Markets last week
There was some movement on investor sentiment last week, in particular in the US. Some early signs of a softening in the hitherto drum-tight jobs market started to get factored into markets. Further, the meeting of the US Federal Reserve (Fed) confirmed yet again that the Fed funds rate would not be coming down so soon. Lastly, the banking crisis which started with Silicon Valley Bank, seemed to spread to a few other regional bank names, despite assurances from the Fed Chair that the US banking sector was “sound and resilient”.
The sum total of the above was to increase market concern about a possible US recession.
Market reactions spread quite widely, with short-term US bond yields falling sharply, expectations of more cuts in Fed funds increasing, the US dollar under additional pressure and gold surging again. US equities were particularly sensitive to these movements, whereas the rest of the world remained relatively unscathed. Europe and the UK were less affected by these movements and bond yields there were generally going up rather than down.
Most of these shifts were challenged by a stronger-than-expected US employment report on Friday, which led to higher bond yields, stronger equities, including the US banking sector, weaker gold and recovering oil prices. Despite the very strong payroll number and the sticky hourly earnings, Federal funds futures are pricing in 70bps of Fed cuts by year end, in open disagreement with Fed Chair Powell, who reiterated the Fed’s intention to keep rates high until inflation is under control.
The market discussion about the US debt ceiling is starting to heat up and is adding volatility to various parts of the US economy, including the beleaguered regional banking sector.
The continuing earnings reporting season is still showing companies noting upside surprises in both the US and Europe, and a higher percentage of earnings beats than usual. Some US firms have reported moderating pressure in their margins for the first time in a few quarters.
On the UK bank holiday Monday, all other world markets were open. Europe was positive and US flat, Japanese equities fell on the first day after their long Golden Week, whereas Chinese markets were stronger on commercial banks cutting interest rates.
For the extended week, equities were mixed, with the US falling the most and Asia leading the risers, which also include UK small companies. The best sector was technology, whereas energy and financials fell sharply, led by the weak oil price and the continuing turmoil among US regional banks. For the quarter to date, though, defensive sectors are once again running ahead of other sectors (healthcare, consumer staples, utilities).
There was an unusual discrepancy in bond markets, with US treasury yields falling significantly whilst UK gilt yields were rising. This is a trend we have seen over the last six months as gilt yields have overtaken treasury yields and keep climbing.
The US dollar was once again very weak and oil prices slumped further on economic fears. Gold was the strongest commodity.
The week ahead
Tuesday-Thursday: US CPI and PPI
Our thoughts: is there any further downside in the US consumer price index (CPI) after the Fed’s hawkish comments about inflation? Last month, the headline CPI came down sharply, but the core CPI was a little higher. The CPI is not the gauge followed by the Fed but is nevertheless meaningful for consumers and markets as a harbinger of future monetary policy. The PPI (producer price index) will also be scrutinised for pipeline inflationary pressures, in particular for the core reading (ex food and energy).
Wednesday: China CPI and PPI
Our thoughts: just like the US, inflation in China will be followed closely, but the PPI is more likely to interest global investors, as a proxy for Chinese manufacturing export prices. The Chinese PPI has been heavily negative for six months now and the question is whether the trend will continue. During the pandemic, Chinese producer prices were also negative but spiked in 2021 and have been coming down since. Regardless of “onshoring” or “reshoring” efforts, Chinese manufactures will still dominate industrial prices globally. The CPI is likely to be seen more as a reflection of actual economic growth and an indication of whether the recovery is indeed fragile.
Friday: UK March GDP growth
Our thoughts: UK economic growth has been hovering around the zero mark since the beginning of last year, avoiding the official definition of a recession but not strong enough to show expansion. Nothing spectacular is expected in March but the details will nevertheless be analysed for future direction. Services are the overwhelming share of the UK economy and reflect consumer health and resilience to high inflation. Manufacturing and construction are the other large components, but the trade balance will matter as well.
The numbers for the week
Central banks/fiscal policy
Fed and ECB hike. Powell’s comments more hawkish than expected
The US Federal Reserve met last week and increased its Fed funds rate by 25bps, to a range of 5.00%-5.25%. Despite talk of possible dissent, the decision was unanimous. They left the door open for a pause in June but also for potentially more tightening. Chair Jay Powell reiterated his constant message that inflation is sticky, coming down very slowly and will take time to get to 2%, hence the Fed won’t relent on high rates until their job is done. He acknowledged that there were lags in how monetary policy impacts the economy and said that these lags would be taken into consideration when considering future moves. He said some parts of the economy were already reacting to higher rates, like housing and investment, but the employment market is still too tight, which leads to the current high level of core inflation. His comments about the US banking sector being “sound” were questioned and his answers did not satisfy markets entirely.
