The numbers for the week – 30 Jan 23
Markets last week
US and global stock markets were briefly knocked off course mid-week by tech giant Microsoft announcing softer future earnings guidance but quickly resumed this year’s bullish trend, with technology nevertheless leading and defensive sectors lagging.
A strong Q4 GDP print in the US and record low jobless claims buttressed expectations of an economic soft landing, with the total absence of speakers from the US Federal Reserve (Fed). Fed officials were indeed subject to a blackout period and could not comment, which might have made markets less cheerful on interpreting the data.
Against the backdrop of generally stable government bond yields, currencies and commodities, all the action last week was in equities. Although early quarterly earnings reports were mixed and did not beat forecasts in the same proportion as in previous quarters, companies that did well were more than handsomely rewarded by the market. As a result, US shares performed well compared to other regions, which had not been the case for weeks.
With three of the world’s four major central banks announcing changes to their monetary policies this week and all three expected to keep raising rates, government bond markets are still pricing in cuts in interest rates this year, which is acting as a tailwind for equities, in particular the growth sectors like information technology.
At the end of the week, the best countries were Asian markets, closely followed by the US, which was led by the megacap tech names (up near 10% in the week), and the worst was the FTSE 100. The best sector was technology, followed by financials and the worst were all the defensive areas (healthcare, consumer staples and utilities). US treasury yields were barely changed but gilt yields fell by 6 bps, going against a broad increase in European bond yields.
The US dollar was mostly unchanged after four months of weakness. Commodities remained steady, but on Friday, oil prices fell by 2%.
The week ahead
Wednesday: Fed meeting
Our thoughts: the Federal Open Market Committee (FOMC) is widely expected to downshift its rate hike to just 25 bps at this week’s meeting. Some Fed officials have endorsed that level of reduced rate rises this year so far, but others haven’t and the current blackout on public communications is making the tally more difficult to predict. To complicate matters, the FOMC tends to vote unanimously (unlike the Bank of England where 6-3 or even 5-4 votes are frequent) and it is rare to see a dissent with the Fed Chair. We are therefore not convinced that 25 bps is such a shoo-in for this week’s meeting. The recent strong GDP data, the stubbornly tight jobs market, added to the loosening of financial conditions due to the rallies in both bonds and equities, are likely to elicit at the very least a hawkish comment from Fed Chair Jay Powell, something that markets may not be fully ready for. A 50 bp hike rather than 25bp would obviously rattle Wall Street.
Thursday: ECB meeting
Our thoughts: the rhetoric from European Central Bank (ECB) President Christine Lagarde as well as many of her colleagues has turned quite hawkish recently, leaving markets to assume that the next meeting will deliver a 50 bp hike for each of the three policy rates (main refinancing rate, marginal lending facility rate and deposit facility rate – currently at 3.00%, 3.25% and 2.50%, respectively). It would obviously be a huge surprise if the outcome was any different, but the more important takeaway for investors should be the commentary around the rate increase and any guidance for future hikes. How much more in March and in May? Historically, the ECB has been hampered by dismal European economic growth and, at the beginning of this rate rising cycle, officials were concerned about a major recession ahead for the eurozone. As the region managed to store natural gas better than anticipated and the winter weather was milder than expected, the backdrop changed and led to more hawkish comments from ECB officials. How far will they go this time?
Thursday: BoE meeting
Our thoughts: it may seem narrow-minded to have three central bank meetings as the main events for this week, but ultimately all three meetings will matter enormously to investors and the Bank of England (BoE) could upset the applecart, like either of the other two. The expectation seems more straightforward that the BoE will hike by 50 bps from 3.5% to 4.0% but there is still quite a bit of uncertainty surrounding the vote. Officials voted in divergent directions not that long ago so there may still be some lingering differences of degree among them. The recent fall in producer prices will be welcome but hardly sufficient to change minds, given that CPI is still in double digits and higher than in most other G7 countries. Governor Andrew Bailey has been amazingly candid about the plight of the British economy in the last few months and could well deliver an unadulterated verdict again.
The numbers for the week
Central banks/fiscal policy
Policy message reiterated by ECB President. US Fed in a blackout period
European Central Bank (ECB) President Christine Lagarde said: “We will stay the course to ensure the timely return of inflation to our target. It is vital that inflation rates above the ECB’s 2% target do not become entrenched in the economy.” She said that staying the course is her “policy mantra”. “While energy inflation has recently been coming down, underlying inflation continues to rise.”
Whilst expectations are high for this week’s Fed meeting, its officials were in a ‘blackout period’ where public comments are not allowed.
