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 stocks advanced again in this short holiday week, with the STOXX 600 closing a second straight quarter with gains. Benchmark indices also rose in Germany, France, Italy and Switzerland, while the EUR depreciated against the dollar, falling below 1.08. Government yields broadly declined a bit, with German 10y yields falling to 2.29%. In the UK, the FTSE 100 also advanced further, while the 10y yield barely moved. The economy was confirmed to be in recession in Q4 and the pound appreciated against the USD.
– UNITED STATES: While the Nasdaq was down this week, small stocks rose, as did the S&P 500 and the Dow Jones Industrial Average. Unlike some other international markets, US stock markets will reopen for trading on Monday despite the holiday. This week’s developments were likely also driven by optimism coming from a few key data releases. For instance, durable goods orders finally recovered after 2 months of declines, with core orders excluding defense and transportation also rising more than expected. At the same time, the University of Michigan’s consumer sentiment indicator was revised upward to its highest level in 21 months, with inflation fears receding and more stable expectations about the course of the economy.
– ASIA-PACIFIC: The Japanese stock market gave back some of the previous gains this week, as the yen kept depreciating, hovering over 151 yen per USD. There is some concern that if this development continues further, it could prompt an intervention by the BoJ. However, the yield on the 10y government bonds fell to around 0.7%. Market expectations seem to be converging around 2 more interest rate hikes in a year. Chinese equities also declined this week, with the Shanghai Composite Index and the CSI 300 both falling. Premier Li pledged that the government will step up measures to support growth in several sectors, for example, AI, biological manufacturing, and the data economy. Industrial profits rose by 10.2%, indicating that weakness is receding and the economy is likely starting to recover thanks to policy support and increased international demand.
– BITCOIN: BTC recovered by nearly 10% this week after a drop last week. Bitcoin.com reported that spot BTC ETFs experienced 4 consecutive days of positive inflows, totaling $887.6 million. Grayscale Study points to a likely mid-phase bull run for the largest cryptocurrency but also emphasizes the need for investors to stay vigilant and to monitor ETF flows, as well as macro indicators.
policy rate overview
The Swedish Riksbank decided to keep its policy rate unchanged at 4% this week, acknowledging that inflationary pressures still remain elevated despite further progress on inflation stabilizing towards the target of 2%. But the official statement indicated that it is likely that the policy rate can be cut in May or June if inflation prospects remain favorable. The board of the central bank remains cautious that new supply shocks due to geopolitical unrest, weakening of the krona, or companies’ pricing behavior not normalizing as expected could potentially lead to a resurgence if cuts are done too soon. Inflation is forecast to reach 3.5% on average in 2024 and 1.5% in 2025, with the policy rate likely falling to 3.2% by Q1-25 and 2.76 by Q1-26.
The National Bank of Hungary slowed the pace of rate cuts this month after the forint fell to a 1-year low, cutting by 75bps to 8.25%. The deputy governor stated that monetary policy must remain tight and that financial market stability was crucial for achieving the bank’s 3% inflation target in a sustained manner, with the expectation that it could return to that level sometime in 2025. According to him, it is realistic that the base rate could return to 6.5-7% by the end of June.
The South African Reserve Bank (SARB) kept its repo rate at the current level of 8.25% on Wednesday despite elevated inflation expectations. The country’s consumer inflation rose to 5.6% in February from 5.3% in January, with core inflation rising to 5%. This rise in core inflation was due to an acceleration in services (now the highest since 2019), led by the medical aid component. The 2-year ahead expectations are still in the top half of the target range.
highlights from Germany
Slight improvement in consumer confidence
The GfK survey for Mar-Apr shows that consumer confidence in Germany remains deeply depressed, albeit marginally improving MoM to -27.4 vs. -28.8 previously. The slow pace of recovery is supported by slightly better income and economic expectations, however, the willingness to buy is still quite low and even slightly worsening this month indicating a still too high consumer uncertainty, which is why the propensity to save remains so elevated.
The GfK report indicates that real income growth and a stable job market themselves provide good conditions for rapid improvement in consumer sentiment, but there’s still a lack of planning security and optimism about the future among consumers. In times of multiple crises, the high degree of consumer uncertainty, paired with low confidence in Germany’s economic development, is holding back the willingness to buy. As a result, domestic demand is still failing to stimulate the economy. In a nutshell: The poor sentiment is overshadowing the facts.
Retail sales do not reflect any sentiment improvement
The marginally worse willingness to buy is still showing in retail sales, which once again declined more than expected in February. The decrease was: 1.9% MoM / 2.7% YoY in real terms; and 1.8% MoM / 0.4% YoY in nominal terms.
