The numbers for the week – 22 May 23
Markets last week
We finally saw real movements in markets last week, rather than another roundtrip. The US was in focus, with optimism that the debt ceiling discussion would come to a resolution as early as this week. Comments made by President Biden and Republican Congress leader Kevin McCarthy led investors to believe that a deal was at hand and boosted US equities, the US dollar and treasury bond yields. The consequences of the debt ceiling solution (in terms of liquidity and budget changes) were not clearly set out, but it was the positive sentiment about a deal that helped risk markets.
A Friday news report that debt talks had stalled reversed some of the market moves but did not fully cancel them.
This was also a week in which no fewer than 15 different officials of the US Federal Reserve (Fed) uttered their views on future interest rates, with an obvious split between those favouring a pause and those wishing to continue the hikes, and probably a higher weight for pausing than hiking further. Whether as a result of this overwhelming communication or the debt ceiling sentiment, the expectation of Fed fund rate cuts in the second half of the year has come down to about 50 bps now, which is still at odds with Fed policy, but less so.
The Japanese stock market hit a high that took it back to 1990, one year after its peak and seems to be inching towards its all-time high of late 1989, as first quarter growth beat all expectations. Although that peak has long been surpassed in US dollar or sterling terms, the psychological index level seems to be attracting more investors to Japanese equities.
On Friday, the 10-year gilt yield briefly surged above 4% and finished the week just round that level. With the brief exception of the Liz Truss government market turmoil, the last time the 10-year gilt was at the 4% level was in 2010.
The movements in markets were so significant last week that they have to be ranked. The strongest was the rise in government bond yields, with US treasury yields rising 21 bps and gilts 22 bps. Oil prices rallied more than US$3/bbl on relatively little coincident news but finished up US$2. Equities had a strong week, led by the US and Europe, but with Japan continuing its inexorable ascent since the beginning of the year. Chinese markets were once again the laggards.
Lastly, the US dollar recovered but this was moderated on Friday. The greenback ended higher against the euro and yen, but sterling was well bid.
Going against the flow was the gold price, dropping below the US$2,000 level, as risk appetite surged. The price bounced back over the US$1,950 support and it only lost 1.6% on the week.
Within equities, it was clear what dominated: technology, up almost 4% on the week, despite bond yields rising sharply. Defensive sectors fell significantly (utilities, consumer staples, healthcare, but also real estate). As a result, the technology complex has reclaimed the lead among sectors for the quarter-to-date.
The week ahead
Wednesday: UK inflation
Our thoughts: the UK has the unenviable leadership for high inflation among developed economies, but this is also the country where expectations of a fall are the greatest. The Bank of England (BoE) is forecasting the Consumer Price Index (CPI) to be 5% for the whole of 2023. Given that we are still in double digits, that means a very fast path downwards indeed. As unrealistic as this appears, markets are not necessarily disagreeing with either the direction or the speed of descent, projecting 3.8% for the last quarter of 2023. Are these numbers complete fabrications or possible outcomes? This week’s data may help us decide, including the Producer Price Indices (PPIs) which are indications of pass-through into future consumer prices.
Wednesday: US Federal Reserve minutes
Our thoughts: as long as interest rates matter to investors, they will try and second-guess what the Fed will do on monetary policy. Markets are not sure whether the Fed will hike next month, pause its rate increases or simply skip a month and keep raising rates afterwards. They have also been quite volatile in their expectation of the Fed cutting rates in the second half of this year, at some point showing more than 100 bps of future cuts and now down to only 50 bps. The Fed’s meeting minutes are systematically parsed for hints of the future direction of rates and may have an impact on investor sentiment.
Friday: US PCE inflation
Our thoughts: the Personal Consumption Expenditures (PCE) is less well know than the CPI but more relevant to the monetary authorities. The Fed uses the core PCE as its gauge for inflation with a 2% target. The latest core number was 4.6% and looked quite sticky, whereas the headline CPI and PCE inflation were both falling quite fast. Once again, the difference between the headline and core readings will be analysed to determine how soon the Fed is likely to be satisfied with inflation and start cutting rates.
