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: The moves in the European stock markets were more limited this week. Stoxx 50 and FTSE MIB advanced, but the broader Stoxx 600, as well as German, French, and Swiss benchmark indices, edged down only slightly. However, the DAX index did reach an intra-day all-time high level of 17,012. The best-performing stock in the European index was Danske Bank which benefitted from its fourth-quarter results as it beat its Earnings per share (EPS) by 2%, with an 80% increase in profits for 2023. Nevertheless, it warned that the full effects of higher interest rates are yet to be felt and that this is already visible in the deterioration in credit quality in some segments of its portfolio towards the end of the year. German 10-year government bond yield went down to nearly 2.11% after the euro area disinflation data came out but then returned above 2.23% to end the week almost unchanged. UK 10-year bonds finished the week slightly higher, with the Bank of England holding its base rate steady at 5.25% and removing from its statement any indication that further hikes could be expected. Instead, the signal from the MPC is that they are starting to consider cutting but need to see more evidence first that inflation is now surely moving towards 2%. The euro appreciated against the dollar on Thursday as euro area inflation data showed progress towards the target continued, but then on Friday it weakened again after the strong non-farm payroll (NFP) data release from the US, which seemed much better than expected (at least at first glance).
– United States: This week saw major earnings announcements and economic data releases. It was the week of the tech giants. After Tesla’s results disappointed last week, the Magnificent 7 that reported this week showed some solid results. Meta reported an increase in advertising revenue and reality labs and strong sales of its VR headsets around the holidays, which contributed to a higher operating margin. The company announced that for the first time, it would start paying a quarterly dividend of $0.50 per share, in addition to a $50bn in share buybacks. As a result, the stock advanced over 20%. Amazon reported strong revenue, operating income, and net income increases and investors reacted positively with the stock going up over 8%. Apple’s report showed that growth in service sales remains impressive, and iPhone as a segment also still adds more revenue, while the wearables segment suffered a drop of 11% YoY (which probably suffered due to the legal case related to the Apple Watch patent for the blood oxygen sensor). Net income was up 13% YoY, but iPad and accessories sales were down significantly. The stock fell over 4% WoW. Microsoft beat expectations across the board, with AI contributing significantly to the growth of its cloud business segment. However, the stock still fell on Thursday as investors were likely looking for better results, but then it went back up on Friday and ended +1.8% higher WoW. Alphabet reported higher revenue in Q4 and higher-than-expected profits, but investors were disappointed with the slip in ad revenues at around $400m below estimates. The stock lost 6.4% WoW. The S&P 500 and Dow Jones gains this week were rather narrow, while the small-cap Russell 2000 index was down both on the week and the month, with earnings declining over 50% for Q4 – for those companies who have reported so far.
– Asia-Pacific: In Japan, both the Nikkei 225 and the TOPIX indices increased during the week, with solid earnings releases and good indications of stronger-than-expected domestic demand. The yen appreciated a bit against the USD (to 146) in the middle of the week, but then went back to over 148 after the strong NFP release from the US on Friday. As a result of a strong auction of Japanese Government Bonds (JGB), yields fell compared to the previous week, with the 10-year ending the week at 0.661%. In China, mergers of hundreds of rural banks were announced, as significant amounts of bad loans with smaller lenders cause financial stress. Global funds continued with net sales of Chinese stocks for the 6th month in a row, and major stock indices plunged – the CSI 300 was down nearly 4.7%, the Shanghai Composite over 5.3%. Regulators had to formally implement measures to limit short selling, coming into effect from Monday onwards. The real estate turmoil has not yet been contained – Evergrande (previously the largest developer) was ordered by a Hong Kong court into liquidation (it defaulted in 2021), as creditors could not agree on a restructuring plan. Markets now expect rate cuts and additional stimulus as a result of this turmoil and slowing growth, which is likely what drove the 10-year government bond yield to fall to a two-decade low. In India, the Nifty index hit an all-time high on Friday, with strong purchases across multiple sectors. Positive market sentiment was likely driven by the budget focused on growth and fiscal consolidation, declining bond yields. The strongest gains were in Reliance and IT stocks. However, based on price-to-earnings measures, the market is currently deemed overvalued.
