The content of this post does not constitute financial advice. It is intended for information and education purposes only.

The Week in Global Markets

Financial markets summary:

– Europe: Equities declined for the full week ended 19th January, as ECB policymakers made numerous remarks about unreasonably dovish expectations by market participants about rate cuts. The focus is now shifting to the ECB’s policy meeting coming next week and there is some acknowledgment that consolidation might be justified as expectations need to be tempered down. The real estate and basic resources sectors were the main drivers of the declines this week, while tech stocks saw a positive performance, with some analysts expecting a good upside potential as a result of better macro conditions, structural growth, and thanks to the impact of generative AI. The chairman of the Swiss Central Bank (SNB) stated that he does not expect further rate hikes will be needed given the latest inflation forecasts (1.9% in 2024 and 1.6% in 2025). However, he acknowledged the detrimental impact that the Swiss franc’s appreciation against the EUR, USD, and GBP throughout 2023 has had on exporters, with the SNB no longer focusing on foreign currency sales. In the UK, Chancellor Jeremy Hunt pointed to the spring budget as an opportunity to further drive economic growth, with expectations for tax cuts ahead of the election. However, the leeway for this is limited as the margin to cut is quite narrow if the government is to remain on track for the public debt reduction targets.

– United States: This week the S&P 500 hit an all-time high, reaching 4,842 on Friday. The rally to this point was driven by mega-cap tech companies, with Meta, Nvidia, and AMD being very strong performers. The Dow Jones also reached an all-time high on Friday, closing at the 37,863.80 level (the intraday high was 37,933.73). However, impressive market performance is at odds with some data coming out for the economy, as the New York manufacturing activity index took a major dive, reaching its lowest point since the pandemic. On the contrary, retail sales appeared to defy expectations as the data released this week showed they remain resilient and the consumer is still strong. The University of Michigan Index of Consumer Sentiment supports this conclusion, as it also jumped for January to the highest level in about 3 years. Fed Governor Christopher Waller commented this week that there is “no reason to move as quickly or cut as rapidly as in the past given the healthy state of the economy.” This seemed to have moved the CME FedWatch probability of a rate cut in March from over 80% down to less than 50% and likely contributed to the further increase in government bond yields. Corporate bond yields also rose together with Treasury yields, despite a slight tightening in the spreads.

– Asia-Pacific: Along with the weakening yen, Japan’s stock market continued its rise, with the Nikkei 225 advancing over 1% and the TOPIC index increasing 0.6%. The market now sees a lower likelihood that the Bank of Japan will exit its negative rate policy in the short term given the receding inflationary pressures and the impact on the economy from the Noto earthquake 3 weeks ago. 10-year Japanese government bond yields followed US Treasurys to higher levels while the Consumer Price Index decelerated to 2.3% YoY in December. Other large Asian markets such as India and China saw drops in their major stock indices. Growing pessimism about China’s economic woes keeps impacting the Shanghai Composite Index, which fell over 1.7%, and the CSI 300 declined 0.44%. The Hang Seng Index dropped 5.76%. Despite officially reported GDP growth figures being aligned with expectations, the slump in real estate investment, the rise in urban unemployment, and the lower-than-expected rise in retail sales still indicate some significant weaknesses in the economy. The People’s Bank of China (PBoC) injected RMB 995bn into the banking system, which was more than forecast but the medium-term lending facility (MLF) rate was left unchanged. The expectation is that in the course of 2024, the central bank will ease its policy stance in an effort to stimulate demand, and will likely reduce its minimum reserve requirements. The real estate sector continues to be in decline, with home prices dropping for a 6th consecutive month.

– Bitcoin: Price in USD fell this week by over 4%, with the Financial Times reporting that it has to do with the investors in the Grayscale Bitcoin Trust (GBTC), one of the biggest bitcoin ETFs and a leading lobbyist for legalizing US spot crypto ETFs. It seems that GBTC investors who had been buying the GBTC fund last year at a major discount to its net asset value (NAV) – intending to position themselves favorably for the eventual ETF conversion – started to cash out profits after the conversion took place by exiting the bitcoin space completely, instead of moving funds to cheaper spot bitcoin ETFs. The estimates, as reported by the FT, are for $3bn which had been invested into GBTC during 2023 to take advantage of this discount, of which $1.5bn has now exited the space, with a potential further pressure possible if the other $1.5bn are to be taken out.

policy rate overview

The Central Banks of both Argentina and China left their policy rates unchanged this week. The Argentine peso continued to slide to new lows during the week in the unofficial market and is now exchanged for over 50% less than the official exchange rate vs. the USD. The pressures for further devaluations by the market may not recede soon. As mentioned before, the PBoC kept the MLF rate at 2.5%, despite expectations that it would cut to provide a boost to the economy. Growth of credit has so far not picked up materially and deflationary pressures have been persistent. Some economists now forecast a 20-basis-point reduction in the PBoC policy rate later in 2024.

