Markets last week

Another recovery week in risk markets took place against the shadow of peace talks between Ukraine and Russia. President Biden’s massive release of US strategic petroleum reserves (the largest in history) brought oil prices down by 13%, probably not enough for the US consumer, though. There was continued volatility in government bond yields and mixed commodity prices overall.

Economic data started to show some signs of softening related to the Ukraine war. Surveys were more resilient in the US than in Europe or the UK, but Chinese PMIs showed a meaningful drop, as export orders are hurt by sanctions and the ongoing COVID-19 outbreaks have triggered huge lockdowns. In the US, however, employment was still very buoyant against a weakening housing market, probably leading the Federal Reserve (Fed) to consider large hikes in the next few meetings (0.5% instead of 0.25%).

Inflation readings were higher all over, whether the eurozone CPI (consumer price index) at a record 7.5% or the US core PCE (personal consumption expenditures) followed by the Fed, at 5.4%.

The US yield curve (difference between the bond yields of short and long maturities) was widely discussed last week, as the 2-year to 10-year curve turned negative (shorter rates higher than longer rates) by 7 bps. This is normally seen as a harbinger of a recession, but, of course, it depends on the maturities one picks. The difference between really short-term rates (three months) and long rates, is still positive and large, so, in our opinion, this discussion is premature at best. In any event, the US yield curve currently has a snake-like appearance, which is bound to be confusing to most observers.

At the end of the week, equities were higher again, with emerging markets and Europe doing better and Japan doing worse. Defensive sectors like utilities, real estate and consumer staples performed best, whereas the more cyclical parts of the markets (energy, materials and financials) actually fell. Government bond yields fell after their relentless upward drive, oil slumped 13% and gold eased 1.7%. The US dollar was weaker against European currencies, but stronger against the Japanese yen.

The first quarter of 2022 was the first losing quarter for equity markets in two years, but it was also one of the worst ever quarters for government bonds. In the US, investment-grade bonds actually provided some of the worst returns, followed by treasury bonds and then US equities tied with high-yield bonds. In the rest of the world, stock markets with a high commodity content did well (such as Brazil, Canada, Australia, but also the FTSE 100), whereas energy importers Europe and China were the most challenged. Government bonds were big losers across the board in developed markets. Commodities were the strongest assets, with Brent oil up more than 30%.

The week ahead

Tuesday: US ISM services PMI

Our thoughts: after the ISM (Institute for Supply Management) manufacturing PMI from Friday, all eyes will be on its services counterpart. The same detailed analysis sector by sector, activity by activity, will provide a better understanding of where the US economy stands one month into the Russia-Ukraine war. The previous readings were taken before the invasion and hence the difference will be almost purely due to Ukraine effects. How will services purchasing managers adjust their orders? How will prices move?

Wednesday: eurozone PPI

Our thoughts: inflation is hitting most European economies. Some of it comes from imported energy but some of that price pressure was there prior to the Ukraine conflict, in the form of high producer prices. This is why the PPI (producer price index) is an important gauge to follow in the eurozone. Some eye-watering country numbers need to come down for consumer prices to have a chance of stabilising. Will the PPI start to relent this week or is this still far ahead?

Wednesday: minutes for March meeting of the Fed

Our thoughts: there have been many comments made by Fed members, including the Chair Jay Powell, hinting at the path of interest rates. What we haven’t heard is the debate that led to these comments. Markets might want to pick over the respective views and see how solid their forecasts are for the May and June meetings.

Markets for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

US Fed hawk providing bigger rate hike expectations

The Biden administration announced a massive release of crude oil for the US Strategic Petroleum Reserve, amounting to one million barrels per day for several months, which was estimated by markets at some 180 million barrels altogether. The is the largest release from the Strategic Petroleum Reserve in its history.

Kansas Fed President Esther George delivered some hawkish comments, looking at the neutral Fed Funds rate at 2.5% as a minimum, which is higher than the official US Federal Reserve forecast (the ‘dot plots’) and she also made comments on the Fed’s balance sheet run-off, which were also more hawkish than market expectations.

United States

Some softening in surveys, but not in jobs and the Fed’s favourite inflation gauge jumps to 5.4%

Surveys: the Dallas Fed manufacturing activity index slumped from 14.0 to 8.7. The Conference Board consumer confidence survey was mixed: the overall reading was higher at 107.2 vs. 105.7, but the current situation surged from 143.0 to 153.0 whereas expectations fell from 80.8 (revised down from 87.5) down to 76.6. The MNI Chicago PMI defied expectations of a drop and surged from 56.3 to 62.9. It peaked in May, has been falling since, so it seems to be more forward-looking than regular PMIs.

Last but not least, the all-important ISM (Institute for Supply Management) manufacturing PMI fell from 58.6 to 57.1, with new orders falling the most, from 61.7 to 53.8, but prices paid kept rising from 75.6 to 87.1, employment was buoyant at 56.3, up from 52.9, and the backlog of orders was still above 60.

Housing: the FHFA house price index rose 1.6% during the month of January, up from 1.3% the previous month, whereas the Case-Shiller US national home price index rose 19.17% year-on-year, up from 18% previously. The 20-city home price index was up 19.10% vs. 18.58%. MBA mortgage applications kept falling, down 6.8% for the week ended 25th March, after -8.1% the previous week, against the backdrop of the average 30-year mortgage rate rising to 4.67%, a high not seen since December 2018.