– Bitcoin: Bloomberg reported that the adoption of Bitcoin ETFs has been slowed by due diligence processes at large trading platforms, as they are examining them to determine whether they will be available for nearly 19,000 independent financial advisers. One of the main questions is whether the ETFs could be shut down if they perform poorly, failing to accumulate significant assets, which could hurt investors and be quite costly for advisers. According to Bloomberg data, 253 ETFs closed down in 2023 with an average amount of assets of $34 million, including those covering crypto-tied products, such as VanEck Digital Assets Mining ETF (DAM) and the Volt Crypto Industry Revolution.
policy rate overview
The Federal Reserve did not change the target fed funds range this week. However, it did significantly update the language of the statement, which previously indicated readiness to keep hiking until inflation was back down to target. This is now gone, and the statement is signaling that most likely they are done raising rates but not yet ready to start cutting – because the FOMC wants to gain “greater confidence that inflation is moving sustainably toward 2%”. In the press conference, Fed chair Jerome Powell said that inflation has come down without a slowing economy and without the “important increases in unemployment”, for which they had clearly been hoping, and the FOMC sees no reason to get in the way of that process. A March rate cut is seen as unlikely – as more confirmation with “good data” is expected. The statement makes no more mention of the lagged effects of monetary policy, rather it contained the view that the risks to achieving the employment and inflation goals are “moving into better balance”. The immediate market reaction was that stocks fell, Treasury yields fell and the futures-implied probability of a cut in March declined to 35.5%, which still seemed too high given the statements.
The Bank of England (BoE) followed suit on Thursday and kept the base rate at 5.25%, and, in statements quite similar to those of the Fed, it said it needed more evidence before it could decide to cut. The MPC statement said that service price inflation is still too high and that the effect of deflating energy prices is likely to dissipate in the coming months, which could leave some underlying pressures. Swap markets reacted with a slightly lower implied probability (55% vs. 60% before) of a rate cut in May. The MPC has also decided to keep “under review” how long rates can stay at current levels, as they are deciding what the duration of this restrictive stance should be. The language about further tightening has been removed, and growth expectations have been upgraded (to 0.25% in 2024 and 0.75% in 2025).
The Swedish Riksbank kept the policy rate unchanged as well at 4%, but the statement was that they might bring forward the rate cuts to the first half of 2024 – if inflation prospects remain favorable. After January and February data are out, they cannot rule out a cut even in March. By the end of the year, the expectation is to go down to 3%.
The Hungarian National Bank (MNB) decided to cut rates with a smaller amount than expected (75bp instead of 1pp) to reach a 10% policy rate, as it assessed that market risks have risen after a moderate sell-off of the Hungarian forint. The MNB predicts that disinflation is set to continue in Q1-24 and reach the upper bound of the 4% tolerance band in the spring months (the inflation target is 4.0-5.5% for 2024, but then set to fall in the following 2 years to 2.5-3.5%).
The Central Bank of Brazil reduced its policy rate by 50bp to 11.25% for the 5th consecutive time this week, which was decided unanimously by its rate-setting committee. If the situation allows, in future meetings, they plan to continue with cuts of the same size. The bank notes in its statement that “the external scenario remains volatile” as it is not yet clear when the biggest central banks will begin the easing cycle. Some economists now expect that the easing pace could slow to 25bp per month in June, and then the year could end with a rate of 9%.
Next week we will see decisions from the central banks of Mexico, Czechia, Poland, India, and Australia.
highlights from Germany
Inflation is back to deceleration in January
Flash Consumer Price Index and Harmonized Index of Consumer Prices show that in January inflation likely returned to its downward trend, with the headline figure down to 2.9% YoY / 0.2% MoM for the CPI, and 3.1% YoY / -0.2% MoM for the HICP. Core CPI is expected to be 3.4% YoY. This already reflects the discontinuation of the price controls for energy and CO2 that were artificially lowering the prices of fossil fuels. Importantly, food price inflation kept slowing down but is still well above the general level and above the historical average.
