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 took a hit this week across the board. The Euro STOXX volatility index hit its highest level since November, as the benchmark indices in multiple countries in the EU (including Germany, Spain, Italy and France) declined, accompanied by the Swiss and UK benchmark stock indices. Investors were likely affected by the rebound in oil prices as tensions in the Middle East kept heating up, which could affect inflation as well as the timing of policy rate cuts. The most significant drops were in the utilities, retail and telecommunications sectors. Headline inflation in the euro area did come down in March, according to preliminary data, but core inflation still proves to be rather sticky due to elevated service price inflation. The Purchasing Managers’ Indices (PMIs) keep improving slowly, but the manufacturing slump has not yet reversed and subdued demand is still a drag on output. Retail sales are also still falling, although not as much as expected, with a decline of 0.7% YoY in February. In the UK, there are signs that the housing market is picking up again, with mortgage approvals rising and prices starting to recover. 10-year yields on German and UK government bonds rose 10-11bp this week.
– UNITED STATES: US stock indices also declined this week, with US treasury yields rising as the manufacturing sector gains traction – which was evident in the ISM indices. The best performers of the week were the energy (on account of rising oil prices) and communication services sector, while other sub-sectors of the S&P 500 declined, most significantly health care, real estate, consumer discretionary and consumer staples. The 10y Treasury yield reacted to the positive jobs report this week by hitting its highest intraday level since November.
– ASIA-PACIFIC: Japanese stocks fell as well this week, with the Nikkei 225 dropping 3.37% and the broader TOPIX index declining 2.4%. The Ministry of Finance reiterated that it stands ready to intervene in response to excessive moves in the foreign exchange markets if needed to stabilize the yen. The BoJ signaled that it may raise its policy rate again, leading the yield on the 10y JGB to rise to 0.77%. Chinese equities rose, with both the Shanghai Composite Index and the CSI 30 advancing week-on-week. The March manufacturing PMI rose above 50, confirming that the sector is in expansion again as both production and exports rebound, while the nonmanufacturing PMI improved more than expected in February. The People’s Bank of China (PBoC) said in its Q1-24 policy report that it will intensify existing measures to encourage demand and provide sufficient funding to support growth. Nevertheless, the housing market remains depressed – the value of new home sales by the country’s top 100 developers dropped 49% in March.
– BITCOIN: BTC dropped after the NFP report at the end of the work week, but then rose, and that continued over the weekend, with the price hovering over $69,200 on Sunday. News came in this week that the US crypto exchange Coinbase is integrating the so-called Lightning network, allowing customers to make global Bitcoin transactions almost in real-time at lower fees.
– OIL: Prices spiked this week, as geopolitical tensions kept increasing with signs of a possible direct conflict between Israel and Iran that could further negatively affect supplies. Additionally, Ukrainian drone attacks on Russian refineries may have disrupted more than 15% of Russian capacity. The prospect of a tighter market is expected to lead to a drawdown in inventories during Q2-24.
policy rate overview
The Polish Central Bank decided to maintain its key policy interest rate at 5.75%, with policymakers stating that disinflation in the Polish economy is continuing, as inflation is being driven down by the reduction of cost pressures reflected in falling producer prices, and by the weak growth in economic activity. At the same time, economic activity is picking up in Q1, as indicated by industrial production and retail sales numbers. However, the construction sector is still experiencing a weak performance.
The Reserve Bank of India (RBI) also kept its key rate unchanged, as growth in the economy is expected to remain robust while inflation remains above the 4% target. The RBI governor stated that monetary policy must remain actively disinflationary at this stage, saying that inflation is the elephant in the room and that “the elephant has now gone out for a walk and appears to be returning to the forest” and must “remain there on a durable basis“. Food price volatility is still a concern, although core inflation has fallen sharply in recent months. The expectation is that there likely will not be any rate easing until the July-September quarter this year. The forecast is that the Indian economy will expand by 7% in the fiscal year 2025 (starting on the 1st of April 2024), but consumption, which forms nearly 60% of the economy, is projected to grow at just 3% – the lowest in 2 decades (except for the pandemic). The Indian rupee continues to trade near record lows as the central bank has chosen to absorb dollar inflows to build reserves.
Next week is ECB week. Additionally, the central banks in Canada and South Korea will also announce their rate decisions. The consensus forecasts point to all three central banks keeping their rates unchanged at their current levels.
highlights from Germany
Inflation keeps its downward march
Provisional inflation figures for March show that disinflation goes on, while core inflation remains sticky on account of a rebound in services inflation. Headline CPI: +2.2% YoY / +0.4% MoM. HICP: +2.3% YoY / +0.6% MoM. Core CPI: 3.3% YoY. What is notable in this release, is that Energy disinflation re-accelerated, reaching a rate of -2.7% despite the end of the energy brake measures and the higher carbon price. However, the situation could change in April, as oil prices spiked again, as mentioned earlier. Another notable development was that food prices declined YoY (-0.7%) – also an unexpected development seen for the first time since 2015.
