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The Week in Global Markets

Financial markets summary:

– Europe: This week, the ECB left interest rates unchanged. ECB President Christine Lagarde sounded a tad more dovish in her press conference, as she indicated that wage growth, which had accelerated last year, is now showing signs of slowing down, and that disinflation is progressing as expected. In December, inflation did tick up again, but according to the ECB, this was less than anticipated and the forecasts are still for a deceleration during 2024. However, upside risks to inflation remain: military conflicts and disruptions to supply chains and shipping routes, as well as potential increases in oil and gas prices. Lagarde reiterated that it is premature to talk about rate cuts but she said this could happen by the summer. She highlighted that the euro area has likely stagnated in Q4-23 and there are some clear signs of weakness in the economy at the start of 2024. The euro fell below 1.09 vs. the USD, while German 10y yields remained mostly unchanged at the end of the week. European stock markets gained in value across the board, including in Switzerland and the UK. This was likely a combination of the dovish tone coming from the ECB but also corporate earnings and news of additional stimulus in China. Yields on Swiss and French bonds slipped, while 10-year UK gilt yields edged up. Despite these moves, the negative picture painted by the Purchasing Managers’ Indices (PMIs) is still rather disappointing, as business activity continues to contract. The exception was the UK, where the PMI went up more than expected, meaning that the country might not go into recession after all.

– United States: The US stock market had another week of all-time highs, with the S&P 500 and Dow Jones Industrial Average advancing for a 12th week. In addition to the surge in large caps, there were also gains in the small caps space, although the Russell 2000 remains significantly below its all-time high. Some negative news on earnings and outlook made several large stocks decline this week, in particular, Tesla and Intel, as well as AT&T, 3M, Johnson & Johnson, DuPont, Kimberly-Clark, Texas Instruments, and KLA Corporation. The PHLX Semiconductor Index fell by 0.8%. The biggest increases were in the energy and communication services sectors, while the consumer discretionary sector declined. Microsoft achieved a record this week, as it surpassed $3 trillion market capitalization for the first time. Among the companies with positive earnings and outlook reactions were Netflix, Verizon, United Airlines, and Procter & Gamble. There were a bunch of positive economic data releases this week (advance GDP growth estimate, personal income increase, PCE), but Treasury yields moved very little.

– Asia-Pacific: In Japan, both the Nikkei 225 and the TOPIX indices recorded declines this week, as the Bank of Japan did not change its accommodative monetary policy stance and kept its policy rate at -0.1%. Governor Kazuo Ueda indicated that if there is further evidence of an accelerating positive wage-inflation cycle, they will re-examine their massive stimulus program and that they think they can avoid any “risk of a severe, irregular policy shift”. In China, forceful stimulus measures were announced, leading to a jump in stock prices. The Hand Seng, the Shanghai Composite, and the CSI 300 index all rose this week. The People’s Bank of China (PBOC) announced that it is going to cut the reserve ratio requirement by 50bps for most banks on 5. Feb. Governor Pan Gongsheng said that the central bank will reduce rates on refinancing and rediscounting loans by 25bps from January 25, in an effort to provide support for agriculture and small businesses. In India, benchmark stock market indices declined this week, which is attributed to sub-par earnings results and sales of banking and financial institutions. Drops were observed in the Nifty IT sector, healthcare, pharma, and FMCG indices. Persisting geopolitical tensions and concerns about over-valuations are likely weighing on performance as well.

– Bitcoin: A record number of futures contracts on BTC have been opened at the Chicago CME Group, with traders hoping for quick profits on the crypto ‘cash and carry’ trade (gaining from the difference between those contracts and the spot price) after the ETF launch. The CME is now the largest Bitcoin derivatives exchange. Market participants and analysts stated that this is likely indicative of a change in the structure of the bitcoin market after the introduction of the ETFs, as institutional interest is on the rise and the market is now attracting more arbitrage-seeking traders, exploiting opportunities arising between Bitcoin and its various derivatives.

policy rate overview

Most central banks left rates unchanged this week, including most notably the ECB and the BoJ, with both noting progress on inflation and focusing on the impact of wage increases. Türkiye’s Central Bank hiked another 2.5 percentage points to 45%, hoping to finally stem inflation which had reached nearly 65% in December. This was the 8th interest rate hike since President Erdoğan dropped his unconventional economic policy aspirations, but analysts say this might still not be sufficient to reduce the rate of inflation. The Turkish lira has now reached a rate of 32.96 per euro vs. a rate of 20.45 a year ago.

