Markets last week
The beginning of the week was marked by the family office Archegos Capital Management being forced to sell US$20bn of US and Chinese stocks in a fire sale. Certain banks incurred large losses but the impact on both US and Asian stock markets was limited in scope and time. Indeed, the disruption did not extend to many other markets, with credit conditions benign throughout, making this forced liquidation idiosyncratic, not systemic.
The 90% adult inoculation target in the US for the end of this month is fighting a resurgence in COVID-19 cases and the removal of facemasks and other restrictions by many state governors, whilst European countries are going into further lockdowns and restrictions.
US economic data were as buoyant as it is possible, with the ISM (Institute of Supply Management) manufacturing PMI at the highest level since 1983, the ISM services index at an all-time high, 916K jobs being created during March and home prices rising 11.2% year-on-year. PMIs, in particular manufacturing, were also very strong in other parts of the world, hitting 62.5 in the eurozone and 58.9 in the UK. Chinese industrial profits surged 179%.
Against that backdrop, equities had a good week, with emerging markets, the US and Europe doing best and Japan lagging. Given the risk-on mood, it is no surprise that government bond yields continued rising and sterling was strong. Oil and copper prices were soft, however, having increased sharply with the Suez Canal crisis and going back to previous levels afterwards. The long weekend affected the UK, Europe and US equities on Friday.
For the first quarter, US, European and UK equities did best, up over 5%, with Japan and emerging markets at the rear. Gilts slumped 7% and US treasury bonds fell over 4%. Corporate bonds fell less but were still negative. Oil rose a massive 22% and gold was down 10%. Sterling was the strongest currency, up 4% and yen the weakest, down 5%. Overall, the US dollar was up 2.7%.
The week ahead
Wednesday: US FOMC (Federal Open Market Committee) minutes
Our thoughts: as usual, every single word coming from the US Federal Reserve (Fed) will be dissected in great detail by markets. The minutes give the opportunity for those who don’t believe Chair Jay Powell’s statements to find discordant views and ‘what-if’ scenarios. If any particular turn or phrase is perceived to go against official Fed policy, markets could have a tantrum again.
Wednesday-Thursday: UK Markit/CIPS services PMI and Markit/CIPS construction PMI
Our thoughts: the UK economy is much less driven by manufacturing than Europe, Asia or even the US, hence services matter enormously, but construction is also an important part of the recovery ahead. Given the lockdowns, but also the planned reopening of the country, the services PMI could point towards economic growth in Q2 and also the second half of the year. Construction should be impacted by the extension of the stamp duty allowance.
Thursday: China CPI (consumer price index) and PPI (producer price index)
Our thoughts: once again, we will realise the importance of the Chinese economy to the rest of the world. The Chinese PPI feeds into manufacturing costs and import prices globally and the CPI gives us a clue of how the economy stabilises after short, sharp shocks in supply chains and one-off price increases. The Chinese PPI is expected to soar from 1.7% to 3.6%, which could add to inflationary pressures in the West. The CPI is estimated to settle at a moderate 0.3%, no doubt a number that cannot be extrapolated to other countries, but a sign that inflation surges could well be temporary elsewhere.
The numbers for the week
|Equity indices (price only)|
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||2.10%||6.30%||1.90%||4.70%|
|Emerging market equities||2.40%||3.70%||1.60%||1.80%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.69%||2||78|
|10-year German Bund||-0.33%||2||24|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||62.59||-3.10%||20.80%|
|WTI oil (bbl)||59.14||-3.00%||21.90%|
|Copper (metric tonne)||8790||-1.90%||13.20%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Biden’s large infrastructure bill with higher taxes faces tough path through Congress
President Biden rolled out his US$2.29trn infrastructure package. The ‘American Job Plan’ is being billed as the most sweeping economic investment since the original US space programme. It is mostly aimed at helping the country’s underfunded and disintegrating infrastructure (US$620bn is going to transport, US$110bn for water, US$100bn each for broadband and power) and also for domestic manufacturing, small companies and R&D. The White House plans to fund the bill by raising taxes. The bill plan faces a difficult path through Congress, with moderate Democrats worried about tax increases, such as corporate taxes rising from 21% to 28%. The final package is therefore likely to be watered down quite a bit.”
Best set of economic numbers in decades
Surveys: the Dallas Fed manufacturing activity index jumped from 17.2 to 28.9, and the Chicago PMI jumped to 66.3 from 59.5, its highest level since July 2018, showing that the previous week’s Philly Fed was not an outlier. The main issues to watch are unfilled orders and prices paid, which are all surging and should feed into inflation.
