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The Week in Global Markets
Financial markets summary:
– EUROPE: The benchmark European indices finished this week higher, including the STOXX 50 and 600, the DAX, the CAC 40, the FTSE MIB, as well as the Swiss SMI and the British FTSE 100. At the end of the week, European banking stocks in particular were soaring to levels not seen since 2015, supported by strong earnings releases. This week, communication from ECB members kept signaling very clearly that interest rate cuts are likely coming in June, even though it is not yet certain how many cuts will follow after that (for instance, Bundesbank President Nagel stated that a cut in June does not necessarily mean that there will be a ‘series of cuts’). But service inflation remains a major concern at the moment. Business activity in the euro area and Germany is showing signs of recovery overall, but that is driven mainly by the service sector, while manufacturing is still struggling. UK business activity also grew strongly, but there were indications that corporate margins were getting hit by the developments in input vs. output prices. As data from the US showed drove down the likelihood for a rate cut in Q2 (or even Q3) this year, European bond yields rose to some of the highest levels for 2024. The euro, the pound and the Swiss franc appreciated slightly against the US dollar.
– UNITED STATES: Mixed macro data is what drove markets this week, especially in the US. We saw downside surprises in GDP growth and the PMIs and an upside surprise in PCE inflation, which led markets to reprice interest rate expectations and resulted in spikes in the US Treasury yields across tenors, which reversed to a significant extent before the end of the week. Most stock indices reversed their losses from previous weeks, with the S&P 500 rising 2.67% WoW, the Dow rising 0.67% and the Nasdaq up 4.23%. The share of S&P 500 companies reporting positive earnings surprises and the extent of earnings surprises are above their 10-year averages. We had several tech stocks advancing on Q1 earnings results, such as Alphabet, which together with the rise in Apple and NVIDIA helped the Nasdaq perform better than other indices. Tesla also surged after it reported earnings that were not great but were seen by investors as being “good enough” given initial fears that lower-than-expected unit deliveries would be more detrimental to the Q1 results. However, Meta Platforms dropped after Mark Zuckerberg announced plans to continue heavy spending on new technologies, including AI.
– ASIA-PACIFIC: This week we observed a very significant weakening of the yen against the USD, to levels not seen since 1990 and ended the week at just above 158 yen per dollar. Finance minister Suzuki stated that the government is concerned about the weakness of the currency as the BoJ left the policy rate unchanged. A weak yen does provide a boost to exports, but it is a real challenge for Japanese policymakers due to its impact on input prices and the cost of living for households. The finance minister indicated that measures to fight rising prices are key policy priorities for the government. The currency weakness has contributed to the rise in the key stock indices – both Nikkei 225 and TOPIX were up week-on-week. In China, the Shanghai Composite Index and the CSI 300 also gained during the week, as the country’s GDP rose more than consensus expectations, at a 5.3% annualized rate in Q1. Falling producer prices and the drop in the real estate market, however, led to downward revisions of inflation forecasts. As expected, the loan prime rates for 1-year and 5-year tenors were left unchanged at 3.45% and 3.95%, respectively, likely reflecting a more cautious view on easing by the PBoC.
– BITCOIN: BTC ended the week slightly lower, meeting some resistance at the $64,000 level. Hopes are high at the moment that, after the halving last week, BTC could be headed for the $100,000 mark next, perhaps even within the next 12 months. But such a move can not be forecast with certainty. News came out this week that Michael Saylor, co-founder of software company Microstrategy – the largest publicly traded holder of Bitcoin – sold over $6.4m worth of shares of the company. The company has benefited significantly from the rise of the largest cryptocurrency, with its shares closing at just under $1,300 on Friday.
policy rate overview
Once again this week, Argentina’s Central Bank (BCRA) cut the benchmark interest rate by another 10pp to 60% annually, the fourth cut since Javier Milei took office in Dec-23, when the rate stood at 133%. The measure is expected to hit investment funds aimed at fixed maturities, including those offered by virtual wallets to keep the money in the account, which were already hit by previous cuts. The BCRA’s decision coincided with the government’s plans to issue bonds at lower rates amid falling yields in the banking system. The 60% nominal annual rate translates into an effective annual rate of 82%, which is well below inflation expectations for the next 12 months (at 120%).