Mixed PMI
Service PMI finally (barely) crossed the 50-point threshold, as activity stabilizes and companies’ outlook continues to improve. However, new business inflows kept declining with firms highlighting persistent weakness in the wider economy, even as reports of sustained job creation increased. Wage pressures continued to drive up businesses’ costs but input and output charge inflation have both slowed down. The improvement in the service sector led to an increase in the Composite PMI, but it is still firmly in contraction territory as manufacturing output keeps falling. Final Manufacturing PMI remained firmly in contraction, with higher optimism, but still weak demand, further decreases in orders and output, as well as further factory job losses.
Factor orders tick up, barely
German factory orders rose 0.2% MoM in real terms in Feb according to provisional figures, less than consensus forecasts. On a YoY basis, they dropped 10.6% vs. Feb-23. However, excluding large-scale orders, there was a decline MoM of 0.8% and YoY by 11.1%. Real sales in the manufacturing sector rose 2.2% MoM but are still down YoY by 5.8%. Foreign orders fell 0.7% MoM, of which euro area orders were down 13.1%, while those outside of the euro area were up 7.8%. Domestic orders: +1.5% MoM. Orders for capital goods fell by 0.6% MoM, but increased for intermediate goods (+1.0%) and consumer goods (+2.2%). Biggest positive contributions from incoming orders in mechanical engineering (+10.7% MoM), in the chemical industry (+3.1%) and the pharmaceutical industry (+6.6%). Largest negative impact: orders in the automotive industry (-8.1% MoM) and in the manufacture of metal products (-5.3%).
Net electricity imports more than in previous years
In Q1-24, Germany continued on the path we saw materialize last year – with net electricity imports going even higher for this time of the year already since Feb. This is also a consequence of the shutdown of more German coal power plants in March, replacing them with a cheaper supply from the EU market, and of the return of some French nuclear power plants to the grid, which led to lower demand abroad as well. Country-wise, there was a significant decrease in electricity exports to Poland, Czechia, Austria and Luxembourg. However over the course of Q1, imports from Belgium remained stable while those from France rose in Feb, and those from Denmark, Sweden and the Netherlands increased in Feb and Mar. Electricity consumption also remains low, similar to the start of 2023, except for March which was the lowest consumption for years for this month. Demand from industry is still depressed due to the contraction in output and underutilized capacities.
highlights from EUROPE
Inflation progresses further toward target
Flash euro area headline inflation estimate for March was 2.4% YoY vs. 2.6% previously, and it was lower than expected. Core inflation was at 2.9% YoY. Growth in food prices finally fell below 3%, however, services inflation remained stubbornly high at 4% YoY. This has further solidified the expectation of monetary policy easing by the European Central Bank in the upcoming months. The euro appreciated against the USD this week. Among Euro Area members, Croatia (4.9%), Austria (4.2%), Estonia (4.1%), and Belgium (3.8%) recorded the highest annual inflation rates, while Lithuania (0.3%), Finland (0.7%), Latvia (1%), and Italy (1.3%) had the lowest.
PMI in expansion, with the discrepancy between the South and the North still there
Eurozone PMI returned to an expansionary zone in March, with stabilization of demand and continued efforts to clear backlogs of work, also accompanied by increasing business optimism. This upturn was only marginal overall as a sustained contraction in manufacturing sector output almost canceled out the modest recovery in services activity. However, the variation within the euro area remains significant: Spain, Italy and Ireland are expanding, while Germany and France are still contracting. Underlying data still point to subdued demand conditions, and export sales remained a drag in March. New business is still not growing and the level of spare capacity is still high. Inflationary pressures eased broadly as rates of increase in operating costs and selling charges fell, but still remained stronger than the pre-pandemic period. Growth expectations in manufacturing are still weak. Greek and Spanish manufacturing conditions improved the most, and Italy also picked up, but Germany and France remained “out of action”.
Retail sales declined again
In a sign of lacking sustained recovery, retail sales volumes in the euro area and the EU declined in February: by 0.5% in the euro area and 0.4% in the EU MoM, and by 0.7% in the euro area and 0.2% in the EU YoY. The monthly and annual declines were across all product categories – food, drinks, tobacco, non-food products and automotive fuels. The only exception was the annual increase for non-food products (except automotive fuel) by 0.6%.
