Markets last week

The Easter week saw reduced investment activity but still considerable volatility in many markets. Government bond yields had a rollercoaster ride, affecting equity indices and sectors as well as currencies.

Health-related developments in China have caused large lockdowns covering some 40% of the Chinese GDP, making port delays worse and air freight rates higher. Against that unfavourable backdrop, the US and the UK both registered consumer price indices (CPI) above estimates, 8.5% for the US CPI and 7.0% for the UK CPI. The producer price indices (PPI) have also soared, with the US PPI at 11.2%, the UK PPI input at 19.2% and German wholesale prices up 22.6%, indicating that supply chain inflationary pressures are still there.

There was, however, a glimmer of hope in US goods price inflation, highlighting that the origin of the current inflation surge, namely excess demand in goods, might be moderating, if not reversing. Markets took that interpretation briefly last week, as US government 10-year bond yields corrected from their 2.82% high to the low 2.60s for a couple of days, before resuming their uphill climb to 2.85%. The difference between two-year yields and 10-year yields steepened to 40 bps (it was briefly negative a few weeks ago, setting off concerns about a possible US recession).

Although bond yields are signalling that economic growth should abate globally, there have been few pointers of such a slowdown in US economic data. Only Chinese and European surveys have seen a meaningful drop, with the UK still enjoying a strong housing market and record-low joblessness. Some data, however, lead us to wonder whether the UK housing market might be peaking, as US housing recently did in light of both house prices and mortgage rates surging.

Energy prices were again momentous with the Brent oil gauge falling below US$100/bbl (barrel) before recovering and finishing the week at US$113.

With central banks in New Zealand and Canada hiking rates and China reducing them, the meeting of the European Central Bank (ECB) was almost a non-event. There was little in the way of additional hawkish rhetoric, unlike the US Federal Reserve, and the ECB announced a slow end to the asset purchase programme. The market’s disappointment was reflected in a lower euro/dollar rate. Indeed, the US dollar was very strong last week, with the DXY index (US dollar vs. developed currencies) exceeding the 100 level for the first time since May 2020.

In the extended holiday week, government bond yields rose again by an average of 14-15 bps for the 10-year bonds, and equity markets fell with Japan and the US faring worst whilst the UK did best. Only the energy and materials sectors rose, while technology and healthcare fell the most. Oil prices soared 10%, copper was flat, but gold continued its upward ride. The US dollar was particularly strong against the Japanese yen.

The week ahead

Tuesday: China one-year and five-year loan prime rate

Our thoughts: due to the massive lockdowns in China (affecting up to 40% of GDP) and Premier Li Keqiang’s comments, it is quite obvious that the People’s Bank of China (PBoC) is under pressure to deliver more stimulus to the country. A cut in the one-year and five-year loan prime rates seems to be a foregone conclusion but will there be anything else? Reserve requirement ratios for banks (the proportion of assets they must hold rather than lend or invest) have just been cut by 25 bps. Will the PBoC surprise or just deliver what is expected?

Thursday/Friday: manufacturing and services PMIs for the UK, eurozone, US (all on Friday) and Japan (Thursday)

Our thoughts: the sharp increase in global bond yields is foreshadowing an economic slowdown. But how much, how soon and where? The PMIs will give us some idea of what purchasing managers see as slowing areas; whether new orders, inventories, backlogs are moving fast; whether prices are still expected to surge; whether employment is still booming and whether goods or services are leading the economy. Also, is the accepted wisdom correct that Europe and Japan will slow down the most and is the US really going to be the most resilient economy, despite the fastest tightening of monetary policy? Markets will be glued to these numbers.

Friday: UK retail sales

Our thoughts: once again, how well is the UK consumer going to bear the unprecedented rise in energy costs, together with increases in national insurance contributions and goods and services inflation? The UK consumer is normally seen as the indomitable one, but will this set of circumstances finally prove to be too much? Retail sales have been on the weak side for a few months and should indicate whether the slowdown is mild or serious.

Markets for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

China going against the grain by cutting rates with other central banks hiking

China’s Premier Li Keqiang issued a third warning about economic growth risks, saying that authorities should ‘add a sense of urgency’ when implementing existing policies. This was seen as a sign of more fiscal and monetary support to the economy. About 373 million people in 45 cities are now under full or partial lockdown, making up 40% of China’s GDP. China indicated looser monetary policy is on its way. Indeed, the one-year medium-term lending facility rate was cut from 2.85% to 2.75% and the RRR (reserve requirement ratio for banks) will be cut by 25 bps on 25 April from 11.50% to 11.25%.

The European Central Bank (ECB) renewed its pledge to end bond-buying in the coming months. The ECB said it would halt net asset purchases in the third quarter, a faster timeline than last month. It reaffirmed that ’gradual’ rate hikes will follow ’sometime after’. Record inflation is making it more likely that the ECB will raise rates this year.

The New York Fed President, John Williams, said that increases in interest rates in half-percentage point increments are a ’reasonable option’ and ’we do need to move policy back to more neutral levels’. The more hawkish St. Louis Fed President, James Bullard, though, said that a 75 bp hike could be an option.

The Reserve Bank of New Zealand and the Bank of Canada (BoC) both raised their target rate by 50bps. The BoC also announced that it would stop re-investing maturing bonds starting 25 April.