Retail Sales Continue to Disappoint
Data for the whole of 2023 and December in particular show that the German consumer remained gloomy and reluctant to spend. Provisional annual figures for retail sales declined 3.1%, while the December number was down 1.6% MoM and 1.7% YoY. In the breakdown, it is visible that these declines are broad-based and include not only physical store sales but also internet sales. Real food retail sales are at the lowest level in recent years: -3.9% for the whole of 2023 vs 2022, and the gap with nominal sales is indicative of the cause – high inflation in food prices. Non-food retail real sales fell 3.1% in 2023, while real online & mail sales fell 3.9%, but that’s coming off from the highs still recorded during the pandemic. However, Christmas sales were lower in Dec-23 vs Dec-22 by 1.7% in real terms, and Nov-23 was also lower by 1.6%.
highlights from Europe
The Euro Area is stagnating and the issue is structural
As growth in the euro area was at zero in Q4-23 (according to preliminary figures), it avoided a technical recession, but the news is still far from good. It is possible that it will not be able to start growing without rate cuts by the ECB. Quarter-on-quarter, real GDP growth was 0%, with contractions in Ireland, Germany, and Lithuania and stagnation in France, while year-on-year it was 0.1% vs. Q4-22, with contractions in Ireland, Austria, Czechia, Germany, and Latvia. The EU as a whole had 0% growth QoQ and 0.2% YoY.
While US subsidies and industrial policies are encouraging the private sector to increase capital expenditure, in Europe the subsidies cannot achieve the same effect. Since the introduction of the IRA and CHIPS acts, factory investment in the US has risen quite dramatically, while in Germany and France, spending on the construction of manufacturing plants has either dropped or stagnated not just recently but for a long time. The US programs are simple, involve tax incentives, and the low energy costs and strong domestic demand offer immense advantages. In contrast, in the EU the programs are too complex and difficult to access, tax advantages differ too much across member countries, the regulatory framework suffocates business initiatives, and energy costs and depressed demand are some of the weakest aspects. In addition to that, the outperformance of the US over the Euro area, in terms of GDP growth, since the GFC (2008-2023) when broken down into its components, shows that over time the EA lags behind in productivity growth and this adds up to a significant gap explaining the divergence in growth. This is not caused by too little investment in new capacity, but rather by a way too slow rate of growth in technological adoption and efficiency.
Inflation might be slowing down again
It seems that we are on track to see the 2% target reached, likely even in the course of this year. Headline inflation in the Euro Area is down to 2.8% YoY and the HICP is actually negative MoM (-0.4%), per the flash estimate. Core HICP is also declining and the rate was 3.3% YoY and negative 0.9% MoM. However, the monthly move was driven by a large drop in non-energy industrial goods, while food and energy both went up MoM. On an annual basis as well, food inflation remains too high, and services are still stubbornly at 4%.
Euro Area and EU Economic Sentiment is not recovering yet
The January Business and Consumer survey of the European Commission shows that there was no upturn in economic sentiment in the EU and the EA. In the EU, the indicator development was a reflection of stable confidence in industry, services, retail trade, and consumer sentiment. Confidence in construction, however, declined. The most significant deterioration was observed in Germany, while there were improvements in Poland, France, the Netherlands, Italy, and Spain.
Stocks of finished products were too small, while managers’ production expectations and assessments of the current level of overall order books deteriorated. This contributed to a slight decline in industry confidence of -0.2pt. Consumer confidence also ticked down by the same amount due to slightly improved views on the current financial situation of households, and slightly lower expectations about the general economic situation in their country, leading to decreasing propensity for major purchases. Construction confidence dropped by 1.5 points as builders’ employment expectations and their assessment of the level of order books deteriorated. There were even more construction managers pointing to insufficient demand as a key factor limiting construction activity, whereas the percentage of construction managers indicating labor shortages, material/equipment shortages, or financial constraints as limiting factors decreased.
The Employment Expectations Indicator (EEI) is still above its long-term average but declined 0.8pt as a result of reduced employment plans among retail trade and construction managers.
