The numbers for the week – 27 Mar 23
Markets last week
The week’s highlight was various central bank meetings with interest rate increases in tow, but the market’s focus was evidently on the Wednesday meeting and commentary from the US Federal Reserve (Fed). Prior to the announcement and statement, investors were quite bullish on equities, anticipating a pause in rate hikes from the Fed after an a widely anticipated 25 bp increase last week, as well as flexibility on future movements, therefore with the possibility of rate cuts this year.
Fed Chair Jay Powell did indeed hint at a possible pause on rate hikes, with a change in the language from “ongoing increases will be appropriate” to “some additional policy firming may be appropriate” and indeed the Fed’s own forecasts for future rates only showed one more rise. The expectation of future cuts, however, was dashed as Fed officials did not see any need for a decrease this year, although they pencilled in some reductions for next year.
Fed Chair Powell duly gave reassurance about the US banking system being “safe”, although some of his statements clashed with comments made by US Treasury Secretary Janet Yellen in terms of potential actions to support regional banks and their depositors.
The market’s reaction was somewhat schizophrenic, with Federal funds futures openly disagreeing with Fed forecasts and pricing in nearly 1% of rate cuts this year, bond yields falling further but equities starting to register some concerns with the path ahead.
On Friday, European markets were in turmoil due to worries about Deutsche Bank and a few other large European lenders, as Deutsche Bank’s credit default swaps surged, reflecting concerns about high exposure to corporate lending. US equities, though, recovered to finish the week in positive territory.
In the UK, the consumer price index (CPI) provided yet another shock, rising to 10.4% against expectations of a fall. The Bank of England (BoE) provided another rate hike of 25 bps as per consensus. The British economy seemed to be on the up with stronger retail sales, although surveys are less optimistic. BoE Governor Andrew Bailey did however feel compelled to warn companies wanting to raise prices that higher interest rates would ensue if inflation became “embedded”.
The eurozone services purchasing managers index (PMI) soared, causing a few officials at the European Central Bank (ECB) to make hawkish comments about interest rates in the region.
Economic data in the US did not have a big impact on markets, but both the manufacturing and services PMIs surged, indicating no major loss of growth momentum for the time being.
At the end of the week, bond yields were fairly stable, despite the day-to-day volatility in rate expectations. The US dollar weakened, despite a last-minute rally on Friday.
Commodity prices recovered from drops this month, with industrial metals especially buoyant. Gold took a pause from its recent strength.
In equities, markets finished the week positive, with European shares ahead but UK smaller companies and Japan lagging. Once again, the technology sector was among the winners, joined by consumer staples, energy and materials, with real estate and utilities negative.
The week ahead
Thursday: Chinese PMIs
Our thoughts: can China keep its momentum, or was the post-lockdown surge in economic activity a flash in the pan? The purchasing manager indices (PMIs) in China should give us some answers. It is clear that services activity has picked up more than manufacturing because companies were still more or less fully operating during the lockdowns, whereas consumers were not free to go out and spend – and this is now being rectified. How much staying power, however, is there in these trends unless the authorities further stimulate the economy?
Friday: eurozone CPI
Our thoughts: given the strength of the services PMI in the eurozone, there must be some valid concerns about the stickiness of inflation in Europe too, not just in the US and the UK. Indeed, the expectation seem to be for a small drop in the headline consumer price index (CPI) but an increase in the core CPI (ex food, energy, alcohol and tobacco), which could worry the ECB.
Friday: US PCE deflator
Our thoughts: the US personal consumption expenditures (PCE) deflator is different from the better-known CPI but the core PCE reading is the gauge used by the Fed to target inflation in the US. Given not just the recent change in mood at the Fed regarding how high rates are likely to go, but also its steadfastness in keeping rates at their peak for all of this year, the most recent core PCE will be of heightened importance for Fed officials and indeed should have a large impact on markets. The current estimate is for a small fall in the headline PCE deflator but an unchanged core PCE, reflecting the sticky services inflation. Any change from these expectations could be market moving.
The numbers for the week
Central banks/fiscal policy
Central banks hike everywhere (except for China) but has the Fed signalled an end soon?
The Fed hiked interest rates by another 25 bps to a range of 4.75%-5.00%. A significant change in the language used by Fed Chair Powell pointed towards a peak in rates earlier than anticipated. The previous statement was: “the Committee anticipates that ongoing increases in the target range will be appropriate,” whereas the new comment was “the Committee anticipates that some additional policy firming may be appropriate”.
The Fed Open Market Committee (FOMC) provided updated forecasts for future interest rates, economic growth, inflation and unemployment. The so-called ‘dot plots’, where all FOMC members forecast future rates, showed one additional 25 bp hike ahead and then no more for the rest of this year, followed by cuts next year. The forecast calls for higher unemployment this year and next.
