Markets last week
Fairly rangebound markets and uneventful economic statistics dominated the scene last week. The doom and gloom emanating from the Bank of England’s (BoE) Monetary Policy Committee was less impactful than in other such meetings. After raising interest rates by 25 bps to 4.50% and signalling that more monetary policy tightening lay ahead, the decision by the BoE weighed on UK equities and on sterling, but not for very long. Meanwhile, markets are pricing almost another two rate hikes by November.
In a week devoid of any meaningful data from Europe and limited numbers from other countries, the US dominated the airwaves with many different readings about inflation. The CPI (consumer price index) and the PPI (producer price index) seemed to show slightly less sticky inflation, but University of Michigan long-term inflation expectations hit a 12 year-high, indicating that inflationary pressures are not over yet.
The market’s main concern, however, was not inflation but whether the US economy could be falling into a recession. Jobless claims in the US rose to their highest level since October 2021, showing potential cracks in the tight jobs market. This statistic, together with the lower producer prices in the US and softer surveys (with the University of Michigan especially weak), fuelled concerns about a further economic slowdown.
Bond yields and expected interest rates started the week by falling sharply, but there was a recovery in yields towards the end of the week, resulting in gilts being flat and US treasuries only down 4 bps. Federal funds futures, however, are still indicating more than 70 bps of rate cuts by the US federal Reserve (Fed) by the end of this year.
The main movement last week was in currencies, with the US dollar enjoying a strong bounce against the weaker economic backdrop.
Once again, large US technology shares did best, whereas energy and materials fell again, with oil and copper prices under renewed pressure. By region, Japanese equities pipped the US to the best returns whereas China and UK small capitalisation shares did worst.
The week ahead
Monday-Thursday: US Empire manufacturing and Philadelphia Fed business outlook
Our thoughts: as usual, the regional Fed surveys give a good indication of what is happening to the US economy as a whole, even though sometimes they are contradictory. The Empire manufacturing survey (NY State) and the Philadelphia Fed business outlook are generally seen as bellwethers for all the other regional Fed surveys and for the PMIs (purchasing manager indices). Both have been on a downward trend since the middle of 2021. Any confirmation or change of that trend will be important.
Tuesday: Chinese April growth data
Our thoughts: there is no doubt that the Chinese economy has underperformed its post-reopening expectations. Recent inflation numbers are pointing towards softer ongoing growth, so the monthly data delivery will take on special emphasis, with industrial production and retail sales at the forefront, but also anything related to the property sector (residential property sales, property investment and new home prices – coming the following day). Property has been a huge drag on the Chinese economy and government stimulus has been focused on rescuing this all-important sector for the consumer.
Friday: Japanese national CPI
Our thoughts: the Bank of Japan (BoJ) has so far openly made the assumption that the current spike in Japanese inflation is transitory and hence left monetary policy at its most stimulative level. The question is whether data will start to shake that conviction. Both the national CPI and the ‘core-core’ CPI (ex fresh food and energy) are expected to tick up, but will that be enough to bother the BoJ? Global markets are relying on large flows from Japanese investors and hence any surprises in the data that might stir the BoJ and could have a global market impact.
The numbers for the week
Central banks/fiscal policy
After the US and Eurozone central banks, the BoE hikes by 25 bps
As predicted, the BoE delivered a 25 bp interest rate increase from 4.25% to 4.50% (the highest rate since 2008 and the 12th consecutive hike) in a 7-2 vote, with BoE Governor Andrew Bailey warning that “if there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required”, whilst commenting that the impact of higher rates is still working its way throughout the UK economy. The reference was to ‘second-round effects’ on the economy, which are ‘unlikely to go away as quickly as they appeared’. There was a lot of discussion about food inflation, with Deputy Governor Ben Broadbent saying that “food price inflation will come down significantly” but that it would take longer than expected.
European Central Bank (ECB) President Christine Lagarde said “inflation has been too high and for too long” signalling that “the journey to fight inflation” was not over, in reaction to an ECB survey showing that European Union consumers saw higher inflation ahead, with a 5% 12-month inflation expectation and 2.9% in three years.
The US Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) for April 2023 reported tighter lending standards and weaker demand for commercial and industrial loans to firms of different sizes.
