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: In the week of multiple major central banks’ decisions (and several surprises), European shares showed some mixed performance. Both the STOXX 600 and STOXX 50 indices advanced week-on-week, accompanied by the German, Italian and UK benchmark indices which also rose. However, the French CAC 40 and Swiss SMI declined WoW. Rate-sensitive tech stock and personal and household goods index declined, while there were gains in the defensive utility and real estate shares. The weak reading of the PMI indices for Germany and France, combined with the decisions by the BoE and the Fed, likely contributed to the moves in the bond market, as German 10y yields declined alongside their British counterparts. The euro ended the week lower vs. the dollar, as did the pound.
– UNITED STATES: The major US stock indices gained during this week as the Fed’s remarks were interpreted as dovish by investors. The S&P 500 reached a new all-time high on Thursday (intraday 5,261.10, closing 5,241.53), as did the Nasdaq 100, with tech and communication services stocks leading the rise. NVIDIA’s stock price increased to reach new highs, with its market capitalization reaching nearly $2.4tn (ranking third now after Microsoft and Apple). At the same time, there were some indications that Google and Apple may be partnering in offering generative AI tools, while the US Justice Department accused Apple of monopolizing the smartphone market. The DoJ’s antitrust division argues that Apple’s behavior over the years has added up to a pattern of illegal monopoly by making the iPhone and the apps for it less useful for consumers in the name of maintaining their dominance. The most important factor for market sentiment this week, however, was the communication from the Fed and the update of the FOMC economic projections, which showed higher expected fed funds rates for 2025, 2026 and the longer run. The growth and unemployment expectations have improved while the PCE inflation expectations have deteriorated slightly.
– ASIA-PACIFIC: The Bank of Japan ended its negative-rate policy this week for the first in 8 years, implementing its first rate hike in 17 years to a range of 0-0.1%. The BoJ also eliminated the Yield Curve Control (YCC) regime and announced the end of some asset purchases (e.g., ETFs, corporate debt). Despite this fact, the BoJ is still going to keep buying Japenese Government Bonds (JGBs) at broadly the same amount as before, as indicated by the official statement. As the yen weakened in the aftermath of these decisions, Japanese stocks advanced strongly, with the Nikkei 225 index rising 5.6%, and the broader TOPIX Index going up 5.3%. Chinese equities retreated a bit, as property sector concerns overwhelmed positive expectations related to stimulative policy measures, with property investment still falling by 9% in the January–February period compared to a year earlier, and property sales by floor area dropping 20.5% in the first two months of the year. However, fixed asset investment and industrial production did increase more than expected in Jan and Feb, as did retail sales.
– BITCOIN: BTC volatility remained elevated this week, as the price of the largest cryptocurrency in USD dropped further. Positive momentum seems to have worn off a bit, with an acceleration of outflows from spot Bitcoin ETFs last week. There were also sharp moves in the Bitcoin futures market, as long liquidations increased during the second half of the week. Analysts point to the fact that investors appear to be taking profits at current prices, contributing to the decline in the price.
policy rate overview
We had one of the busiest weeks for central banks globally this week, as major players like the Fed, the Bank of England (BoE), the Bank of Japan (BoJ) and the Swiss National Bank (SNB) made their policy decisions. Below is a summary of the key policy changes that were announced:
– US Fed: policy rate was kept unchanged at 5.5%, and the dot plot has essentially remained unchanged apart from its composition, with 3 cuts (75bp) expected in 2024, then another 75bp in 2025. Long-term rate projection is now higher at 2.6%, and the expectation is that fed funds will stay above 3% through 2026. Chair Powell stated that the rebalancing in the labor market will continue, easing pressure on inflation and that the updates in the economic projections are a reflection of how well the economy has been performing. He reiterated that it is not appropriate to cut rates before there is greater confidence that there is enough progress toward the 2% target. A discussion about possibly slowing the pace of decline in security holdings has started – but no decisions were made. The pace could be slowed fairly soon but it does not mean that the balance sheet will shrink by less overall, just that the appropriate level more gradually.
– BoE: its policy rate was also kept unchanged at 5.25%, with a majority (8-1) of the MPC voting to hold and 1 vote for a cut of 25bp (the first meeting without a vote for a rate hike). Governor Bailey stated that there have been further encouraging signs that inflation is coming down, but they keep rates at this level because they “need to be sure that inflation will fall back to the 2% target and stay there”. CPI inflation is projected to fall to slightly below the 2% target in Q2-2024, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget.
