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The Week in Global Markets
Financial markets summary:
– EUROPE: European benchmark indices recorded strong gains this week, with STOXX 600 up for a 7th week in a row and hitting an all-time high. Italy’s FTSE MIB rose 1.43%, France’s CAC 40 advanced 1.18%, and Germany’s DAX was up 0.45%, while the UK’s FTSE 100 Index fell 0.30%. Both the CAC 40 and the DAX touched new all-time highs this week. On a European level, the gains in the stock market were driven by the real estate sector, while the tech sector dipped a little. All this happened in the week when the ECB kept policy rates unchanged, while policymakers signaled that they are strongly supporting a first rate cut in June and might even go for a further cut in July. After the ECB announcement, 10-year bond yields fell for Germany, France and Italy and the EUR appreciated against the USD. UK 10y yields also declined, with the announcement of the last Spring Budget of this government before the general election. The budget includes reductions in employees’ national insurance rates and those of the self-employed, changes in property taxes, as well as some amendments to child benefits to make them more ‘generous’. The pound appreciated against the USD during the week.
– UNITED STATES: Although the S&P 500 hit some new intraday highs, it finished the week slightly lower compared to last Friday. Mega-cap tech receded, driven by a decline in Apple stock, as the company experienced a double hit: first, the EU fined Apple €1.8bn for stifling competition from rival music streaming services which is a breach of EU law; then, there were reports that the company’s iPhone sales in China had dropped by 24% YoY for the first 6 weeks of 2024 and that its smartphone market share has now declined to 15.7% (from 19% a year ago). The Nasdaq and the Dow also declined on a weekly basis. There were some notable data releases: the Beige Book survey of economic conditions pointed to increasing consumer sensitivity to higher prices, while job opening and the quits rate fell. The NFP (Non-farm payroll) report showed that more jobs were added than expected in February, however, the January gains were revised downward, the unemployment rate increased, and the number of full-time employer persons also kept declining. Job gains were mainly reported in government, health care, food services and drinking places, social assistance, and transportation and warehousing. Fed chair Jerome Powell testified before Congress, but that testimony was mostly a repeat of previous Fed statements. He did indicate that the FOMC was “not far” from having the confidence that inflation’s downtrend will be sustained, allowing them to begin cutting rates. This led to futures markets adjusting their pricing to a somewhat higher likelihood of a cut at the Fed’s policy meeting by June (easing probability stands at 73.4% according to the CME FedWatch tool). US 10y yields declined.
– ASIA-PACIFIC: In Japan, this week the two main indices – Nikkei 225 and TOPIX – moved in opposite directions, with the former declining while the latter advanced, moved by positive earnings sentiment. There were some reports (e.g., by Bloomberg) that the Bank of Japan might be considering ending its yield curve control program and exiting its negative rate policy while considering a new monetary policy framework. The yen appreciated against the dollar while the 10y yield was up WoW. Consumer prices rose in line with expectations, but household spending dropped a whopping 6.3% YoY, the most rapid decline in 3 years. In China, shares rose again as investor confidence took hold, supported by the government’s measures for market stabilization. The National People’s Congress agreed on a 5% economic growth target for 2024 (same as last year, although without the post-lockdown recovery), while the budget deficit target was set again at 3% (it was not met last year). The Chinese Premier announced that there will be further measures to support the troubled housing sector, such as new refined housing policies and the construction of government-subsidized housing. Data releases showed service activity was weaker than expected but still in expansion.
– BITCOIN: This week, BTC briefly rose to over $70,000 reaching a new all-time high, making an over 60% gain YTD. But trading was volatile. There was a temporary drop during the week (over 10%), with some investors taking advantage of the gains and cashing out. The bitcoin historical volatility index is at its highest level in almost a year. Deutsche Börse announced that it would create its own platform for cryptocurrencies and thus compete with companies such as Coinbase for investor demand.
