Markets last week
The week was curtailed by the US Memorial Day holiday on Monday and the UK Jubilee holiday on Thursday and Friday. In addition, many European countries are on holiday today.
Euro-area consumer and producer prices climbed to yet another record and piled more pressure on the European Central Bank (ECB) to act. Money markets are pricing around a 30% possibility of a 50-basis point ECB hike in July. The ECB last hiked by ½% in 2000. Government bond yields in the eurozone have been pricing in these rate hikes. Europe’s later economic reopening compared to the US means that prices are still being compared to a lockdown economy.
Economic data were supposed to start showing a global slowdown, but in the US, surveys, employment and the housing market were stronger than expected.
President Biden met with US Federal Reserve (Fed) Chair Jay Powell during the week and reiterated his support for the Fed’s independence. His comments were directed at inflation, with five months to go before the US mid-term elections, where high prices are the major issue for voters.
The US dollar recovered from a 3% drop over the last 2-3 weeks. The yen weakened to above 130 vs. the dollar, helping Japanese equities.
Bond yields soared across the board, by 24 bps in 10-year gilts, despite the short trading week, by 20 bps in the US and an amazing 31 bps in Germany, with other eurozone yields also surging. Gilt yields finished the week at 2.16%, a level not seen since 2015.
Far Eastern and in particular Chinese markets were quite buoyant, as the lockdowns were being eased in Shanghai and other parts of China. UK and European markets were the worst. Energy and materials were the most positive sectors, helped by oil prices approaching US$120/bbl (barrel), whilst healthcare and financials were the biggest losers.
The week ahead
Wednesday: Chinese imports and exports for May
Our thoughts: the Chinese economy has been suffering under draconian lockdowns caused by the zero-COVID-19 policy. This has been reflected in weaker exports and imports. Now that there are signs of the authorities relenting on some of the harshest shutdown measures, in particular in Shanghai, will trade flows show this improvement through higher imports and/or exports? Oil prices have risen in anticipation of such a move. Has the move really happened?
Thursday: ECB meeting
Our thoughts: for the first time in more than a decade, the European Central Bank (ECB) is expected to start a new tightening cycle. Guidance has been sparse for the time being, so any comments from ECB President Lagarde or her colleagues will have an impact on markets, especially currency and government bonds. Will the ECB announce its full programme now or will guidance be limited to the next few meetings?
Friday: US CPI for May
Our thoughts: once again, inflation is dominating markets. The US is the focus, as it currently determines global risk appetite. There is a lot of talk about ’peak inflation‘, but have we reached it in the US? It will take a few readings to create a trend. More important than the headline or core number are the details: where inflation is coming from and which parts of the consumer basket are now softer are what will overwhelmingly matter to markets.
The numbers for the week
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Hawkish comments from Fed member
US Federal Reserve (Fed) Governor Christopher Waller said he wants to keep raising in 50 bp increments until inflation is back near the Fed’s 2% goal. “I support tightening policy by another 50 basis points for several meetings. In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target.” Waller said that various economic models suggest that the overall reduction in the balance sheet would be equivalent to around “a couple of 25-basis-point rate hikes”. He is one of the more hawkish Fed members.
San Francisco Fed President Mary Daly said that we are still seeing signs of strong growth and a Fed pause could come after the Fed funds rate is around 2.5%, which she labelled as the ’neutral rate‘.
Mixed surveys are not pointing to a major slowdown. The job market is still on fire
Housing: the FHFA house price index rose 1.5% in March and the Case-Shiller house price index was up 20.55% year-on-year, up from 20% the prior month. Mortgage applications declined 2.3% despite a drop in mortgage rates to their lowest level in six weeks. Construction spending in April rose 0.2% vs. 0.3% previously.
Surveys: the MNI (Market News International) Chicago PMI rose from 56.4 to 60.3. The Conference Board consumer confidence index fell from 108.6 to 106.4 with the present situation and expectations both falling equally. The Dallas Fed manufacturing activity survey slumped from +1.1 to -7.3. The final S&P Global US manufacturing PMI was downgraded from 57.5 to 57.0.
The ISM (Institute for Supply Management) manufacturing PMI rose from 55.4 to 56.1 against expectations of a drop. Prices paid remained very high at 82.2 vs. 84.6; new orders improved from 53.5 to 55.1; production was solid at 54.2; but employment contracted from 50.9 to 49.6.
