Markets last week
Last week was dominated by inflation data, with the US CPI (consumer price index) providing a sobering outlook to investors who had been anticipating a smooth downward ride for price increases. At 8.3% headline CPI, the number fell less than expected, but more importantly the details showed that inflation was stickier. The core CPI (ex food and energy) actually rose from 5.9% to 6.3%, driven by higher rents and showing that softer energy costs are not sufficient to bring other prices down.
Inflationary pressures are lessening at the input level (whether producer prices in the UK, import prices in the US, prices paid and received in US regional surveys, wholesale prices in Germany) but the initial burst of inflation caused by higher energy and goods prices has now spread to other parts of the economy, making the central banks’ job more difficult in trying to tame inflation. Even normally immune Japan posted a surprisingly high 3% CPI print.
Having said that, natural gas prices fell as the European Union started outlining details of its intervention into the energy crisis, including a proposal for targets to reduce electricity demand. Oil prices also fell, leading to lower power prices, although most consumers will not necessarily feel these small differences.
Risk markets reacted badly to the inflation saga. Further, growth issues emerged, with softer economic surveys (the “Philly Fed” in the US, YouGov in the UK, ZEW in Germany and the eurozone). The Atlanta Fed’s GDPNow tracking model, which provides a running forecast of US growth for the current quarter, fell again from a 1.3% forecast to 0.5%, only two weeks after being revised down from 2.6%. The drop in its estimate was mostly caused by lower consumer spending growth.
To make matters worse, on Friday, the market woes were compounded by an announcement from FedEx, often considered to be a bellwether for the whole US economy, that it would be withdrawing its earnings forecast.
All of these movements happened against the backdrop to two major central bank meetings this week: the US Federal Reserve (Fed) tomorrow and the Bank of England on Thursday. The consensus on the Fed hike has hardened from 50-75 bps to 75-100 bps, putting pressure on US government bond yields.
At the end of the week, the US dollar was once again close to a 20-year high, with sterling further weakened by the soft economic data, slumping to a 37-year low and falling against the euro to its lowest level since February 2021. Government bond yields continued their almost relentless rise, with 10-year US treasuries up 18 bps and 10-year gilts up 4 bps. The difference in yields between Italy and Germany reached 2.5%, a level where the European Central Bank was assumed to consider intervening through its Transmission Protection Instrument, but finished at a more moderate 2.28%.
Equities had another bad week, with the US particularly hit and Japan the most resilient of the main markets. Although all sectors fell, information technology was the worst whereas energy, financials and healthcare were relatively more defensive.
Yesterday was a market holiday in the UK in honour of Her Majesty the Queen, but other main markets were open, with Europe flat and the US rising 0.7% and some carry-over in Asia today.
The week ahead
Tuesday: US CPI
Our thoughts: the US CPI (consumer price index) is arguably the most followed and anticipated piece of data in the world right now, as the key to future US interest rates and hence all other world markets. This is the second month in a row where a fall in the headline CPI is expected, but the details could matter as much as the top number. If headline CPI is falling but core CPI (excluding food and energy) is not, or is still rising, does this mean that the headline reading is only reflecting lower oil prices but that the rest of the economy has been infected by higher inflation? Have any specific products or services been instrumental in the CPI move, and do they reflect a trend or simply a correction from previous trends? The analysis can be tricky and stir markets as much as the number itself.
Wednesday: UK CPI, RPI and PPI
Our thoughts: UK inflation has been expected to skyrocket by economists, politicians and the Bank of England itself. Now in double digits, the CPI has the potential to surge further. Before the new government’s energy price cap plan is put into action, it will be instructive to note how far the existing trend can go. The CPI is fed by the PPI which comes in two shapes: input and output. In addition, the core CPI (excluding energy, food, alcohol and tobacco) will identify the areas of sticky inflation vs. those that can be reversed easily. If the difference between headline and core increases, this could point towards energy being the dominant factor behind prices, whereas if that difference falls, it could mean that inflation is spreading throughout the British economy, something that the energy price cap policy cannot do much about.
Thursday: Chinese statistics for August
Our thoughts: no country elicits more scepticism than China when it comes to data. Many market participants believe that China is headed for a major slowdown, like the rest of the world, despite the command control of the economy and the country being at a different stage in its cycle. Last month, the usual data scared many investors, who saw red flags for growth. Those red flags seemed to be confirmed by later cuts in interest rates by the People’s Bank of China. It is well known that the Chinese property sector is in a slump, but other parts of the economy have held up fairly well so far (industrial production, retail sales, investment and employment). Will they continue to do so, in light of the significant drop in inflation registered recently? Do lower price rises signify an improvement in supply chains, or a major growth shortfall?
The numbers for the week
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
No activity or comments from central banks
The People’s Bank of China left its one-year medium-term lending facility rate unchanged at 2.75%, its one-year loan prime rate at 3.65% and the five-year loan prime rate at 4.30%, which disappointed markets expecting a cut.
The Fed was in its closed period and its officials could not make any comments to the markets. Likewise for the Bank of England.