The numbers for the week
Central banks/fiscal policy
High-stakes Fed-speak from different officials
A grand total of 15 officials from the Fed, including Fed Chair Jay Powell on Friday, expressed their views on future Fed policy last week, breaking along the traditional dove-hawk alignment.
Cleveland Fed President Loretta Mester reiterated her hawkish stance on interest rates, Minneapolis Fed President Neel Kashkari said the Fed has more work to do to beat inflation and Richmond Fed President Thomas Barkin stated he is willing to go for further rate increases if necessary.
On the more dovish side, Atlanta Fed President Raphael Bostic mentioned that the Fed should pause its rate hikes now and Chicago Fed President Austan Goolsbee called for ‘prudence and patience’, since rate hikes effects are still in the pipeline and hence that rate increases should be stopped. Also in the pausing camp were New York Fed President John Williams, who said ‘we’ve got to make our decisions and then watch what happens, get that feedback, see how the economy’s behaving’, and Governor Philip Jefferson, who said he could be ‘patient’.
Hedging her bets, however, was Dallas Fed President Lorie Logan, who noted that ‘when conditions are uncertain, you may need to travel more slowly’, although she later stated that the case for pausing rate hikes wasn’t clear yet and was the one who suggested maybe skipping one meeting and continuing hikes afterwards.
On Friday, Fed Chair Jay Powell tried to convey patience to the markets, categorising monetary policy as ‘restrictive’ and saying that the Fed can look at data before making further decisions. He added that the ‘risks of doing too much’ and ‘too little’ were ‘becoming more balanced’, although he does not expect a rapid fall in inflation.
BoE Governor Andrew Bailey said he was ‘unwavering’ in his commitment to 2% inflation. He said that it should fall sharply ‘over the coming months… The easing of labour market tightness is happening at a slower pace than we expected in February, and the labour market remains very tight. While we expect CPI inflation to fall quite sharply as energy costs begin to ease, albeit at a somewhat slower pace than projected in February given the near-term outlook for food prices, the outlook for inflation further out is more uncertain and depends on the extent of persistence in wage and price setting.’ As such, he outlined that they would continue to raise rates ‘if there were to be evidence of more persistent pressures.’
The Deputy Governor of the BoE, Ben Broadbent, said that the pace of quantitative tightening would increase. The BoE is currently selling £20 billion of assets per quarter and he suggested speeding up the process, as there are still £820 billion of assets on the balance sheet accumulated during the quantitative easing period.
The People’s Bank of China (PBoC) kept the 5-year loan prime rate and the 1-year loan prime rate unchanged at 4.30% and 3.65%, respectively.
United States
Lack of direction from data: jobless claims not rising as fast as seen previously, housing attempting to bottom, surveys mixed-to-bad, but retail sales and industrial production more resilient
Retail: April retail sales disappointed at the headline level, with the advance reading up 0.4% for the month, up from -0.7% previously, but retail sales ex auto and gasoline were up more strongly, 0.6%, while the control group rose 0.7%.
Surveys: the Empire Manufacturing (NY State) survey fell sharply from +10.8 to -31.8, the lowest level since the pandemic and very close to the 2009 low. Its services counterpart, the New York Fed Services Business Activity index, also fell from -9.8 to -16.8. Bucking the trend, the Philadelphia Fed Business Outlook improved sharply from -31.3 to -10.4, better than estimates.
The Conference Board US Leading Index fell 0.6% in April, after its 1.2% drop in March, making this the 13th consecutive fall.
Industry: industrial production was up 0.5% in April, with manufacturing production up 1.0% from a prior negative -0.8%, and capacity utilisation at 79.7%, from a downward revised 79.4%. Business inventories fell 0.1% in March, from a flat month.
