The numbers for the week – 21 March 2022
Markets last week
As the world enters the fourth week of the Ukraine war, once again huge volatility in both directions characterised markets last week. Nowhere more than in China where the beginning of the week saw massive equity falls related to COVID-19 spreading across the country and large lockdowns, fears of sanctions and concerns about energy imports, and then later on witnessed an equally momentous rally as the authorities promised better disclosure rules for foreign-listed Chinese shares and a Russia-Ukraine settlement was being discussed.
In the US, a meeting of the US Federal Reserve (Fed) gave markets better clarity on interest rate policy. The Fed hiked rates (Fed funds) by 25bps and outlined potential future increases of 25bps for each of the remaining 6 meetings this year. Markets had been quite concerned ahead of this meeting but seemed reassured with the outcomes, both in terms of comments and actions. Hot on the heels of the Fed, the Bank of England also hiked rates by 25bps to 0.75%. Both rate movements had been widely expected and were therefore welcome by markets, starting (or hoping) to move to a post-war, post-rate-uncertainty world.
The Fed meeting capped the best two-day gain for US equities since April 2020, with technology and financials the strongest performers whilst energy lagged.
Oil prices fell sharply to below US$100/bbl at the beginning of the week on peace hopes but then recovered partly on Thursday and Friday, ending 4% down on the week.
The US treasury yield curve (difference in bond yields between 2 years to 10 years) flattened after the Fed meeting and finished the week at 21 bps, down from 25 bps the previous week, implying a slightly higher probability of a recession due to the Fed’s expected rate rises during the year. The US dollar weakened. Most commodities followed Brent oil and performed a huge roundtrip during the week. Gold finished at US$1,921/oz.
The week ahead
Wednesday: UK CPI, RPI and PPI
Our thoughts: once again, inflation will be the dominant concern for markets. The UK will be no exception to the trend. The CPI (consumer price index) is expected to rise further, approaching 6%. The PPI (producer price index) will tell us more about pipeline price pressures, with the PPI input generally much higher than the PPI output and in turn higher than the CPI. Are the markets steeled for the rise or could they be surprised again? For the time being, UK inflation is not hitting the highs of the US, but how much further is there?
Thursday (Wednesday for Japan): manufacturing and services PMIs for UK, eurozone, US and Japan
Our thoughts: part of the market’s discourse these days is the risk of “stagflation” (lower growth with higher inflation). Will the PMIs, which normally correlate with future economic growth, start to show a meaningful descent? The eurozone is the area expected to be under pressure due to Russian energy imports, but could UK, US and Japanese PMIs be affected? Some moderate fall is expected in Europe, the UK and, to a lesser extent in the US, for both manufacturing and services, but no estimates at this stage look like a harbinger of recession. Japan does not provide estimates yet.
Friday: UK retail sales
Our thoughts: the UK has managed to get away with strong retail sales in recent months, with an upward trend from Q4 of last year. Will this continue in light of energy bills soaring and the Chancellor steadfastly refusing to cancel the tightening of national insurance contributions (unless some change is forthcoming during the Spring Statement on Wednesday)? The numbers will help markets distinguish between the economic movements in the UK and Europe.
Markets for the week
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
25 bps hike from both the Fed and the BoE, in line with expectations
The US Federal Reserve (Fed) embarked upon a rate-raising cycle last week, due to sticky US inflation. The FOMC (Federal Open Market Committee) voted to raise interest rates (Fed Funds) by 25 bps (with one dissent for 50 bps) and signalled additional rate hikes in 2022. The so-called “dot plots” (the expected future interest rates as provided by every single Fed voting member) are supposed to rise by 25 bps at each of the remaining six meetings. Fed Chair Jay Powell noted that if it became appropriate to move more quickly to tighten, the FOMC would act.
Recent geopolitical events were noted: “in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.” There was a comment that the FOMC made progress on discussing the run-off of their balance sheet, meaning that Quantitative Tightening (the sale of the market assets purchased during Quantitative Easing) should be coming soon.
The Fed’s economic projections changed, reducing 2022 growth from 4% to 2.8% but not changing 2023 and 2024 and increasing inflation (core PCE – personal consumption expenditures – rising from 2.7% last December to 4.1% now, 0.3% higher in 2023 and 0.2% higher in 2024). The Fed expects unemployment to remain at 3.5%. The dot plots say that the Fed funds rate will be 1.9% by year end and 2.8% by end 2023.
