The numbers for the week – 24 Apr 23
Markets last week
There was another round-trip in markets last week, with first a relentless upward drive for government bond yields, in particular in the UK as inflation surprised on the upside, and later on, concerns about the US economy pushing bond yields back down.
Once again, the US economy provided no end of contradictory data, in particular in surveys: New York State soaring, Philadelphia slumping, the Leading Index pointing towards a recession but the US manufacturing survey climbing above the 50 threshold between expansion and contraction.
Outside of the US, manufacturing Purchasing Manager Indices (PMIs) are continuing to show a manufacturing recession that seems to be getting worse, but services PMIs have surged, clearly indicating that consumer spending has moved inexorably from goods to services.
Central bank officials didn’t make any waves with their comments, although it is interesting to note that not a single official of the US Federal Reserve (Fed) mentioned a possible cut in rates during this year, despite Fed futures markets forecasting more than 50 basis points (bps) of expected Fed cuts by year-end. The one comment worthy of market attention, however, was by a Chinese official hinting at an early removal of the extra pandemic-era stimulus, which weighed on Chinese and other Far Eastern equities.
The most significant move in markets last week was the collapse of oil prices, whether in the US or globally, as the effect of Organization of the Petroleum Exporting Countries (OPEC) output cuts wore off in the face of renewed concerns about economic growth. In fact, commodities were generally soft during the week, without this being driven by a higher US dollar.
At the end of the week, sterling was the strongest currency, with expectations of higher rates triggered by the high consumer inflation print (still in excess of 10% despite hopes for single digits). Government bond yields rose, with gilts up almost 10 bps and US treasuries more subdued. Oil prices fell sharply, between 5% and 6%, and copper also lost 2.5%. Gold had a roller coaster ride around the US$2,000 mark and finished the week down over 1%.
Equities were mixed, with UK, Japanese and European markets eking out small gains, whereas emerging markets fell with China leading the negative mood on reduced stimulus expectations. Sectors were pointing in the direction of a change of leadership from the cyclicals that have driven markets this year towards the defensive areas. Energy, materials and the broad technology complex fell while consumer staples and utilities went up modestly. Under the surface, healthcare has been improving after a poor first quarter and is now on top of the return rankings for the quarter-to-date.
The week ahead
Tuesday: US Conference Board consumer confidence
Our thoughts: is the US consumer still as strong as before, despite some cracks appearing in parts of the economy? The University of Michigan Consumer Sentiment Index was quite negative, but inflation is an important part of that survey. The Conference Board survey, on the other hand, is more interested in employment and hence has proved much more resilient in the current environment. As we start to see some movement in jobless claims and job openings, will that attitude persist or could we start to see some deterioration in consumer confidence?
Thursday: Bank of Japan
Our thoughts: the last meeting of the Bank of Japan (BoJ) was Governor Kazuo Ueda’s maiden policy decision and he made no changes either to the policy balance rate or the 10-year yield target for Japanese Government Bonds (JGBs) and the so-called ‘yield curve control’, i.e. the maximum level at which the BoJ can tolerate JGB yields. Since then, not only have economic data in Japan improved but core inflation has hit a 42-year high. Will any hint of change be given this week? It could have repercussions on global bond markets given how important Japanese investors are globally.
Friday: US PCE deflator
Our thoughts: inflation is still the topic everywhere, and nowhere more than in the US, as we are 10 days away from the Fed holding their next meeting where they are expected to increase rates again but presumably also indicate a potential pause in hikes. The Personal Consumption Expenditures (PCE) deflator is a lesser-known measurement than the Consumer Price Index (CPI), but the core PCE is the Fed’s inflation gauge, with a 2% target. We are still far from that level and the current expectation is for the headline PCE to drop quite sharply but for the core PCE to be quite sticky. This is a problem seen not just in the US, but also in other countries: headline inflation falls as energy prices turn negative and goods prices stall, but services inflation hardly budges, causing the core reading to be sticky. For markets it will be a question of degree of fall in price rises but also the direction of the data
The numbers for the week
Central banks/fiscal policy
Many comments from Fed, ECB and PBoC officials: not market-moving except for a Chinese official hinting at stimulus being dialled down
Bank of Atlanta Fed President Raphael Bostic said this week that “there is still more work to be done, and I am ready to do it.” He would raise interest rates one more time and leave them at that level for “quite some time.”
