The numbers for the week – 17 Apr 23
Markets last week
The expectation of lower inflation boosted equities last week. It wasn’t the US CPI (consumer price index) that led investors to downgrade future price increases. True, the headline CPI fell from 6.0% to 5.0%, but the core CPI, which is more likely to interest the US Federal Reserve (Fed), actually rose from 5.5% to 5.6%, indicating how sticky services inflation still remains. No, it was the US PPI (producer price index) collapsing to 2.7% from 4.9%, the German wholesale price index also slumping from 8.9% to 2.0%, the increasingly negative US import price index, only contradicted by the University of Michigan forecasting one-year inflation to spike up.
Markets seemed glued to incoming data and moving with them. To be fair, the US provided lots of numbers, not just the slightly hopeful inflation picture, but a steady jobless claim trend, better industrial production, worse retail sales, more negative small business surveys but more positive consumer sentiment, all leaving markets unclear as to the direction of the US economy. The rest of the world simply did not produce the same quantity of statistics, although Chinese surging exports and a better European economy were noticed. The market reaction was less clear-cut, though, with better Chinese numbers not helping their equities, whilst Europe was more responsive.
Fixed interest markets did not display the same high hopes for lower inflation as equities. The backdrop was once again for higher bond yields in the UK and Europe, a weaker US dollar (at some point hitting a one-year low last week) despite a Friday rebound and rising oil prices. It is interesting to note that gilts are now providing higher yields than US treasuries, by about 15 bps for the 10-year maturity. Federal funds futures were driven by the lower inflation hopes and kept forecasting significant cuts in Fed rates in the second half of this year (about 60 bps now, although it was higher earlier in the week).
Moreover, company announcements drove markets, with the luxury sector boosting Europe and the banking sector helping the US at the beginning of the Q1 company reporting season.
There was a small correction on Friday, as bond yields surged, and Fed fund futures priced in a higher hike probability next month and fewer cuts later in the year.
At the end of the week government bond yields rose by 10 bps in the US but around 25 bps in the UK and Europe. The euro was by far the strongest currency as the US dollar generally weakened. Commodities were well bid, with Brent oil and copper both up 2.5% and gold consolidating around the US$2,000 mark.
Equities were positive, with European and small caps in the UK leading, and the US at the rear. The sector score shows cyclicals doing better than defensives, with energy, financials, industrials and materials at the top, and utilities and real estate lagging. The financial sector was helped by the start of the US Q1 earnings season looking positive for banks after the recent turmoil.
The week ahead
Monday-Thursday: Empire manufacturing and Philadelphia Fed business outlook surveys
Our thoughts: recent data in the US seem to be pointing in the direction of a recession, or at least a slowdown, but we have been down this road before, with the most widely anticipated recession in history late last year, so the question is whether the US economy is really poised for a major stall, or even drop. The paired Fed surveys in New York State and Philadelphia (‘Philly Fed’) generally give a good perspective on future manufacturing activity, but also services in the case of the Philly Fed. Both surveys have been falling since the middle of 2021, albeit not in a straight line. Are they going to forecast a recession, or simply a slowdown? They tend to move markets.
Wednesday: UK inflation for March
Our thoughts: with US consumer prices now down to the 5% area, our double-digit inflation is a major eyesore and is responsible for the greatest wave of strikes in decades for the UK. The expectation is for a fall below 10%, with core CPI below 6%. Surveys are generally quite in line with the outturn but lately there has been some disappointment, so the number will be eagerly awaited. Neither an overshoot nor undershoot is likely to make a huge difference to the Bank of England, which is struggling with the highest inflation since the early 80’s, and an economy barely skirting recessionary levels. Will consumers catch a break?
Friday: Manufacturing and services PMIs for US, UK, eurozone and Japan (Thursday for Japan)
Our thoughts: the S&P Global series of PMIs (purchasing manager indices) are widely followed because they cover many countries globally. For the time being, all manufacturing PMIs are below 50, indicating contraction in that sector, whereas services surveys are doing much better and expected to remain strong. Right now, Japan has the highest services PMIs and the US the lowest, with the eurozone and the UK in the middle. How much change is there going to be and where will it come from services or manufacturing? Is the US really slowing down? Is Japan really doing better after a long stagnation? Are the UK and eurozone likely to continue to avoid a recession? The answers may be in the PMIs this week.
