The numbers for the week – 3 Jul 23
Markets last week
After a risk-off week, last week saw the resumption of the bullish mood in markets to top off a strong but diverse first half of the year. Against the backdrop of better US economic data and continued hawkish central bank commentaries, equities recovered whilst bond yields rose. A sudden drop in US jobless claims, albeit for a bank holiday week, threatened to upend the progressive rise in claims that was anticipated to loosen the very tight US jobs market.
Once again, the contrast between buoyant US data and weak Chinese statistics kept investors away from Chinese equities, although expectations are mounting that the authorities will deliver a large stimulus package. The Japanese economy, however, seems to be going from strength to strength, which is supporting its market, though with the help of a weakening currency.
Strong US numbers tended to push bond yields upwards, but higher core inflation compared to the headline reading also contributed to that trend. The US personal consumption expenditures (PCE) fell sharply, but core PCE (which is the one followed by the US Federal Reserve (Fed)) was sticky. In the eurozone, core inflation actually rose.
The futures market is now reflecting a probable increase in the US Federal Funds rate of 30 bps by year-end (after the Silicon Valley Bank failure in March the forecast was for a 1% cut by year end!), bringing this market much closer to the Fed’s own publicly stated views on its rate policy outlook.
The European Central Bank (ECB) held its summer symposium in Portugal and the Heads of the US, UK and Japanese central banks joined in. The first three institutions reiterated their message of additional rate hikes to control inflation, whilst the Bank of Japan is still not contemplating any change in monetary policy.
The US dollar was generally the beneficiary of the US macro-economic surprises and the continued tough central bank language.
Over the week, government bond yields rose, in particular in the US, with the ten-year yield up 10 bps. UK yields were also higher, but the eurozone was more subdued, due to weaker data, especially in Germany.
Equities posted a strong week, with Europe leading and the US in tow, and emerging markets were at the bottom of the rankings, led by China. The best sectors were a combination of cyclical areas (energy, financials, materials, real estate) but also technology, with defensive sectors (healthcare consumer staples, utilities) lagging.
The week ahead
Monday: US ISM (Institute for Supply Management) manufacturing PMI (purchasing managers index)
Our thoughts: has the US economy really reaccelerated? The latest data would have us believe that, but the question is, which part of the economy has picked up? Housing seems to have bottomed recently and services have been strong for a while, so it will be interesting to note whether manufacturing might be responsible for the uptick. The best gauge of manufacturing activity is the ISM survey, which provides details by sector as well as employment, new orders, inventories, prices paid, etc. Economic surprises have been more positive of late, but is this confirmed by this important survey? The ISM services index is being released on Thursday and should complete the economic picture.
Wednesday: minutes of the US Federal Reserve June meeting
Our thoughts: few Fed meetings have been as thoroughly scrutinised as the June meeting, in which the decision was not to increase rates, but to signal the potential for further rates (known as a “skip” rather than a “pause”). Communications from that meeting were perceived as awkward and not entirely convincing, so the minutes will be dissected in great detail for clues on further monetary tightening. Given that the July meeting is “live”, i.e., expected to lead to a higher rate, investors would want to quantify the odds of that hike, and any other, by parsing through the minutes.
Friday: US employment data for June
Our thoughts: non-farm payrolls in the US have created an average of 325K jobs per month this year. This level has often been quoted by Fed speakers as incompatible with a low inflation target. The estimate for June payrolls is for some softening, but nowhere near the numbers the Fed thinks are non-inflationary. Details will also matter, such as the labour force participation rate, to assess whether there have been any new entrants into the job market, but also the average hourly earnings and the average weekly hours worked, for clues on the employment link to service inflation.
The numbers for the week
Central banks/fiscal policy
No let-up in fight against inflation for central banks
The ECB forum in Sintra, Portugal, gathered not only ECB President Christine Lagarde but also US Fed Chair Jay Powell, Bank of England Governor Andrew Bailey, and Bank of Japan Governor Kazuo Ueda. Billed as the European Jackson Hole (Jackson Hole, Wyoming, is the summer meeting venue for the Fed, in which policy ideas are discussed and aired), comments from its participants were as eagerly awaited as from Jackson Hole.
Jay Powell, Christine Lagarde and Andrew Bailey delivered a joint message that there was still quite a lot of work to do to stem high inflation. More specifically, Jay Powell signalled that the Fed might have to hike at the next two meetings: “inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go”. Christine Lagarde reiterated the intention to raise rates at the July ECB meeting. Andrew Bailey said that interest rates in the UK are likely to remain high for longer than markets are expecting. Only Governor Ueda struck a more dovish tone, saying that Bank of Japan policy would depend on how confident they were that Japanese inflation would stay high.
Separately, the 23 largest US banks passed the Fed’s annual stress test.
United States
Very strong week for economic statistics with better housing trends, a turn around in surveys, a potential halt to climbing jobless claims and headline inflation dropping way below core
Surveys: the Dallas Fed manufacturing activity index improved from -29.1 to -23.2. The Richmond Fed manufacturing index rose from -15 to -7, with business conditions up from -17 to -12. The Dallas Fed Services Activity Index jumped from -17.3 to -8.2.
The bellwether Conference Board consumer confidence survey was much stronger, at 109.7 vs. 102.5, with the present situation up from 148.9 to 155.3, and the expectations component from 71.5 to 79.3.
The Market News International Chicago PMI increased from 40.4 to 41.5, below estimates.
