The numbers for the week – 29 May 23
Markets last week
There were huge movements in the markets last week, based on various events and developments: the US debt ceiling negotiations, the shocking UK inflation print, a China Covid flare-up, as well as a wealth of economic data, in particular in the US.
US debt negotiations sounded more hopeful, culminating in an announcement over the weekend, although little comment has been made yet on how the liquidity picture will change after the deal is approved, so some uncertainty still lies ahead. The positive vibes moved US markets from Thursday onwards, and we are yet to see the reaction to the announced deal, with the US market closed yesterday for Memorial Day.
The negative UK inflation surprise had an impact not just on British equities, gilts, and sterling, but on other bond markets due to fears of sticky inflation globally. UK rate futures are now expecting Bank of England rates at 5.5% by year-end compared to the current 4.5%. Gilt yields rose very sharply (34 bps over the week), back to the levels of the Liz Truss government, with the difference being that sterling is much higher, so the issue appears to be specifically inflation related.
In sympathy, US Federal Reserve (Fed) fund futures also corrected sharply and are suggesting one more 25 bp hike, either in June or July, and a potentially much smaller reduction in rates afterwards, with 5% forecast on Fed funds by year-end (after being as low as 3.7% at the time of the Silicon Valley Bank – SVB – failure). This was reinforced on Friday by the high PCE (personal consumption expenditures) inflation print, which pushed US treasury yields higher in the expectation of further monetary tightening. The two-year treasury security rose to a yield of 4.56% compared to a low of 3.77% during the SVB turmoil.
There was a muted announcement of the latest Covid flare-up in China, but several articles indicated a possible 65 million new infections per day. This had an impact on Chinese equities, Chinese bond yields and the Chinese currency (Renminbi), but also more broadly on copper (down 1.4% over the week even after a Friday recovery), other industrial metals, iron ore, as well as European equities and cyclical sectors. The European luxury sector suffered a short, sharp fall mostly driven by Chinese consumption concerns.
The US dollar had another strong week, despite a small recovery in sterling on Friday after buoyant UK retail sales.
On the economic front, PMIs (purchasing manager indices) globally were quite resilient, but the gap between manufacturing and services has seldom been greater, indicating that industrial sectors are reacting much more to higher interest rates than the consumer in a world of tight job markets and high savings.
After their communications blitz the previous week, US Fed officials were less conspicuous, as were other central bank officials, but the concept of the Fed “skipping” a hike in June rather than pausing has now been widely floated.
In light of the above developments, US equities did better than the rest of the world, amid otherwise poor developed market returns, once again led by the technology sector projecting significant increases in AI (artificial intelligence) growth. The tech complex is the only sector up last week, this month and this quarter, and by a huge margin, whilst the difference between the returns of US market capitalisation indices and equal-weight indices has increased to the highest level since 1999.
Other equities fared less well, with the European fast-track sector, luxury, taking a tumble on Chinese consumer concerns. The UK and Chinese markets were also weaker, and Japan broke its recent uptrend.
Yesterday, the US and UK markets were closed but the rest of the world was open. European and Asian shares generally fell but Japan was positive.
The week ahead
Wednesday: Chinese PMIs
Our thoughts: China has been on a roller coaster ride over the last year, from lockdowns to a reopening of consumer spending, to a disappointing stagnation of such activity, to yet another wave of the Covid infection, which is threatening to stall the economy further. Chinese consumers have not fully embraced their ability to spend, due to their concerns about the property market, youth unemployment and lack of support from the authorities. Will any of this be reflected in the manufacturing and non-manufacturing PMIs, both the official (CFLP) and the unofficial (Caixin) versions? As in the West, services appear to be more resilient than manufacturing, but will that still be the case this month?
Thursday: ISM manufacturing index in US
Our thoughts: out of many surveys published in the US this week (Conference Board, MNI Chicago, Dallas Fed Services), we select the ISM (Institute for Supply Management) as the most meaningful driver of risk appetite, due to the wealth of details it provides on the real economy. Prices paid, employment, new orders, and inventories give us a colourful picture of the state of manufacturing in the US, followed next week by the same analysis of the services economy.
Friday: US employment data for May
Our thoughts: US employment still appears to be booming, in spite of the 5% interest rate increases by the Fed. Clearly, this is contributing to the sticky inflation prints recently seen. Will May’s numbers surprise on the upside, as April’s did? Where will the new jobs be created? Are these areas that are liable to foster inflationary pressures? Will the labour force participation rate give any indications of a possible exhaustion in new entrants into the jobs market? And what about average hourly earnings?
The numbers for the week
Central banks/fiscal policy
Quiet week on the central bank front
After a week of extreme communication to the markets, US Fed officials were more subdued in their messages about monetary policy.
On Friday, following the high inflation print, Cleveland Fed President Loretta Mester reiterated her view that progress had been made on inflation, but that it was still too high and concerning, that “data has underscored that the economy is resilient”. She mentioned that everything was “on the table” for the June Fed meeting.