The National Bank of Hungary (NBH) cut its key interest rate by 50bp to 7.75% and decided to keep the symmetry of the interest rate corridor with similarly large cuts at both ends. This is in line with their previously communicated intention to keep easing but at a slower pace. Policymakers said domestic disinflation was strong and broad-based, however, the volatile risk environment and increasing risk aversion continue to warrant a careful and patient approach to monetary policy. The central bank expects inflation to increase temporarily in the middle of the year due to the retrospective pricing of market services, and base effects. Core inflation is expected to fluctuate between 4.5% and 5% in H2.
The Central Bank of Türkyie maintained its policy rate at 50% as the underlying trend of monthly inflation continues to be higher than expected and citing lagged effects of past hikes still in the pipeline. The Monetary Policy Committee’s statement shows that the MPC expects the moderation in domestic demand and the real appreciation in the Turkish lira, as well as the improvement in inflation expectations, to lead to disinflation in 2H24. The MPC no longer mentions building up its reserves in parallel with its so-called monetary framework simplification policy. The central bank announced an increase of the interest rates on required reserves involving lira and FX-protected lira deposits to support the transition to lira deposits: (1) the maximum interest rate on required reserves for lira deposits will be set at 80% of the policy rate; (2) the maximum interest rate applied to required reserves of FX-protected lira deposits will be set at 60% of the policy rate.
The Bank of Japan (BoJ) held its benchmark policy rate at 0%-0.1% on Friday, as expected and as inflation came in cooler than expected. As mentioned before, this contributed to a significant deterioration of the yen against the dollar, past the 158 level. The BOJ also stated that it will continue to conduct bond purchases in line with the March decision. Governor Ueda said that while the bank’s monetary policy does not directly target currency rates, exchange rate volatility could have a “significant impact” on Japan’s economy and prices and that if those effects were hard to ignore, it could be a reason to adjust policy.
The Bank of Russia also kept its key rate the same at 16%, citing easing but still elevated inflationary pressures. Inflation is expected to return to the target somewhat more slowly than the February forecast indicated. The central bank statement pointed out that this means tight monetary conditions will have to be maintained in the economy for a longer period than previously forecast. Annual inflation did not change significantly since the beginning of March and, as of April 22, amounted to 7.8%. The key inflationary risks to the upside remain in place: the changes in terms of trade (including as a result of the war with Ukraine and geopolitical isolation), persistently high inflation expectations, and upward deviation of the Russian economy from a balanced growth path, as well as with the fiscal policy normalization path.
After the surprising decision to keep the MLF rate unchanged last week, the People’s Bank of China (PBoC) also announced this week that the loan prime rates (1-year and 5-year) would stay at the same levels. Analysts point to the fact that cuts at this point could lead to additional depreciation pressures which the PBoC wants to avoid. Given some depreciation of the yuan against the USD this year, some anticipate the PBOC to resume rate cuts as soon as it regains some ground, forecasting 20bp in rate reductions by the end of Q2.
highlights from Germany
Better economic sentiment in April
The ifo indicators show that German economic sentiment improved further in April, rising for the 3rd consecutive time – with both the current assessments and business expectations turning brighter. However, these results were not uniform across sectors:
– Current situation improved in the service sector only, while the assessments deteriorated in manufacturing, construction and trade.
– Expectations became less pessimistic in manufacturing, trade and construction, while they remained stagnant in the service sector.
Business uncertainty is still elevated but keeps declining gradually over time. Since expectations and assessment of the current business environment are both still in a range that is below average, the heatmap shows that the country remains in a crisis, with manufacturing, trade and services in a crisis mode, and construction in a slowdown.