– BoJ: as already mentioned, the Bank of Japan ended its unorthodox monetary policy this week, but it still kept its policy rate stuck around zero. It only took “baby steps” to exit its ultra-accommodative stance, by shifting away from negative rates, yield curve control and ETF and corporate bond purchases, but still keeping the door open for more interventions when needed. The governor stated that the BOJ would keep buying “broadly the same amount” of government bonds as before and ramp up purchases in case yields rise rapidly, emphasizing its focus on preventing any harmful spike in borrowing costs. He did not indicate what the pace of future hikes might be but the signal so far has been that they will likely be moderate, as the expectation is that “accommodative financial conditions to be maintained for the time being“.
– SNB: unexpectedly cut its policy rate by 25bp to 1.5%, stating that it stands ready to adjust monetary policy again if necessary. The statement also noted that the easing had been made possible because the fight against inflation over the past two and a half years has been effective, with the rate now back below 2% and thus in the range the SNB equates with price stability. The policy rate cut is also intended to support economic activity. The new conditional inflation forecast is significantly lower: averaging 1.4% for 2024, 1.2% for 2025, and 1.1% for 2026. GDP growth is expected to remain modest (1% in 2024), given weak international demand and the appreciation of the CHF in real terms. Unemployment is likely to keep rising gradually. The SNB sees weaker economic activity abroad as the main risk for the Swiss economy.
– Banxico: The Bank of Mexico decided to cut its policy rate by 25bp to 11% after holding for the past 7 meetings. In the statement, the bank predicted that continuous cuts seem most likely, at least during the next two quarters, but these decisions will depend on whether incoming data suggest that inflation is on track to reach its 3% inflation target. The new headline inflation estimate for 2024 is at 3.6%, slightly higher compared with its previous estimate of 3.5%, acknowledging that upside risks to inflation remain.
– BCB: The Copom (Monetary Policy Committee) of the Bank of Brazil decided unanimously to cut the base interest rate by 50bp to 10.75% and signaled that another 50bp cut is likely coming at its next meeting in May. According to the official statement, the inflation outlook remains stable, with risks both to the upside (e.g., ongoing global inflationary pressures and increased activity in the services sector) and downside (e.g., a more pronounced slowdown in the global economy or greater-than-expected effects from interest rate increases in other countries).
– PBoC: China’s 1-year loan prime rate (LPR), a market-based benchmark lending rate, came in at 3.45% on Monday, unchanged from the previous month. The 5-year LPR, on which many lenders base their mortgage rates, also remained unchanged from the previous reading of 3.95%. LPR cuts could be expected if the policy rate (the medium-term lending facility (MLF) rate) keeps moving downward. Economists argue that the lack of effective demand and weak expectations domestically, as well as the struggles of the property market, will require further rate cuts to boost consumer prices and address risks.
– CBRT: Türkiye’s central bank also surprised markets this week as it raised its policy rate by 5pp to 50%, resuming with hikes after previously pausing, as inflation kept advancing last month and reached over 67% YoY. The statement by the bank is that this is a response to “the deterioration in the inflation outlook” and that “a tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed“. Central bank officials noted that the stickiness in services inflation, inflation expectations, geopolitical risks, and food prices keep inflation pressures elevated This hike took place despite concerns that policymakers might have been given a directive not to engage in further hikes before the local elections taking place at the end of March. However, the Turkish lira at around 32 per dollar, i.e., near its all-time low.
– The central banks of Australia and Norway kept their policy rates unchanged, as expected. Norges Bank signaled that it may start cutting rates in autumn (e.g., in September) but it may be delayed, according to analysts. The RBA decided not to hike further as there are clear signs the economy has slowed and announced that they are not ruling anything in or out at this point.
– The Czech Central Bank cut its main rate for the third time, to 5.75%. This reduction by a half-percentage point was expected, as inflation dropped to 2% YoY in February, which equals the bank’s target. The Czech economy contracted by 0.2% in Q4-2023.
highlights from Germany
Business sentiment might be turning
The ifo indicator for March shows that business sentiment has likely started to turn around somewhat, but it has a long way to go until it properly recovers. Companies’ expectations became less pessimistic this month and the assessment of the current economic situation ticked up. All major sub-components: manufacturing, services, trade, and construction saw a positive development. Note that this is still far off from pre-pandemic levels of sentiment, and the cycle clock is still in the “crisis” quadrant. But the traffic light indicator has finally come out of contractionary territory and uncertainty measures have started to subside. It is too early to call this sustainable yet, especially given the contractionary PMI in the manufacturing sector and the likely recession expected to be confirmed with Q1 growth figures.
