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The Week in Global Markets
Financial markets summary:
– Europe: European stocks advanced across the board and across countries this week, as hopes of an upcoming rate cut by the ECB keep fuelling optimism, supported also by positive earnings updates. STOXX 50 moved up 1.06%, while the STOXX 600 rose 1.39% in EUR terms. The German DAX index advanced 1.13%, the CAC 40 1.58%, and the Italian FTSE MIB 1.85%. The British FTSE 100 and Swiss SMI also increased by similar magnitudes (1.84% and 1.97%, respectively). After US inflation came in higher than expected, 10-year bond yields increased a bit, finishing the week slightly higher compared to last week in Germany and the UK, for instance. The UK GDP print showed that the country had a technical recession as the economy contracted 0.3% in Q4-23, and inflation came in below expectations but still at rather high levels (4% headline, 5.1% core, and re-acceleration in services to 6.5%). The pound depreciated slightly against the USD and the EUR. At the same time, the European Commission reduced its forecast for economic growth in the euro area in 2024 to 0.8% from the previous projection of 1.2% a quarter ago. The second GDP estimate confirmed that the euro area has effectively stagnated in Q4.
– United States: The S&P 500 ended its first week in decline since the start of the year, with the decreases mostly in large-cap growth stocks. The Dow Jones and the Nasdaq also declined slightly. In most sectors, stocks advanced except for Technology services, Consumer non-durables, and Electronic technology. Small stocks, however, rose during the week, with the Russell 2000 up 2.66% WoW. There were several macro data releases this week that impacted investors – the CPI, which showed that headline and core inflation had accelerated more in January than expected; and producer prices (PPI) increasing the most in 5 months – again, with core rising more than expected. Homebuilder confidence appears to be slightly worse (also driven by weather factors), with housing starts declining 14.8% MoM in January, and building permits dropping 1.5% MoM. Initial jobless claims also came in below consensus but with a little change overall, while continuing claims were a little above expected levels – indicating that most likely fewer people are being let go but rehiring is taking longer. The 10-year Treasury yield rose modestly, and the market is now pricing in only about a 10% probability for a cut in March.
– Asia-Pacific: While China’s stock markets were closed due to the Lunar New Year holiday, the key Japanese stock indices moved up. The Nikkei 225 rose by 4.37%, while the TOPIX increased by 2.6%, supported by the further depreciation of the yen against the dollar (ending the week above 150 JPY per USD) and some positive earnings releases. The GDP print showed that Japan’s economy did enter into a recession in Q4, with a growth rate of -0.4% QoQ. The main driver for this was the decline in domestic demand, partly offset by increased exports. In India, stocks kept advancing as well, although there are some analyst reports that apart from large-caps, there are some sectors (e.g., consumption, investment, and outsourcing) where many stocks have seen too rapid rise and are likely overvalued. This might especially be the case with some low-quality companies. Current valuations would suggest that the market does not expect any decline in profitability from current abnormal levels.
– Bitcoin: This week the biggest cryptocurrency crossed the $50,000 mark for the first time since 2021, with analysts attributing the rise to new-investor enthusiasm and piling on in expectation of the ‘halving’ coming later this year. Bitcoin ETFs posted $2.2bn net inflows over the past week, with BlackRock’s ETF attracting the largest share.
policy rate overview
Russia’s central bank kept its benchmark rate unchanged at 16% this week, albeit inflation in the country is still at an elevated rate. The statement from the bank was that returning inflation to the 4% target in 2024 would require “tight monetary conditions…for a long period“, with a warning that inflationary pressures were still high, despite their easing from autumn peaks. This was largely viewed as a neutral signal and the governor confirmed that, adding that the bank had also considered hiking rates, but the consensus was to hold, and a first rate cut is now seen as likely for the second half of 2024.
