI
Our thoughts: inflation is still the main driver of all markets globally and nowhere more than in the US, where the Fed has vowed to tame inflation down to 2%. The headline consumer price index (CPI) is indeed expected to keep showing another fall, but the core reading is the one that will be of concern to the Fed, given how sticky services inflation has been, even against the massive drops in energy prices feeding into lower goods prices. Any improvement in the core level will help markets.
Thursday: UK GDP growth for May
Our thoughts: will the UK dodge the recession again? That is probably the question many economists and market participants are asking themselves. Growth has been subdued in the UK, but we have not had two negative months in a row since the beginning of 2022. The expectation for May is for a fall in GDP growth. As usual, it will matter where the growth or shortfall comes from, whether manufacturing, services or construction.
The numbers for the week
Central banks/fiscal policy
Few comments from central banks, but generally hawkish
Fed Dallas President Lorie Logan spoke in favour of more interest rate hikes, as follows: “I remain very concerned about whether inflation will return to target in a sustainable and timely way.”
ECB President Christine Lagarde said that there was still “work to do” on inflation, and reiterated the ECB’s determination to act if there was a massive increase in wages and company margins which “would fuel inflation risks”.
Chinese banks cut rates for US dollar deposits for the second time in a month, although there was no change in the local currency (renminbi) rates.
United States
Softer employment amid better economic and survey data
Surveys: the Institute for Supply Management (ISM) manufacturing fell further from 46.9 to 46.0, with a drop in employment from 51.4 to 48.1, a fall in prices paid from 44.2 to 41.8, but an increase in new orders from 42.6 to 45.6, albeit still in the contraction zone.
The ISM services index, on the other hand, was much stronger, at 53.9 from 50.3, driven by an improvement in new orders from 52.9 to 55.5 and in employment from 49.2 to 53.1, with prices paid cooling at 54.1 vs. 56.2.
Industry: factory orders rose 0.3% in May, below estimates, following 0.3% the previous month. Ex transportation, factory orders were down -0.5% vs. -0.6%. The Wards series total vehicle sales increased from 15.05 million (annualised) to 15.68 million.
Housing: Mortgage Bankers’ Association (MBA) mortgage applications for the week ended 30 June fell 4.4% after a few strong weeks.
Employment: The Challenger, Gray & Christmas job cuts continued to rise, up 25.2% year-on-year, though this indicates considerably fewer job cuts than last month’s increase of 286.7% year-on-year. Jobless claims resumed their upward trend after the prior week’s drop, with initial claims rising from 236K to 248K, whereas continuing claims fell from 1733k to 1720K. The Job Openings and Labour Turnover Survey (JOLTS) job openings fell about half a million from 10320K to 9824K.
June employment numbers were a little weaker than estimates. Non-farm payrolls rose 209K, vs. 306K the previous month. The revisions to the previous two months were negative, deducting 110K from previous payroll data. Manufacturing payrolls were minimal, at 7K, and there was also some weakness in the retail sector. The unemployment rate (U-3) fell from 3.7% to 3.6%, with the labour force participation rate remaining steady at 62.6% but the underemployment rate (U-6) increasing from 6.7% to 6.9%. Average hourly earnings in June were up 0.4% for a year-on-year growth of 4.4%, unchanged from previously.
Foreign Trade: the trade deficit improved from US$74.4bn to US$69.0bn in May.
United Kingdom
Property and construction suffering but car sales improving
Housing: mortgage costs surged, with the five-year fixed-rate loan above 6% and the average two-year loan near 6.5%. The average UK property price fell 2.6% in June year-on-year, as reported by Halifax, for the largest fall since June 2011.
Industry: new car registrations picked up from 16.7% year-on-year to 25.8% in June.
Surveys: the S&P Global/CIPS construction PMI fell sharply from 51.6 to 48.9, into contraction territory for the first time in five months.
Inflation: the Decision Maker Panel (DMP) survey mean expected price growth (three-month average) eased from 5.4% to 5.3% year-on-year and the DMP one-year CPI expectations fell from 5.9% to 5.7%.
Europe
Is the huge drop in producer prices a sign of lower consumer prices ahead?
Inflation: the eurozone producer price index (PPI) fell 1.9% in May, the first negative reading since 2020, for a year-on-year of -1.5% vs. +0.9% the prior month.
Industry: French industrial production had a strong May, up 1.2%, after +0.8% previously. German factory orders jumped 6.4% in May from 0.2% previously.
Surveys: the Hamburg Commercial Bank (HCOB) Germany construction PMI fell from 43.9 to 41.4.
Consumer: eurozone retail sales were flat in May for a year-on-year drop of 2.9%, identical to the previous month.
Once again, Chinese surveys disappoint with inflation collapsing, but Japan and India are doing well
China: the unofficial Caixin services PMI fell sharply from 57.1 to 53.9, below all estimates. Foreign exchange reserves increased in US dollar terms from US$3,176bn to US$3,193bn.
The CPI fell from 0.2% to 0.0% and the PPI from -4.6% to -5.4%.
Japan: labour cash earnings rose to 2.5% year-on-year in May, up from 0.8% the prior month. Household spending, however, was still down 4% year-on-year, up from -4.4%.
The Coincident Index eased from 114.2 to 113.8 whilst the Leading Index CI rose from 108.1 to 109.5, both significantly above estimates. The Eco Watchers surveys fell, with the current reading at 53.6 vs. 55.0 and the outlook at 52.8 vs. 54.4.
India: in contrast to Chinese surveys, Indian PMIs have remained very strong, with the S&P Global manufacturing PMI at 57.8 and the services PMI at 58.5, albeit falling from even higher levels.
Oil/Commodities/Emerging Markets
Oil price rebound after output reduction
Russia and Saudi Arabia announced an extension of their crude output cuts, which was supportive of oil prices. Indeed, both the Brent and West Texas Intermediate (WTI) gauges rose almost 5% during the week, whereas copper and industrial metals had much smaller moves and gold was almost unchanged.