The European Central Bank (ECB) hiked rates by 25bps, as generally anticipated. The ECB President Christine Lagarde said the decision was “almost unanimous”, with a few colleagues going for a larger hike. She also indicated that there would be more rate increases in future meetings, saying “there is more ground to cover”.
Some cracks appear in the tight jobs market but payrolls still strong and hourly earnings climb
Employment: Challenger, Gray & Christmas job cuts rose by 67,000 in April, for a total of 340,000 this year, almost four times the number in the equivalent four months of last year. The JOLTS (job openings and labour turnover survey) job openings fell from 9974K to 9590K. Despite the large fall, the number of job openings per jobseeker is still in the area of 1.6 to 1.
Initial jobless claims shot up from 229K to 242K whilst continuing claims fell from 1843K to 1805K.
Non-farm payrolls in April climbed 253K, up from a revised 163K the previous month. There were significant downward revisions of 149K to the last two months. Once again, the vast majority of new jobs came from services, with manufacturing payrolls only up 11K. The unemployment rate (U-3) fell to 3.4%, as in January, which was the lowest level since 1969(!) with the labour force participation rate unchanged. The underemployment rate (U-6) fell from 6.7% to 6.6%. Average hourly earnings year-on-year actually rose 0.5% during the month for a 4.4% year-on-year rate, up from 4.2%.
Industry: factory orders rose 0.9% in March, but ex transportation fell 0.7%. The Wards series total vehicle sales surged from 14.82m (annualised) to 15.91m in April.
Housing: MBA (Mortgage Bankers Association) mortgage applications fell 1.2% during the week ended 28 April.
Surveys: the ISM (Institute for Supply Management) services index improved from 51.2 to 51.9, with new orders surging from 52.2 to 56.1, employment falling from 51.3 to 50.8 but prices paid remaining very high at 59.6 vs. 59.5.
Productivity: non-farm productivity during Q1 was down 2.7% while unit labour costs soared 6.3%, which is an unfavourable combination for inflation. The previous quarter had productivity up 1.6% and unit labour costs up 3.3%.
The economy appears more resilient despite mixed signals
Housing: the Nationwide House Price Index rose 0.5% in April for a -2.7% year-on-year growth. Mortgage approvals rose from 44.1K to 52.0K in March.
Credit: net consumer credit rose from £1.5bn to £1.6bn in March, up 7.9% year-on-year, but net lending securitised on dwellings from £0.7bn to zero.
Money supply: M4 money supply fell from 1.1% to 0.4% year-on-year in March.
Industry: new car registrations were up 11.6% year-on-year in April, down from 18.2% the previous month.
Surveys: the final versions of the PMI (purchasing manager indices) were upgraded significantly from the preliminary numbers, with the S&P Global/CIPS manufacturing PMI up from 46.6. to 47.8 and the S&P Global/CIPS services PMI up from 54.9 to 55.9. The S&P Global/CIPS construction PMI was stronger at 51.1 vs. 50.7.
Consumer: the BRC (British Retail Consortium) April sales like-for-like grew 5.2% year-on-year vs. 4.9% the prior month.
Inflation is still sticky, and some signs of industrial recession are showing
Inflation: the eurozone CPI rose from 6.9% to 7.0% whereas the core CPI (ex energy, food, alcohol and tobacco) was lower at 5.6% vs. 5.7%. The eurozone PPI was much lower at 5.9% vs. 13.3%.
Employment: the eurozone unemployment rate eased from 6.6% to 6.5%.
Money Supply: M3 money supply in March was up 2.5% year-on-year, down from 2.9% the prior month.
Industry: German factory orders slumped 10.7% in March after a +4.5% month. French industrial production fell 1.1% in March following a +1.4% month. German industrial production in March slumped 3.4%, although the year-on-year growth was better than the previous month at 1.8% vs. 0.7%.
Surveys: the HCOB (part of the S&P Global data) Germany construction PMI fell from 42.9 to 42.0. The eurozone Sentix investor confidence fell from -8.7 to -13.1.
ISofter surveys in China show that the consumer recovery is hesitant
China: the Caixin China manufacturing PMI fell from 50.0 to 49.5, whereas the Caixin services PMI was also weaker at 56.4 vs. 57.8. Chinese exports grew 8.5% year-on-year in April, while imports fell 7.9%, worse than expected.
Japan: labour cash earnings in March remained at 0.8% year-on-year but household spending fell 1.9% after a positive 1.6%.
Oil and gold move in opposite directions
Oil prices last week hit a low since the beginning of last year, driven by concerns about a possible US recession. The US announced that crude inventories fell by 1.28m barrels during the month, much less than expected. Oil recovered sharply on Friday, together with risk appetite.
Gold moved in the opposite direction, reaching US$2,050/bbl. on Thursday, but then correcting back as risk markets bounced on Friday.