Employment: the JOLTS job opening series was almost unchanged at 11.266 million job openings in February, vs. 11.283 million the previous month. Initial jobless claims moved back up last week, from 188K to 202K, but continuing claims actually fell from 1342K to 1307K. The Challenger job cuts were less negative (-30.1% vs. -55.9%) in March, which means there were more job cuts, as the numbers are negative. The monthly non-farm payrolls were slightly below estimates at 431K for March, but the previous two months were revised up by 95K. The vast majority of new jobs were in the services sector, with leisure and hospitality at the top. The unemployment rate (U-3) fell further from 3.8% to 3.6% and the underemployment rate (U-6) from 7.2% to 6.9%, with the labour force participation rate increasing somewhat from 62.3% to 62.4% (still a very low percentage by historical standards).

Inflation: the PCE (personal consumption expenditures) inflation rose from 6.0% to 6.4% in line with estimates, but the core PCE was a smidge below estimates, at 5.4% up from 5.2%. The core PCE is the US Federal Reserve’s official inflation gauge and is sitting at the highest level since 1983. The employment report data showed average hourly earnings rising further from 5.2% to 5.6%, whilst the average weekly hours worked fell from 34.7 to 34.6.

Industry: wholesale inventories rose 2.1% in February and retail inventories rose 1.1%. Total vehicle sales, as published by Wards, fell from 14.07 million (annualised) to 13.33 million.

Income: personal income rose 0.5% in February, but personal spending only 0.2% after the previous month where personal spending soared 2.7% (revised up from 2.1%).

United Kingdom

Existing data still look good, but surveys offer grim reading

Credit: consumer credit improved but housing-related credit was down. Net consumer credit was up £1.9bn in February, compared to £0.1bn the previous month), whereas net lending securitised on dwellings fell from £5.9bn to £4.7bn and mortgage approvals fell from 73.8K to 71K.

Money supply: money supply rose further with M4 up 1% in February for a year-on-year growth of 6.0%, up from 5.7%.

Prices: the BRC shop price index rose from 1.8% to 2.1% in March year-on-year.

Surveys: the Lloyds Business Barometer fell from 44 to 33. Business confidence collapsed to a 17-month low in a survey by the Institute of Directors, with more than half of executives pessimistic about the British economy over the next year and a similar proportion braced for inflation of more than 6% by the end of 2022.

Housing: Nationwide Building Society reported that house prices jumped at the fastest annual pace since 2004 in March, up 1.1% for the month and 14.3% year-on-year, taking the average value to a record £265,312.

GDP: Q4 2021 economic growth was upgraded from the initial 1.0% estimate to a final 1.3%.

Europe

Soaring inflation and falling confidence

Surveys: mixed numbers for eurozone confidence data in March, with economic confidence down from 113.9 to 108.5, industrial confidence down from 14.1 to 10.4 but services confidence up from 12.9 to 14.4. The German GfK consumer confidence fell from -8.5 to -15.5.

Employment: eurozone unemployment fell a smidge from 6.9% to 6.8% against expectations of a bigger fall.

Inflation: the eurozone CPI soared from 5.9% to 7.5%, a record since the advent of the euro, although the core CPI reading (ex food and energy, alcohol and tobacco) looked more reasonable, at 3.0%, up from 2.7%, indicating that the vast majority of the monthly increase is due to food and energy.

China/India/Japan/Asia

Big drops in Chinese PMIs

China: the official CFLP (China Federation of Logistics and Purchasing) manufacturing PMI fell from 50.2 to 49.5 whereas the CFLP non-manufacturing PMI saw a sharper drop from 51.6 to 48.4. The unofficial Caixin manufacturing PMI fell from 50.4 to 48.1, well below estimates. The National Statistical Bureau blamed weak export orders due to sanctions on Russia, as well as disruptions from regional COVID-19 outbreaks and government restrictions.

Japan: the jobless rate fell from 2.8% to 2.7%. Industrial production rose 0.1% in February for a year-on-year 0.2% growth. Retail sales fell 0.8% in February for also a
-0.8% year-on-year drop. Housing starts were a bright spot in February, rising 6.3% year-on-year, up from 2.1% previously. The Tankan surveys were softer, with the outlook particularly weak. Vehicle sales in March were down 14.8% year-on-year, better than -18.6% the prior month. Finally, the monetary base expanded by 7.9% year-on-year in March, up from 7.6% previously.

Oil/Commodities/Emerging Markets

Biden’s release of oil reserves helps prices, but is it enough?

OPEC Plus (OPEC plus countries such as Russia) agreed a 432,000 bbl/day output increase from May. Added to President Biden’s decision to release one million bbl/day from the US Strategic Petroleum reserve, this put downward pressure on oil prices, in particular on the US WTI gauge, which fell below US$100/bbl. The drop is still quite short of the big move expected given the massive release in US oil reserves but reflects the reality of sanctions against Russia. The oil market has lost three million bbls/day from Russia and one million doesn’t offset that.

Other commodities were mixed and gold finished the week at US$1,925.