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: This week, European equities fell across the board on the continent, while UK stocks recorded a gain, supported by the GBP weakening against the US dollar. The biggest benchmark stock indices in Europe appear to have been affected rather negatively by the likely divergence in the monetary policy outlook forming across the Atlantic – with inflation still rising in the US and making rate cuts in Q2-24 less likely, while the ECB clearly signals that such cuts could be imminent by June. The banking sector took a slight dip this week, accompanied by the telecom sector, while there was a better performance by the utilities and healthcare sectors. The euro depreciated more significantly this week against the USD, with the American currency gaining against most world currencies as geopolitical risks escalated once again, driven by the situation in the Middle East (the anticipated retaliatory attack of Iran on Israel). Analysts indicate that there is likely a trend towards parity again. With US inflation still heading higher and the policy announcements by the ECB, yields on German, French and Italian government bonds declined. At the same time, UK yields rose after hawkish remarks from Bank of England policymakers warning about rate cuts still being a way off.
– UNITED STATES: Multiple factors contributed to the decline in the US stock market this week. The rising risks related to the situation in the Middle East were one, as mentioned. The negative inflation surprise was another. The S&P 500 index dropped 1.56%, accompanied by declines in the Dow Jones Industrial Average and the Nasdaq, while the Russell 2000 Index had its worst daily decline in almost two months mid-week, ending at a negative YTD territory on Friday. S&P sector performance was rather discouraging, with all sectors in the red this week, most of them by over 1%. Growth stocks did better than value stocks, which were negatively impacted by interest rate-sensitive sectors, such as real estate investment trusts, housing, regional banks, and utilities. After the surprising inflation report, US Treasury yields jumped, ending the week higher, as the likelihood for a rate cut by the Fed in June priced in by the futures market shrank.
– ASIA-PACIFIC: Japanese stocks returned to green this week, with increases in both the Nikkei 225 index and the broader TOPIX index. Analysts and market participants are considering whether there could be some government intervention in the FX market, given the further depreciation of the yen to near 34-year lows. The 10y JGB yield also rose after the US inflation report. Bank of Japan Governor Ueda stated that hiking rates to manage the yen’s decline is not likely, although the market is pricing in two more likely rate hikes within the next 12 months. In China, stocks retreated this week, with inflation recording a below-expectations increase and producer prices falling for the 18th month in a row. Both exports and imports declined in March, meaning that external demand is not supporting economic growth as hoped.
– BITCOIN: With a few days left to the BTC halving (on 20th April), this weekend brought a surprising drop in the largest cryptocurrency’s price, briefly falling below $62,000, and now hovering around the $64,000 mark. The decline coincided with the timing of the Iranian attack on Israel, which led to some speculation whether it was a direct reaction to the events. Reports on the Bitcoin ETFs showed that this week’s inflows were the lowest to date.
policy rate overview
The European Central Bank kept its policy rates unchanged this week, as expected. It signaled that it could cut interest rates at its next meeting in June, as confidence grows that the 2% inflation target will be reached soon, even as the situation in the US is quite different. The statement by President Lagarde was: “If our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.” The expectation is that inflation will keep fluctuating around the current levels in the months while growth is expected to remain subdued.
The Central Bank of Argentina unexpectedly cut its benchmark rate to 70% this week, even as inflation has been running at a whopping 288% annual rate. However, the central bank statement referred to seeing a pronounced slowdown in inflation, despite the strong statistical drag that inflation carries in its monthly averages. The new government’s tight fiscal policies have contributed to an improvement in the mood of investors in the country, leading shares and bonds higher. This is happening despite the continued increase in poverty levels and the recession, as activity, production and consumption keep falling.
Canada’s Central Bank maintained its policy rate at 5% and is continuing its policy of quantitative tightening. It projects economic growth to pick up in 2024 as household spending increases, along with government spending and residential investment. Business investment is projected to recover gradually after considerable weakness in the second half of last year. While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months, with the expectation that it will be close to 3% during the first half of this year, move below 2.5% in the second half, and reaching the 2% inflation target in 2025.
