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 week in European stock markets was a battle between positive earnings updates and high interest rate concerns. Some companies announced strong quarterly earnings updates, driving up pan-European STOXX indices, as well as country indices such as those in Italy and France. The DAX, however, barely moved on the week. Healthcare and technology stocks were notable gainers this week, while the banking and utilities sectors declined. The UK FTSE 100 index fell 0.56% and the Swiss SMI fell 1.32% on the week. On the other hand, ECB members spoke on several occasions about keeping rates higher for a bit longer in order to contain inflation – given sticky service prices, disruptions to supply chains as a result of the Red Sea situation, and the tight labor market. German and UK 10y yields rose as expectations for early cuts by the ECB or BoE eased (implied probabilities for both to cut in April, resp. May, now hovering around 50% or less).
– United States: For the first time in history, the S&P 500 closed above the psychological level of 5000 on Friday, as the Nasdaq hit 16,000. The breadth in these moves was narrow, driven mainly by mega-cap stocks, with NVIDIA in particular getting another boost on high earnings expectations. Reuters reported that the company was building a new business unit focused on designing bespoke chips for cloud computing firms and others, including advanced artificial intelligence (AI) processors. The semiconductor index (SOX) advanced over 5.3% Week-on-Week. By now, two-thirds of S&P 500 companies have reported earnings and 81% are beating estimates so far, with Q4 growth at 9% vs. 4.7% expected. The concerns about commercial real estate and its negative impact on regional banks remain high, as NYCB stock has now fallen over 15% WoW, while the regional bank index recovered slightly after the middle of the week but is still down 1.25% WoW. Markets are still carrying hopes of a Fed cut, although the likelihood of that happening sooner rather than later has declined, with the March cut now at 16% implied probability, and a May cut at 52.2% probability (according to the CME Fed Watch Tool). Once we see data about January consumer prices development next week, we could have a better idea as to when it will be more likely to see the first cut. Treasury yields finished the week at their highest levels since December. Revisions to the past CPI figures were relatively small, but the eyes are still on next week’s release, with expectations of analysts at around 3% YoY headline and 3.8% YoY core inflation rates. The Treasury Department’s $42bn auction of 10y notes was well received by the market.
– Asia-Pacific: Japan’s stock market advanced on a weekly basis, with both the Nikkei 225 and TOPIX indices rising. The yield on 10y government bonds rose as the BoJ provided assurances that financial conditions would remain accommodative and the yen weakened slightly against the dollar. In China, deflation news was overshadowed by government stimulus measures which drove a rally in the stock market. The Shanghai Composite Index rose 4.97% and the CSI 300 advanced 5.83% WoW. In Hong Kong, the benchmark Hang Seng Index rose 1.37%. Trading in mainland China markets will resume on Monday, Feb 19th due to the Lunar New Year holidays. According to Bank of America, the stock inflows ($19.8bn during the week) were driven by state funds as intervention in the markets intensified. Analysts expect more stimulus in an attempt to stem the downturns in property and stock markets, as well as ongoing deflationary pressures. The PBoC’s report stated that policy should remain flexible, targeting domestic demand, as the central bank expects consumer prices to start rebounding. The Australian dollar strengthened slightly against the USD after the Reserve Bank of Australia (RBA) decided to keep rates unchanged but warned that it might still hike rates to fight inflation. The ASX 200 index declined slightly WoW.
– Bitcoin: The biggest cryptocurrency experienced a major increase this week, briefly breaching the $48,000 level, as positive sentiment returned with fears of GBTC outflows subsiding. The optimism was most probably driven by recent inflows into the new spot ETFs, the expectations related to the upcoming halving, and the risk-on attitude of market participants.
policy rate overview
Despite some reacceleration of inflation in January, Mexico’s central bank left its policy rate unchanged at 11.25%. Core inflation rate is still falling, albeit it is still high. Expectation is that in Q2-24, inflation will reach the 3% target as the price shocks continue to recede.