Minneapolis Fed President Neel Kashkari said that “inflation has come down but it’s still well above our 2% target… We’ve been surprised at how high it got, we’ve been surprised at how persistent it’s been.” He was also concerned about credit conditions tightening after the Fed’s SLOOS report: “If the yield curve is going to be inverted for an extended period of time, that creates real stresses in the banking system.”
Fed Governor Michelle Bowman said that the Fed will need to hike further and hold rates high for some time: “should inflation remain high and the labour market remain tight, additional monetary policy tightening will likely be appropriate… I also expect that our policy rate will need to remain sufficiently restrictive for some time.”
In China, the one year medium-term lending facility rate was kept at 2.75%.
Generally better inflation numbers but jobless claims shooting up and surveys are falling
Surveys: the NFIB (National Federation of Independent Business) small business optimism index fell from 90.1 to 89.0, the lowest level in 10 years. The University of Michigan sentiment index fell sharply from 63.5 to 57.7 with current conditions at 64.5 vs. 68.2 and expectations down to 53.4 vs. 60.5.
Inflation: the headline CPI fell from 5.0% to 4.9%, with the core CPI from 5.6% to 5.5%. Both monthly numbers were exactly as forecast.
Looking at the details of the CPI, services represent 3.9% of the 4.9%. That number is down from 4.1% in March and 4.2% in February, so the disinflationary process for services has started. The speed, though, is much less than the speed at which we saw goods inflation fall last year, not to mention energy inflation.
‘Super-core’ inflation, which looks at services prices excluding costs related to shelter, dipped to its lowest in eight months and this is a measure that Fed Chair Powell looks at.
The PPI fell faster than estimated, with the PPI final demand at 2.3%, the lowest rate since January 2021, vs. 2.7% the prior month, the PPI ex food and energy at 3.2% vs. 3.4% and the PPI ex food, energy and trade at 3.4% vs. 3.7%.
Real average weekly earnings fell 1.1% year-on-year, a little higher than the previous month at -1.5%.
The import price index in April rose a high 0.4% for a -4.8% year-on-year movement and ex petroleum was down 0.1%, whilst the export price index increased by 0.2% on the month to -5.9% year-on-year.
Inflation expectations from the University of Michigan survey were higher than expected with 1-year inflation at 4.5% and 5-10-year inflation rising from 3.0% to 3.2%, the highest expected level since 2011.
Employment: jobless claims jumped, with initial jobless claims at 264K, the highest level since October 2021, vs. 242K the previous week and continuing claims at 1813K vs. 1801K.
Weak March growth
Housing: the RICS (Royal Institute of Chartered Surveyors) house price balance improved from -43% to -39%.
Growth: March Gross Domestic Product (GDP) was down 0.3% vs. a flat estimate, driven by services falling 0.5%, whereas industrial production was up 0.7% and construction output up 0.2%, with the drag from the trade balance relatively unchanged. For the first quarter, GDP was in line with expectations at +0.1%, with investment leading, private consumption flat and government spending down sharply.
No meaningful statistics last week
Chinese inflation down sharply is better news for the rest of the world than for China
China: the CPI collapsed to 0.1% from 0.7%, driven by energy costs falling (whilst core CPI was unchanged at 0.7%) and the PPI from -2.5% to -3.6%. This is good news for manufacturers globally but tells us that China’s reopening bounce is fading.
Money supply was a little weaker, with M2 money supply down from 12.7% to 12.4% year-on-year, M1 up from 5.1% to 5.3% and M0 down from 11.0% to 10.7%.
Japan: the Leading Index CI (Business Cycle Indicators) fell from 98.2 to 97.5 whereas the Coincident Index was unchanged at 98.7. The Eco Watchers Surveys were better, with the current reading at 54.6 vs. 53.3 and the outlook at 55.7 from 54.1.
Money supply was almost unchanged, with M£ money stock at a steady 2.1% and M2 money growth down from 2.6% to 2.5%.
The PPI fell from 7.4% to 5.8%, although the level was above estimates.
April machine tool orders were down 14.4% year-on-year, a slight improvement on the previous -15.2%.
Oil vs. gold again
Once again, oil and gold prices have been going in opposite directions, driven by economic growth concerns. Copper and other industrial metals have also been particularly weak. The sharp dollar recovery on Friday cut gold’s returns over the week.