The Bank of Korea also kept rates steady, with the key rate at 3.5%, holding off on policy easing given sticky inflation. The country’s CPI stayed over 3% for the second consecutive month in March on record prices of fruits and rising global oil prices. However, the policy statement amendment was seen as potentially opening the way for a rate cut in the second half of the year.
highlights from Germany
Finally, a rebound in production
Industrial production in Germany showed further signs of recovery in February, rising +2.1% MoM but still lower by 4.9% compared to Feb-23. On a 3m/3m basis, production was 0.5% lower in the Dec-23 to Feb-24 period vs. the Sep-23 to Nov-23 period. The main drivers were: construction (+7.9% MoM) and energy-intensive industries (+4.2%), including the automotive industry (+5.7%) and the chemical industry (+4.6%). Contrary to these developments, production in the energy production sector dropped by 6.5%.
A fall in the trade balance reported in February
Germany’s trade surplus shrank by 22.5% MoM to €21.4bn in February, with exports down 2.0% and imports up 3.2% on a calendar & seasonally adjusted basis vs January. Country-wise, exports to the rest of the EU declined by 3.9%, to China by 0.6%, and to the UK by 2%. The exceptional development when it comes to exports was to the United States, where they rose by 10.2%. Imports dropped from all locations but China, where they rose by 16%.
Credit tightening continues
The results of the Q1-24 Bank Lending Survey for Germany show that German banks tightened credit standards further for loans to enterprises, loans to households for house purchases, and consumer credit and other lending, but less than expected in the prior quarter. The main driver of this tightening was elevated credit risk and the transposition of the provisions of the seventh update to the Minimum Requirements for Risk Management (MaRisk). The plan for Q2 is to tighten again in all loan categories. Terms and conditions changed very little for corporate and housing loans but for consumer credit and other lending, they were tightened – mainly due to lower risk tolerance on behalf of banks. Demand for loans declined for loans to enterprises (due to the levels of interest rates and low financing needs for fixed investment as well as for mergers, acquisitions and corporate restructuring) and rose back up for loans to households for the first time in 2 years (stimulated by households’ improved housing market prospects, as reported by the banks). However, the loan rejection ratio rose once again in all loan categories. For the next 3 months, the surveyed banks are expecting enterprises’ demand for borrowing to remain unchanged.
Consumer expectations stabilize
The Mar-24 Consumer Expectations Survey of the Bundesbank shows some signs of stabilization and improvement. Consumers’ inflation expectation for the next 12 months is lower this time at 3.3%, while expectations also fell slightly for the next 3 years and 5 years. Income growth expectations for the next 12 months improved again, anticipating an increase on average of €170. Fewer individuals expect interest rates on loans to keep rising, but in aggregate still, an increase is expected. Real estate prices are expected to rise by 3.6% in the next 12 months, higher than before. Expectations for rate increases have basically stabilized.
highlights from EUROPE
The service sector remains resilient
The EU/EA services sector continues to perform well: production was up 1.5% MoM / 4.5% YoY in the EA, and up 1% MoM / 4.1% YoY in the EU in January. The increase was broad-based across the board, both on a monthly and annual basis. The biggest MoM increases in production were in professional, scientific and technical activities, followed by real estate activities. The biggest YoY increases were in information and communication, followed by professional, scientific and technical activities, administrative and support services, and real estate activities.
Access to finance has not sustainably recovered yet
According to the Q1-24 Survey on the Access to Finance of Enterprises by the ECB, firms reported that the general economic outlook was the main factor hampering the availability of external financing. A net 26% of firms reported that a deterioration in the general economic outlook had reduced the availability of external financing. Large firms continued to be more pessimistic about the impact of the outlook for the general economy than SMEs. Firms are still reporting fewer applications for bank loans, with the share of applications for bank loans dropping to 17% (down from 23%) – a decline that was observed across size classes. The most common reason stated by firms for not applying is the amount of internal funds at their disposal, which firms consider sufficient to finance their business plans. About 4% of firms reported an improvement in banks’ willingness to lend, with both SMEs and large firms signaling a slightly better attitude of banks towards them. The primary uses of external and internal financing sources in Q1 continued to be for fixed investment and for inventories and working capital. The share of large firms investing continued to be much higher than that of SMEs for fixed investments (49% versus 27%) as well as for inventories and working capital (37% versus 31%). Fewer firms indicated difficulties in obtaining bank loans compared to Q4-23, with net percentages of 6% for SMEs and 2% for large firms. Discouraged borrowers (firms that do not apply for bank loans even if they would need them) represent the largest fraction of financially constrained firms, mostly among SMEs.