Next week, it’s the turn of the US Federal Reserve and the Bank of England, as well as Brazil’s, Hungary’s and Sweden’s central banks. The Fed and BoE are expected to keep rates unchanged, with the latter still having to worry about a 4% inflation rate recorded for last month. The market is pricing in over 50% probability that the Fed will start cutting by 25bp on May 1st, and there are similar expectations for the BoE cutting in May as well. The US economy is clearly performing stronger than any other major developed economy, with resilient growth above expectations, while the UK is showing signs of activity picking up again which could potentially delay any plans for rate cuts a bit.

highlights from Germany

German Business Climate deteriorates further
The ifo Business Climate Index Kept worsening in January, with the current business situation assessed as deteriorating and expectations turning pessimistic again. Business cycle indicators are very clearly recessionary. Current situation: in services, the assessment was significantly worse due to order backlog dissatisfaction; in trade (both retail and wholesale) and construction, the story was similar on both indicators. Only for manufacturing the current assessment has improved. Business expectations: more pessimism in services and trade, and a darker outlook for construction. Again, manufacturing is the exception with a slight improvement but pessimism remains there as well – order books are still shrinking, and capacity utilization is still falling. The ifo Institute updated its forecast for the German economy – a downward revision to 0.7% growth in 2024, however, it is worth highlighting that some of the other economic think tanks and institutes have bleaker projections for this year, forecasting a decline in GDP once more.

Flash PMI shows signs of bottoming out
The Purchasing Managers’ Index is still in contraction territory but is rising to better-than-expected levels. The decline in new orders has slowed and business expectations have started to pick up, however, overall business activity is still falling, backlogs are in decline, the consumer is still hesitant, financing costs and geopolitical uncertainty are still quite high, and international demand has not recovered. As the report by HCOB/S&P Global points out, this is a sluggish start to the new year. Services activity has not only declined for the fourth consecutive month but has also accelerated in its downturn. These developments suggest that the recession has continued into the current quarter.

Consumer confidence is in post-holiday depression
The GfK Consumer Confidence index was revised higher for December, but unfortunately dipped again to nearly 30pt in January, approaching readings from the start of 2023. This was due to markedly reduced economic and income expectations, and a low willingness to buy, while the propensity to save is very noticeably up. According to the survey report, crises and wars, as well as persistently high inflation, make consumers feel insecure and thus prevent an improvement in consumer sentiment. Inflation was back up at 3.7% in December, the regular 19% VAT returned in the gastronomy sector, while the increase in the CO2 tax for energy will most likely increase prices and further weaken income expectations. In the open survey, around 60% responded that high and rising prices are the reasons for their negative judgment. This puts the issue of inflation well ahead of all other reasons mentioned, such as political and economic uncertainty and their own bad financial situation.

Nominal Exports decrease further
In nominal terms, German exports to non-EU countries continued to decline in Dec-23 by 4% MoM and 1.7% YoY vs. Dec-22 (calendar and seasonally adjusted), and by 9.2% MoM non-adjusted. Except for the UK and Mexico, with the other most important trading partners – the US, China, Switzerland, and Türkiye – there were drops in the exports.

highlights from EUROPE

Better PMIs in the rest of Europe, outside of Germany and France
In France, economic activity keeps dropping steeply, with composite PMI, manufacturing output PMI, and services activity PMI all falling. The downturn worsened in January as faster falls in output at both service providers and manufacturers. Weaker sales performances placed a considerable constraint on output volumes at French companies. Lower activity levels at clients, uncertainty towards the outlook, as well as general weakness across the economy were reasons given for the drop in new order inflows in January. The sustained decline in demand continued to drive French private sector firms towards backlog completion, with outstanding workloads falling for a sixth successive month in January. Sector data showed the reduction was broad-based and led by goods producers. Europe’s second-largest economy is likely to stagnate in Q1-2024, but there is a risk this could turn into a contraction.
Eurozone Flash PMI looks better than the two largest economies, Germany and France, which are still dragging down the area… Flash figures show slower contraction in activity, with manufacturing, services and the composite all rising to several-month-highs The rest of the eurozone as a whole has now returned to growth after 5 months of decline, recording the largest – yet still modest – expansion since last June. Service sector growth outside of France and Germany accelerated to a 6-month high and the manufacturing decline moderated to register the smallest reduction for 10 months. New orders for goods likewise showed the smallest decline in 9 months. January also saw the region’s export decline easing, with overall new export orders dropping at the slowest rate for 9 months thanks to reduced losses for both goods and services. Not a proper recovery yet, but it seems things might be bottoming out at this point.