Consumer mood remains depressed, despite a slight tick-up
Once again in April, there were continuing signs of a slow and hesitant recovery in consumer sentiment in Germany, which still remains stuck at deeply negative levels. The overall indicator improved by 3.1pt mostly driven by noticeably more positive income expectations. The propensity to buy and economic expectations also improved, although more moderately. The ongoing rise of the willingness to save is preventing a more meaningful recovery in consumer confidence. The report states that “Income expectations are primarily based on real income development. And the signals here are definitely positive. Rising wages and salaries combined with a recent decline in the inflation rate form the foundation for increasing purchasing power among private households.” However, the survey also points to the fact that there is still significant uncertainty among consumers because they do not see a clear and comprehensible perspective for the country’s future development. This is the reason why there is still no strong momentum for domestic demand.
A hesitant recovery in the construction sector?
New orders and sales in the construction sector in Germany ticked up slightly in February, which as mentioned previously was likely helped by the mild weather that supported the industry mid-Q1. A full-blown recovery momentum is likely still a long way away. New order rose +1.8% MoM / +0.9% YoY (real), with building construction up +0.5% MoM/ -1.5% YoY (real) and civil engineering increasing +2.9% MoM/+2.8% YoY (real). Sales grew 2% YoY.
PMIs signal a service-driven recovery
April Flash PMI for Germany moves into positive territory (>50) signaling a modest expansion, driven primarily by the ongoing recovery in the services sector, while manufacturing clearly remains in contraction. Services new business rose for the first time in 10 months, with customer demand growing moderately and accelerating hiring in the sector. At the same time, this month saw the sharpest drop in new factory orders in 5 months, as new business and exports kept falling. Manufacturing demand remains weak and there was a lack of a turnaround in the inventory cycle (unlike elsewhere in the world). Order backlogs in industry are still in decline.
highlights from EUROPE
The growth trend continues
Euro area Composite PMI continued to rise in April, with a further expansion in the service sector and a contraction in manufacturing. Growth outside of France and Germany was the key driver for this development, although in both countries there were also some positive developments. Manufacturing output fell across the eurozone for a 13th straight month and continues to be a drag on the economy. New business continues to decline rapidly, along with order backlogs, as demand remains weak. And while services kept recovering, price pressures also picked up across the eurozone alongside the improvement in output and hiring, mostly due to the rise in wages. Input costs and average selling prices both rose at faster rates, as price pressures in the service sector remained stubborn. New orders for services rose in April at the fastest pace since May of last year, up for a second straight month, but new orders for manufactured goods fell at an increased rate. Business expectations about the 12 months ahead cooled slightly vs March, as service sector confidence declined.
Sustained weakness in consumption and business investment
The ECB Economic Bulletin for April shows that the weakness in retail sales volumes and car sales persists, with both remaining below their Q4 levels in Jan and Feb. The EC consumer confidence indicator ticked up but remains below its long-term average. The indicators for expected retail trade business and expected major purchases by consumers were once again subdued in March. The segment that continues to improve is services where demand indicators are on the rise. Business investment is also still negatively affected by a variety of factors. After a sharp contraction in Q4, mainly driven by the strong contraction in machinery and equipment investment in Germany, business investment is expected to have remained weak in Q1, with industrial production in the capital goods sector (excluding Ireland) declining sharply in January. Confidence among producers of capital goods fell throughout Q1, as output, outstanding business and new orders stayed deep in negative territory, according to PMI data, and financing conditions were restrictive. Both the BLS and the Access to Finance Survey point to ongoing weakness in fixed investment. Housing investment also likely continued to decline in Q1 after it had dropped in Q4. Building construction output was 1.5% lower in Jan compared to the Q4 average. The EC indicator for building construction activity in the last 3 months and the PMI for residential construction output, have remained in contractionary territory up to March. Insufficient demand was cited by firms as the most significant factor limiting construction activity. Momentum in housing investment is likely to remain weak in the near future, consistent with subdued lending for house purchases. This weak outlook for housing investment is linked to the considerable rise in the cost of owning and living in a home since the start of the recent monetary tightening cycle, which is likely to weigh further on housing demand.
Euro area monetary developments Mar-24
Summary of changes in aggregates:
– M1 (currency in circulation and overnight deposits): up to -6.7% annual growth rate
– M2-M1 (short-term deposits other than overnight deposits): down to +16.9% (annual)
– M3-M2 (marketable instruments): up to 19.2% (annual)
– M3 overall: up to +0.9% annually
Credit growth:
– The annual growth rate of adjusted loans to households stood at 0.2% (down from 0.3% in Feb), for adjusted loans to non-financial corporations it was 0.4% (up from 0.3% in Feb).