The numbers for the week
Central banks/fiscal policy
A few comments from Fed and ECB officials on the future path of interest rates show differences of opinion
There were a few interventions by officials of the Fed, with New York Fed President John Williams reiterating a message of “staying the course” on interest rate policy, with one more rate hike and then a pause being a “reasonable starting place”. His colleague, Chicago Fed President Austan Goolsbee was less hawkish, calling for “prudence and patience”. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”
The European Central Bank (ECB) has already done most of the hard work on interest rate rises to fight inflation, according to Governing Council member Francois Villeroy de Galhau. “We may possibly still have a little way to go on rate hikes at our next meetings. We have already completed most of our rate-hiking journey and the strongest economic effect ahead of us will be the pass-through of what’s already in the pipe.”
Other Governing Council members, however, want the ECB to maintain a faster tightening pace, with Austrian Governing Council member Robert Holzmann calling for the fourth consecutive 0.5% rate increase in May, given how stubborn high inflation still is.
The People’s Bank of China (PBoC) left the one-year medium-term lending facility rate unchanged at 2.75%, after the PBoC Governor said that the Chinese economy was rebounding, expecting 5% growth this year.
United States
Again, confusing data: CPI and PPI falling sharply, but stubborn core CPI, import prices dropping but University of Michigan inflation forecast jumping. Altogether not a clear inflation picture, despite optimistic market interpretation. Other statistics mixed, with retail sales falling, industrial production rising, surveys not conclusive.
Surveys: the NFIB (National Federation of Independent Business) small business optimism index fell from 90.9 to 90.1 with loan availability exhibiting a large drop. The bellwether University of Michigan sentiment index improved from 62.0 to 63.5, with current conditions rising from 66.3 to 68.6 and expectations from 59.2 to 60.3.
Housing: MBA (Mortgage Banking Association) mortgage applications rose 5.3% for the week ending 7 April, up from -4.1% the previous week.
Inflation: the CPI fell from 6.0% to 5.0%, but the core CPI (excluding food and energy) rose marginally from 5.5% to 5.6%. The PPI showed more downside in inflation, with the PPI final demand dropping from 4.9% (revised upward) to 2.7%, the PPI (ex food and energy) from 4.8% to 3.4% and the PPI (ex food, energy and trade) from 4.5% to 3.6%.
The import price index year-on-year fell 4.6%, down from -1.1%, while the export price index fell 4.8% from -0.8%.
The University of Michigan sentiment index embedded inflation expectations on the other hand, jumping from 3.6% to 4.6% for one-year inflation, and remaining at 2.9% for 5-10-year inflation.
Employment: the jobless claims series has settled into a different range now, with the initial claims at 239K vs. 228K the previous week and continuing claims at 1810K vs. 1823K.
Industry: industrial production in March rose 0.4% vs. 0.2% the previous month. Manufacturing production, though, fell 0.5%, down from +0.6%. Capacity utilisation increased from 79.6% (sharply revised up from 78.0%) to 79.8%.
Business inventories in February rose 0.2% from -0.2% the prior month.
Retail: retail sales in March fell 0.8% and ex auto and gasoline -0.3%.
United Kingdom
UK growth still weak despite skirting recession
Growth: February Gross Domestic Product was flat, down from 0.4% the previous month, with industry down 0.2%, services down 0.1%, but construction up 2.4% and the trade deficit larger.
Housing: the RICS (Royal Institute of Chartered Surveyors) house price balance showed a small improvement at -43% vs. -47%.
Europe
Better numbers in general: surveys, industrial production and collapsing wholesale prices in Germany
Surveys: the eurozone Sentix investor confidence improved from -11.1 to -8.7.
Consumer: eurozone retail sales in February were down 0.8% after +0.8%.
Industry: industrial production was very strong in February in the eurozone, up 1.5%, after +1.0% the prior month.
Inflation: the German wholesale price index slumped from 8.9% year-on-year to just 2.0%.
China/India/Japan/Asia
Chinese exports surprise on the upside and Japanese PPI keeps going down
China: money supply was almost unchanged, with M2 rising 12.7% year-on-year, from 12.9% previously and M0 up 11.0% from 10.6%.
The trade balance increased from a US$16.8 bn surplus to US$88.2 bn, thanks to exports unexpectedly rising 14.8% year-on-year from -1.3% previously, and imports down 1.4% from +4.2%.
Japan: PPI inflation reduced from 8.3% to 7.2%. Core machine orders fell 4.5% in February, from +9.5% the prior month. The money stock was little changed, with M2 remaining at 2.6% year-on-year and M3 moving from 2.2% to 2.1%.
Oil/Commodities/Emerging Markets
Commodities strong on falling dollar and better global economic data
Oil prices remained well supported, as the OPEC oil cartel kept emphasising the short supply situation after their recent output cut announcement. Brent finished 2.5% higher but the US gauge WTI did better, as the US announced a plan to rebuild its Strategic Petroleum Reserve. On Friday, as bond yields rose and the US dollar recovered, gold took a breather from its recent strength, ending the week at U$2,004.