Monetary growth turns back up at the end of 2023
In December 2023, currency in circulation and overnight deposits (M1 monetary aggregate) annual growth was still negative but slightly less so at -8.5% (vs. -9.5% in Nov). Short-term deposits other than overnight deposits (difference between M2 and M1) annual growth was stable at 20.9%. Annual growth in marketable instruments (the difference between aggregates M3 and M2) was up to 19.3% (vs. 17.8% in Nov), with M3 (broad money) as a whole growing at 0.1% (vs. -0.9% in Nov).
Credit to euro area residents was down 0.4% YoY, with credit to the general government declining 2.5% YoY, and credit to the private sector rose 0.5% YoY (loans to households +0.3%, loans to non-financial corporations +0.4%). Net external assets contributed 2.8 percentage points (up from 2.7 percentage points in November), credit to the private sector contributed 0.4 percentage points (up from 0.3 percentage points), credit to general government contributed -1.0 percentage points (up from -1.1 percentage points), longer-term financial liabilities contributed -2.1 percentage points (up from ‑2.3 percentage points), and the remaining counterparts of M3 contributed 0.0 percentage points (up from -0.4 percentage points).

Q1-24 ECB Survey of Professional Forecasters
The survey shows that both inflation expectations and real GDP growth forecasts were revised downward in the updated SPF, while the unemployment projection remained unchanged. ECB’s main refinancing operations (MROs) are expected to start declining in Q2-24, reaching 3.75% by Q4-24, then further to 3% in 2025 and 2.75% in 2026. The euro is expected to appreciate a bit against the USD to 1.13 in 2026. Nominal wages are projected to increase by 4.2% in 2024 and 3.4% in 2025, before moderating to 2.8% growth in 2026 and 2.6% in the longer term

Real disposable income declined in Q3
Overall in the euro area and the EU, real household consumption per capita rose slightly (+0.1% QoQ and +0.3% QoQ respectively), while real income per capita declined in the euro area (-0.3% QoQ) but increased in the EU (+0.1%). While gross nominal disposable income went up (mostly due to increases in employee compensation mainly), the burden of taxes and social security contributions continued to increase as well, thereby bringing the rate of growth lower in Q3. Household savings rates decreased by 0.3pp in the EA and by 0.4pp in the EU QoQ, with the largest drops in Spain and Ireland. Household investment rates also decreased by 0.1pp QoQ in both the EA and the EU, with the largest drop in Poland, Sweden, and Finland.

Q4-23 ECB Bank Lending Survey (BLS)
The latest BLS shows that credit standards in the euro area continued to tighten while demand for loans kept declining, both with corporations and households. In most countries, banks reported a perception of increasing risks and an expectation of further tightening in Q1-24.

Business lending:
– company demand for loans kept declining in Q4, mainly driven by higher interest rates, reported by banks in all four of the largest euro area economies, and lower fixed investment, consistent with the net decrease in demand for long-term loans;
– for Q4, banks expect a small net increase in demand for loans to firms for the first time since Q2-22;
– banks in most of the largest euro area economies reported a tightening impact owing to greater credit risks: the weak economic situation and outlook, together with credit risk for firms related to their financial situation, were the main underlying reasons for the tightening impact of risk perceptions;
– banks did not further revise their risk tolerance in Q4;
– overall terms and conditions for new loans to enterprises tightened moderately further, reflecting the pass-through of ECB policy rate hikes and the adjustment of bank lending policies to higher credit risks; margins on riskier loans to firms did widen further at the euro area level and banks demand additional protection against potential credit losses in the context of higher borrowing costs and weak economic growth; higher risk perceptions and lower risk tolerance continued to be the main drivers of the net tightening in overall terms and conditions for loans to firms;
– there was a further net increase in the share of rejected applications for loans to firms (net 12%), with the increase bigger for SME loans
– net demand for loans continued to decrease significantly and was widespread, with net declines in all four of the largest euro area economies – with the higher interest rate environment and declining fixed investment still being the key drivers.

