The numbers for the week – 31 Jul 23
Markets last week
The three central bank meetings last week did not leave investors unstirred. With a little lag, the meeting of the US Federal Reserve (Fed) was perceived by risk markets as a sign of the end of the Fed’s hikes, and the start of a long pause ahead. Fed fund futures are still pricing in a 1/3 chance of a further hike in September or November, but equities took their cue from the seemingly more dovish language by Fed Chair Jay Powell. The move interrupted the country and sector rotation seen this quarter to date in equities and brought market leadership back to technology and large companies.
The picture painted by many investors was one of a ’Goldilocks‘ environment, where economic growth is strong enough (boosted by a 2.4% estimated growth rate in the US for Q2) to fuel higher earnings, but not too strong so as to upset the Fed and bring higher rates in its wake (personal consumption expenditures (PCE) inflation fell below projections). Goldilocks is generally associated with bullish equity markets and indeed the response late last week was positive across the board, although other parts of the world benefited more than the US.
Interestingly, the Fed meeting, in which the tone was more dovish than expected, led to higher US treasury bond yields, whereas the European Central Bank (ECB) meeting, which sounded more hawkish, helped eurozone bond yields fall somewhat.
The third central bank to announce its monetary decisions was the Bank of Japan (BoJ). Despite offering the most subtle change, it was still enough to move markets. The long-standing yield curve control policy, whereby the BoJ has a target 10-year government bond yield of 0% with a maximum yield of 0.5%, was tweaked to make the ceiling a reference, rather than a strict limit. The Japanese yen wobbled all over the place before settling higher. The 10-year bond yield took some time to breach the 0.5% now ’soft‘ ceiling, ending the week at 0.54%.
The weaker US dollar direction was reversed again later in the week. Oil prices rallied strongly, with the US gauge West Texas Intermediate (WTI) crossing above US$80 after three months in the doldrums.
Corporate earnings for Q2 have generally been better than expected, with the technology sector delivering strong growth, which helped investor sentiment. Chinese markets finally seemed to be reacting to constant piecemeal announcements of stimulus by the authorities and displayed a more positive mood.
At the end of the week, bond yields were higher, in particular in the US, helping the US dollar. Equities rose modestly in the West but soared in the Far East, with Chinese technology stocks leading emerging markets and Japan continuing its positive year-to-date run. Technology recovered the mantle of leadership; defensive sectors generally fell, and materials picked up in line with better commodity prices.
The week ahead
Monday – Thursday: eurozone CPI and PPI
Our thoughts: will the recent string of good news on the global inflation front extend to the eurozone? Clearly, the German economy is depressed, but other parts of Europe are doing much better, thus helping to justify the ECB hiking rates for the region as a whole. Here again, the comparison of headline and core CPI (consumer price index) will be important for markets, given how much of the headline data may be driven by dropping energy prices. Later on in the week, the PPI (producer price index) will be worth watching, coming from a negative -1.5% the previous month. Are producer prices still going down?
Tuesday: US ISM manufacturing PMI
Our thoughts: there is no doubt that the US economy has beaten all expectations this year, whether in regard to growth, surveys, housing, or consumer spending. The last penny to drop, so to speak, would be manufacturing, which has been in a recession of its own, without dragging the rest of the US economy into it. Are the numbers improving? Is sentiment better? A recovery in manufacturing in the US would buttress the case against a recession in the country as a whole. Of course, the ISM (Institute for Supply Management) provides more than just a headline PMI (purchasing manager index), with details about new orders, inventories, employment, and prices paid, making it the ultimate up-to-date analysis of the industrial area in the US.
Thursday: Bank of England meeting
Our thoughts: the last one of the four major central banks to report and decide this week will probably carry the most difficult message to the population and markets. The Bank of England (BoE) has a tough task ahead, with a weak economy ailing from mortgage rates re-setting at much higher levels for many borrowers, a depressed manufacturing sector and a yawning balance of trade deficit. Against that backdrop, the BoE is determined to fight inflation, but there is an underlying feeling among economists that their heart is not quite as much in this fight as other central banks, given the fragility of the economy. A 25 bp hike is forecast with another 50-60 bps ahead by early next year. Is this juggernaut of rate increases realistic? Markets will hope that the commentary from BoE Governor Andrew Bailey will give them a clue.
The numbers for the week
Central banks/fiscal policy
Central banks seem to be playing their last cards for markets. The US is now perceived to be on hold for good, with the eurozone not far behind, and Japan is starting a slow process of tightening its ultra-loose policy
The Fed raised interest rates by 0.25% to 5.25%-5.5%, the highest level in 22 years, in its 11th consecutive hike since March 2022. Fed Chair Jay Powell said: “Looking ahead, we will continue to take a data-dependent approach in determining the extent of additional policy firming that may be appropriate”, as they don’t see inflation coming down to 2% until 2025. Interestingly, the Fed’s statistical staff are no longer forecasting a US recession. There was no change to quantitative tightening, the policy whereby the Fed is reducing its balance sheet by selling treasury bonds.
The ECB hiked by 25 bps, the ninth consecutive increase, as widely expected, to the highest levels in its history (equal to 2001), with its main refinancing rate at 4.25%, its marginal lending facility at 4.5%, and its deposit facility rate at 3.75%, despite the eurozone economy expected to remain weak in the short run. In her comments, ECB President, Christine Lagarde, said that inflation would remain above target for some time, although it is expected to drop further. The ECB will keep sufficiently restrictive interest rates level for as long as necessary. She did not commit to a specific policy at the September meeting, since the decision will be data dependent.
