The numbers for the week – 20 Mar 23
Markets last week
Drama and healing shared the limelight last week and continued at the weekend. Another potential banking crisis emerged, as the Swiss bank Credit Suisse seemed to be under intense duress, dragging the whole of the European banking sector down on Wednesday. The next day, Credit Suisse received a CHF 50bn (£44bn) injection from the Swiss National Bank (SNB) and offered to repurchase debt, which calmed markets on both sides of the Atlantic on Thursday. The healing, however, did not cause a full recovery of the banking sector in Europe, which kept falling throughout the week after a strong start to the year. Over the weekend, news emerged that Swiss bank UBS would take over Credit Suisse with a significant backstop from the Swiss government, but certain classes of Credit Suisse securities being wiped out, which is likely to weigh on markets this week.
During the week meanwhile, 11 large US banks agreed to deposit US$30bn with First Republic Bank, a regional bank headquartered in San Francisco, whose shares had also been under pressure following Silicon Valley Bank’s collapse the previous week. Again, the US banking sector, in particular the regional banks, was continuously under pressure despite the massive support from the bank’s peers.
The European banking turmoil did not stop the European Central Bank (ECB) from hiking interest rates by 50 bps, as previously anticipated, but the current uncertainty led to a removal of forward guidance for the next few meetings, with ECB President Christine Lagarde emphasising that future monetary policy moves would be totally data dependent.
A group of the largest central banks, including the US Federal Reserve (Fed) and five other central banks, have set up liquidity lines for swap arrangements for US dollars, to deal with liquidity issues this week.
As the Fed is meeting this week (as well as the Bank of England and the SNB), markets are eager to finetune the projections for Fed rates. The ECB decision did not really impact the US Federal funds futures market, which is currently forecasting a peak Fed rate of 4.74%, less than one 25 bp hike from here, but is also assuming a rate cut of more than 1% before year end. We don’t know whether the Fed is likely to validate the market’s rate forecasts at their meeting on Wednesday, but details in the language may matter as much as the action and the forecasts.
Away from Europe or the US, the monthly Chinese data delivery was positive and highlighted the recovery from the zero-COVID-19 lockdowns, but did not overwhelm, with the services sector growing by 5.5% and industrial production by 2.4% only. Later in the week, the People’s Bank of China (PBoC) cut the reserve requirement ratio for banks by 25bps, in a bid to stimulate the economy, after having added liquidity to the markets earlier in the week.
At the end of the week, the biggest winners were government bonds, gold and the Japanese yen and the biggest losers, energy prices, UK and European equities.
Breaking it down, the movement in bond yields was nothing short of gigantic, with German Bunds down 40 bps in yield and gilts down 36 bps, whilst US treasuries were less volatile at -27 bps. Some of it was driven by a large drop in US inflation breakevens (forecast of inflation over a period) with the 2-year breakeven down to 2.44%, down almost 1% in the last fortnight. Gold soared to US$1,989/oz in line with risk appetite concerns and lower yields. The US dollar was uncharacteristically weaker for that environment.
In equities, this was a difficult week again, but the focus moved from the US the previous week to the rest of the world, with UK and European equities falling sharply, whereas the US managed to eke out a small gain.
The difference between sectors was stark, with information technology and defensive areas (utilities, healthcare, consumer staples) rising whereas energy fell almost 8%, financials 6.5%, and industrials and materials were also negative.
European banks fell by 14% on the week and almost 20% since their peak a fortnight ago. US banks were down 12% for the overall sector but the regional banks fell 15% and almost 30% over two weeks.
The week ahead
Wednesday: UK CPI, RPI and PPI
Our thoughts: inflation in the UK is barely expected to fall into single digits for February. The Chancellor’s budget seemed to pay little attention to consumer prices or to provide support to consumers other than energy. Is the path of consumer prices (CPI) going to be an easy and swift downhill or will we have to use the term ‘sticky’ as in the US? Also, looking at the producer price index (PPI), both input and output, are they falling sufficiently to feed into lower inflation at the CPI level?
Wednesday: Fed interest rate decision
Our thoughts: once again, we characterise the Fed meeting as momentous and its decisions as market-moving. This time round might be more meaningful than usual, though, due to the recent volatility in the financial sector, both in regional banks in the US as well as bigger banks in Europe. First, what will their interest rate decision be? The market has taken back 50 bps and some commentators have even assumed no hike at all. Also, of course, the balance between what they say about financial stability and inflation will matter. Will they claim that what they have done for financial stability is sufficient with backstops for depositors and banks (Bank Term Funding Programme)? Will they say that there could be an impact from the regional banks on economic growth, employment and ultimately inflation that could change their policy? Will they amend quantitative tightening (selling assets) and use it instead of interest rates to deal with questions of financial stability?
Friday: manufacturing PMIs in the UK, eurozone, Japan and US
Our thoughts: manufacturing has generally been in a recession in most parts of the developed world, but this situation has yet to spread to the rest of the economy, so the question is whether manufacturing and services have different lives of their own and in which regions. If services slow down as the weight of interest rate hikes finally deals with the tight job markets and hence services inflation, will manufacturing recover of its own volition without central banks cutting rates?
The numbers for the week
Central banks/fiscal policy
ECB hikes by 50 bps despite banking turmoil whilst China cuts reserve requirements for banks. UK Chancellor favours investment and savings over public sector pay rises
The UK Chancellor used the leeway provided by improved public finances to deliver some giveaways, despite economic growth not expected to be very strong. The choice of tax relief for pensions, capital allowances and childcare support over public sector pay might be controversial but not estimated to change the path of economic growth.
