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: European benchmark indices advanced again this week, across the board. The STOXX 600 was up for the 8th week in a row on positive corporate updates and expectations of interest rate cuts from the European Central Bank, fueled by several policymakers’ speeches. Expectations are for a first cut in June, then back-to-back in July, and likely a full 100bp by the end of 2024. Italian, German, and French indices gained, accompanied by the Swiss SMI and the UK’s FTSE 100. EURUSD was above 1.09 earlier in the week but after the release of US macro data pointing to sustained inflationary pressures, it declined again below that level. However, the euro gained against the Swiss Franc and the British Pound. German 10-year yields rose this week on continued loss of investor confidence and relatively weak economic data, while the spread of Italian 10y bonds vs. German bunds declined materially due to positive views on the country’s economic policies and high demand for high-yield debt. UK 10y yields rose, while the pound depreciated against the dollar, as the unemployment rate unexpectedly rose while wage growth slowed down.
– UNITED STATES: The major US stock indices declined slightly this week, with unfavorable inflation surprises and slowing consumer spending likely contributing to the moves. Shares of energy companies performed best this week as a result of increases in the price of oil, while the tech sector lagged as chipmaker stocks gave back some of the prior weeks’ gains. Despite some not-so-positive macro surprises this week, the US economy remains resilient, which combined with the higher-than-expected inflation leads to expectations for fewer interest rate cuts by the Fed in 2024, resulting in a further increase of 10y Treasury yields to the highest level in 3 weeks. According to the CME FedWatch Tool, the implied probability for a rate cut in June fell below 60%. Municipals performed better than Treasuries, despite the rise in primary issuance volume. The inversion in the yield curve between 2y/10y notes widened slightly.
– ASIA-PACIFIC: Japanese equities lost ground this week, with the Nikkei 225 Index losing 2.47% and the broader TOPIX Index down 2.1%. Nikkei Asia reported that it is now expected that the Bank of Japan (BoJ) might end its ultra-accommodative monetary policy next week, and make its first hike since Feb-2007, with rates finally going back into positive territory. With these expectations, the yen weakened against the dollar WoW, and the yield on the 10y Japanese government bond rose to 0.79%, hitting the highest level in 3 months. In China, despite the increase in government support, home prices continued to drop in February, with the property crisis showing no significant signs of receding. Stocks kept recovering this week, but concerns are rising that the ambitious 5% GDP growth target is at risk, due to indications for likely slowing growth in retail sales and industrial output vs. December. The Shanghai Composite Index went up 0.28%, while the blue-chip CSI 300 gained 0.71% and in Hong Kong, the benchmark Hang Seng Index increased 2.25%. Money supply increased YoY (M0 was up 12.5% in Feb, M1 rose 1.2%, M2 rose 8.7%) and the CPI reveres its January decline, rising 0.7% in February YoY – the first positive move since August 2023.
– BITCOIN: This week, BTC briefly touched an all-time high and then dropped in a likely souring of investor sentiment. Bitcoin traders explained that the majority of the selling has been driven by takers (market selling), reporting that waves of liquidity are going to rain down on the Bitcoin ETFs, pointing to rumors of a fresh institutional wealth allocation to BTC potentially arriving in the coming months. Even as the week came to a close, the futures gap remained relatively wide, supporting optimism for a rebound.
policy rate overview
The past week may have been relatively quiet on the central bank front, next week will be a big one. A number of central banks, including 3 of the biggest ones (the Fed, the BoJ and the BoE) are about to announce their rate decisions, with eyes particularly focused on Japan where market participants are expecting that policymakers will finally break with the past 17 years of loose policy and hike, with the largest wage increase in 30 years putting additional pressure. The Fed and the BoE are expected to keep rates steady, and likely start hiking mid-2024.
highlights from Germany
Moderating consumer expectations
The Bundesbank consumer survey for February 2024 shows that 12-month inflation expectations declined further below 4%, along with the 3-year & 5-year inflation expectations. Consumers also see it as more likely that real estate prices decrease compared to the expectations that they might increase. Rent increase expectations are slightly lower. Income growth expectations are generally higher, across all income and age groups for the next 12 months. However, the expected growth is quite a bit higher in the South and West regions, compared to the North and East. Expectations for both savings rates and credit interest rates over the next 12 months have declined.
Corporate insolvencies have risen at the fastest rate in years
For the full year 2023, they went up 22.1% vs. 2022, while in February they likely rose by 18.1% YoY based on the preliminary quick indicator. This represented creditor claims for around €26.6bn, of which €25m were large corporate cases. The highest insolvency frequency was reported again in transport and warehousing, economic services, and construction, followed by the hospitality industry and manufacturing sectors. Consumer bankruptcies were 0.7% more in 2023 vs 2022. Note that there is a lag in reporting and court decisions.