This weekend the People’s Bank of China also decided to leave its medium-term lending rate unchanged, in an effort to strike a balance between the deflationary pressures developing in the Chinese economy at present, and the risks for capital outflows and depreciation of the yuan due to more significant monetary moves. There is also uncertainty about when the Fed will cut, as expectations and Fed officials have been pushing back on a sooner date, and the likelihood is now higher that the first cut could take place mid-year. Hence, analysts expect China could hold back rolling out imminent stimulus. Next week, a decision will be made regarding the 1-year and 5-year loan prime rates.
Next week there will also be a decision by South Korea’s central bank, with an expectation that the policy rate will stay at the same 3.5% level.
highlights from Germany
Sentiment improvement but current assessment deteriorating
Despite an improvement in the overall ZEW economic sentiment index in Germany, the assessment of the current economic situation is now at the lowest level since the pandemic at -81.7pt. What is driving the slightly more positive outlook is the expectation for ECB rate cuts over the next 6 months in light of falling inflation rates, and the expectation for imminent rate cuts by the Fed
Deflation in wholesale prices continues
The decline in wholesale prices extended further in January at the same pace as the previous month (-2.7% YoY) but they increased vs. Dec-23 at +0.1% MoM, with the mineral oil products being the main driver for the move (at -7.2% YoY / -1.6% MoM) – a decline that is losing momentum. Prices were also lower for the wholesale trade of grain, unmanufactured tobacco, seeds and animal feeds, chemical products, metals and metal ores, and waste and scrap. However, wholesale prices went up again in several key categories: – fruit, vegetables, and potatoes (+11.8%); sugar, confectionery, and bakery goods (+7.0%); beverages (+6.5%); tobacco products (+5.1%).
Insolvencies still rising
According to the preliminary indicator, bankruptcies in Germany jumped back up in Jan-24, increasing 26.2% YoY. Since Jun-23, double-digit growth rates have been observed YoY, even though the overall insolvency figures were still slightly lower than pre-Corona levels (note the reporting lag). November final numbers were up 15.3% YoY (corporate), while consumer bankruptcies decreased slightly. In November, 1,513 corporate insolvencies were filed, making the number of filings between Jan and Nov 16,264. The insolvency frequency is still the highest in the transport and storage sector, followed by other economic services.
highlights from EUROPE
Deceptive jump in industrial production
Industrial production was up both MoM and YoY in both the EU and the euro area (EA) in December 2023, which was much better than expected:
– EA: +1.2% YoY / +2.6% MoM
– EU: +1.2% YoY / +2.6% MoM
However, that result seems to be disproportionally skewed by Ireland’s industrial output which is highly volatile. The Irish Statistical Office comments that year-end results should be taken with a grain of salt due to adjustments and volatile data.
Bankruptcies and new business registrations are both up
In Q4-23, bankruptcy declarations in the EU were up 0.6% QoQ, which means that at the end of 2023, they were still at levels above those observed in the pre-pandemic period 2016-2019. The increase was largest in the transportation and storage sector (+9.3%), followed by trade (+7.7%) and accommodation and food services (+1.1%). Business registrations were only up 0.1% QoQ, with the highest increases in the transport and storage sector (+5.6%), construction (+3.6%), and accommodation and food services (+3.5%). The largest declines were in information and communication (-2.1%), financial, insurance and real estate activities (-1.5%), and trade (-0.9%)
highlights from THE UNITED STATES
Consumer and Producer prices rose more than expected in January
The US Consumer Price Index (CPI) increased more than expected: Headline: 0.3% MoM / 3.1% YoY; Core: 0.4% MoM / 3.9% YoY. Over two-thirds of the monthly increase was driven by shelter inflation (0.6% MoM), while the food index rose 0.4% MoM. Even without shelter, core services still accelerated. Food prices moved higher as well, up 0.4% MoM, while energy offset some of the increase, down 0.9% due largely to a 3.3% slide in gasoline prices. Even with these increases in prices, inflation-adjusted hourly earnings rose 0.3% MoM. However, adjusted for the lower average workweek, real weekly earnings declined 0.3%. Real average hourly earnings increased 1.4% YoY. This was disappointing for anyone expecting a Fed rate cut to take place sooner rather than later. The Producer Prices Index (PPI) was up 0.9% YoY in January (vs. +0.6% expected) while core PPI was up 2% YoY (vs. +1.6% expected). The main contributors were services by a large margin, and then goods excluding food and energy. There is likely a seasonal factor that could be driving these developments.