Housing: the National Association of Home Builders (NAHB) housing market index recovered from 45 to 50, above expectations. Housing starts rose 2.2% in April, but based on a downward revised previous month, down 4.5%. Conversely, building permits were down 1.5% but based on an upward revised -3.0%. The general trend for both housing starts and building permits is still falling but could well have bottomed recently. Existing home sales fell 3.4% in April after -2.6% the previous month.
Employment: jobless claims had to be adjusted to reflect previous fraudulent claims made in the State of Massachusetts. As a result, initial claims dropped sharply by 22,000 from 264K to 242K. Likewise, continuing claims fell from 1807K to 1799K.
United Kingdom
Is the jobs market finally giving in?
Employment: the jobs market disappointed, both in April and with the International Labour Organisation (ILO) March data. The payrolled employees monthly change suddenly turned negative, at -136K for April, after 42K the prior month, with the jobless claims change up from 26.5K to 46.7K. The ILO unemployment rate over three months to March rose from 3.8% to 3.9% and the April claimant count rate from 3.9% to 4.0%.
Inflation: average weekly earnings over three months year-on-year remained at 5.8% but the weekly earnings ex bonus edged up from 6.6% to 6.7%.
Surveys: the GfK consumer confidence survey improved from -30 to -27.
Housing: the Rightmove house prices index in May rose 1.8% for a 1.5% year-on-year growth.
Europe
The recent recovery in European data stalled last week
Industry: eurozone industrial production in March fell 4.1% for a year-on-year growth of -1.4%, down from +2.0%. EU 27 car registrations rose 17.2% year-on-year, down from 28.8% previously.
Surveys: the Zentrum für Europäische Wirtschaftsforschung (ZEW) survey fell sharply, with the eurozone expectations down from +6.4 to -9.4, the expectations for Germany from -32.5 to -34.8 and the German current situation from +4.1 to -10.7.
Inflation: the German wholesale price index fell 0.4% in March for a -0.5% year-on-year move. The German PPI dropped from 6.7% to 4.1%.
Chinese growth challenged and Japanese core inflation highest in more than 40 years
China: the April monthly data release showed much reduced growth compared to what economists expected, with industrial production especially weak, at 5.6% year-on-year vs. double-digit estimates. Retail sales climbed from 10.6% to 18.4% but below 21.9% expectations, fixed assets ex rural (i.e. investment) fell from 5.1% to 4.7%, property investment fell further from -5.8% to -6.2%, but residential property sales jumped from 7.1% to 11.8%. New home prices rose 0.32% after 0.44% the prior month. Foreign direct investment year-on-year was almost unchanged from the previous month at 2.29% vs. 2.26%.
The surveyed jobless rate was better at 5.2% vs. 5.3%.
Japan: Q1 GDP was above expectations, rising 1.7% in nominal terms, driven by business spending and private consumption, with minimal inventory contribution and negative net exports. The GDP deflator year-on-year rose from 1.2% to 2.0%. Exports for April rose 2.6% year-on-year from 4.3% the prior month, with imports down 2.3% from +7.3%.
The national CPI rose from 3.2% to 3.5%, with the “core-core” CPI (ex fresh food and energy) up from 3.8% to 4.1%, the fastest pace since 1981.
The tertiary industry index (i.e. services) in March fell a sharp 1.7%, after +1.7% the previous month. Core machine orders fell 3.9% in March for a year-on-year growth of-3.5%.
Oil/Commodities/Emerging Markets
Oil rebounding and gold slumping
The International Energy Agency estimated that world oil consumption will grow by 2.2 million barrels a day in 2023, to 102 million barrels, the highest level on record, driven by higher Chinese and Asian demand. Maybe because of this announcement, oil prices rose by more than 3% last week even as Chinese growth data were seen to be softening.
Industrials metals were not a strong as energy and copper ended the week flat, but their trend is still pointing downwards.
Finally, gold had one of its worst weeks, dropping below US$2,000 and bouncing back at the US$1,950 level to finish down 1.6%.