– The annual growth rate of deposits by households up to 0.9% (from 0.6% in Feb); annual growth rate of deposits by non-financial corporations increased to 0.1% (from -1.2% in Feb); annual growth rate of deposits by investment funds other than MMFs was -9.5% (vs -6.7% in Feb).
Consumer Inflation Expectations Decline Further
The ECB Consumer Expectations Survey for March 2024 shows that:
– median consumer inflation expectations for the next 12 months decreased to 3%, while inflation expectations 3 years ahead remained unchanged;
– consumer expectations for nominal income growth slightly decreased to 1.3%; this decrease was observed across all age groups;
– expectations for nominal spending growth over the next 12 months slightly decreased to 3.6%;
– economic growth expectations for the next 12 months remained unchanged at -1.1%; by contrast, expectations for the unemployment rate 12 months ahead decreased to 10.7%;
– consumers expected the price of their home to increase by 2.4% over the next 12 months, while expectations for mortgage interest rates 12 months ahead declined slightly to 5.0%; the net percentage of households reporting a tightening (relative to those reporting an easing) in the access to credit over the previous 12 months continued to decline, as did the net percentage of those expecting a tightening over the next 12 months.
highlights from THE UNITED STATES
Growth slows down more than expected
US GDP Growth decelerated to 1.6% YoY (less than the expected 2.5%) according to the advance estimate for Q1-24. The primary drivers of the positive growth were the positive contributions from consumer spending (due to a rise in service consumption, while goods spending declined), residential fixed investment, nonresidential fixed investment, and state and local government spending. The increase in imports outpacing the decelerating growth in exports, as well as the decline in private inventory contributed negatively.
PCE higher than expected
Person Consumption Expenditures went up slightly more than expected on an annual basis: headline +2.7% YoY, core +2.8% YoY (monthly changes were in line with expectations). On a quarterly basis, the core PCE component of GDP actually went up +3.7% in Q1-24. This is not a sufficient improvement to warrant a rate cut in June, which is why the market repriced the likelihood, shifting the first expected cut until the end of the year (November). The main contributor pushing the GDP deflator was PCE services inflation, primarily financial services i.e., insurance costs.
PMIs confirm growth is slowing down
All PMI indices remained in expansion territory in April except for manufacturing. US business activity continued to increase but the rate of expansion slowed amid signs of weaker demand. There was an overall reduction in new orders for the first time in 6 months. Companies responded by scaling back employment for the first time in almost 4 years, with business confidence also waning to the lowest since last November. Rates of inflation generally eased at the start of Q2, with both input costs and output prices rising less quickly at the composite level. However, manufacturing input cost inflation hit a 1-year high.
highlights from THE UNITED KINGDOM
Expansion continues but price pressures increase
UK private sector activity expanded for the 6th consecutive month in April as a robust recovery in service sector output helped to offset a marginal decline in manufacturing production. Output growth was supported by a solid upturn in new order volumes and a modest acceleration in staff hiring, in each case driven by the service economy. Service providers indicated a robust and accelerated rise in business activity during April, with the rate of growth the fastest for 11 months. Manufacturing production declined slightly in April, reversing the positive trend seen during the previous survey period. Lower output levels were often linked to weak market conditions and customer destocking in line with reduced demand. The rate of cost inflation in the service sector was the steepest since last July, which was almost exclusively linked to higher salary payments during the latest survey period.
Depressed but slowly improving consumer sentiment
Thanks to optimism on personal finance for the next 12 months, with the headline confidence index edging up 2 points, although still remaining negative. All of the underlying 5 component measures this April are significantly better than they were last April, reflecting the impact on household budgets of lower inflation and the anticipation of further tax cuts. But the GfK report points out that there is still a long way to go from the much firmer sentiment last seen in the period before Brexit, Covid and the conflict in Ukraine.
Author: Nikolay
Founder of MoneyCraft
