The numbers for the week – 21 February 2022
Markets last week
Market sentiment during the week was in thrall to political and military moves in Russia and the Ukraine, with hopes rising as President Putin announced a troop pullback but slumping as the reality on the ground disappointed. The escalation towards the end of the week put risk markets under renewed pressure without any brightening of the mood at any time.
Economic data were generally softer in the US and Europe, but UK statistics seemed to be defying gravity. Markets paid relatively little attention to numbers, though, as the elephant in the room was the geopolitical situation.
The one exception, of course, was inflation, with different sources of price rises being scrutinised carefully in the US and the UK (wages and imports in the US, clothing and producer input prices in the UK). The UK consumer price index has now overshot forecasts in seven out of the past nine months. Some respite might be in sight if you pay attention to consumer surveys of inflation expectations and future purchasing intentions for consumer durables, but the market has given up on the ’transitory’ rhetoric and wants to see real inflation data falling before amending its course. Meanwhile, Chinese and Japanese consumer and producer prices are actually rising less than previously, which is important since many supply chains start in the Far East.
Markets are now starting to price in a possible reversal of rate hikes from the US Federal Reserve (Fed) in 2024, due to fears that Fed rate increases might trigger a recession by overtightening this year and next. Indeed, some commentators go as far as to suggest that the Fed would hike nine times in a row, something that could well bring the economy into reverse. Bond investors, however, are starting to price in a lesser probability of the Fed starting the rate cycle with a 50 basis points (bp) rise.
In line with the ‘risk-off’ tone, there was a large drop in gilt yields over the week (down to 1.38% on the 10-year gilt), with eurozone yields also falling but US treasuries remaining fairly stable. Gold broke through levels of resistance and neared the US$1,900/oz mark.
Over the week, equities fell everywhere, with Europe, the UK and the US faring worst, whereas Japan and emerging markets were slightly more resilient. Only consumer staples managed to eke out a small gain, whereas energy, financials and technology were the biggest losers.
The week ahead
Monday: UK Markit manufacturing CPI and Markit/CIPS services PMI
Our thoughts: most countries are now experiencing a slowdown as a result of the massive tax on consumption that is inflation. The UK, though, seems to have been holding up well thanks to strong consumer demand and a booming jobs market. The question is how long this will continue in light of expected tightening from the Bank of England. Manufacturing matters much less to the British economy than services, but both surveys will give a good indication of future growth.
Tuesday: US Conference Board consumer confidence
Our thoughts: consumer confidence in the US has been hit for six, mostly due to much higher gasoline prices, which affect most Americans, whereas other items in the inflation basket are less frequently purchased. The University of Michigan survey has recently shown a big drop. Will the Conference Board confidence index follow?
Friday: US January PCE deflator and core PCE deflator
Our thoughts: whereas everyone in the US (and the world) follows the CPI (consumer price index), the US Federal Reserve (Fed) follows the core PCE (personal consumption expenditures) inflation gauge. A higher reading is expected for both the headline and the core numbers, but the level is unlikely to hit the 7% range we have recently seen for CPI. How high will it get, though? Will there be any signs of a potential let-up in inflation?
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||-2.30%||4.00%||-2.20%||3.60%|
|Emerging market equities||-0.70%||0.00%||-0.60%||-0.40%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.93%||-1||42|
|10-year German Bund||0.19%||-11||37|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||93.54||-1.00%||20.30%|
|WTI oil (bbl)||91.07||-2.20%||21.10%|
|Copper (metric tonne)||9956||1.00%||2.40%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
More debate on US Federal Reserve’s next interest rate move
Chicago Fed President Charles Evans voiced strong concerns about inflation, although he is currently a non-voting member: “the current stance of monetary policy is wrong-footed and needs substantial adjustment.” New York Fed President John Williams, however, said that while raising rates will be “appropriate” in March, he doesn’t see a compelling argument for taking “a big step at the beginning”.
The minutes of the last Fed meeting emphasise the fact that the Fed will start to shrink its balance sheet soon after it starts raising rates.
The Bank of England (BoE) has apparently begun talks with the Debt Management Office and the Treasury over how to handle active sales of the bonds held in its £875bn quantitative easing portfolio, by potentially not replacing expired gilts. The BoE has said that it would consider active sales once interest rates hit 1%.
After a few recent rate cuts, the People’s Bank of China (PBoC) kept its 1-year and 5-year loan prime rates unchanged at 3.70% and 4.60%, respectively.
Inflation still dominates and surveys are starting to feel the pressure
Inflation: the PPI (producer price index) surprised on the upside. It was expected to fall by 0.7% for both the headline and the core readings, but it just fell by 0.1%. The headline PPI was 9.7%, PPI core ex-food and energy 8.3% and PPI core ex-food energy and trade 6.9%.