Czechia’s central bank cut its benchmark interest rate by 50bp, down to 6.25%, and borrowing costs by 0.25bp. Overall for 2023, the country had an inflation rate of 10.7%, lower compared to 2022 but much higher than the 2% target. The economy already contracted by 0.2% in Q4-23. These cuts are expected to continue in the following months.
Poland’s national bank left the policy rate unchanged at 5.75%, aligned with expectations. The Monetary Policy Council stated that inflation in Q1-24 is expected to fall markedly but then is likely to reaccelerate in Q2 as the value-added tax (VAT) on food returns to normal and energy prices go up. The MPC seem to aim to stabilize rates at current levels, although there might be a cut later in the year. Analysts are now expecting only one 25bp cut by November and there is a high probability that rates will not be changed throughout the whole of 2024.
The Reserve Bank of India (RBI) also decided to keep its repo rate the same, at 6.5%, which reflects the ‘cautious yet steady approach towards India’s economic management’, as commented by RBI Governor Das. This is an attempt to carefully navigate the balance between enabling economic growth and controlling inflationary pressures. Headline inflation is decelerating while core inflation is stable, and the interim budget is fiscally prudent and non-inflationary.
The board of the Reserve Bank of Australia (RBA) decided to keep the cash rate target at 4.35% and the interest rate paid on Exchange Settlement balances at 4.25%. Inflation is easing but is still high at 4.1%. The central forecasts of the RBA are for inflation to return to the target range of 2–3% in 2025.
Next week, the Russian central bank will announce its decision about its key interest rate, which currently sits at 16% as it hiked in the past year to fight inflation (which was 7.4% on an annual basis in 2023). The expectation is that it will remain unchanged.
highlights from Germany
Industrial production is still in decline
Per preliminary data from the Federal Statistical Office, industrial production dropped further in real terms, both for December 2023 (-1.6% MoM/-3% YoY) and for the full-year 2023 (-1.5% vs. 2022). Energy-intensive industries (-5.8% MoM) and energy production led this decline. The most significant drop was recorded in the chemical industry (-7.6% MoM) and in construction (-3.6% MoM), followed by the manufacturing of rubber, plastic, and non-metal mineral products (-4.4% MoM), the manufacturing of computer and electrical equipment (-2.2% MoM), and textiles and textile products (-1.4% MoM).
Order drought persists
Overall factory orders were up 8.9% MoM (2.7% YoY) in December, however, this was due to the jump in large aircraft orders which doubled vs. November (in addition to the increase in large orders in the production of metal products and electrical equipment). Without these, there was a 2.2% MoM decline, and overall for 2023, orders were down 5.9% vs. 2022. Orders for the construction of aircraft, ships, and trains recorded an increase in 2023. In December, some key sectors for the German economy recorded drops in orders: auto (-14.7%), mechanical engineering (-5.3%), and chemical industry (-3.7%). Capital and intermediate goods were up, while consumer goods orders dropped 1.3%. Sales went down by 0.1% in December MoM in real terms and 3.1% YoY. Domestic demand is what drove the decrease.
Moreover, per the survey performed by the ifo Institute, there is a pervasive lack of orders at the start of this year as well, across sectors, that is weighing heavily on activity and output: 36.9% of manufacturing companies in Jan-24 reported a lack of orders, vs. 20.9% a year ago; in the services sector, it was 32.1% in Jan-24 vs. 29.3% a year ago. This is once again especially severe in the energy-intensive industries: paper (53.9%), basic metals (53.3%), and chemical (40.6%).
Improving trade balance on weaker demand
Germany’s external trade balance improved further in December – but this time it was due to a drop in both exports (-4.6% YoY and MoM) and imports (-12.4% YoY and -6.7% MoM), with the latter outpacing the former. Exports to other EU countries declined 5.5% and imports from them declined 7.4% MoM. Exports to the US dropped 5.5% MoM while imports from the US rose 1.9%. Exports to China were down 7.9% MoM while imports declined 8.5% MoM. Exports to the UK fell by 4.3%, while imports from the UK declined by 10%.