PMI still shows contraction, orders stock confirms
According to the flash reading of the Purchasing Managers’ Index for March, service activity is close to stabilizing, while in contrast – the rate of decline in factory production remained sharp. The reason is manufacturing, which performed worse than expected. Inflows of new work continued to decline, highlighting the persistent weakness in demand across the German private sector. Business expectations and confidence improved again in March – outlook became more optimistic. The rate of input cost inflation slowed, but services input cost inflation remained historically high, driven in large part by ongoing wage increases. Germany has clearly not been able to participate in the global turnaround in the inventory cycle. As the PMI report sums it up, overall, Germany now teeters on the edge of a technical recession.
This week the data about the stock of manufacturing orders were also released for January, showing that the stock kept shrinking: -0.9% in real terms MoM (seasonal & calendar adj.), -5.2% in real terms (calendar adj.), and the range is now shorter at 6.9 months. The biggest drivers for this development were the decreases in the orders in the automotive industry (-3.5% MoM) and manufacturing of machinery and equipment (-1.2% MoM). In terms of goods categories, this was driven by capital goods dropping 1%.
Positive expectations not carrying the current assessment
The ZEW indicator shows that economic sentiment in Germany once again improved in March on the strong expectation that the ECB will cut rates soon, however, the assessment of the current economic situation has barely moved – and remains stuck in a deeply negative zone at -80.5.
Annual pension adjustment: +4.57%
As of 1. July 2024, pensions will increase by 4.57% – for the first time, uniformly in the West and East states This will affect 21 million pensioners in the country and reflects the relatively strong (nominal) wage increases that took place in 2023 (4.72%). Last year, for the first time since reunification, the pension value was equalized between East and West. The pension level guarantee provision also kicks in (it is set to 48%), meaning that the minimum pension level will be raised to €39,92 per day (i.e. a monthly increase of €77,40 for an average salary when the number of years of contributions is at least 45).
Residential property prices are still in a slump
In Q4-23, residential property prices in Germany were down 7.1% vs. Q4-22 and down 2% vs. Q3-23, according to provisional data. For the whole of 2023, prices declined 8.4% vs. 2022. For existing buildings, the decrease was 7.8% YoY and 2.1% QoQ, while for new buildings it was 3.2% YoY and 1% MoM. The annual decline in 2023 was the largest since the beginning of the time series in 2000, according to the Statistical Office.
highlights from EUROPE
EU/EA HICP inflation still above target
Final figures for February showed that headline HICP was 2.6% YoY for the EA and 2.8% YoY for the EU, while core HICP was 3.1% YoY / 0.6% MoM. Sticky services inflation remains the biggest driver and food – the second biggest driver. Inflation was particularly high in Romania (over 7%) and remains above 4% in Croatia, Estonia and Austria. The lowest figures (below 1%) were recorded in Denmark, Latvia, Italy, with Lithuania and Finland also being below the 2% target at this point.
March Flash PMI showed services performing stronger than expected while manufacturing – weaker than expected
Business activity at 49.9 came close to stable, with the service sector expanding further while ongoing declines in output in France and Germany offset the upturn in the rest of the eurozone. Order books fell at a reduced rate and business confidence about the year ahead improved to a 13-month high. The bad news: manufacturing output fell across the eurozone for a 12th successive month, with the rate of decline easing only slightly to register another month of steep contraction. New orders for goods likewise fell sharply by historical standards. Price pressures eased in March but are still elevated. Growth of average input costs across the goods and services sectors slowed, and selling price inflation also moderated. Companies remain optimistic about future production. The index of stocks of finished products has risen for the second month in a row and is approaching the point of no change. Reaching this point would mean that destocking would no longer be a drag on production.
A declining trade surplus in January
The EU/EA international goods trade balance declined in Jan-24 vs. Dec-23, according to estimates released by Eurostat. However, back in Jan-23, both the EU and the EA had a deficit. For the EA, the Jan-24 surplus was €11.4bn (vs. deficit of €32.6bn Jan-23), and for the EU: a surplus of €6.2bn (vs. deficit of €38.6 Jan-23). The main reasons are that imports dropped quite significantly (-16.1% in the EA and -18.9% in the EU YoY) while exports edged only slightly up (+1.3% in the EA and no change in the EU YoY). The main contributors to the surplus increase are the chemical sector, followed by machinery and vehicles, while there was a persistent deficit in the energy sector, as usual. Month-on-month, the US, UK, China, Switzerland and Türkiye remained the top 5 trading partners, with exports to the US, UK and Switzerland rising MoM, while falling with China and Türkiye. Imports fell from all of the top trading partners except Türkiye.