The import price index rose further from 10.2% to 10.8% year-on-year and the export price index from 14.8% to 15.1%.
The Atlanta Fed’s median wage growth tracker rose to 4.1% during January, the highest reading since summer 2008. Leading the way higher are younger workers, with wages growth up more than 10%.
The New York Fed’s survey of consumers’ inflation expectations over the next 12 months edged down to 5.8% during January from 6.0% during the last two months of 2021. Consumers’ three-year-ahead inflation expectations fell to 3.5% last month, down from over 4.0% late last year.
The University of Michigan survey showed buying conditions for vehicles and large household durables falling sharply, i.e. people are less interested now that the prices have soared.
Surveys: the Empire Manufacturing survey disappointed, rising only from -0.7 to +3.1 vs. +12 expected. It shows higher prices but a stall in February orders and shipments data. The Philadelphia Fed Business outlook survey dropped from 23.2 to 16.0, below estimates. The Leading Index fell -0.3% from a positive +0.7% the previous month.
Industry: capacity utilisation rose sharply from 76.6% to 77.6% whilst industrial production surged 1.4% in January from a negative reading the previous month. Business inventories were up 2.1% in December vs. 1.5% the previous month.
Housing: MBA mortgage applications had another fall, down 5.4% after -8.1% the previous week. The NAHB housing market index slid to 82 from 83. Housing starts fell 4.1%, below estimates, whereas building permits rose 0.7% instead of an expected drop. Existing home sales surprised by surging 6.7%.
Sales: retail sales rose 3.8% in January after a downwardly revised 2.5% drop in the prior month, much higher than estimates.
Employment: weekly jobless claims unexpectedly surged from 225K to 248K whereas continuing claims fell from 1619K to 1593K.
The UK economy appears to be doing well
Employment: the UK jobs market seems to be in good shape, with the claimant count rate in January remaining at 4.6% and jobless claims falling 31.9K after a 51.6K drop the previous month. The payrolled employees monthly change was +108K after +131K the previous month.
Inflation: the CPI unexpectedly accelerated for a fourth straight month in January, to 5.5%, a new 30-year high, driven by clothing and footwear. Core CPI also rose to 4.4%. The CPI has now overshot forecasts in seven out of the past nine months. The PPI was also higher than expected, with PPI input at 13.6% and PPI output at 9.9%.
Housing: the UK house price index (average price for all dwellings year-on-year) edged up further from 10.7% to 10.8% for December.
Sales: retail sales had a strong month in January, rising 1.9% including auto fuel and 1.7% excluding it, after a down month in December.
Data and surveys are deteriorating
Surveys: in the eurozone, the ZEW survey expectations fell from 49.4 to 48.6. The expectations for Germany missed the estimate at 54.3 instead of 55.0, but still up from 51.7. The current situation was a tad better at -8.1 vs -10.2. Eurozone consumer confidence fell further from -8.5 to -8.8.
Employment: employment in the euro area exceeded its pre-pandemic level. The number of employed people rose 2.1% from a year ago in the final quarter of 2021, the third straight increase.
Industry: eurozone industrial production rose 1.2% in December after +2.4% the previous month. EU 27 new car registrations were down 6% year-on-year in January, an improvement over the previous reading of -22.8%. The construction output fell 4.0% in December.
Inflation falling in China and Japan (!)
China: inflation eased in January as food and energy prices weakened. The PPI rose 9.1% from a year earlier, down from 10.3% in December, while the CPI slowed to 0.9% from 1.5%. Both gauges were below forecasts. Core inflation, which excludes volatile energy and food prices, rose 1.2%, the same as in November and December. Services inflation accelerated to 1.7% in January.
FDI (foreign direct investment) into China was less strong, at 11.6% year-on-year vs. 14.9%.
Japan: the GDP for Q4 rose 1.3% (annualised at 5.4%) vs. -0.7% the previous quarter, with an annualised GDP deflator of -1.3%. Core machine orders rose 3.6% in December against an expected fall for a 5.5% year-on-year growth.
Inflation fell in Japan, with the national CPI easing from 0.8% to 0.5% in January, whereas the core CPI ex fresh food and energy (which is the Bank of Japan’s gauge) fell to an even more negative level of -1.1% from -0.7% previously.
The Jibun Bank manufacturing PMI fell from 55.4 to 52.9 and the services PMI slumped from 47.6 to 42.7.
The oil price yo-yoed in response to news of the Ukraine-Russia tension, ending the week lower. Gold, however, was well sustained, breaking through another resistance level at US$1,875/oz and nearing US$1,900.