The Conference Board’s consumer confidence index soared to 109.7 from 90.4, far above estimates (the biggest one-month gain since April 2003, but still below its pre-COVID-19 level of about 130).
The Markit Manufacturing PMI, which is more stable generally, edged up from 59.0 to 59.1. The ISM Manufacturing PMI, however, jumped to 64.7 from 60.8, above expectations and the highest reading since December 1983. Like other manufacturing surveys, there is a surge in prices and tightening supply lines. The prices paid index was little changed, at an incredibly high 85.6, which should be feeding into inflation. The more important move, though, was the sharp increase in the employment index from 54.4 to 59.6.
The services PMIs were also buoyant. The Markit Services PMI edged up from 60.0 to 60.4, but the ISM Services Index jumped from 55.3 to 63.7, the all-time high.
Housing: US home prices have continued to rise, helped by low mortgage rates. The Case-Shiller index was up 11.2% year-on-year in January, but pending home sales dropped 10.6%, below estimates of -3.0%. Most of it was weather related but there was probably an impact of rebounding mortgage rates.
Employment: initial claims rose to 719K from 658K, above the consensus, 675K. Last week’s claims were revised down to 658K from 684K. Taking the two weeks together, it’s clear that the trend in claims is still falling. US payroll employment rose strongly in March, by 916K, with upward revisions of 156K for previous months. The unemployment rate (U-3) declined from 6.2% to 6.0% with the labour force participation rate rising 0.1% to 61.5%. The underemployment rate (U-6) declined from 11.1% to 10.7%.
Industry: factory orders fell 0.8% in February and ex transportation also fell 0.6%. Durable goods orders fell 1.2% and ex transportation -0.9%. Capital goods shipments non-defence ex aircraft fell 1.1%.
Improvement in data
Housing and consumer lending: house purchase mortgage approvals fell to 87.7K in February, down from 99.0K in January and below estimates. Meanwhile, gross lending to households rose 3.8% in February, supporting other signs that GDP increased marginally last month.
The nationwide measure of house prices fell by 0.2% in March. The year-on-year growth eased to 5.7%, from 6.9% the previous month. The nationwide data show that the housing market remains relatively buoyant, with prices rising by 1.1% in Q1. Some of it, of course, is distorted by the special stamp duty allowance.
Surveys: the Markit/CIPS manufacturing PMI rose to 58.9 in March, from 55.1 in February. The PMI rose in March to its highest level in just over a decade, amid steady growth in orders and output, renewed hiring, and longer delivery times for components, but the rebound would be much stronger, were it not for Brexit. At 57.0, the total orders balance is 7.3 points below the eurozone’s, the largest underperformance since July 2000.
Inflation: the output price index increased to 63.7 in March, from 61.2, its highest level since April 2011.
Stronger surveys heading into further lockdowns
Surveys: in France, the consumer confidence index rose to 94 in March, from 91 in February, above estimates, but a drop is likely in April due to the new lockdown.
Eurozone confidence numbers were better and above estimates. Although consumer confidence remained at a low -10.8, economic confidence rose from 93.4 to 101.0, industrial confidence from -3.3 to +2.0 and services confidence from -17.1 to -9.3.
The manufacturing PMI in the eurozone rose to 62.5 in March, from 57.9 in February. The upturn in export orders was particularly strong, especially in Germany. Some of the national numbers are near record levels and new orders and production are now driving a clear increase in employment, which is rising at the fastest pace since August 2018.
Covid restrictions: a French lockdown has been announced for April. Germany is struggling with a third wave and Italy has extended the restrictions until the end of April.
Inflation: headline inflation in the eurozone rose in March to 1.3%. The core rate dipped to 0.9%, from 1.1% in February. Both were below expectations.
Sales: retail sales in Germany rose by 1.2% year-on-year in February, below expectations.
No matter how you look at them, Chinese industrial profits are stunning
China: Chinese industrial profits surged 179%, off previous scales, led by manufacturing with mining also very strong. The obvious caveats are the comparison with the COVID-19 low and the timing of the Chinese New Year. Nevertheless…
The Caixin PMI Services jumped from 51.5 to 54.3.
Japan: the Jibun Bank services PMI rose from 46.5 to 48.3, an improvement but still below the 50 threshold between contraction and expansion.
Back to normal after the Suez Canal crisis
As the Ever Given was refloated and partially moved in the Suez Canal, the 450 vessels stuck waiting have moved and shipping has resumed through the canal. As a result of the improvement, oil prices fell. In addition, OPEC+ agreed to increase oil production gradually from May to July, adding more than 1 million barrels a day.