United States

Soaring inflation does not seem to be affecting the US economy, with surveys and jobs buoyant

Inflation: CPI (consumer price index) inflation rose from 7.9% year-on-year to 8.5% headline, 0.1% above estimates, but the core CPI ex food and energy missed expectations by 0.1% at 6.4%. The headline rate was boosted by a 32.0% increase in energy and an 8.8% increase in food, the largest increase since 1981. We saw a broadening of inflation with 68.7% of the CPI basket rising by more than 4% annualised compared to 35% in August 2021. At the same time, however, the monthly pace of core inflation is consistent with 4% annual inflation, as core goods prices fell 0.4% (vs. a rise of 0.4% the prior month), the first decline in a year.

The PPI (producer price index) surged to 11.2% year-on-year from 10.3%. It is very rare to see the PPI in double digits (the only previous time was in the 1970s). Ex food and energy, the US PPI was 9.2%.

The import price index surged 2.6% in March, up from 1.6% previously, for a year-on-year increase of 12.5%. The export price index was even higher, up 4.5% for the month, or 18.8% year-on-year.

The inflation expectations embedded within the University of Michigan sentiment survey improved, with the one-year inflation rate expected at an unchanged 5.4% vs. estimates of an increase and unchanged 5-10-year inflation expectations of 3.0%.

Real average hourly earnings declined 2.7% year-on-year and real average weekly earnings declined 3.6%.

Surveys: the NFIB small business optimism index fell from 95.7 to 93.2. The University of Michigan consumer sentiment index surprised on the upside, at 65.7, up from 59.4. Current conditions were slightly better at 68.1 vs. 67.2 but expectations soared from 54.3 to 64.1. The Empire Manufacturing Survey (NY State) unexpectedly surged from -11.8 to +24.6. It is generally paired with the Philadelphia Fed Survey (coming this week) as a bellwether for the economy.

Housing: the 30-year mortgage rate jumped to 5.31%, very close to the record high in 2018. Mortgage applications are still falling, down 1.3% last week. With a couple of notable exceptions, mortgage applications have fallen since mid-January, reflecting higher house prices and higher mortgage rates.

Sales: retail sales rose 0.5% in March, down from 0.8% the prior month. Ex auto sector, sales rose a faster 1.1%, but the retail sales control group actually fell 0.1%.

Employment: initial jobless claims for the week ticked up from 167K to 185K but continuing claims were still on their downward path, from 1523K to a record low of 1475K.

Industry: industrial production increased 0.9% in March, the second such monthly rise. Capacity utilisation rose strongly from 77.7% to 78.3%.

United Kingdom

Inflation has yet to affect housing, but retail sales (and jobs?) are starting to feel the pinch

Inflation: inflation has kept rising above estimates, 7% for the CPI (consumer price index), up from 6.2% and the core CPI at 5.7% up from 5.2%. In addition, the PPI input soared to 19.2% from 15.2% and the PPI output from 10.2% to 11.9%.
UK living standards have fallen. Average earnings excluding bonuses rose 4.1% from a year earlier. Adjusted for prices over the same period, however, they dropped 1.3%, the most since 2013.

Employment: unemployment fell to 3.8% in the three months through February, the lowest since the end of 2019, while vacancies are at record levels. Growth may be slowing, though, with employers adding just 35,000 payrolls in March, well below estimates and the lowest since February 2021.

Retail sales: BRC (British Retail Consortium) sales like-for-like fell 0.4% in March year-on-year vs. +2.7% the previous month.

Housing: the house price index for February rose 10.9% year-on-year, up from 10.2% revised upward, but the RICS house price balance for March fell from 78% to 74%, still near historic highs.

Europe

Very poor surveys

Surveys: the German ZEW survey remained negative, with expectations falling to -41.0 in April and the current situation at -30.8 down from -21.4. The ZEW survey expectations for the eurozone fell from -38.7 to -43.0. The Bank of France industrial sentiment index fell from 107 to 103.

Inflation: wholesale prices in Germany surged +22.6% year-on-year in March, up from 16.6% the prior month.

China/India/Japan/Asia

Weaker numbers in China

China: money supply was stronger in March with M0 up from 5.8% to 9.9%, M1 unchanged at 4.7% and M2 up from 9.2% to 9.7% (all year-on-year).

Trade data showed a larger than expected surplus, due to weaker domestic demand. Exports rose 14.7% year-on-year whereas imports fell -0.1%.

Foreign direct investment into China fell from 37.9% year-on-year to 25.6% in March. New home prices were still soft, down 0.07% in March after -0.13% the previous month.

Industrial production rose 5% year-on-year, retail sales fell 3.5%, fixed assets ex rural (i.e. investment) rose 9.3% down from 12.2% before, property investment was 0.7% down from 3.7% and the surveyed jobless rate increased from 5.5% to 5.8%. In addition, residential property sales year-to-date fell 25.6% in March, down from 22.1% the prior month.

Japan: the PPI (producer price index) eased from 9.7% to 9.5%. Capacity utilisation rose 1.5% in February, after a 3.2% fall previously.

Oil/Commodities/Emerging Markets

Oil resumes its rise

Yo-yoing energy prices are affecting inflation. Brent oil fell below US$100/bbl only to recover by more than 10% subsequently. The Ukraine situation has not been resolved by a long stretch and Chinese lockdowns will eventually come to an end, bringing Chinese industry back as customers to the oil market.

Copper was fairly stable during the week, but gold prices continued their slow upward march approaching US$2,000/oz again.