The ECB stuck to the expected 50 bp hike, despite worries about the banking sector within the region but future guidance was withdrawn: “the elevated level of uncertainty reinforces the importance of a data-dependent approach…”. The ECB’s main refinancing rate now stands at 3.50%, the marginal lending facility rate at 3.75% and the deposit facility rate at 3.0%. The ECB forecasts were lowered for inflation with the comment that “inflation is projected to remain too high for too long.” Inflation is now seen at 5.3% (4.6% excluding food and energy) instead of 6.3% in 2023, 2.9% instead of 3.4% in 2024 and 2.1% instead of 2.3% in 2025. GDP growth was upgraded in 2023 from 0.5% to 1.0% but reduced in the subsequent two years to 1.6% per year. Regarding the banking sector, they made the comment that “the euro area banking sector is resilient”.
The People’s Bank of China (PBoC) kept the 1-year medium-term lending facility rate at 2.75% whilst adding more liquidity to the market. Later in the week, the PBoC cut the Reserve Requirement Ratio for banks by 25 bps from 11.00% to 10.75%, effective 27 March, as a further stimulus to the economy.
In the run-up to this week’s US Fed meeting, the usual blackout period stopped Fed officials from expressing their view publicly.
United States
Consumer prices still sticky, but producer prices offer a ray of sunlight. Surveys generally weaker but jobless claims again very low. Is housing healing or are the numbers outliers?
Inflation: the consumer price index (CPI) was in line with estimates, at 6.0% down from 6.4% and the core CPI (ex food and energy) easing from 5.6% to 5.5%. Despite the consensus number, services inflation edged up to 4.2% of the total 6.0% headline CPI with the services CPI at a cycle high of 7.6% year-on-year.
The producer price index (PPI), however, was lower than expected, with the PPI final demand down from 5.7% to 4.6%, the PPI ex food and energy down from 5.0% to 4.4% and the PPI ex food, energy and trade remaining at 4.4%.
The import price index fell 0.1% in February (or -0.4% ex petroleum), following -0.4% with the export price up 0.2%, after 0.5%.
The University of Michigan inflation expectations component for one year fell to 3.8% from 4.1% and for 5-10 years to 2.8% from 2.9%.
Employment: jobless claims were again unexpectedly low, with initial claims falling from 212K to 192K, led by a big drop in the State of New York, and continuing claims down from 1713K to 1684K.
Surveys: the NFIB (National Federation of Independent Business) small business optimism index moved up from 90.3 to 90.9, although it is still on a declining trend from 2018. The Empire Manufacturing survey (NY State) collapsed from -5.8 to -24.6. The Philadelphia Fed Business outlook was also below estimates, at -23.2 from -24.3 and the New York Fed Services Business Activity improved marginally from -12.8 to -10.1. The Leading Index fell 0.3% for the second month but is now in its 11th negative month. The University of Michigan sentiment index dropped from 67.0 to 63.4, with current conditions down to 66.4 from 70.7 and expectations down to 61.5 from 64.7.
Housing: the MBA (Mortgage Bankers Association) mortgage applications series rose 6.5% vs. +7.4% the previous week. The NAHB (National Association of Home Builders) housing market index improved from 42 to 44. Housing starts surged 9.8% in February after a negative month and building permits soared 13.8%.
Industry: industrial production was flat in February with manufacturing up 0.1%. Capacity utilisation remained at a low 78.0%, below estimates.
Retail: retail sales for February went down -0.4% after a strong month in January, +3.4%.
United Kingdom
Employment still very tight
Employment: the UK still has a very strong jobs market, whether you look at the lagging International Labour Organisation (ILO) data or the more updated payrolls. The payrolled employees monthly change rose to 98K in February from 42K with the claimant count rate slightly higher at 3.9% vs. 3.8% and the jobless claims change down 11.2K from -30.3K.
The ILO unemployment rate over the three months to January was unchanged at 3.7% with the employment change 3 months/3 months up 65K from 74K the previous month and average weekly earnings at 5.7% down from 6.0%.
Inflation: the Bank of England/Ipsos inflation forecast (a survey run by the Bank of England among households) for the next 12 months fell from 4.8% to 3.9% in February.
Europe
Minimal data
Inflation: the German wholesale price index fell from 10.6% to 8.9% in February.
Industry: eurozone industrial production rose 0.7% in January compared to -1.3% the prior month.
China/India/Japan/Asia
Decent monthly data from China, but not yet showing an economic take-off
China: the monthly data release was rather uneventful with industrial production and retail sales almost exactly as expected at 2.4% year-on-year and 3.5%, respectively. Fixed assets ex rural (i.e. investment) were a little better at 5.5% and property investment fell less than estimated at -5.7%, with residential property sales rising 3.5%. The surveyed jobless rate, though edged up from 5.3% to 5.6%, showing that employment is still a challenge in China. Youth unemployment is a particular problem, at a 6-month high of 18.1%.
New home prices rose 0.3% in February. Foreign direct investment into China fell from 14.5% to 6.1% year-on-year in February.
Japan: capacity utilisation fell 5.5% in January, down from -1.1% previously. Core machine orders rose 9.5% in January, up from 0.3%, for a year-on-year growth of 4.5%.
Exports increased by 6.5% year-on-year in February, with imports up 8.3%. Exports improved from the prior month whereas imports had lower growth.
The tertiary industry index (i.e. services) bounced back 0.9% after the previous -0.4%.
Oil/Commodities/Emerging Markets
Watching the gold price soar
Gold shot up again, even as all other commodities were collapsing. Gold prices have now hit a high in sterling terms as well as in many other currencies, too. As we write, the US$2,000 level has been exceeded. Its strength obviously depends on how long the current financial sector turmoil lasts.
Economically sensitive commodities, however, had a poor week, with oil prices down 12-13% and industrial metals falling in single digits.