The estimated rate of capacity utilization decreased by 0.5 percentage points, to 79.1%, in January 2024 compared to October 2023, further below its long-term average of 80.6%. Export orders expectations declined, and the share of industry managers indicating insufficient demand as a factor limiting their production increased. The percentage of managers pointing to shortages of material and/or equipment as a factor limiting production decreased further. Services capacity utilization also declined compared to October, reaching 89.1%
highlights from the UNITED STATES
Employment: Reading between the lines
January nonfarm payrolls (NFP) beat expectations this week, increasing by 353k (vs. 185k estimated), and December numbers were revised up from 216k to 333k, which seems like a great result. Average hourly earnings ticked up to 4.5% on a YoY basis. The increase in employment was broad-based across industries, with education and healthcare sectors leading. However, the devil is in the details: hours worked actually declined, and there was also a great discrepancy between the two component surveys: establishment NFP was up 353k but the household survey was -31k. The decline in full-time workers in January was 63k, following a December decline of 1.5m. While part-time workers rose by 211k to a 2-year high. Hence, the report was actually not as great as the headlines would suggest at first glance.
The Job Openings and Labor Turnover (JOLTs) report rose slightly to 9.026 million (vs. 8.75m estimate and 8.925m in the month before) in December. Layoffs and discharges were unchanged vs. November (at 1%) and are still quite low from a historical perspective. The quits rate remained at 2.2%. This should, on balance, contribute to a lower chance of the Fed cutting rates sooner rather than later, as the market is still tighter than they need.
Regional banks bank in focus
New York Community Bancorp (NYCB) dropped 38% on February 1st, as it reported an unexpected loss of $252m and cut its dividend in order to meet capital requirements. It had an increase in its loan loss provisions to $552m, way exceeding expectations (more than 10 times!). This is the result of issues with office and multifamily real estate loans, a significant decline in capitalization, and high and growing reliance on wholesale funding. This is effectively a red light for regional banks that are overexposed to commercial real estate. The KBW Regional Banking Index has now dropped over 7.5% on a weekly basis, and it had the biggest 1d drop on Thursday since March 13 2023 when Signature Bank collapsed. A reminder that NYCB acquired part of Signature Bank last year.
This episode has brought the problem of regional banks’ and even global banks’ real estate exposures back into the limelight. After NYCB we got a warning from Aozora Bank in Japan, which forecasts a full-year loss on overseas real estate loans and stated it would probably take as much as two years for the US office market to stabilize). Then came the quarterly report for Q4 of Deutsche Bank, which reported a 5-times jump in its loan-loss provisions on US CRE compared to the year before. The concern is that the risks are not confined to the US real estate market: Switzerland’s Julius Baer reported over 50% drop in its profits as it had to write off CHF606m from its exposure to Signa, the crisis-ridden Austrian property group – and the CEO had to resign.
US House Prices Make New Highs in November
Both the FHFA and the S&P CoreLogic Case-Shiller home price indices reached all-time highs in November, reversing the recent shallow drops experienced before. FHFA went up 0.3% MoM, aligned with expectations, and recorded a 12th consecutive month of gains. The CS index was up 0.24% MoM, a 9th consecutive increase. A note on the development: even though this was reported in November, some of the data reflects contracts completed several months before, therefore it has a significant lag.
Consumer Confidence Hits 2-Year High
The CB Consumer Confidence Index rose in January to the highest level since Dec-21, a 3rd consecutive month of increase. The US consumer appears to be more satisfied with the current business situation and labor market conditions, while the short-term outlook, reflected in the expectations index, improved. This is thanks to slowing inflation, expectations of interest rate declines, and favorable employment conditions as companies continued to hoard labor. Consumer expectations for the next 6 months increased slightly due to lower pessimism around future business conditions, labor market, and income prospects.
highlights from the UNITED KINGDOM
Credit Conditions Seem to Have Improved in December 2023 in the UK
Net mortgage and remortgage approvals for house purchases increased between November and December, while the ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages fell by 6bp to 5.28%, the first decline since Nov-21. Net consumer borrowing by individuals fell, and household sight deposits increased on aggregate, and for the first time since May-22, flows into sight deposits exceeded those in time deposits.
UK public and private non-financial businesses borrowed on net 0.7 billion pounds. Borrowing by large non-financial corporations increased MoM, while net borrowing by small and medium-sized companies (SMEs) decreased (still in a net repayment territory of GBP 1bn). The average cost of new borrowing from banks by private non-financial companies fell from 7 to 6.78%.
Author: Nikolay
Founder of MoneyCraft