Construction and services further in contraction
The HCOB/S&P Global PMI indices for January 2024 show that the construction sector continues to be in a slump approaching the one observed during the pandemic, even though there are no lockdowns. Per the report, there is a sustained sharp downturn in building activity as a result of sharply falling new orders, severe lack of demand, and companies’ negative outlook on future activity. Employment in the sector is also falling, and while the worst performer in January was housing activity, there was a deeper downturn in work on commercial building projects as well.
At the same time, service sector business activity fell for the fourth consecutive month, driven by ongoing weakness in demand. However, due to an improvement in expectations for activity in 2024, firms refrained from staff cuts. Work backlogs decreased even more. Unlike in the manufacturing sector, the service sector remains firmly entrenched in inflationary territory. The PMI metrics for both output prices and input prices maintain levels significantly above their long-term averages, even as the indices fall short of their 2022 peaks.
highlights from EUROPE
Industrial Producer Prices continue to decline
In December 2023, the PPI fell 0.8% MoM / 10.6% YoY in the euro area, and 0.9% MoM / 10% YoY in the EU. The annual average industrial producer prices for the full year 2023 decreased by 3.2% in the euro area and by 2.1% in the EU vs. 2022. The monthly decline and the annual decline were both driven by drops in energy and intermediate goods prices. On a monthly basis, the declines were the biggest in Ireland, the Netherlands, and Estonia, while YoY the PPI dropped the most in Ireland, Italy, and Bulgaria.
A Christmas retail disaster
European retail sales were down in December in both the EU (-1% MoM/-0.7% YoY) and the euro area (-1.1% MoM/-0.8% YoY). On a monthly basis, in the EA the volume of retail trade decreased by 1.6% for food, drinks, and tobacco, by 1.0% for non-food products, and by 0.5% for automotive fuels. In the EU, the volume of retail trade decreased by 1.8% for food, drinks, and tobacco and by 1.1% for non-food products, while it remained unchanged for automotive fuels. On an annual basis, in the EA the volume of retail trade decreased by 6.2% for automotive fuels and by 1.0% for food, drinks, and tobacco, while it grew by 0.1% for non-food products. In the EU, the retail trade volume decreased by 6.3% for automotive fuels and by 0.7% for food, drinks, and tobacco, while it grew by 0.4% for non-food products.
European services sectors growing in January
Led by ‘Other Financials’, service sectors continue to top growth rankings at the start of this year. They had an expansion in business activity, with many of them recording growth in output and increases in new orders. ‘Other Financials’, ‘Software & Services’, ‘Tourism and Recreation’, as well as ‘Industrial services’ also experienced employment growth. ‘Banks’ recorded further modest output growth but ‘Real Estate’ remained steeply in decline. ‘Consumer Services’ segments (including ‘Tourism & Recreation’) also registered expansion in business activity, with ‘Media’ signaling a sharp rise in output.
Sharpest drop in construction activity since the pandemic
In January, the construction sector continued to suffer from a significantly deteriorating activity as demand remained weak and new business declined – the most considerable drop since May 2020. There was also a steep rise in delivery times due to delivery delays and difficulty sourcing materials. The degree of pessimism in the sector has eased somewhat, but employment is still being scaled back. The sharpest drop in overall construction activity was once again seen in Germany and France. The sharpest reduction continued to be seen in housing, again most materially in Germany and France. The same with commercial construction activity. The speed of contraction in new business flows accelerated Month-on-Month. The outlook remains bleak, as the signs of recovery are still rather weak.