The construction sector has a big problem
It is unlikely that companies in the construction industry will be able to start recovering sustainably until the issue with construction costs is resolved. Even as some price declines took place in 2023 compared to 2022 (e.g. wood and metals), the costs of building materials are too high – prices are still significantly more elevated than before the energy crisis began. This, combined with borrowing costs, prevents a number of companies from returning to profitability and is one of the primary reasons for defaults in the industry still rising over time.
highlights from EUROPE
A full-employment stagnation in the EU/EA
The employment rate ticked up in Q4: +0.1pp QoQ, standing at 75.5%. The level of labor market slack declined in Q4: -0.1pp QoQ, reaching 11.2% of the extended labor force aged 20-64. At the same time, vacancy rates kept declining in Q4: in the EA: down to 2.7% (from 2.9% in Q3), in the EU: down to 2.5% (from 2.6% in Q3). Highest vacancy rates were recorded in Belgium (4.4%), Netherlands (4.2%), Austria (4.1%) and Germany (3.9%). Lowest rates: in Bulgaria and Romania (0.7% in both of them), Spain and Poland (0.8% in both of them), Ireland (1.0%) and Slovakia (1.1%). Per activity type, the highest rates were recorded in: administrative and support service activities (EA 4.4%, EU 4.2%), construction (EA 3.8%, EU 3.4%), professional, scientific and technical activities (EA 3.4%, EU 3.1%), information and communication (EA 3.3%, EU 3.0%).
Back in decline
EU/EA industrial production dropped once again in January: -3.2% MoM / -6.7% YoY in the EA, and -2.1% MoM / 5.7% YoY in the EU. We have observed another huge swing in Ireland (this time downwards) due to adjustment-caused volatility, like last month. Energy is the only component rising on MoM and YoY basis, intermediate goods production was up MoM but down YoY. All other categories (capital goods, durable and non-durable consumer goods) are down both MoM and YoY Apart from Ireland, Estonia, Malta and Bulgaria also experienced significant drops in industrial production.
Trade between the EU and the US
The US was the largest partner for EU goods exports and the second-largest partner for EU goods imports in 2023. After the ban on Russian oil and gas, the US partly replaced Russia and oil and natural gas became the first and third most imported products from the US, while medical and pharmaceutical products were the second most imported products in 2023. The top 3 exported products to the US in 2023 remained the same as in 2022: medical and pharmaceutical products, motor cars and motor vehicles and medicaments. The three largest importers from the US in the EU were the Netherlands, Germany and France. The three largest exporters to the US in the EU were Germany, Italy and Ireland.
highlights from THE UNITED STATES
Consumer inflation higher than expected
The Consumer Price Index (CPI) increased more than expected in February: headline +3.2% YoY (vs. 3.1% exp.), core +3.8% YoY (vs. 3.7% exp.), headline +0.4% MoM (as expected), core +0.4% MoM (vs. 0.3% exp.). Owner’s equivalent rent (OER) part of CPI inflation is now down to 6% YoY. Biggest increases YoY: motor vehicle maintenance & repair, hospital services, OER, rent of primary residence, food away from home, electricity. Biggest increases MoM: gasoline, airline fares, natural gas, fuel oil, apparel, used cars & trucks, rent of primary residence.
Producer Prices also rose more than anticipated
The Producer Prices Index (PPI) came in hot in February, rising by 0.6% on a monthly basis, double what was expected, and by 1.6% YoY. Nearly two-thirds of the rise in final demand prices was due to the index for final demand goods, which advanced 1.2%, while prices for final demand services moved up 0.3%. Nearly 70% of the broad-based rise in February can be attributed to the index for final demand energy, which jumped 4.4%. There were significant increases in the prices of gasoline, diesel fuel, chicken eggs, jet fuel, beef and veal, and tobacco products. A quarter of the February increase in the index for final demand services can be attributed to a 3.8-percent rise in prices for traveler accommodation services.
Retail sales disappoint
Advance estimates of US retail and food services sales for February 2024 (seasonally and holiday adjusted but not for price changes), were $700.7bn, up 0.6% MoM, and up 1.5% YoY. This was a smaller-than-expected increase, with a downward revision for January (to -1.1% MoM). February’s number was also lifted in part by higher gas prices as well as higher auto sales and a rebound in building materials, which were depressed by severe weather in January. Excluding sales from gas stations and auto dealers, sales rose 0.3%.
highlights from THE UNITED Kingdom
Gross Domestic Product recovers in January
The monthly real GDP estimate shows an increase likely occurred in Jan-24 by 0.2%, following a fall of 0.1% in Dec-23. Real GDP is estimated to have fallen by 0.1% in the 3 months to Jan-24, compared with the three months to Oct-23. Services output grew by 0.2% in January and was the biggest contributor to the GDP increase, but the 3-month measure showed no growth in services. Production output fell by 0.2% both for the month and the 3-month period. It was mainly driven by a 3.3% fall in mining and quarrying. Construction output grew by 1.1% in Jan, but on a 3-month basis was down 0.9%. New work decreased 4.5% over the period, while repair and maintenance rose by 4.0%. Within new work, the largest contributor to the decrease came from infrastructure new work, which decreased by 9.3%.
Unemployment remains low while vacancies decline
Payrolled employees in the UK rose by 15k in Jan-24 vs. Dec-23 and by 386k vs. Jan-23. The number is rising but the rate of annual growth is decreasing. The UK employment rate (for those aged 16-64 years) was estimated at 75.0% for the period from Nov-23 to Jan-24, below estimates of a year ago and down in the latest quarter. The UK unemployment rate (for those aged 16 years and over) was estimated at 3.9% for the period from Nov-23 to Jan-24, unchanged from last quarter. Vacancies fell QoQ for the 20th consecutive period but are still above pre-COVID levels. Annual growth in real terms for total pay (including bonuses) rose on the year by 1.4% for the period from Nov-23 to Jan-24, and for regular pay (i.e., excluding bonuses) rose on the year by 1.8%.
Author: Nikolay
Founder of MoneyCraft