The BoJ only ‘tweaked’ its monetary policy, but this had a large impact on markets. Keeping its short-term interest rate at -0.1%, the BoJ continued its yield curve control policy with a targeted 10-year Japanese Government Bond (JGB) yield of 0.0% and a maximum limit of +0.5%, but it signalled that the 0.5% yield level was now a flexible reference rather than a rigid limit. This extremely modest change is the first ‘tightening’ of BoJ monetary policy in many years; hence why it was perceived by markets as the beginning of a more normal interest rate policy. The BoJ’s economic forecasts were updated to raise consumer inflation this year from 1.8% to 2.5%.
United States
Data show a strengthening economy, with lower jobless claims, soaring durable goods, better national surveys, and moderating inflation… ‘Goldilocks’?
Surveys: the regional surveys were mixed. The Chicago Fed National Activity Index fell further from -0.28 to -0.32. The Philadelphia Fed non-manufacturing activity index rallied sharply from -16.6 to +1.4. The Richmond Fed manufacturing index was a smidge worse at -9 vs. -8, although its business conditions rose from -14 to -8. The Kansas City Fed manufacturing activity edged up from -12 to -11, whereas the Kansas City Fed services activity index slumped from +14 to -1.
The national surveys were much more positive. The S&P Global PMIs surprised with their direction. The manufacturing PMI bounced back from 46.3 to 49.0, albeit still below the expansion level of 50, whereas the services PMI fell from 54.4 to 52.4. The Conference Board consumer confidence index soared from 110.1 to 117.0, with the present situation up from 155.3 to 160.0 and the expectations from 80.0 to 88.3.
Housing: the FHFA house price index was up the same percentage, 0.7% in May, as the prior month. The S&P Core Logic CS (formerly known as Case-Shiller) improved from 0.85% to 0.99% in May for the 20-City index, whereas the broader US house price index was worse at -0.46% year-on-year from -0.10%. Mortgage Bankers Association (MBA) mortgage applications fell 1.8% for the week ending 21 July, following +1.1%. New home sales disappointed, falling 2.5% in June even after a 6% downward revision the previous month. Pending home sales rose 0.3% in June for a year-on-year fall of 14.8%, better than the previous -20.7%.
Industry: durable goods orders in June soared 4.7%, with durables ex. transportation up 0.6% only, and capital goods shipments (non-defence) ex. aircraft remained flat. Wholesale inventories fell 0.3% in June, but retail inventories rose 0.7%.
Growth: second quarter GDP was 2.4% annualised, much higher than estimates, with personal consumption up 1.6% and the GDP price index down to 2.2% from 4.1%.
Employment: jobless claims continued to fall, with initial claims down from 228K to 221K and continuing claims down from 1749K to 1690K. The Q2 employment cost index moderated from 1.2% in Q1 to 1.0%.
Inflation: the PCE deflator fell from 3.8% to 3.0% as expected, but the PCE core deflator dropped from 4.6% to 4.1%, below estimates. The PCE core deflator is the Federal Reserve’s gauge for inflation, with a 2% target.
Consumer: personal income in June rose 0.3% whereas personal spending grew 0.5%
Foreign Trade: the advance goods trade balance reduced the trade deficit from US$91.9bn to US$87.8bn in June..
United Kingdom
Generally weaker data
Surveys: the S&P Global/CIPS PMIs disappointed, with the manufacturing PMI down from 46.5 to 45.0, and the services PMI from 53.7 to 51.5.
The CBI (Confederation of British Industry) trends surveys were a little better: total orders improved from -15 to -9, selling prices moved from +19 to +18 and business optimism rose from -2 to +6. The CBI retail survey was worse, with retailing reported sales down from -9 to -25, and total distribution reported sales at -17 vs. -12.
Europe
Surging definitely worse
Surveys: the S&P Global/CIPS PMIs disappointed, with the manufacturing PMI down from 46.5 to 45.0, and the services PMI from 53.7 to 51.5.
The CBI (Confederation of British Industry) trends surveys were a little better: total orders improved from -15 to -9, selling prices moved from +19 to +18 and business optimism rose from -2 to +6. The CBI retail survey was worse, with retailing reported sales down from -9 to -25, and total distribution reported sales at -17 vs. -12.
Money supply: eurozone M3 money supply slowed down from 1.0% year-on-year to 0.6%.
Consumer: French consumer spending in June was very strong, at 0.9%, up from 0.6% the prior month.
China/India/Japan/Asia
Is Chinese manufacturing recovering?
China: industrial profits were not as negative in June, with the year-on-year growth at -8.3% vs. -12.6% previously. The official (CFLP) PMIs were mixed, with the manufacturing PMI edging up from 49.0 to 49.3, and the non-manufacturing PMI falling from 53.2 to 51.5.
Japan: the PPI softened from 1.7% to 1.2%. June retail sales fell 0.4% for a 5.9% year-on-year growth, up from 5.8%, and industrial production rose 2.0% for the month for a -0.4% year-on-year move. Housing starts fell 4.8% year-on-year, down from a positive the previous month. The consumer confidence index improved from 36.2 to 37.1.
Oil/Commodities/Emerging Markets
Oil prices surging
The US oil price gauge, WTI, rose above US$80/bbl. for the first time since April. Energy prices have been rising quite sharply and copper has also recovered, due to a better Chinese backdrop.