Consumer expectations improving at the end of 2023
The latest ECB Consumer Expectations Survey (CES) shows that 12m inflation expectations declined further, while 3y expectations edged up. Median expectations over the next 12 months went down from 3.5% to 3.2% in December. The 3-year expectation rose to 2.5% from 2.4%. This development was closely aligned across income groups, albeit somewhat higher for the two lowest income quintiles. Consumer expectations for nominal income growth remained unchanged at 1.2%. Expectations for nominal spending growth over the next 12m also remained stable at 3.6%. Economic growth expectations for the next 12m were unchanged at -1.3%. However, expectations for the unemployment rate 12m ahead declined to 11.2%. Consumers continued to expect the future unemployment rate to be slightly higher than the perceived current unemployment rate (10.8%). The lowest income quintile continued to report the highest expected and perceived unemployment rates.
Consumers expected the price of their home to increase by 2.2% over the next 12m, which was slightly lower than in November. The difference in expectations for growth in housing prices across income groups continued widening, as households in the lowest income quintile expected 1.5pp higher growth than those in the top income quintile. Expectations for mortgage interest rates 12m ahead declined to 5.3%, with the lowest-income households expecting the highest mortgage interest rates. Access to credit is expected to become marginally easier over the next 12m.
highlights from THE UNITED STATES
Services PMIs improve further
January was the 13th consecutive month in which service activity expanded. Business activity and new orders recorded growth, and supplier deliveries were also up MoM. The Prices Index registered 64% in January, a 7.3pp increase from December’s seasonally adjusted reading of 56.7%, meaning that this growth came at a cost, with additional inflationary pressure in the pipeline. The Inventories Index contracted, while the Inventory Sentiment index improved and the order backlog grew. The 8 industries reporting an increase in new orders in January are: Agriculture, Forestry, Fishing & Hunting; Professional, Scientific & Technical Services; Health Care & Social Assistance; Utilities; Educational Services; Public Administration; Wholesale Trade; and Finance & Insurance. The 6 industries reporting a decrease in new orders are: Retail Trade; Mining; Information; Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; and Transportation & Warehousing.
Lending standards still tightening but at a more modest pace
The latest Senior Loan Officer Opinion Survey (SLOOS) showed that credit conditions continued to tighten in the last quarter of 2023, as expectations for loan quality continued to worsen. The share of responding banks incrementally tightening further became smaller compared to prior quarters. Demand for commercial and industrial loans, as well as commercial real estate (CRE) loans, weakened for all firm sizes. Banks’ appetite for residential mortgage loans and consumer loans remained low, signaling a likely contraction in lending in these areas in the coming quarters. A particular concern for banks is the rising delinquencies for credit cards and auto loans. In particular, Gen Z had the highest percentage of auto loans transitioning into delinquencies (about 12%), followed by Millennials (at nearly 10%). A similar picture can be seen for credit card delinquencies.
According to the Household Debt and Credit Report for Q4, household debt rose by $212 billion to reach $17.5 trillion. Credit card balances increased by $50 billion to $1.13 trillion over the quarter, while mortgage balances rose by $112 billion to $12.25 trillion. Auto loan balances rose by $12 billion to $1.61 trillion, continuing an upward trajectory seen since 2011.
highlights from THE UNITED Kingdom
Unlike the euro area, the UK’s construction and services sectors are in expansion
Construction sector business optimism hits a 2-year high, as activity expectations grew at the strongest pace since the start of 2022. This was despite an ongoing decline in current output levels and a marginal fall in incoming new orders. House building remained the weakest-performing segment, while civil engineering was the best-performing one. Commercial activity was also resilient. Optimism is on the rise, with about 51% of the survey panel forecasting a rise in business activity during the next 12 months while remaining cautious with their hiring plans. Service sector performance also accelerated, expanding for the third consecutive month in January. Higher levels of output were supported by a sustained rise in new orders. Survey respondents commented on improved confidence among clients due to strengthening economic conditions and expected interest rate cuts. Strengthening order books led to a renewed rise in employment numbers across the service economy during January. Although only marginal, the rate of job creation was the fastest since July 2023. Increased recruitment mostly reflected efforts to boost business capacity and process unfinished work. However, some firms suggested that elevated wage pressures had acted as a constraint on hiring and encouraged the non-replacement of voluntary leavers.
Author: Nikolay
Founder of MoneyCraft