A slower pace of labor costs increase in Q4-23
The EU/EA labor costs rose at a lower rate last quarter: in the EA +3.4% vs. Q4-22 (of which hourly wages & salaries increased by 3.1%, and the non-wage component increased by 4.2%) and in the EU +4% vs. Q4-22 (of which hourly wages & salaries were up 3.8%, while the non-wage component rose 4.6%). The highest increases in hourly wage costs for the whole economy were recorded in Romania (+16.9%), Hungary (+16.3%), Croatia (+16.0%), Poland (+13.1%) and Slovenia (+12.5%). The highest increase in hourly wage costs was in ‘Mining and quarrying’ (+11.3%), while the lowest annual increases were recorded in ‘Professional, scientific and technical activities’ (+1.6%) and ‘Human health and social work activities’ (+2.1%). In this week’s speech of ECB president Lagarde, she mentioned that wage growth is one of the key pieces of evidence that they need to become confident that progress towards the 2% target in terms of disinflation is sufficient, so they can start dialing their restrictive policy. In that presentation, the wage trackers clearly indicated that according to some indications, there has been some rebound, still supporting sticky services inflation, for example. This is why there can be no pre-commitment to rate cuts.
highlights from THE UNITED STATES
Business activity on the rise
The March PMI showed that business activity in the US continued its upward trajectory at the end of Q1, but with a softer overall expansion due to a weaker rise in services activity. The rise in manufacturing activity sped up, reaching the fastest pace in almost 2 years. In the service sector, price pressures reportedly restricted the ability of customers to commit to new projects, resulting in a slower rate of business growth. Business confidence jumped to a near 2-year high and the rate of job creation ticked higher. Unfortunately, inflationary pressures also picked up in March, with the rate of input cost inflation accelerating across both services and manufacturing. Service providers indicated that higher operating expenses generally reflected increasing wages, while rising oil and gasoline costs were often mentioned by manufacturers. In turn, companies in the US raised their own selling prices at a faster pace. In fact, the rate of inflation was the sharpest in just under a year and stronger than the series average.
highlights from THE UNITED KINGDOM
Output keeps rising, but business activity expectations remain mixed
March data pointed to another solid upturn in output levels across the UK private sector, with the rate of expansion only fractionally slower than February’s. The main driver was the ongoing strength in the service economy, where activity keeps rising. But manufacturing also finally ended its downturn and entered expansion territory in March, with a turnaround in production volumes due to customer restocking and a rebound in new order intakes. However, private-sector employment still stagnated in March, despite this expansion. There is some caution with regard to hiring due to strong cost pressures, especially in the services sector. The rate of backlog depletion was only modest and the slowest seen since June 2023, reflecting a much smaller reduction in work-in-hand. There was still a steep increase in input costs, with cost inflation in the manufacturing sector in particular accelerating again. Expectations were mixed because service providers recorded a decline in confidence (due to lackluster growth prospects for the UK economy and political uncertainty ahead) while manufacturing sector optimism accelerated.
Stagnating retail sales in February
After a strong rebound last month, in Feb UK retail sales were basically flat, with volumes remaining unchanged, and slightly lower on a 3-month and 1-year basis. Sales values fell marginally by 0.1% MoM. Overall, sales volumes are still 1.3% below their pre-pandemic levels (Feb-20). After falls in previous months, sales of clothing & footwear went up 1.7% in Feb. Sales volumes at department stores and other non-food stores also grew over the month (by 1.6% and 0.4%, respectively). Household goods stores fell by 1.0% with respondents reporting the economic climate and poor weather as factors that contributed to the fall. Food stores sales volumes fell by 0.3% over the month following January’s recovery from December’s record fall in 2023. Respondents again reported poor weather leading to a reduction in footfall.
Disinflation continues
Inflation in the UK was lower than expected in February, with headline declining to 3.4% YoY (vs. 4.0% in Jan), and core declining to to 4.5% YoY (vs. 5.1% in Jan). CPI including owner occupiers’ housing costs (CPIH) declined to 3.8% YoY (vs. 4.2% in Jan). The monthly index of consumer prices rose by 0.6%. Core inflation clearly remains high, with services inflation still quite elevated at 6.1% YoY. This means the Bank of England is likely in a similar dilemma as the Fed and cutting rates too soon will risk slowing down the progress on disinflation.
Author: Nikolay
Founder of MoneyCraft
