Markets last week
British inflation stole the show last week, as world markets stood to attention when the UK consumer price index (CPI) came in lower than expected. Not only did yields on gilts drop quite sharply but other government bond yields also fell in sympathy, in the expectation that global inflation was now on an unstoppable downward trend. Although at 7.9% headline CPI and 6.9% core CPI, British inflation levels are still much higher than in other developed countries. The pound fell sharply and futures for Bank of England rates fell to 5.8% by next February, compared to 6.5% earlier this month.
Hopes of moderating global inflation were clearly behind the additional strength in risk markets, with British shares picking up a bid on a change of mood about Bank of England rates.
The Chinese currency, the renminbi, was propped up by the People’s Bank of China (PBoC) following further announcements by the authorities about easing home-buying restrictions in the largest cities. China’s 11-point plan to boost household spending without specific amounts has not helped local markets. Markets in Asia ex Japan keep underperforming with continued stress on companies in the property sector in China. Across the Sea of Japan, Bank of Japan (BoJ) officials did their best to dash hopes of any change in the BoJ’s monetary policy, which drove the yen significantly down on Friday.
Few comments came out of the other central banks, as US Federal Reserve (Fed) officials were in purdah ahead of their meeting this week, but markets paid some attention to US Treasury Secretary Janet Yellen’s comments on the labour market and inflation. She said a cooling, but not faltering, labour market is helping to slow US inflation. Economic data in the US was still mixed, showing strength in services and employment, but a weaker industrial mood with poor manufacturing and leading surveys.
Markets were also driven by the results announced by many reporting companies, mostly in the US, helping the hitherto languishing healthcare sector and trimming the technology complex buoyancy.
Despite a recovery in government bond yields on Thursday, gilt yields fell 16 bps over the week. Other bond markets, however, ended up stable, with US yields and eurozone yields mostly flat, as yields recovered from the mid-week lows. Gilts stand out compared to other government markets: 10-year gilt yields have fallen 40 bps from their peak.
The US dollar recovered somewhat as sterling and the yen slumped. This didn’t stop oil prices from staging a further recovery based on Chinese stimulus hopes.
At the end of the week, equities had a mixed week in local currency, but sterling-based investors enjoyed a good rally. The UK was the star, with the FTSE 250 doing even better than the FTSE 100, the strongest performance since January this year. US equities came second, helped by a broadening of sectors and companies among market leaders. Indeed, the best sectors globally were a mixture of defensive and cyclical, with energy, healthcare and financials at the top, whereas technology and its associated sectors (communications services and consumer discretionary) all did poorly. Financials and energy are now heading the list of best sectors this quarter.
The week ahead
Wednesday: Federal Open Market Committee of the US Federal Reserve
Our thoughts: once again, the Fed is likely to make waves not necessarily by hiking rates by 25 bps, which is widely expected, but by providing future guidance on their monetary policy. Markets are split as to whether the Fed will deliver its last increase this week or if a further rise is still possible. The commentary will be mined for hints on that issue, but also for some views on what the Fed would do if a recession was coming and hence how long they are likely to keep rates at their highest level. Treasury bonds have reacted to inflation data and equities have taken their cues from bonds as well.
Thursday: European Central Bank meeting
Our thoughts: it seems that markets are now assuming that the European Central Bank (ECB) will hike by 25 bps in July and then may or may not follow up with a subsequent rate increase in September-October – i.e., that it is coming up to the end of its rate cycle. As usual, ECB officials tend not to give much guidance for their future moves, so any colour delivered by President Christine Lagarde in her communication could move eurozone bond yields or the euro.
Thursday-Friday: Bank of Japan meeting
Our thoughts: have officials at the BoJ given us the outcome of this week’s meeting already? It seems that investors are being set up for another disappointment, whereby the Japanese yen may relinquish its recent surge. Nevertheless, many strategists think that it’s only a matter of time before the BoJ ‘tweaks’ its monetary policy, starting with the yield curve control in a mild way and eventually moving to interest rates. Will any of this we hinted at during this BoJ meeting? The three central bank meetings this week are likely to deliver some surprise somewhere, but it’s not clear exactly where.
The numbers for the week
Central banks/fiscal policy
Not much coming out of central bank officials, but the Bank of Japan looks unwilling to change its policy
Early in the week, there was a strong rally among eurozone government bonds, as a generally hawkish official of the European Central Bank (ECB) raised hopes of ECB rates ceasing their ascent soon. Klaas Knot said that there was no guarantee of any further tightening beyond the meeting this week. His colleague Ignazio Visco added that inflation could fall faster with lower commodity prices.