Mixed surveys and solid jobs don’t offset the inflation shocker
Surveys: the NFIB small business optimism index rose from 89.9. to 91.8 in August. The Empire Manufacturing survey (NY State) improved from -31.3 to -1.5, whereas the Philadelphia Fed Business outlook survey (known as the Philly Fed) went the other way from +6.2 to -9.9. The University of Michigan sentiment index was better, but not quite as much as expected: the index rose from 58.2 to 59.5, with both sub-indices improving, current conditions from 58.6 to 58.9 and expectations from 58.0 to 59.9.
Inflation: the August CPI was a huge disappointment, with the headline CPI falling only from 8.5% to 8.3% against expectations of a larger drop and the core CPI ex food and energy actually rising from 5.9% to 6.3%. The PPI (producer price index) final demand fell from 9.8% to 8.7% in August, with the core PPI ex food and energy falling from 7.67% to 7.3% and PPI ex food, energy and trade from 5.8% to 5.6%. the import price index fell from 8.7% year-on-year to 7.8% and the export price index from 12.9% to 10.8%. Lastly, the University of Michigan inflation surveys improved slightly, with the 1-year forecast down from 4.8% to 4.6% and the 5-10-year forecast down from 2.9% to 2.8%.
Employment: the weekly jobless claims continued on their lower trend over the last two months, with initial claims down from 218K to 213K but continuing claims up from 1401K to 1403K. This series bottomed in March at 166K, rose to 261K in mid-July and has been heading lower since, in defiance of the slower economy.
Earnings: real average hourly earnings were -2.8% in August, slightly better than the prior -3.0%.
Sales: retail sales rose 0.3% in August after -0.4% the previous month, but the control group was flat after +0.4%.
Industry: industrial production fell 0.2% in August, down from 0.5% and capacity utilisation eased from 80.2% to 80.0%.
Housing: MBA mortgage applications had another negative week, down 1.2%, after -0.8%. The NAHB housing market index tumbled from 49 to 46, the lowest number since the height of the pandemic in May 2020.
The CPI surprise was not as bad as in the US, but the issues are similar: lower headline and sticky core inflation
Employment: the claimant count rate was unchanged at 3.9% in August with a small increase in jobless claims to 6.3K and a positive payrolled employees monthly change of 71K vs. 77K the previous month. The ILO (International Labour Organisation) unemployment rate for July fell to the lowest since 1974, at 3.6% in the three months through July. This decline in the jobless rate was driven by a sharp increase in the number of people not seeking employment. A total of 194,000 people left the workforce, the most since the start of the pandemic.
Inflation: the CPI moderated slightly in August from 10.1% to 9.9%, although the core CPI (ex food, energy, alcohol and tobacco) edged up from 6.2% to 6.3%, highlighting the spreading of inflationary pressures in the economy even as energy prices are coming down. The PPI was lower, with the PPI output down from 17.1% to 16.1% and the PPI input down from 22.6% to 20.5%. The BoE/Ipsos inflation forecast for the next 12 months rose from 4.6% to 4.9% in August.
Surveys: the YouGov UK consumer confidence slipped into negative territory for the first time since the pandemic lockdown in the middle of 2020, dropping 4.2 to 98.8 in August.
Sales: retail sales were down 1.6% in August including or excluding auto fuel, the biggest drop this year.
Continuing to be weaker
Surveys: the ZEW survey fell further with the eurozone expectations gauge down from -54.9 to -60.7. The ZEW for Germany also dropped, with the current situation down from -47.6 to -60.5 and the expectations from -55.3 to -61.9.
Trade: the trade deficit for the eurozone increased from €32.2bn to €40.3bn in July (seasonally adjusted).
Industry: industrial production in the eurozone fell 2.3% in July after +1.1% the prior month. EU 27 new car registrations were finally positive in August, up 4.4% after 13 negative months!
Construction: construction output for July in the eurozone fell 1.3% after -1.2% the previous month.
Inflation: the wholesale price index in Germany was less elevated, at 18.9% year-on-year in August, down from 19.5%.
Better Chinese and Japanese data, but Japan CPI at 3% raises eyebrows
China: the monthly economic data were generally better than expected and the previous month, industrial production up from 3.8% to 4.2%, retail sales up from 2.7% to 5.4%, fixed assets ex rural (i.e. investment) up from 5.7% to 5.8% and surveyed jobless rate down from 5.4% to 5.3%. Only property investment disappointed, down from -6.4% to -7.4%.
Japan: the PPI was 9.0% in August with the previous month revised up from 8.6% to 9.0% as well. Core machine orders rose 5.3% in July from 0.9% previously. Capacity utilisation increased 2.4% in July, after a +9.6% month. The tertiary industry index (i.e. services) fell 0.6% in July, from -0.4% the previous month.
August exports rose 22.1% year-on-year, up from 19.0%, with imports up 49.9% from 47.2%.
The national CPI rose from 2.6% to 3.0% with the core CPI (ex fresh food and energy) from 1.2% to 1.6%.
The stronger US dollar weighed on most commodities last week, with energy and industrial metals correcting and gold particularly weaker. Additionally, growth concerns added to lower crude and metals prices. Brent oil fell by 0.9% and copper by 1.3%.