More tightening of credit
The ECB Q1-24 Bank Lending Survey revealed that EA banks tightened credit standards further for loans and credit lines to companies, but smaller than previously expected. This tightening was mainly in Germany and a few smaller countries. Banks’ risk perceptions were the main driver of the net tightening, whereas the cost of funds and balance sheet constraints, competition and risk tolerance had a broadly neutral impact. The weak economic situation and outlook, together with credit risk for firms related to their financial situation, remained the main underlying reasons for the tightening impact of risk perceptions. Banks’ overall terms and conditions for new loans to enterprises remained broadly unchanged. Margins on average loans narrowed slightly, while margins on riskier loans continued to widen. Specifically, margins on riskier loans continued to widen further in Germany and Italy. Lending rates on new loans remained broadly unchanged in net terms. Banks’ higher risk perceptions continued to be the main factor having a tightening impact on the terms and conditions of loans to firms, which was largely counterbalanced by an easing impact from competition. There was a further net increase in the share of rejected loan applications for firms. It was similar for loans to SMEs and to large firms. This further increase was driven by rejections in Germany. Net demand by firms for loans continued to decline substantially. Banks in all 4 large euro area countries reported a further net decrease in demand which contrasted with banks’ expectations of a slight increase. The net decreases in demand for loans to SMEs and large firms were similar in magnitude and were both larger than in Q4-23.
For the first time, in Q1 credit standards on loans to households for house purchase eased, in contrast to the tightening that banks had expected. It was mainly driven by developments in France, although it also materialized in several smaller countries. Of the three other large economies, German banks reported a net tightening and Spanish and Italian banks reported unchanged credit standards. Competition and banks’ risk tolerance were the main factors driving the net easing of credit standards on housing loans. Some German banks linked the tightening of credit standards (in “Other factors”) to increased costs of living, which in turn has led to a deterioration in borrower debt-servicing capacity and creditworthiness. At the other end of the spectrum, French banks reported that exercising greater flexibility within the leeway allowed by prudential guidance, as well as competitive pressures, contributed to the net easing of housing loan credit standards. Overall terms and conditions for new housing loans eased as a result of lower lending rates driven by developments in reference rates. margins on average loans remained unchanged and margins on riskier loans continued to tighten moderately. Banks in Germany, France and Italy reported a net easing in terms and conditions, while banks in Spain reported unchanged terms and conditions. Competition was the main driver of the net easing of overall terms and conditions. In Germany, risk perceptions did have a moderate tightening impact. There was a further net increase in the share of rejected applications for housing loans. Among the 4 largest euro area economies, only German banks reported an increase in the share of rejections, whereas banks in the other three countries reported unchanged rejection rates. Banks reported a small decline in net demand for housing loans, opposite to the increase banks were expecting. Among the 4 largest euro area economies, German banks reported a strong net increase in loan demand, after the substantial net decline reported in previous quarters, while strong net decreases were reported elsewhere. Housing market prospects were the main factor exerting downward pressure on demand for loans for house purchases. German banks reported the increase in demand as the result of improved housing market prospects and lower interest rates. This is consistent with the improved affordability of housing in Germany, with residential real estate prices having dropped substantially throughout 2023 and with new business lending rates on loans for house purchases in Germany declining faster between November 2023 and February 2024 than the euro area average.
Credit standards on consumer credit and other lending to households tightened further in Q1, in line with expectations. Increased risk perceptions and, to a lesser extent, banks’ lower risk tolerance mainly contributed to the net tightening. The increased risk perceptions were mostly related to banks’ perceptions of the economic outlook and consumers’ creditworthiness. Banks’ overall terms and conditions applied when granting consumer credit and other lending to households tightened further in net terms. Margins widened on both average-risk and high-risk loans, particularly in France and Italy. Lending rates stayed broadly unchanged. Perceptions of risk and banks’ risk tolerance contributed most to the net tightening of banks’ overall terms and conditions. The factors contributing to changes in the terms and conditions varied across the four largest economies, with risk tolerance or risk perception being most important in Germany, France and Italy, and cost of funds and balance sheet constraints being the only important factor in Spain. The share of rejected applications for consumer credit rose further in net terms, and it was in 3 of the 4 largest economies, with only Italy reporting a net decrease. Demand for consumer credit and other lending to households remained broadly unchanged, but was heterogenous across countries, with German and Italian banks reporting a net increase, French banks reporting a net decrease and net loan demand remaining unchanged in Spain.