The ISM services index fell more than expected to the lowest level in 15 months at 55.9 from 57.1.
Employment: the JOLTS job openings number was better than estimates, at 11.4 million, but down from 11.855 million. The quits rate remained at 2.9%, near record highs.
The Challenger job cuts went from positive to negative again, falling 15.8% in May (which means fewer jobs being cut). Initial jobless claims fell from 211K to 200K and continuing claims dropped from 1343K to 1309K.
Non-farm payrolls were stronger than expected, with 390K jobs being created in May vs. 436K in April, with moderate revisions of -22K for the previous two months. Manufacturing jobs hardly contributed to that number, which was driven by rebounding labour supply in the service sector. The unemployment rate (U-3) remained at 3.6% and the underemployment rate (U-6) edged up from 7.0% to 7.1%, with the labour force participation rate increasing from 62.2% to 62.3%.
Industry: the Wards total vehicle sales series slumped from 14.29 million annualised to 12.68 million. Factory orders in April were soft, up 0.3% vs. 1.8% the prior month with factory orders ex transportation also at 0.3%.
Inflation: average hourly earnings rose 0.3% in May but fell from 5.5% to 5.2% year-on-year. The average weekly hours for all employees remained at 34.6.
Improving survey and housing data
Surveys: the Lloyds Business Barometer (which covers 300 companies with turnover above £1mn) rose from 33 to 38, close to the post-COVID-19 high. 57% of companies are planning to raise prices as a way to rebuild their margins. 53% are planning to boost hiring. Confidence among retailers was the weakest, though.
Housing: the Nationwide house price survey was better than expected, rising 0.89% in May to an average of £269,914, an 11.2% year-on-year increase. Mortgage approvals fell from 69.5K to 66K in April but consumer credit year-on-year edged up from 5.2% to 5.7%.
Inflation: the BRC (British Retail Consortium) shop price index year-on-year was 2.8% (a number that will surprise many) vs. 2.7% the previous month, but the BRC said that fresh food prices had jumped 4.5% year-to-date through May, up from 3.4% in April.
Soaring consumer and producer inflation
Surveys: confidence in the eurozone was steady, with economic confidence at 105 vs. 104.9, industrial confidence at 6.3 vs. 7.7, services confidence at 14.0 vs. 13.6 and consumer confidence still at a low -21.1.
Inflation: the German CPI surged from 7.4% to 7.9% and Spanish CPI from 8.3% to 8.7%. The eurozone CPI was even worse than estimates at 8.1%, up from 7.5% before, with the core CPI reading rising from 3.5% to 3.8%. The eurozone PPI (producer price index) rose 1.2% in April for a year-on-year growth of 37.2%.
Employment: the eurozone unemployment rate remained at 6.8% in April.
Sales: German retail sales fell 5.4% in April, down from a positive +0.9% the previous month. Eurozone retail sales in April fell 1.3% for a year-on-year growth of 3.9%, up from 1.6% previously.
Recovering surveys in China, though below expectations
China: the PMIs improved, with the official (CFLP) manufacturing PMI rising from 47.4 to 49.6 and the non-manufacturing PMI jumping from 41.9 to 47.8. These numbers still indicate contraction, though. The unofficial Caixin manufacturing PMI was up from 46.0 to 48.1, below expectations. The Caixin services PMI rallied from 36.2 to 41.4, but disappointed hopes of a higher rebound.
Japan: the April jobless rate improved a smidge from 2.6% to 2.5%. Retail sales increased 0.8% but industrial production fell 1.3%.
The consumer confidence index rose from 33.0 to 34.1.
As the US heads into the fuel-consuming driving season, oil prices have been strongly supported against the backdrop of supply concerns and low inventories. After hitting a cycle high of US$123/bbl on the EU banning 90% of Russian oil imports by year-end, the Brent gauge corrected to US$115 on the news that Russia might leave OPEC+ (despite the Russian Foreign Secretary visiting Saudi Arabia). The OPEC meeting, however, decided to add 200,000 barrels per day in July. The amount was too small to prevent crude prices from rising further and the Brent gauge finished the week close to US$120.
Gold prices were quiet during the week and settled at US$1,851/oz, close to unchanged.