Despite noises from the Chinese authorities about further stimulus to the economy, the PBoC kept the five-year loan prime rate unchanged at 4.20% and the one-year loan prime rate at 3.55%. The PBoC did however intervene in the foreign exchange markets in support of the Chinese renminbi.
BoJ officials made a comment ahead of this week’s meeting, saying that they saw little need to act on the BoJ’s yield curve control policy despite stickier inflation.
Surveys driven by industry continue to be weak, such as the Leading Index and the Empire Manufacturing, but services are more buoyant and jobless claims seem to have arrested their downward path
Surveys: the Empire Manufacturing Index (NY State) fell from 6.6 to 1.1, whereas the Philadelphia Fed Business Outlook survey was almost unchanged at -13.5 vs. -13.7. New orders and employment were a tad weaker, but prices received soared from +0.1 to +23 which doesn’t bode well for the falling inflation theme.
The NY Fed Services Business Activity index moved up from -5.2 to 0.0.
The Leading Index continued its downward trend, dropping 0.7% in June, the 15th straight monthly fall.
Employment: jobless claims continued on their erratic path, with initial claims falling further from 237K to 228K, but continuing claims jumping from 1721K to 1754K.
Housing: housing starts fell 8.0% in June, from +15.7% the prior month. Building permits also fell 3.7% in June vs. +5.6%. Existing home sales slumped 3.3% in in June. Mortgage Bankers Association (MBA) mortgage applications rose 1.1% for the week ended 14th July. The National Association of Home Builders (NAHB) housing market index edged up from 55 to 56.
Consumer: retail sales disappointed in June, up 0.2% from +0.5% the previous month, with retail sales ex auto up 0.2% vs. 0.3%.
Industry: industrial production was down -0.5% in June, like the previous month, but manufacturing production was slightly worse at -0.3% vs. -0.2%. Capacity utilisation took a tumble from 79.6% (revised down to 79.4%) to 78.9%. Business inventories rose 0.2% in May, after +0.1%.
The good news on inflation was mostly relative to expectations, given how high the numbers still are. Consumer confidence and retail sales go in opposite directions.
Inflation: the CPI surprised on the downside, at 7.9%, down from 8.7%, and the core CPI went down to 6.9% from 7.1%. The producer price index (PPI) input (raw or intermediate inputs) is now heavily negative at -2.7% and the PPI output (factory gate prices) is up 0.1%, so the UK joins many other countries where the PPI is now flat to negative.
Housing: the house price index fell from 3.2% year-on-year to 1.9% in May.
Surveys: the GfK consumer confidence index fell from -24 to -30, the largest drop in over a year.
Consumer: retail sales had a strong month in June, rising 0.7% including auto fuel and 0.8% excluding auto fuel.
Public Finances: the public sector net borrowing worsened in June from £15.8 billion to £17.7 billion, albeit below expectations of a higher deficit.
Slightly better numbers and surveys
Growth: the eurozone construction output rose 0.2% in May for a +0.1% year-on-year growth from +0.4% the previous month.
Industry: EU27 new car registrations eased a little from 18.5% year-on-year to 17.8% in June.
Inflation: the German PPI fell 0.3% in June for a 0.1% year-on-year growth compared to +1.0% the prior month.
Surveys: French confidence surveys were mostly flat, with business confidence remaining at 100, manufacturing confidence at 100 as well, and the production outlook indicator also staying at -9, but the own-company production outlook dropped from +10 to -5. Eurozone consumer confidence improved a smidge from -16.1 to -15.1.
Japanese inflation goes against the global falling trend
Japan: the tertiary industry index (i.e. services) rose 1.2% in May, after 0.9% the previous month.
June exports were up 1.5% year-on-year, up from 0.6%, whilst imports fell further at -12.9% vs. -9.8%.
Japanese inflation disappointed, with the national CPI (consumer price index) up from 3.2% to 3.3% and the “core-core” CPI ex fresh food and energy down from 4.3% to 4.2%.
The Jibun Bank PMIs (purchasing managers indices) were very slightly lower with the manufacturing PMI down from, 49.8 to 49.4 and the services PMI from 54.0 to 53.9.
Oil rally defies stronger US dollar
Oil prices rallied on expectations of additional Chinese stimulus, whereas copper and industrial metals weakened against the backdrop of the rallying US dollar.
Wheat prices jumped by 15% in one day following the threat from Russia to attack ships sailing to Ukrainian ports. This had an impact on food-related equities, too. The price surge was partly corrected on Friday.
Gold caught a bid late in the week and managed to keep a small increase even with the stronger dollar.