St Louis Fed President James Bullard recommended rates going to 5.5%-5.75%, i.e. another 75 bps higher than now.
Philadelphia Fed President Patrick Harker said that Fed funds rates are “close” to where they need to be. “Since the full impact of monetary policy actions can take as much as 18 months to work its way through the economy, we will continue to look closely at available data to determine what, if any, additional actions we may need to take.”
New York Fed President John Williams said: “The banking system is sound and resilient. Nonetheless, these developments will likely lead to some tightening in credit conditions for households and businesses, which in turn will weigh on spending. It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy. The use of the discount window and the special program we set up is basically doing exactly what is wanted.” On inflation, he said that “the most recent data indicate that this trend of slowing inflation is continuing.”
European Central Bank (ECB) President Christine Lagarde said there’s still some work to be done to beat high inflation: “We have inflation that’s too strong compared to our target and has been for some time… There’s still a little way to go on the path.” Her colleague, Vice President Luis de Guindos, had a slightly different tone, saying that “core inflation remains very sticky.”
The People’s Bank of China (PBoC) kept rates at 4.30% for the five-year loan prime rate and at 3.65% for the one-year loan prime rate. A senior official from the PBoC, Zou Lan, Head of the Monetary Policy Department, spoke about a potential dialling down of stimulus by the central bank, as some of the pandemic support comes to an end.
Some cracks starting to show in the growth machine with continuing jobless claims, wage inflation, Leading Index and other surveys
Wage inflation: the Bureau of Labor Statistics announced that median weekly earnings of full-time workers increased by 6.1% in Q1 vs. the same period last year, higher than consumer price inflation. Also, the Atlanta Fed publishes a wage growth tracker, which was up 6.4% year-on-year in March, the first move up in five months.
Surveys: the Empire manufacturing survey (NY State) surged from -24.6 to +10.8, whereas the New York Fed services business activity was only marginally better at -9.8 vs. -10.1. The Philadelphia Fed Business Outlook survey, which is generally paired with the Empire Manufacturing, unexpectedly dropped from -23.2 to -31.3.
The Leading Index fell 1.2% in March after -0.5% the previous month.
The S&P Global manufacturing PMI rose above 50 for the first time since November, at 50.4 from 49.2 and the services PMI increased from 52.6 to 53.7.
Housing: the National Association of Home Builders (NAHB) housing market index edged up from 44 to 45, still a very depressed level, close to the pandemic lows. Housing starts fell 0.8% in March from +7.3% previously and building permits slumped 8.8% after a very strong +15.8%. Existing home sales fell 2.4% in March after a strong +13.8% the prior month.
Likewise, Mortgage Bankers Association (MBA) mortgage applications fell 8.8% during the week ending 14th April after +5.3% the previous week. Mortgage rates rose to 6.43% the week ending 14th April, which was the first increase in five weeks.
Employment: initial jobless claims kept increasing, from 240K to 245K, and continuing claims from 1804K to 1865K, the highest since November 2021.
Banking sector: the Fed’s Beige Book, which focuses on banking activity across the US and provides many anecdotes on the economy, was fairly uneventful with the comment that “economic activity was little changed in recent weeks.” This was seen as good news following the recent turmoil in US regional banks.
Once again, an inflation shock and slumping retail sales
Employment: unemployment increased slightly, whether using the claimant count rate in March, up from 3.8% to 3.9%, or the International Labour Organisation (ILO) rate in February, up from 3.7% to 3.8%. The jobless claims change rose by 28.2K vs. a previous drop. Employment numbers, however, went up: the payrolled employees monthly change was up 31K in March while the employment change three months/three months in February was up 169K.