The Bank of England (BoE) raised rates by 25 bps from 0.5% to 0.75%, as widely expected. The MPC (Monetary Policy Committee) voted by a majority of 8-1 to increase the Bank Rate, but one member preferred to maintain it at 0.5%. Further increases are expected at the subsequent meetings: “based on its current assessment of the economic situation, the Committee judges that some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on both sides of that judgement depending on how medium-term prospects for inflation evolve.”
The People’s Bank of China (PBoC) kept its 1-year medium-term lending facility rate unchanged at 2.85% against expectations of a cut.
Some signs of softness with producer prices at 10%
Surveys: the Empire manufacturing survey (NY State Fed index) plunged to -11.8 in March, with weakness in new orders and an increase in producer price pressure. On the other hand, the Philadelphia Fed Business Outlook survey (the “Philly Fed”), which is often paired with the Empire survey, surged from 16.0 to 27.4. The Leading Index was up 0.3% in February after -0.5% the previous month.
Inflation: as forecast, the February PPI (producer price index) rose to 10% with the previous month being revised up to the same level, driven by goods up 14.4%, with services up 7.8%. The PPI ex food and energy eased from an upward-revised 8.5% to 8.4%. The import price index rose 1.4% during the month of February after 1.9% the prior month and the export price index rose 3.0% after 2.8%.
Sales: February retail sales rose 0.3%, after a strong +4.9% the previous month. Ex auto and gasoline the February growth was -0.4%, down from +5.2%.
Housing: the NAHB housing market index fell from 81 to 79 in March. Housing starts had a strong month, up 6.8% in February after a 5.5% drop the previous month, but building permits dropped 1.9% after +0.5% previously. Existing home sales slumped 7.2% after +6.6% the prior month.
Industry: manufacturing production rose 1.2% in February, up from 0.1% previously, with capacity utilisation rising from 77.3% to 77.6%.
Employment: initial jobless claims fell from 229K to 214K and continuing claims fell more from 1490K to 1419K.
Job market still booming
Employment: the February claimant count rate fell from 4.5% to 4.4%, with jobless claims falling 48K and payrolled employees rising 275K after 61K the previous month. The January ILO unemployment rate fell from 4.1% to 3.9%. The numbers are very close to full employment.
Massive slump in surveys
Surveys: the ZEW survey fell dramatically in March (a bigger monthly drop than during the height of the COVID-19 pandemic), reflecting increased likelihood of a recession in Europe. The eurozone survey expectations slumped from +48.6 to -38.7. In Germany the expectations also collapsed from +54.3 to -39.3, whereas the current situation fell less, from -8.1 to -21.4. The Bank of France industrial sentiment was unchanged for February at 107.
Inflation: the final eurozone CPI (consumer price index) number was revised upwards to 5.9% in February. Labour costs during Q4 in the eurozone rose 1.9% vs. 2.3% for the prior quarter.
Auto sales: EU27 new car registrations dropped -6.7% in February year-on-year from -6.0% previously.
Unclear direction from Chinese data
China: the monthly Chinese data delivery was better than estimated, with industrial production, retail sales and property investment not falling as much as forecast: industrial production rose 7.5% year-on-year, down from 9.6%, fixed assets ex rural (i.e. investment) was up 12.2% vs. 4.9%, retail sales were up 6.7% vs. 12.5%, property investment rose 3.7% vs. 4.4%. Residential property sales fell, sharply, down 22.1% vs. + 5.3% the previous month and new home prices fell 0.13% after -0.04% previously. The surveyed jobless rate rising from 5.1% to 5.5%. FDI (foreign direct investment) soared to 37.9%.
Japan: in February, exports rose 19.1% year-on-year, vs. 9.6% the prior month and imports rose 34.0% vs. 38.7%. Capacity utilisation fell 3.2% in January vs. -0.4% the previous month. Core machine orders in January fell 2% after a 3.1% rise the previous month for a 5.1% year-on-year growth. The tertiary industry index (i.e. services) was down 0.7% in January, after +0.1% the prior month. The national CPI (consumer price index) increase from 0.5% to 0.9% in February, but the core number (which is the gauge followed by the Bank of Japan) ex fresh food and energy remained at a -1.0% level.
Oil prices yo-yoed during the week, with Brent crude starting the week above US$110/bbl, falling to US$98 mid-week and then recovering to close the week close to US$108. The moves were influenced by the Ukraine war and chances of peace, as well as by comments about the possibility of a nuclear deal with Iran, which would lead to Iran exporting more oil. A similar level of volatility was seen in natural gas, copper, nickel, aluminium, wheat and gold.