Next week is promising to be quite a busy one, with some major central banks announcing their policy rate decisions – the European Central Bank (ECB) and the Bank of Japan (BoJ), both likely holding rates unchanged for the time being. Canada, Norway, Türkiye, and South Africa will also be among those whose policy committees will be meeting. The PBoC will be announcing its Loan Prime Rates on Monday.

highlights from Germany

Negative growth in 2023
Real German Gross Domestic Product (GDP) fell by 0.3% in 2023 according to the Federal Statistical Office’s full-year estimates. One of the key factors to which this is officially attributed is the high prices in all stages of the economic process which are dampening growth by curtailing consumption and other areas of the broader economy. The rise in interest rates as a result of ECB and international hikes has led to significant tightening of financing conditions. As a result, we have seen weaker domestic demand, as well as weaker foreign demand owing to economic challenges abroad. Industrial output (ex-construction) was down 2% in 2023, primarily due to much lower production in the energy supply sector. Manufacturing in particular was down 0.4%: production and value-added fell again in energy-intensive industrial branches, such as the chemical and metal industries. Construction saw a growth of 0.2% but was severely impacted by deteriorating financing conditions, high building costs, and a shortage of skilled labor. Most service sectors grew, with activity rising versus 2022, but growth was weaker compared to the preceding years. The consumer was one of the weakest links: household consumption dropped 0.8% vs 2022, and was overall at lower levels than before the pandemic. The main reason: high consumer prices. Spending was down particularly sharply for durable goods such as furniture and household appliances. Government spending was also down -1.7% due to the withdrawal of COVID measures. Gross fixed capital formation in construction dropped 2.1% on a price-adjusted basis in 2023, while it was up 3% in machinery and equipment, mainly due to the increase in commercial new registrations of passenger cars, which was buoyed by the eco-bonus for electric company cars that applied until August 2023. Global economic weakness impacted foreign trade, with imports contracting by 3% and exports contracting by 1.8%, leading to a positive balance.

Producer and wholesale prices decline
Producer prices of industrial goods fell 8.6% YoY and 1.2% MoM in December 2023. For the whole of the year, they were on average 2.4% lower than in 2022. The main driver for this decline was still the base effects from energy prices, supported slightly by a little less expensive intermediate goods, while consumer and capital goods were more expensive. Since energy prices were down 23.5% in Dec-23 YoY, thanks to declines in prices of natural gas, mineral oil products, heating oil, and motor fuel, without this energy impact producer prices were up 0.3% YoY and unchanged MoM. Metals prices, basic chemicals, and materials drove the move in intermediate goods. However, there were large price increases in the prices of concrete and cement (>20% for both), gravel, and natural sands. In the consumer goods space: durable goods were 3% more expensive vs Dec-22, but 0.1% cheaper than Nov-23; non-durable goods were up 3.2% YoY and unchanged MoM; food prices were up 2.8% YoY, in particular, processed potatoes +13.5% YoY, preserved fruit and vegetables +12.4% YoY, sugar +10.5% YoY, while vegetable oil and butter were down. The capital goods increase was driven mainly by a rise in machinery prices +4.7% YoY and motor vehicle prices +3.4% YoY.

Wholesale selling prices also kept declining, although at a slower rate in December: -2.6% YoY and -0.6% MoM, both rates a bigger decline than consensus expectations. The main driver remained mineral oil products where the drop was still significant at -9.8% YoY and -4.6% MoM. Declines were also observed for grain, unmanufactured tobacco, seeds, and animal feeds (-19.7 %), chemical products (-19.0 %), metals and metal ores (-12.7 %), and waste and scrap (-7.6 %).
Very importantly though, there were increases in the following food categories: fruit, vegetables, and potatoes +13.9% YoY; sugar, confectionery, and bakery products +8.9% YoY; wholesale beverages +7.1% YoY; tobacco +5.8% YoY. Annual averages for the whole of 2023 were down 0.5% vs 2022 but that is again driven by mineral oil products, while the averages for live animals, fruit and vegetables, sugar confectionery, and bakery products were all higher.

Economic sentiment still negative
The ZEW Indicator of Economic Sentiment for Germany went slightly further up in Jan-24, while the assessment of the current economic situation ticked down a bit and is still very much in negative territory. The sentiment improvement is thanks to ECB rate cuts expectations for the first half of 2024 and a large number of respondents also predicting rate cuts by the Fed in the US. The inflation rate increases in the euro area, Germany, and the US in December did not impact these expectations. Euro area sentiment by financial market experts went down a bit, while the current situation assessment climbed by 3.4pt although it remains at a negative 59.3pt.

Building permits are declining again
The number of approvals went down once again in November, when construction of 20,200 homes was approved, i.e., almost 17% less than in November 2022. The number of issued permits for the period January to November 2023 was about 26% less than the same period in 2022, with new residential buildings being 79,700 fewer. The decline was observed across all home types: -38.6% for single-family houses, -49.2% for two-family houses, and -23.8% for multi-family houses, compared to Jan-Nov 2022.

highlights from EUROPE

Consumer Expectations Survey November 2023 (CES)
1. Inflation expectations are declining
12-month and 3-year expectations are down to 3.2% and 2.2%, respectively, which are the lowest levels since February 2022. These expectations are mostly aligned across income and age groups. On a country level, they are mostly also consistent, except for the 12m expectations in Spain which have not moved much and remain most elevated compared to other big countries in the euro area.