On the earnings side, average weekly earnings for three months year-on-year remained at 5.9% in February and at 6.6% ex-bonus.
Inflation: the widely awaited CPI reading came out higher than expected, at 10.1% vs. 10.4% the previous month, driven by soaring food prices rising at the fastest rate for 45 years. The core CPI (ex energy, food, alcohol and tobacco) was unchanged at 6.2%. There was a ray of hope from the Producer Price Index (PPI), with the PPI input (raw or intermediate inputs) dropping from 12.8% to 7.6% and the PPI output (factory gate prices) from 11.9% to 8.7%. This, in theory, should point towards lower future CPI levels.
Housing: the house price index year-on-year fell from 6.5% to 5.5% in February.
Retail: retail sales in March fell 0.9% including auto fuel and 1.0% excluding auto fuel, missing estimates after two strong months in January and February.
Surveys: GfK consumer confidence improved from -36 to -30, a high since the beginning of the Ukraine war. The S&P Global/CIPS manufacturing PMI fell from 47.9 to 46.6, below estimates, whilst the services PMI surged from 52.9 to 54.9, above expectations.
Inconclusive data, but services are up and manufacturing is down
Industry: EU-27 new car registration picked up from 11.5% year-on-year to 28.8% in March. Construction output in the eurozone had another good month, up 2.3% in February after 3.8% the prior month.
Inflation: the German PPI fell sharply from 15.8% to 7.5%.
Surveys: the eurozone ZEW survey expectations fell from 10.0 to 6.4. In Germany, the expectations were down sharply, from 13.0 to 4.1, but the current situation improved from -46.5 to -32.5.
Eurozone consumer confidence improved from -19.1 to -17.5. The S&P Global eurozone manufacturing PMI fell further from 47.3 to 45.5 whereas the services PMI hoisted itself even higher from 55.0 to 56.6.
Inflation shock in Japan too, with ‘core-core’ CPI at 42-year highs. Chinese growth number driven by consumer not industry or investment
China: Q1 2023 GDP growth exceeded estimates, at 4.5% year-on-year, after +2.9% the previous quarter. The monthly data delivery for March was mixed, with the consumer generally doing better, whereas industry and investment was less strong. Industrial production rose 3.9% year-on-year, below estimates; fixed assets ex rural (i.e. investment) was less buoyant at 5.1% vs. 5.5%; and property investment fell 5.8%, from 5.7% previously. On the other hand, retail sales surged from 3.5% to 5.8% and residential property sales from 3.5% to 7.1%.
Foreign direct investment into China fell from 6.1% to 4.9% year-on-year in March.
Japan: capacity utilisation improved, up 3.9% in February, from -5.5% the prior month. The tertiary industry index (i.e. services) rose 0.7% in February, exactly as in the previous month.
The Jibun Bank manufacturing PMI was slightly better at 49.5 vs. 49.2 and the services PMI a tad lighter at 54.9 vs. 55.0.
The inflation picture was mixed, as in other countries, with the national CPI down from 3.3% to 3.2% but the national ‘core-core’ CPI (ex fresh food and energy rather than just ex food and energy), which the Bank of Japan focuses on, rising from 3.5% to 3.8%, the highest reading since 1981.
Exports rose 4.3% year-on-year and imports 7.3%, with the trade deficit almost unchanged.
The end of the output cut impact on oil?
A significant drop in crude prices has taken back a large part of the recovery caused by the surprise output cut from the OPEC cartel, despite a large drop in US stockpiles in the last week. The price fall has been likely driven by increased fears of a recession in the US.
Other commodities have also corrected, with copper, iron ore and steel falling, whereas aluminium and nickel have been more resilient. Gold has been hovering around the US$2,000 level without crossing it again.