Inflation: the all-important PCE deflator gauge of inflation fell from 4.4% to 3.8%, but the PCE core deflator fell much less, at 4.6% vs. 4.7%. The PCE core deflator is the one followed most closely by the US Federal Reserve with a 2% target.
Industry: durable goods orders rose a strong 1.7% in May, up from 1.2% the prior month, with durable goods, ex transportation, up 0.6% from -0.6%.
Housing: the FHFA (Federal Housing Finance Agency) house price index was up 0.7% in April, from 0.5% the previous month. The S&P Core Logic CS house price index (formerly known as Case-Shiller) was up 0.91% in April for the 20-City index, down -1.7% year-on-year, with the broader index down -0.24% year-on-year. MBA (Mortgage Bankers Association) mortgage applications for the week ended 23 June were up 3.0% from 0.5% the previous week. New home sales surged 12.2% in May after a +3.5% month. Pending home sales bucked the trend, falling 2.7% after -0.4% the prior month.
Consumer: personal income in May rose 0.4% from 0.3% the previous month but personal spending was up only 0.1% vs. 0.6%.
Foreign Trade: the trade deficit for May was a little better, at US $91.1bn vs. US $97.1bn the prior month.
Retail: retail inventories rose 0.8% in May, whilst wholesale inventories lost 0.1%.
Employment: after some stability around the 260K level, initial jobless claims unexpectedly fell from 265K to 239K, the largest drop since October 2021, although this may have been affected by a bank holiday, with continuing claims at 1742K vs. 1761K.
Growth: the Q1 GDP growth number was upgraded from 1.3% annualised to 2.0%, driven by personal consumption up 4.2% and an upgrade in export data.
United Kingdom
Are there any green shoots? Borrowers seem to be paying down their mortgages
Surveys: the Confederation of British Industry retailing surveys were weaker than estimated, with total distribution reported sales down from -10 to -12, and retailing reported sales a tad better at -9 vs. -10.
The Lloyds business barometer rose from 27 to 38, the highest in 13 months.
Inflation: the British Retail Consortium shop price index fell from 9.0% year-on-year to 8.4%.
Credit: net consumer credit fell from £1.5bn to £1.1bn in May. Net lending secured on dwellings fell £0.1bn, the second negative month in a row, indicating that mortgage borrowers are repaying their loans. Mortgage approvals were slightly higher, at 50.5K vs. 49.0K.
Money Supply: M4 money supply increased 0.2% in May for a year-on-year 0.0%. However, the last three months annualised were still negative, at -1.9%.
Housing: the Nationwide house price index rose 0.1% in June, better than estimates, for a -3.5% year-on-year move. The annual drop, though, is the worst since 2009.
Europe
Generally weaker data, led by Germany. Inflation falls at the headline level but rises for the core reading
Surveys: in the eurozone, confidence was lower. Economic confidence fell from 96.4 to 95.3, consumer confidence stayed at -16.1, industrial confidence dropped from -5.3 to -7.2, and services confidence from +7.1 to +5.7. The German IFO (Institute for Economic Research) survey dropped sharply: expectations fell to 83.6 from 88.3, way below estimates, due to weakness in manufacturing, with the business climate down from 91.5 to 88.5, whereas the current assessment was a little more stable at 93.7 vs. 94.8. The GfK German consumer confidence survey fell from -24.4 to -25.4.
On the other hand, French consumer confidence rose from 83 to 85.
Money Supply: eurozone M3 money supply grew 1.4% year-on-year in May, down from 1.9% the previous month.
Inflation: the CPI for the eurozone fell from 6.1% to 5.5%, but with the core CPI (ex energy, food, alcohol, and tobacco) increasing from 5.3% to 5.4%. Inflation expectations within the eurozone fell to a seven-year low, at 6.1 vs. 12.1 previously.
Employment: the eurozone unemployment rate in May remained unchanged, at 6.5%.
Consumer: German retail sales in May rose 0.4%, for an improved year-on-year fall of -5.1% vs. -8.4% the prior month. Consumer spending in France was up 0.5% during May for a year-on-year fall of 3.6%, better than the previous -4.3%.
Better data in Japan but China is stalling
China: industrial profits were down year-on-year in May but registered an improvement from -18.2% to -12.6%.
The official PMI (CFLP) was mixed, with the manufacturing PMI improving slightly from 48.8 to 49.0, and the non-manufacturing PMI falling from 54.5 to 53.2, the third decline in a row and the lowest level this year. The unofficial Caixin manufacturing PMI was weaker at 50.5 vs. 50.9, albeit above estimates.
Japan: retail sales jumped 1.3% in May for a year-on-year growth of 1.3%, from -1.1% previously. Consumer confidence edged up from 36.0 to 36.2. The jobless rate in May remained at 2.6% with the job-to-applicant ratio barely changed from 1.32 to 1.31.
Industrial production in May fell 1.6% for a year-on-year growth of 4.7%, up from -0.7%. Housing starts in May defied expectations by jumping 3.5% year-on-year, up from -11.9% the previous month.
Oil/Commodities/Emerging Markets
Rebound in oil
A slightly stronger US dollar crimped commodity returns, but oil prices still managed to post a rebound from previous drops, without specific news on the sector. Weak Chinese data hit copper and industrial metals. Gold fell quite sharply during the week to below US$1,900 but recovered to almost flat on Friday.
