Markets last week

President Biden had his first press conference last week after 65 days in office. He promised to double the goal of 100 million COVID-19 jabs during his first 100 days in office. He pledged to reach 200 million by the deadline, which is good, since US COVID-19 cases are rising again – reversing course after months of decline – due to: more easily transmitted variants, the premature loosening of restrictions and widely flouted precautions. His next fiscal package has also been leaked and it looks larger than the previous one, but over 10 years as opposed to one year and with tax hikes to finance most of it, so markets are not completely sure about its impact yet.

Once again, US Federal Reserve Chair Jay Powell reiterated the Federal Reserve’s (Fed) monetary policy objectives, this time joined by Treasury Secretary Janet Yellen, who was his predecessor at the Fed. Bond markets experienced a pause in the strong rise in yields.

The tanker stranded in the Suez Canal is expected to cause some further disruption in global shipping. Most markets will write it off as a short-term bump, but in addition to oil and commodities, it looks like coffee might be disrupted. There might also be some industrial bottlenecks that will add to already rising inflation in the next couple of months.

Once again, February data in the US were tainted by the snowstorms, but surveys were strong in the US, the UK, Europe and Japan. Employment improved a little in the US and the UK. Despite expectations of higher inflation, so far these have failed to materialise anywhere, although the next three months are key for that concern.

Markets had a further wobble last week but recovered towards the end, with US equities leading and emerging markets lagging, mostly due to the 15% correction in Chinese equities since the Chinese New Year. The US dollar was well bid, sterling recovered from a drop early in the week and government bond yields were globally lower during the week.

The week ahead

Wednesday: eurozone CPI (consumer price index) estimate for March

Our thoughts: Will this provide the first signal of higher inflation this year? The eurozone’s estimate of March CPI should be a good guide of what we are likely to see in other countries for the first month where the comparison with last is likely to boost inflation significantly. Expectations are for headline CPI to rise from 0.9% to 1.4% and for the core reading to increase less from 1.1% to 1.3%. The European Central Bank has what appears to be an unachievable target of 2%. How much closer are we going to get to that goal in the next few months? US inflation is more likely to soar than European inflation but the first ‘whites of their eyes’ sight will be provided this week by the eurozone.

Thursday: US ISM (Institute of Supply Management) manufacturing PMI

Our thoughts: the ISM survey is always a good reflection of US manufacturing activity on a ‘live’ basis. The last few months have been exceptionally strong and the question is whether we will see a plateau or a peak. The expectation is for a stonking 61.0 reading for the ISM manufacturing PMI. Almost more important than the headline number is the detailed breakdown. Employment last month rose above 50.0 for the first time and sat at 54. Will that improvement continue? Jobless claims are receding but very slowly. What will the ISM survey tell us? Equally crucial will be the Prices Paid series. The last level, at 86, was a precursor of soaring inflation in manufacturing. Will this nosebleed number subside or even keep rising? This will move inflation expectations and hence many markets (bond yields, value vs. growth equities, etc.).

Friday: US employment data for March

Our thoughts: jobless claims in the US have fallen but disappointed somewhat. Will the jobs creation be stronger this month or do we have to wait until a fuller reopening of the economy? The expectation is for a very high 600K non-farm payroll number, compared to 379K last month, with all of the new jobs coming from private payrolls, rather than government payrolls and most in the services sectors rather than manufacturing. The details will matter to the markets. Also, in light of Fed Chair Powell’s repeated statements on trying to get unemployment down to pre-COVID-19 levels, the focus will be on unemployment (U-3) which is expected at 6%, but more importantly, underemployment (U-6) which was 11.1% at the last reading. How long will it take for these numbers to get down to where the Fed would start to think about raising rates? All grist to the market’s mill.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Biden‘s next spending package likely to include tax increases

President Biden is likely to propose US$3trn of new spending for structural changes, such as infrastructure, climate change, education and paid family leave. There are likely to be large tax increases, however, which could mean raising the corporate tax rate to 25%, raising taxes on individuals making over US$200,000 and households over US$400,000, plus capital gains and dividend tax increases.  

In front of the US House Financial Services Committee, together with Treasury Secretary Janet Yellen, Federal Reserve Chair Jay Powell noted that “a transitory rise in inflation above 2% would not meet” the Fed’s revised standard. “It’ll turn out to be a one-time sort of bulge in prices, but it won’t change inflation going forward” and won’t get the Fed “suddenly to change to another policy regime”.

Powell’s definition of full employment has broadened from targeting low unemployment to a more “broad-based and inclusive goal. The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit. In particular, the high level of joblessness has been especially severe for lower-wage workers in the service sector and for African Americans and Hispanics”. He also said that tapering asset purchases would not happen that soon: “As we make substantial further progress toward our goals, we’ll gradually roll back the amount of Treasury and mortgage-backed securities we’re buying. And then in the longer run, we’ve set out a test that will enable us to raise interest rates.”

One of his Fed colleagues, Dallas Federal Reserve President Robert Kaplan, took a different view, as the stimulus moved him to argue for a partial withdrawal of monetary support starting in 2022 (meaning that a rate hike could happen next year). He said he was one of four Fed officials expecting an increase in 2022.”