Households’ saving behavior
Households in the euro area are saving more but investing less: their Q4 savings rate rose to 14.6% (vs. 13.9% in Q3), while their investment rate during Q4 declined to 9.7% (vs. 9.8% in Q3). The rise in the savings rate was due to gross disposable income rising faster than consumption (1.2% vs. 0.4%). The decline in the investment rate was driven by the decrease in gross fixed capital formation combined with a rise in gross disposable income.
Survey of Professional Forecasters shows revised GDP expectation
Q2-24 ECB Survey of Professional Forecasters (SPF) points to unchanged inflation expectations compared to Q1: 2.4% in 2024, 2% in both 2025 and 2026, long term 2%. However, GDP growth expectations for 2024 and 2025 are lower: 0.5% and 1.4% respectively; and higher for 2026 at 1.4%; longer-term at 1.3%. Unemployment expectations were revised downward: 6.6% in 2024 and 2025, then down to 6.5% in 2026 and to 6.4% in the longer term. Forecasters expected the interest rate on the ECB’s main refinancing operations (MROs) to fall to 4.25% in Q2-24, reaching 3.5% by Q4 and declining further to 3% in 2025 and 2.5% in 2026. The euro is expected to appreciate marginally against the US dollar, from USD 1.09 in Q2-24 to USD 1.12 in 2026. Nominal wages are expected to rise by 4.0% in 2024 and 3.2% in 2025, before moderating to a growth rate of 2.8% in 2026 and 2.7% in the longer term.
highlights from THE UNITED STATES
Inflation rose more than expected in March
US headline CPI increased 3.5% YoY / 0.4% MoM and core CPI rose 3.8% YoY / 0.4% MoM. This increase puts significant doubts on the idea that the Fed might attempt its first rate cut in June. Implied probabilities priced in by the futures market shifted significantly after the CPI report and declined from just over 50% before it to around 27%. In particular, services inflation remains quite sticky, with core services (excluding housing) rising to 7.5% annualized in March. Transportation was at +10.7% YoY / 1.5% MoM, shelter at +5.7% YoY / 0.4% MoM, motor vehicle insurance +22.2% YoY / 2.6% MoM, tobacco & smoking products +6.8% YoY / 0.4% MoM, food away from home +4.2% YoY / 0.3% MoM.
Producer prices record biggest rise since Apr-2023
The US Producer Price Index (PPI) for final demand rose 0.2% in March (seasonally adjusted). On an unadjusted basis, the index for final demand increased 2.1% for the 12 months ended in March. The main driver was a 0.3% rise in prices for final-demand services. In contrast, the index for final demand goods edged down 0.1%. The index for final demand less foods, energy, and trade services moved up 0.2%. While the headline YoY increase was below expectations, Core PPI inflation rose 2.4%, above expectations of 2.3%. This is another reason why the Fed pivot expected by the end of Q2 might be in question.
highlights from THE UNITED KINGDOM
The economy likely grew again in February
Monthly real GDP is estimated to have grown by 0.1% in Feb-24, following growth of 0.3% in Jan-24. Services output grew by 0.1% MoM, while production output grew by 1.1% MoM and was the largest contributor to the monthly growth in GDP. Construction output fell by 1.9% in February, following an unrevised growth of 1.1% in January.
Professional, scientific and technical activities were the largest positive contributor to the rise in services output in the 3-month period ending in February, followed by admin and support services, and transportation and storage. These growths were partially offset by declines in education, human health and social work activities, and financial and insurance activities.
The growth in production was driven by increases in manufacturing output, as well as output in electricity, gas steam and air conditioning supply, while there were falls in water supply, sewerage, waste management, and mining and quarrying. The largest contribution to manufacturing growth was the manufacture of transport equipment, followed by the manufacture of food products, beverages and tobacco, and the manufacture of basic metals and metal products. The largest negative contributor was the manufacture of machinery and equipment not elsewhere classified. In construction, 8 out of 9 sub-sectors saw a decline in output, with the largest contributors being non-housing repair and maintenance, and private commercial new work. The only positive contributor was private housing repair and maintenance.
Author: Nikolay
Founder of MoneyCraft