– GOLD: It also reached an all-time high this week, topping $2,195 per ounce on Friday for the first time ever. Some potential drivers for this demand for gold are the risk-on sentiment that has spread among investors and the bleak prospects for some non-US advanced economies such as Germany, Japan and the United Kingdom, which are all in recessions. But data also points to “phenomenal” demand from Chinese investors, likely trying to hedge against potential economic instability in the world’s second-largest economy caused by a commercial real estate crisis in China. According to UBS, about half of all gold shipments in January went to Hong Kong and mainland China.
policy rate overview
The ECB kept policy rates unchanged, as expected. The growth projection was revised down to 0.6% for 2024, inflation is also forecast to be lower at 2.3% in 2024. ECB staff now see inflation hitting the ECB’s 2% target in 2025 and cooling further to 1.9% in 2026. Market bets increased that cuts will come in the summer, and ECB policymakers are signaling that this is now very likely and that there might be sequential back-to-back cuts in June and July. Lagarde’s statement and the announcement did highlight, however, that although most measures of underlying inflation have eased further, domestic price pressures are still high, especially when it comes to the strong growth in wages. Financing conditions are restrictive and the past interest rate increases continue to weigh on demand, which is helping push down inflation but also weighing down on economic activity which is expected to remain subdued in the near term.
The Bank of Canada also left its benchmark interest rate unchanged (at 5%) and signaled that it is still too early to ease monetary policy despite the recent slowdown in inflation. There should be more progress on taming core inflation first. Governor Macklem stated that there have been no big surprises and progress on disinflation continues, but underlying pressures still persist.
The Polish Central Bank also left its reference interest rate the same, at 5.75% and reiterated that rates are not expected to rise anytime soon (still sounding hawkish), as progress on slowing down inflation has been clear. In its latest Inflation Report (Nov-23), the central bank projected that inflation would average 4.6 percent in 2024, followed by 3.7 percent in 2025. There is still some uncertainty about the sustainability of low inflation.
highlights from Germany
Positive trade balance surprise
Germany’s trade surplus rose by 18% MoM to €27.5bn in January, with exports up 6.3% MoM (+0.3% YoY) driven by stronger than expected demand from other EU countries and China, while imports rose 3.6% MoM (while declining 8.3% YoY). Region-wise:
– Imports from other EU countries increased by 10.8% – more than the increase in exports to them (+8.9% MoM);
– Imports from the US declined by 5.2%, while exports to the US fell by 1.7% MoM;
– Imports from China declined 11.1% MoM, while exports to China rose by 7.8%;
– Exports to the UK fell by 8.1%, imports went up by 18.4%.
Sentiment in the export sectors also seems to be improving a little in February on the back of better expectations, according to the ifo Index. However, it is still in negative territory.
Bleak PMIs in services and construction
The picture in the German construction sector remains “ugly”: the PMI index for Feb shows activity is still firmly in the recessionary zone. Housing is still the main driver of the contraction, followed by commercial real estate activity. Input prices rose for the third month running, while future expectations remain persistently pessimistic. As the PMI report highlights, the thing that complicates the longed-for recovery is the rise in subcontractor rates in February for the first time in five months, which means construction companies are not only suffering from the high interest rate level but also from increasing costs. Given the weak economy, it is difficult to build residential units that are both attractive for the builder and affordable to the people.
In February, the service sector remained under pressure from weak demand, leading to a fifth consecutive monthly drop in business activity, while inflationary pressures intensified. Surveyed businesses cited reasons such as tight financial conditions, client uncertainty and associated weakness in the wider economy (particularly the manufacturing and construction sectors) as key factors for these developments.
Industrial production ticked up slightly
In January, industrial production rose +1% MoM in real terms on a seasonally and calendar-adjusted basis (though still down -5.5% YoY) according to provisional data. The main contributors were: construction +2.7% MoM, chemical industry +4.7% MoM, food industry +5.9% MoM, machine maintenance and assembly +11.1% MoM. Production in industry excluding energy and construction was up 1.1%. Production in the auto sector dropped -7.6%. Production of capital goods decreased by 2.1%, while those of intermediate goods and consumer goods were both up (+4.4% and +4%, resp.). Energy production declined by 3.7%. Thanks to the positive development in the chemical industry, overall energy-intensive branches increased their production by 2.8%. Needless to say, more sustained and significant recovery is required to break the long-term trend.