US Retail Sales disappointed in January
Retail sales dropped by the most in nearly a year, missing expectations at both the headline and core levels (-0.8% and -0.6%, respectively). The main contributors to this decline were declines in sales of motor vehicles and parts, building materials, gas stations, health and personal care. Since persistently strong consumer spending has been the key contributor to growth, there are concerns that if this weakness persists due to lingering inflationary pressures, it could lead to a slowdown of the economy more notably this quarter.
Manufacturing declined slightly in January
Industrial production in the US edged down by 0.1%, as manufacturing decreased by 0.5%, mining fell by 2.3%, while utilities increased by 6.0%. The index for consumer goods rose 0.6% with modest gains in its durable and nondurable components. The indexes for business equipment, construction supplies, and business supplies all declined less than 1%; the index for construction supplies was 4.1% below its year-earlier level. Meanwhile, the output of defense and space equipment continued to post solid growth in January and was over 13% above its year-earlier level. Materials output decreased 0.4% in January, as the non-energy component decreased 0.7%, while the energy component edged up 0.1%. The index for durable manufacturing edged up 0.1%, while the index for nondurable manufacturing fell 1.1%. The index for other manufacturing (publishing and logging) moved down 0.2%. Among durables, the largest gains were recorded in electrical equipment, appliances, and components as well as in aerospace and miscellaneous transportation equipment. Computer and electronic products also moved up in January, in part based on the continued strength in semiconductor production. Nonmetallic mineral products and primary metals recorded declines of around 1%. Declines were widespread among nondurables, with notable weather-related decreases in the indexes of petroleum and coal products, chemicals, and plastics and rubber products. Capacity utilization (using preliminary estimates for industrial capacity) for manufacturing decreased to 76.6% in January, a rate that is 1.6 percentage points below its long-run average. The operating rate for mining decreased by 2.3 percentage points to 92.2%, a rate that is 5.7 percentage points above its long-run average. The operating rate for utilities moved up 4.0 percentage points to 74.2%, well below its long-run average of 84.4%.
highlights from THE UNITED Kingdom
UK economy went into recession in Q4-23
Gross domestic product (GDP) is estimated to have fallen by 0.3% in Q4, following a fall of 0.1% in Q3. This was driven by contractions in all 3 main sectors in the latest quarter: -0.2% in services, -1.0% in production, and -1.3% in construction output. In terms of expenditure components, there were declines in the volume of net trade, household spending, and government consumption, partially offset by an increase in gross capital formation. For the whole of 2023, GDP is estimated to have increased by 0.1% – the weakest annual change in real GDP since the financial crisis in 2009, excluding the start of the pandemic (2020). Compared with the same quarter of 2022, there was a continued easing in the GDP implied deflator, which increased by 5.2%.
Retail sales rebounded strongly in January
UK Retail Sales bounced right back up in Jan-24 after a dismal Dec-23 performance, with volumes increasing by 3.4% MoM. The rise was recorded in all sub-sectors except clothing & footwear, with the biggest contributor being food stores. The value increase was 3.9% MoM, reflecting the persistent inflationary impact. Sales volumes in department stores and other non-food stores (e.g., sports equipment stores) rose by 5.4% and 6.2% MoM, respectively. Household goods store sales rose by 1.8% MoM in January 2024, which was mainly because of sales in hardware stores, while clothing stores fell by 1.4%. Automotive fuel sales volumes rose by 5.4% MoM (0.5% YoY) as fuel prices were falling.
Author: Nikolay
Founder of MoneyCraft