Later in the week, Atlanta Fed President Raphael Bostic emphasised that the decision to hike in the middle of a banking crisis “was not taken lightly” and his colleague St Louis President James Bullard stressed that financial stability and high inflation can be dealt with simultaneously through different policies. Richmond Fed President Thomas Barkin said “inflation is high. Demand hadn’t seemed to come down. And so, the case for raising was pretty clear.” Minneapolis Fed President Neel Kashkari struck a different note about the banking turmoil and a possible recession, saying: “It definitely brings us closer”.
The Bank of England (BoE) voted by 7-2 to raise interest rates by 25 bps to 4.25% after the jump in inflation to 10.4%. Although the accompanying statement was relatively dovish, the next day the BoE Governor Andrew Bailey warned companies trying to raise prices that interest rates might have to increase further to counter that movement. “If we get inflation embedded, interest rates will have to go up further, and higher inflation really benefits nobody”.
The Swiss National Bank hiked by 50 bps and the Norges Bank (Norwegian Bank) by 25 bps.
The People’s Bank of China (PBoC) kept its prime rates unchanged, with the 5-year loan prime rate at 4.30% and the 1-year loan prime rate at 3.65%.
Confusing surveys, better housing data, industry softening but employment still very strong
Surveys: the Philadelphia Fed non-manufacturing activity index dropped from +3.2 to -12.8.The Kansas City Fed manufacturing activity index stayed at 0 but the Chicago Fed national activity index dropped from +0.23 to -0.19, a large move for that survey. The Kansas City Fed services activity index fell from +1 to -4.
The S&P Global purchasing manager indices (PMIs) were much stronger than anticipated, with the manufacturing PMI up from 47.3 to 49.3 and the services PMI from 50.6 to 53.8.
Housing: existing home sales for February surged 14.5% from a -0.7% previous fall. New home sales, however, rose only 1.8% after the previous month’s number was revised down substantially from 7.2% to 1.8%. Mortgage Bankers Association (MBA) mortgage applications for the week ending 17 March rose 3%.
Employment: jobless claims remained stuck at a very low level, with initial claims at 191K vs. 192K the week before, and continuing claims at 1694K vs 1680K.
Industry: durable goods orders in February fell 1%, the second drop in a row, and excluding transportation they were flat.
Once again, inflation is a worry but the consumer seems undeterred
Inflation: inflation disappointed in February when economists were expecting a drop. The consumer price index (CPI) rose to 10.4% from 10.1%, with core CPI (ex energy, food alcohol and tobacco) also rising to 6.2% from 5.8%. The producer price index (PPI) was a little better behaved, with the PPI input falling from 14.7% to 12.7% and the PPI output from 13.5% to 12.1%.
Public finances: after an extraordinary January surplus which allowed the Chancellor to deliver a giveaway budget, February public finances reverted back to a large deficit of £15.9bn for the Public Sector Net Borrowing Requirement.
Housing: the house price index fell sharply in January from 9.3% year-on-year to 6.3%.
Surveys: the GfK consumer confidence index was slightly better at -36 vs. -38. The Confederation of British Industry (CBI) Trends surveys worsened somewhat, with total orders down from -16 to -20 and selling prices falling from +40 to +25.
The S&P Global/CIPS PMIs (purchasing manager indices) were weaker than expected with the manufacturing PMI falling from 49.3 to 48.0 and the services PMI from 53.5 to 52.8.
Retail: retail sales were buoyant in February, up 1.2% including auto fuel and 1.5% excluding auto fuel, after +0.9% the prior month.
Drops in surveys, except for stronger services PMI
Industry: EU27 car registrations improved slightly in February to 11.5% year-on-year vs 11.3%.
Construction: the eurozone construction output rose 3.9% in January, up from a negative December.
Surveys: the ZEW survey for the eurozone dropped from 29.7 to 10.0 for the expectations component. In Germany, expectations fell from 28.1 to 13.0 and the current situation remained very weak at -46.5 vs -45.1.
Eurozone consumer confidence was almost unchanged at -19.2 vs-19.1.
The S&P Global eurozone PMIs were mixed, with the manufacturing PMI dropping from 48.5 to 47.1 but the services PMI unexpectedly soaring from 52.7 to 55.6.
Inflation: the German producer price index (PPI) fell from 17.6% to 15.8%, albeit higher than estimates.
Chinese industrial profits not a good start for the reopening economy
China: industrial profits slumped a massive 22.9% year-on-year.
Japan: the national consumer price index (CPI) fell from 4.3% to 3.3%, but the gauge followed by the Bank of Japan, the core CPI ex fresh food and energy, actually rose from 3.2% to 3.5%. PMIs were slightly better, with the manufacturing PMI up from 47.7 to 48.6 and the services PMI up from 54.0 to 54.2.
The producer price index (PPI) services edged up from 1.6% to 1.8%.
Strength in metals and energy
Oil finally recovered after this month’s large falls. Industrial metals were also much stronger, with copper up 4%.
Gold took a pause from its recent strength, but recovered after the Fed meeting which indicated a softer path ahead for interest rates.