Household lending:
– net tightening of credit standards on loans to households for house purchase continued but was less pronounced, driven by banks’ increased risk perceptions primarily related to perceptions regarding housing market prospects and the general economic outlook;
– In Q1-24, euro area banks expect a rise in the net tightening of credit standards on loans to households for house purchase (net 8%), with this being most pronounced in Germany;
– overall terms and conditions eased moderately, although margins on average loans remained broadly unchanged, and margins on riskier loans continued to widen, and loan-to-value ratios tightened slightly; competition contributed to the easing;
– among the largest euro area economies, margins increased in France and Spain, with banks in those countries also reporting even tighter terms and conditions, while banks in Germany and Italy reported narrower margins on average loans and easier terms and conditions;
– there was a further net increase in the share of rejected applications for housing loans (net 6%);
– the net decrease in demand for housing loans remained substantial in Q4 and was stronger than anticipated by banks, and widespread among the biggest euro area economies; primary drivers – high interest rates, as well as weakening housing market prospects and low consumer confidence;
– there was also further tightening of lending standards for consumer credit due to banks’ higher risk perceptions and lower risk tolerance; margins on consumer loans widened, especially for riskier loans; rejected applications went up again, and net demand decreased moderately.

highlights from THE UNITED STATES

Real GDP growth once again with a positive surprise
In Q4-23, real GDP growth was 3.3% according to the advance estimate, higher than the expected 2%. The largest contributor was consumer spending (1.91pp) on both goods and services. But all components had a positive development vs Q3 and a positive contribution to Q4 growth. Leading service contribution: food services, health care, accommodations. Leading goods contribution: pharmaceuticals and recreational goods and vehicles. Main government spending increase: on the state and local government level, it is employee compensation and investments in structures, while on the federal level, it is non-defense spending. For non-residential fixed investment, the biggest drivers were increases in intellectual property products, structures, and equipment.

The Leading Economic Index (LEI) still flashing red
The Conference Board LEI is still signaling a recession ahead, despite the soft landing sentiment everywhere else and the positive surprises from the GDP growth figures… The LEI fell by 0.1% in December 2023 after declining 0.5% in November, making the overall decrease over Jun-Dec 2.9% The slight decline in December is still a sign of an underlying weakness in the US economy. Six out of ten leading indicators made positive contributions to the LEI in December. Still, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence. As the magnitude of monthly declines is smaller, the LEI’s 6m and 12m growth rates have turned upward but remain negative. Therefore, the CB expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.

Richmond Fed Manufacturing Index surprises again to the downside
This is the third consecutive decline in the index and is now at its lowest level since May 2020. The new orders component deteriorated in January, while shipments remained in contraction but improved marginally relative to the prior month. Employment fell sharply to -15, but the average wage component climbed again. Firms remained somewhat pessimistic about local business conditions, as the index increased slightly but remained in negative territory.

Flash PMI at a 7-month high
S&P Global Flash US Composite PMI shows output growth was the fastest for 7 months at the start of 2024, with businesses signaling a strong upturn in activity. This was driven by service providers, as manufacturers continued to see a drop in production amid intensifying supply issues.
A broad-based improvement in demand conditions was reported, as firms reported stronger new order growth for both goods and services, helping push business confidence for the year ahead to a 20-month high.
The rate of decline in production at goods producers eased from that seen in December, however, linked to improved order inflows. Manufacturers also mentioned that delivery delays following severe storms and shipping disruptions at times hampered production. Suppliers’ delivery times at goods producers lengthened on average for the first time in 13 months. Companies in the US recorded another rise in employment during January, albeit slightly slower than seen in December. The increase in staffing numbers was only marginal overall and the second-softest since last August.

PCE keeps cooling down
The Fed’s preferred measure of inflation has come down despite strong consumer spending: the core PCE index eased to 2.9% in December, while the 6-month annualized core PCE measure has moved below 2%. Headline PCE declined to 2.6%. This is good news for the Federal Reserve and supports the case for the Fed to cut rates later in 2024.

highlights from THE UNITED Kingdom

Flash PMI shows UK business activity is recovering
Output in the private sector is turning around, per the Flash PMI index. The composite output index reached a 7-month high, while the services activity index reached an 8-month high, both of which were in expansion territory. The rise in service sector activity was the fastest since last May, whereas manufacturing production decreased to the greatest extent for 3 months. With improving demand conditions and improving business outlook, there is an indication that private sector employment is starting to rise again.

Consumer confidence is improving
The index of consumer sentiment compiled based on the GfK survey went up in January, reaching the highest level since the start of 2022. However, it is still negative. All 5 components have improved compared to last month: importantly, the view on the personal financial situation for the coming 12 months is better, and the forward-looking economic situation and major purchases indices are also up. Despite the cost-of-living crisis still impacting many households across the UK, consumers appear to be encouraged by the positive news about falling inflation. Now the question is whether this optimism can be sustained for longer.