Risks in the banking sector are rising
The Q4-23 EBA Risk Dashboard published this week showed clear signs of credit quality deterioration in the portfolios of EU/EEA banks. Non-performing loan (NPL) volumes and ratios are still low, but they have started to increase compared to previous quarters. Stage 2 loans (declining credit quality) rose from 9.2% to 9.6% between Q3 and Q4. The cost of risk also rose by 4 bps over the same period. CRE (Commercial Real Estate) collateralized NPL also increased in both volume (from €54.2bn to €57.6bn) and ratio (from 4% to 4.3%) between Q3 and Q4 amid declining outflows and rising inflows – still far from historical highs. Banks’ capital ratios went back to the aggregate historical high of 15.9% from Q2-23 and the aggregate leverage ratio is at 5.8% in Q4 2023, meaning capitalization remains strong overall, as both capital supply and RWA went up by similar amounts. Loan generation remained low: QoQ loans to non-financial corporations increased by 0.2% and loans to households by 0.3%. Liquidity ratios increased in Q4 by over 6pp for the LCR and 80bp for the NSFR. The loan-to-deposit ratio continued to decline, stabilizing at 107% in Q4. Profitability for 2023 remained high at 10.3%, albeit with wide dispersion. While all banks have benefited from rising interest rates, the share of banks with a RoE higher than 10% has decreased from 60% to 45%. The dispersion of return on assets has narrowed over the recent period, indicating increased profitability for all banks. But the cost-income ratio as of Q4 shows that this convergence trend is slowing.
highlights from THE UNITED STATES
Jobs data shows the Fed has little reason to rush with rate cuts
US Nonfarm payrolls increased by 303k jobs in March, which beat expectations, while data for February was revised slightly lower to show 270k jobs. However, the overall strong result conceals the details showing that full-time employment is actually falling, while part-time is what is rising. Unemployment remains below 4% and then the YoY increase in wages remains at about 4.1%, meaning no material inflationary pressures from wages. Average hourly earnings rose at an annualized rate of 4.3% to $34.69. Participation rate and hours worked were both up last month. The market reaction was that the implied probability of a rate cut in June fell by about 5pp, as the market is likely perceiving the rate trajectory as more uncertain given the positive development in the job market.
US PMIs remain in expansion territory
At the composite level, the PMI Output Index fell to 52.1 in March, down marginally from 52.5 in February but still pointing to a solid monthly increase in overall business activity. Manufacturing production rose at the fastest pace in almost 2 years, but growth of services activity slowed. New orders in both sectors increased, but that rise was dragged down by a lack of export growth. Rates of both input cost and output price inflation accelerated and were at 6- and 10-month highs, respectively. The sector-specific PMIs for all 7 sectors recorded an expansion in business activity during March, with the Consumer Goods sector being the best performer. Basic Materials, Financials, Industrials and Technology all had a more significant rise in output in March compared to February.
Factory orders growing again after 2 months of declines
New orders for manufactured goods increased by $8.2bn or 1.4% MoM, reaching $576.8bn. New orders for manufactured durable goods were up $3.5bn or 1.3% MoM, those for transportation equipment rose by $2.9bn or 3.3% MoM, and orders for manufactured nondurable goods increased $4.7bn or 1.6% MoM. Shipments also rose by 1.4%, while unfilled orders remained virtually unchanged. The unfilled orders-to-shipments ratio was 7.10, down from 7.17 in January. Inventories increased by $2.3bn or 0.3% MoM, to $857.7bn, with the inventories-to-shipments ratio down slightly to 1.47 (from 1.49 in January).
highlights from THE UNITED KINGDOM
House price rebound
Annual growth in UK house prices picked up in March, with the Nationwide index rising 1.6% YoY (avg. price at £261,142) but declining MoM by 0.2%. Activity in the market is picking up, but the number of mortgage approvals was still 15% before pre-pandemic levels due to the impact of higher rates on affordability. Price increases were strongest in Northern Ireland (+4.6% YoY), while the South West was the weakest performing region (-1.7% YoY).
PMIs show recovery continues
UK Final Manufacturing PMI kept rising in March, with new orders, output and suppliers’ delivery times consistent with an improvement in overall operating conditions, and rates of contraction in employment and purchasing activity slowing sharply. Business optimism about the year-ahead outlook hitting an 11-month high: about 58% of companies expect their output to rise over the coming year. The report points to remaining potential blockers such as continued weak export performance and supply chain stresses, with the neighboring EU market the main drag on overseas demand and the Red Sea crisis still impacting supply chains. The survey shows that the impact of both of these factors is easing. In the construction sector, UK companies indicated a renewed increase in total industry activity during March, thereby ending a 6-month period of decline. There was a turnaround in sales pipelines and greater new business inquiries linked to the improving economic outlook and more stable financial conditions. With rising work on infrastructure projects and strong demand in the energy sector, civil engineering turned out to be the best-performing segment in March. House building and commercial construction activity were both broadly unchanged.
Author: Nikolay
Founder of MoneyCraft