United States

Dismiss storm-hit February data. Surveys are strong

Housing: existing home prices continue to soar thanks to record low inventory, even though existing home sales fell 6.6% in February, again due to the exceptional weather. Sales of new homes declined in February to a 9-month low. Purchases of new single-family homes decreased 18.2%, the sharpest fall since July 2013. Still, the pace of new home sales remains 8.2% year-on-year and the median price for an existing single-family home rose 16.2% year-on-year in February to a record high of US$317,100. A year ago, this inflation rate was 8.3%. This is due to a severe shortage in the supply of existing homes as well as mortgage rates near record lows.

Industry and trade: durable goods orders fell 1.1% in February, well below the 0.5% estimate. Orders ex-transportation fell 0.9%, also well below expectations. The advance goods trade balance increased from a deficit of US$84.6bn to US$86.7bn.

Surveys: the Markit US manufacturing PMI at 59.0 indicates continued expansion and the services PMI at 60.0 also indicates momentum, with pricing pressures continuing to mount. The Kansas City Fed manufacturing activity index was slightly higher at 26 vs. 24. The University of Michigan sentiment survey rose from 83.0 to 84.9, with both the current conditions rising from 91.5 to 93.0 and the expectations from 77.5 to 79.7.

Employment and income: jobless claims are falling but slowly. Initial claims fell to 684K from 781K, below estimates of 730K. Compared with the previous cycle, though, 655K was the high, so the numbers are still inordinately high. Personal income slumped 7.1% in February and personal spending fell 1.0%. Both numbers were doubtless affected by the February storm.

Inflation: the PCE (personal consumption expenditures) deflator rose from 1.4% to 1.6%, whereas the PCE core deflator fell from 1.5% to 1.4%. The University of Michigan survey inflation gauge for 1 year remained at 3.1% whereas the 5-10-year reading edged up from 2.7% to 2.8% .

United Kingdom

Stronger PMIs but lower inflation (so far)

Employment: the ONS (Office for National Statistics) said that payrolls in the UK increased by 68K in February but have still fallen by 693K from February 2020. The claimant count rate was 7.5% vs. 7.2% the previous month. The employment change over 3 months to January fell by 147K, a little better than estimates, with the ILO unemployment rate down to 5.0% from 5.1%, but these are older numbers. Job vacancies rose by 600K over the 3 months to January, showing resilience in the employment market. The extension in the furlough scheme is also shaving the expected peak of unemployment by about 400K this year from 2.6 million to 2.2 million.

Inflation: the CPI (consumer price index) fell to 0.4% in February, from 0.7% in January, well below estimates. Core inflation fell to 0.9%, from 1.4% in January, also below expectations, most of it due to temporary weakness in clothing prices.

Manufacturing: the CBI total orders balance rose to -5 in March, from -24 in February, well above estimates. Price expectations jumped to +20 in March, from +3 in February, indicating that manufacturers are starting to pass on higher costs to customers.

Housing: the official house price index fell by 0.5% in January, although, seasonally adjusted, it was unchanged. Year-on-year growth eased to 7.5%, from 8.0% in December.

Retail sales: the CBI’s survey reported sales balance remained at -45 in March, below estimates. Retail sales volumes, however, rose 2.1% in February, including auto fuel, in line with expectations (excluding auto fuel up 2.4%). Year-on-year growth increased to -3.7%, from -5.9%, slightly below expectations.

Surveys: the services PMI increased to 56.8, from 49.5, above estimates of 51.0. The manufacturing PMI also rose to 57.9, from 55.1, above estimates of 55.0. The data were collected between 12-22 March, reflecting rising business confidence. The output price index in the manufacturing survey rose very sharply though, to 63.7, its highest level since April 2011, pointing to higher inflation.

Europe

Better surveys all round

Surveys: manufacturing PMIs were very strong, up from 56.1 to 58.8 for France, from 60.7 to 66.6 for Germany and from 57.9 to 62.4 for the eurozone. Services PMI were also higher, from 45.6 to 47.8 for France, from 45.7 to 50.8 for Germany and from 45.7 to 48.8 for the eurozone. Lockdowns are likely to drag these numbers down.

The eurozone consumer confidence rose to -10.8 in March, from -14.8 in February, well above estimates. The GfK consumer confidence index in Germany rose to -6.2 in April, from a revised -12.7 in March, also above expectations. The headline manufacturing confidence index in France was unchanged at 98 in March, whereas the business confidence gauge jumped to 97, from 90 in February, well above expectations. All these improved numbers may be reversed soon due to the further lockdowns.

The IFO business climate index in Germany rose to 96.6 from 92.7, with expectations driving most of the increase from 95.0 to 100.4, with the current assessment up from 90.6 to 93.0.

China/India/Japan/Asia

Japan slowly recovering

China: no meaningful statistics were published. The Chinese stock market had a very poor month, falling some 15% from the pre-Chinese New Year peak. A recovery on Friday seems to have stopped this movement.

Japan: the leading index eased a little from 99.1 to 98.5 but is still way above pre-COVID-19 levels. The coincident index fell from 91.7 to 90.3. The Jibun Bank manufacturing PMI edged up from 51.4 to 52.0 and the services PMI from 46.3 to 46.5, still below the threshold between contraction and expansion.

Oil/Commodities/Emerging Markets

After a quick 5% run-up of oil prices early in the week due to a large tanker getting stuck in the Suez Canal, crude prices subsided and then recovered further. Many commodities are expected to have some supply interruptions due to the crisis, as 12% of world trade is going through the waterway. At the end of the week, Brent oil was flat; copper and gold fell less than 1%.