Without large aircraft orders, German manufacturing orders drop sharply
In December, there was a significant increase in manufacturing orders driven by aircraft orders. However, that was not the case in January, and the overall level of manufacturing orders therefore dropped -11.3% MoM / -6% YoY in real terms. This slump actually drove large-scale orders back down to average levels. Significant declines were observed in: manufacturing of electrical equipment (-33.2%), other transport equipment, in particular, aircraft, ships, trains (-27.3%), fabricated metal products (-14.5%), manufacturing of machinery and equipment (-4.7%). All 3 major categories saw order declines: capital goods (-13.1%), intermediate goods (-9.3%) and consumer goods (-5.7%). Foreign orders dropped 11.4%, with euro area orders dropping 25.7%, while orders from outside the EA rose by 1.6%. Domestic orders declined by 11.2%. Real turnover in manufacturing was down 2.0% MoM in Jan (seasonally and calendar adjusted).
highlights from EUROPE
Full-employment stagnation in the EU/EA
Both the EU and the Euro Area (EA) growth stagnated in Q4-23, as expected, while employment kept rising and labor productivity fell. The number of employed persons was up +0.3%/+0.2% QoQ in EA/EU, and hours worked increased slightly +0.1%/+0.2% QoQ in the EA/EU. Measured on an employed people basis, labor productivity declined 1.1%/0.8% in the EA/EU QoQ; and based on hours worked it was down 1.2%/0.7% in the EA/EU.
Service Sector Optimism vs. Construction Sector Pessimism
The service sector in the south of the EU (especially Italy and Spain) is showing signs of recovering activity with an uptick in staff recruitment, and stability of incoming new business. This is in contrast to Germany and France, where the contraction continues (but hiring is rising). Construction activity in the eurozone contracted markedly, with firms in Germany and France registering robust decreases in activity, while those in Italy reported growth, with expansion of new business. Input prices at eurozone construction firms increased further in February, though at a slower pace. Italian and German firms saw stronger increases in operating expenses. Supplier capacity saw sustained pressure in February, as lead times were lengthened for the second successive month. Weak demand conditions led firms to cut employment levels again in February, with German and French construction firms reporting the sharpest drop in workforce numbers, while Italian firms reported an expansion. Hence, it is not surprising that in terms of outlook, businesses in Germany and France reported negative sentiment, while construction firms in Italy remained optimistic.
highlights from THE UNITED STATES
Soft Jobs Reports But Negative Revisions
The job openings were at 8.86 million in January with the ratio of openings to unemployment edging a bit higher. As the hiring rate shows (3.6%), labor demand is still softening. At the same time, the quits rate for the retail sector dropped sharply. Overall, this JOLTs report was not that significant for the economic situation assessment or consequential for policymakers. February nonfarm payrolls came in higher than expected (+275k vs. +200k est.) but the January numbers were revised down significantly (from +353k to +229k). Sector-wise, the changes were as follows: private education & health +85k, leisure/hospitality +58k, government +52k, trade and transport +40k, construction +23k, professional and business services +9k, information +2k, financial activities +1k, wholesale trade -1k, manufacturing -4k. The US unemployment rate unexpectedly rose to 3.9% in February on a seasonally adjusted basis, the highest in 2 years.
Slower expansion in Services PMI
Economic activity in the services sector expanded in February for the 14th consecutive month, but the index fell to 52.6 vs. 53 expected and 53.4 in the prior month. New orders were up to 56.1; business activity up to 57.2; prices paid eased to 58.6, while employment softened and fell back into contraction at 48. Most service sectors reported growth in February, but these 3 were in decline: Arts, Entertainment & Recreation; Mining; and Real Estate, Rental & Leasing.
highlights from THE UNITED Kingdom
Service growth continues to advance
UK service providers experienced a sustained increase in business activity in February, supported by stronger new order growth and aided by another modest rise in employment numbers. Output growth projections for the year ahead were the most upbeat since February 2022. Input price inflation meanwhile accelerated in February and was the highest for five months, mostly due to elevated wage pressures. Some firms also noted rising shipping costs. A turnaround in customer demand and the prospect of interest cuts on the horizon helped to boost business optimism across the service economy.
The seasonally adjusted final S&P Global UK PMI Composite Output Index was at 53 in February (slightly higher than January), a fourth consecutive month of expansion, signaling a solid upturn in private sector output that was the fastest since May 2023.
Author: Nikolay
Founder of MoneyCraft