The Chief Economist of the European Central Bank (ECB), Philip Lane, commented on the work left to be done to bring inflation down: “we expect to turn the corner, but I wouldn’t say we’ve reached that corner yet. We do think that this spectacular reversal of energy prices will feed into the core, but timing is uncertain.”
United States
US economy looks resilient, with bullish consumer spending and durable goods, but PCE inflation is quite sticky
Surveys: the Philadelphia Fed non-manufacturing activity index improved from -22.8 to -16.0. The Richmond Fed manufacturing index fell from -10 to -15 whilst the Richmond Fed business conditions increased from -27 to -17. The Chicago Fed National Activity Index was better, at +0.07 vs. -0.37. The Kansas Fed manufacturing activity index improved from -10 to -1. The Kansas City Fed Services Activity index fell from 7 to 3.
The S&P Global manufacturing PMI dropped from 50.2 to 48.5, but the services PMI rose from 53.6 to 55.1.
The revision of the University of Michigan sentiment index was positive, rising from 57.7. to 59.2.
Housing: new home sales surprised on the upside, rising 4.1% in April after an equally strong 4% month. Pending home sales, though, were flat for the month after -5.2% previously.
Employment: the weekly jobless claims series was revised down by 14K per week by the State of Massachusetts, after fraudulent claims. As a result, the previous week’s initial claims were re-set at 225K, and rose to 229K last week, with the continuing claims down from 1799K to 1794K.
Inflation: the widely expected PCE disappointed, rising from 4.2% to 4.4%, with the core PCE (which is the Fed’s gauge) up from 4.6% to 4.7%.
Industry: April durable goods orders were buoyant, up 1.1%, after 3.3%, but ex transportation they fell 0.2%.
Consumer: personal income rose 0.4% in April, up from 0.3% previously, with personal spending surging 0.8% from 0.1%. Retail inventories increased 0.2% but wholesale inventories fell 0.2%.
United Kingdom
Shocking sticky core inflation, weaker surveys, but better retail sales
Public Finances: the public sector net borrowing requirement (PSNBR) rose from £20 billion to £24.7 billion in April.
Surveys: the S&P Global/CIPS manufacturing PMI fell from 47.8 to 46.9, with the services PMI remaining quite high at 55.1 vs. 55.9.
The Confederation of British Industry (CBI) trend reports were fairly stable, with the total orders better at -17 vs. -20, and the selling prices lower at 21 vs. 23. The CBI sales surveys were less cheerful, with retail reporting sales down from +5 to -10 and total distribution reported sales down from +11 to -10.
Inflation: surprising upside on core inflation and sticky headlines compared to expectations. The CPI fell from 10.1% to 8.7%, with the core CPI (ex energy, food, alcohol and tobacco) actually rising from 6.2% to 6.8%. The PPI (producer price index), on the other hand, fell quite sharply from 8.5% to 5.4% for the PPI output and 7.3% to 3.9% for the PPI input. The BRC (British Retail Consortium) shop price index continued to rise, up 9% year-on-year vs. 8.8% last month.
Housing: the house price index fell from 5.8% to 4.1% in March.
Consumer: retail sales were strong in April, up 0.5% including auto fuel and 0.8% excluding auto fuel.
Europe
Generally weaker surveys
Surveys: eurozone consumer confidence was almost unchanged at -17.4 vs. -17.5. The HCOB (formerly S&P Global) manufacturing PMI fell further from 45.8 to 44.6, whilst the services PMI remained at a high level of 55.9 vs. 56.2.
The Institut für Wirtschaftsforschung survey in Germany worsened, with the business climate down from 93.4 to 91.7, the current assessment from 95.1 to 94.8 and the expectations slumping from 91.7 to 88.6. Also in Germany, the GfK consumer confidence was a smidge better at-24.2 vs. -25.8. In France, consumer confidence was unchanged at 83, business confidence fell from 102 to 100, manufacturing confidence from 101 to 99, and the production outlook indicator from -4 to -10.
Construction: construction output in the eurozone fell 2.4% in March after a positive +1.7% month.
Japanese surveys doing better than in other developed countries
China: industrial profits in April were slightly less gloomy, down 20.6% year-on-year, vs. -21.4% the prior month.
Japan: the Jibun Bank manufacturing PMI increased from 49.5 to 50.8, above the 50 threshold between expansion and contraction, whilst the services PMI rose further from 55.4 to 56.3.
The PPI eased from 1.7% to 1.6%. The jobless rate fell from 2.8% to 2.6% as the job-to-applicant ratio remained at 1.32.
Oil/Commodities/Emerging Markets
Industrial metals were the big losers last week
Oil prices continued their mild recovery against the backdrop of heavy falls in industrial metals, especially caused by fears of a Chinese Covid-related slowdown. Copper lost 1.4% after a Friday recovery, as other industrial metals and iron ore also succumbed to these concerns.
The gold price was remarkably resilient given the meaningful rise in government bond yields and the stronger US dollar, ending the week down 1.6% and breaking the US$1,950 level.