2. Income and spending growth expectations improved overall
A bit higher is the expected nominal income growth rate over the next 12 months, at 1.2% on average. This optimism is, however, not broadly shared as middle-income quantiles are less positive and respondents from Spain, France, Germany, and Belgium do not fully share this view. Spending growth expectations over the next 12 months went down to 3.2%, and while this was broad-based across income and age groups (except the middle quantile), it was not shared by respondents in the Netherlands and Belgium where increased spending growth rates are expected.

3. Growth and employment expectations diverged
Economic growth expectations are in aggregate a little less negative but still sub-zero at -1.2%. They have deteriorated in Spain, Belgium, and Germany. Unemployment rate expectations have improved a bit across all countries, and consumers still expect the future unemployment rate to be only slightly higher than the perceived current unemployment rate, implying a stable labor market. The lowest income quintile continued to report the highest expected and perceived unemployment rates. The mean reported probability of losing your job in the next 3 months has, however, gone up across all age groups and almost all income quantiles.

4. Higher rise in house prices and a receding mortgage rate expectation
On average, the expected home price increase over the next 12 months is 2.1%, i.e., higher than in October. The expected rate has however come down in Spain, Belgium, and the Netherlands. Mortgage rate expectations have started to come down a bit (at 5.3%) with lowest income households expecting the highest mortgage interest rates. In Germany and the Netherlands, those expectations are still sticky high. Perceived access to credit has eased and credit applications over the last 3 months have gone up, especially in Germany and Spain. And the expectations have now turned, with the aggregate being that it will become even easier over the next 12 months.

You can review the 4 slides below for some selected graphs illustrating the results of the survey (the rest can be found on the provided ECB link).

Policy Rate Expectations for the ECB
According to the Bloomberg survey of economists, conducted between the 5th and 11th of January, 4 rate cuts of 25 basis points each are expected from the ECB, starting in June, and then in September, October, and December. This also captures the improved inflation forecast, which is now lower for 2024 (stable for 2025). However, multiple governing members of the Fed spoke this week, including President Lagarde, stating that these expectations might be too aggressive, and premature and that “markets are getting ahead of themselves”, in an attempt to influence market expectations. We are on track to get inflation down to 2%, but that target will likely be hit in 2025, and a lot can happen until then – so, it is too early to declare victory. Lagarde mentioned that in late spring, the ECB gets data from the collective wage agreements which could then give it a better idea of where household incomes and therefore inflation is going, and stated that if investors are mispricing the ECB’s future moves, that could be counterproductive to the fight against inflation. ECB’s Knot stated that the rate path priced in by the markets is self-defeating, mirroring that same sentiment. However, Lagarde still indicated that there is a possibility that the ECB might cut rates by the summer.

highlights from the united states

US Retail Sales Surprise
The Advance Monthly Sales report surprised to the upside with a 0.6% MoM and 5.6% YoY growth in December, higher than expected and higher than November. The resilience of the US consumer proves to be very persistent once more, with both in-store and online sales showing strong results at the end of 2023. Total sales for the 12 months of 2023 were up 3.2% from 2022.

Record use of the Fed’s Bank Term Funding Program (BTFP)
In recent weeks borrowing through the BTFP has been ramped up, reaching a high last week of nearly $162bn, an increase of $14.3bn over the previous week. Discount window borrowing has also gone up by about $189m. The plan from inception has been, that the BTFP (and all the preferential provisions it comes with) would end in March 2024.

Consumer Sentiment Improves Further
The Index of Consumer Sentiment constructed based on the University of Michigan Survey of Consumers, increased to 78.8pt in January, higher than expected. This is a sign of significant optimism, which is also coupled with a decline in inflation expectations to 2.9% (the lowest reading since December 2020). Over the last 2 months, sentiment has climbed a cumulative 29%, the largest 2-month increase since 1991 as a recession ended. For the second straight month, all five index components rose, with a 27% surge in the short-run outlook for business conditions and a 14% gain in current personal finances. Like December, there was a broad consensus of improved sentiment across age, income, education, and geography. Both current conditions and consumer expectations indexes increased markedly.

highlights from the united kingdom

Retail sales disappointment
December 2023 retail sales volumes and values came in lower than expected, showing a decline at the fastest rate since January 2021, which was observed across the board. This also reversed the gains that were seen in November. Overall volumes dropped 3.2% MoM and 0.9% QoQ. Non-food store sales volumes declined by 3.9% MoM, while food store volumes went down by 3.1% MoM. Non-store (mainly online) volumes decreased by 2.1% MoM, automotive fuel sales volumes by 1.9%, and department store non-food sales – a whopping 7.1% MoM. The pound dipped a bit against the EUR and the USD after the release. People likely brought forward their purchases to November when Black Fridays and Cyber Mondays, as well as other discount events, were taking place before the holidays, and then cut back on some discretionary spending at the end of the year.