Confusing surveys, rebounding housing sector, red-hot employment, inflation falling in line with expectations all add up to a mixed progressive slowdown of the US economy
Surveys: the Conference Board’s Leading Index (also known as Leading Economic Indicators) registered its tenth consecutive fall with a 1% drop in December, after -1.1% the previous month. The S&P Global manufacturing PMI was a little better at 46.8 vs. 46.2 with the services PMI showing a greater rebound, at 46.6 vs. 44.7. The Chicago Fed National Activity Index was little changed at -0.49 vs. -0.51.
The bellwether Philadelphia Fed non-manufacturing activity was better at -6.5 vs. -12.8, revised up from -17.1. The Richmond Fed manufacturing index, on the other hand, fell from +1 to -11 with the Richmond Fed business conditions index at -10 vs. -14. The Kansas City Fed Manufacturing Activity index was slightly improved at -1 vs. -4. The Kansas City Fed Services Activity index fell further from 0 to -11.
Inflation: the Personal Consumption Expenditures (PCE) deflator fell from 5.5% to 5.0%, with the PCE core deflator also down from 4.7% to 4.4%, both in line with estimates. The PCE core deflator is the gauge used by the Fed to measure inflation with a 2% target.
Housing: the MBA mortgage applications series had another good week, up 7.0%, from +27.9%. New home sales rebounded from a bad streak, rising 2.3%, better than the previous week at 0.7%. Pending home sales also rose 2.5% vs. -4.0% the prior month.
Growth: Q4 GDP was estimated at 2.9%, down from 3.2% the previous quarter, adding up to a 2.1% increase for all of 2022. Most of the quarterly growth, however, was derived from a jump in inventories, rather than consumer demand. Personal income in December eased to 0.2% from 0.4% the previous month and personal spending fell to -0.2% from 0.1%.
Trade: the trade deficit widened from US$82.9 billion to US$90.3 billion in December.
Industry: durable goods orders soared 5.6% in December, from -1.7% the prior month, although durables ex transportation were down -0.1% and capital goods orders non-defence ex-aircraft fell -0.2%.
Retail: retail inventories rose 0.5% in December, up from 0.0%.
Employment: once again, initial jobless claims fell from 192K to 186K, with continuing claims edging up from 1655K to 1675K, below the pre-COVID-19 average. Even the 4-week average, which is supposed to be less volatile, fell from 207K to 198K, indicating a historically low level of job losses.
Some improvement on producer inflation but economic surveys still depressed
Public finances: UK public finances deteriorated further in December. The Public Sector Net Borrowing Requirement surged from £18.8 bn to £26.6 bn.
Surveys: the CBI Trends reports were mixed, with total manufacturing orders at -17 in January vs. -6 in December, export orders at -22 vs. -19, stocks at +12 vs. +9, selling prices at +41 vs. +52 and business optimism at -5 vs. -48. The S&P Global manufacturing PMI rebounded somewhat from 45.3 to 46.7 and the services PMI fell from 49.9 to 48.0, below estimates.
The CBI distribution surveys were much weaker, with the total distribution reported sales down from -5 to -22 and the retailing reported sales slumping from +11 to -23.
The business sentiment index published by the Institute of Chartered Accountants in England and Wales slumped from -16.9 to -23.4, the lowest level since 2009.
Inflation: the Producer Price Index (PPI) kept falling, with the PPI output (factory gate prices) down to 14.7% in December, from 16.2% and 17.5% previously, and the PPI input (materials) down to 16.5% from 18.0% and 20.2%.
Surveys generally picking up in the eurozone and specifically Germany
Surveys: eurozone consumer confidence edged up slightly from -22.0 to -20.9. The S&P Global manufacturing PMI for the eurozone rose from 47.8 to 48.8 and the services PMI from 49.8 to 50.7.
In Germany, the GfK consumer confidence survey increased from – 37.6 to -33.9. The widely followed Institut für Wirtschaftsforschung (IfO) was somewhat mixed. The business climate gauge rose from 88.6 to 90.2, the current assessment gave up a little at 94.1 vs. 94.4 but the expectations reading surged from 83.2 to 86.4.
In France, business confidence lost a little from 103 to 102, manufacturing confidence picked up from 102 to 103, the production outlook indicator fell from -6 to -8 and the business survey overall demand dropped from 13 to 5. French consumer confidence fell to 80 from 81, revised down from 82.
Money Supply: M3 money supply in the eurozone fell to 4.1% year-on-year in December from 4.8% previously.
Surprising improvement in services survey in Japan
China: due to the Chinese New Year holiday, no statistics were published
Japan: the Jibun Bank manufacturing PMI was unchanged at 48.9 whilst the services PMI increased from 51.1 to 52.4. The Leading Index CI was softer at 97.4 vs. 97.6 but the Coincident Index rose from 99.1 to 99.3. The PPI (producer price index) for services eased from 1.7% to 1.5%.
Very quiet commodity markets, but oil prices corrected by 2% on Friday without major news items behind the move.