Sales in food retail (cal/seas. adj.) fell by 1.7% MoM / 2% YoY in real terms and fell by 2.0% MoM / rose by 0.7% YoY in nominal terms. Sales in non-food retail declined by 1% MoM / 2.3% YoY in real terms. Internet and mail order sales decreased by 2.8% MoM / 4.7% YoY in real terms.
No surprises in construction: still in a slump
Order intake in the construction sector kept falling in January: MoM by -7.4% in real (adjusted) terms, although they did rise marginally by +1.3% YoY. Orders in civil engineering declined by 3.1% MoM, while in building construction they dropped 12% MoM. Revenues in the sector were 5.3% lower than Jan-23 in real terms, as the number of people working in the industry fell by 0.2% vs. Jan-23.
highlights from EUROPE
Economic sentiment ticks up
In March, the Economic Sentiment Indicator (ESI) picked up in both the EU (+0.7 points to 96.2) and the euro area (+0.8 points to 96.3), driven by improved confidence among retailers, consumers and, to a lesser extent, services and industry managers, while confidence remained stable in construction. It was up the most in France, Germany and Italy, while it deteriorated in the Netherlands and Spain, remaining stable in Poland. The Employment Expectations Indicator remained virtually unchanged above its long-term average. Reduced employment plans among services managers were counterbalanced by improved employment plans in retail trade and construction. Selling price expectations fell sharply in retail trade, construction, and services while rising marginally in industry, although also there they remained below their long-term average.
Broad money growing in the euro area
The annual growth rate of the narrower aggregate M1 (currency in circulation and overnight deposits) was -7.7% in February, which is a smaller decline compared to January. The growth of short-term deposits other than overnight deposits (M2-M1) decreased to 18.8% in February while the growth of marketable instruments (M3-M2) decreased to 17.6%. Credit growth was still negative at -0.3%, with the rate of growth of credit to general government at -2.8% (accelerating compared to Jan), and credit growth to the private sector at +0.7% (growth for credit to households for house purchase was unchanged at 0.3%, while that for non-financial corporations rose to 0.4%).
highlights from THE UNITED STATES
Stickiness in PCE inflation
The core PCE index rose 0.26% in February on a MoM basis, while it declined slightly YoY to 2.78%. Monthly core PCE was, however, revised higher for both December and January. The headline index was up 0.33% MoM and 2.45% YoY. These developments were basically aligned with expectations. On a longer-term basis, the 3-month annualized rate rose to 3.5%, while the 6-month annualized rate rose to 2.9% from 1.9% in December. These numbers likely indicate that the expectation for the upcoming Fed rate cut will not change significantly.
Corporate profits reached a record high
In Q4-23, profits of US domestic financial corporations increased by $5.9bn, while profits of US domestic non-financial corporations increased by $136.5bn. That means an increase of +5.1% YoY, up from -0.56% in the prior quarter. The seasonally adjusted annual rate was thus $2.69tn. Such a spike could be an indication that US companies increased prices a lot faster than the speed with which costs (including labor costs) went up. Profits of banks and other financial intermediaries declined, while profits of durable and non-durable goods manufacturers rose. Along with them, profits of retail trade, wholesale trade, information, transportation and storage firms also went up.
New orders for manufactured durable goods are finally up
After 2 consecutive months of decline in durable goods orders, they finally recovered in February, increasing by $3.7bn or 1.4% to $277.9bn. This was a bigger increase than expected. Core capital goods orders rose 0.7%, also above consensus. Excluding defense orders, the monthly rate of increase was +2.2%.
highlights from THE UNITED KINGDOM
Business investment rose at the end of 2023
In Q4, UK business investment increased by 1.4%, driven mainly by an increase in buildings investment, meaning that it now stands at 2.8% above where it was the same quarter a year ago. Annual UK business investment increased by 5.5% in 2023. UK whole economy investment (i.e., gross fixed capital formation GFCF), which includes business and public sector investment, increased by 0.9% QoQ in Q4-23 and by 0.5% compared to Q4-22. The primary driver behind this growth was other buildings contributing 0.9 percentage points. But transport was the largest contributor to the annual UK GFCF cited above, with additional positive contributions from information and communication technology (ICT) and other machinery and equipment, intellectual property products (IPP), and buildings. Among OECD countries, for the whole of 2023, the UK was surpassed in GFCF growth only by Italy.
Author: Nikolay
Founder of MoneyCraft
