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: Investors in European stocks seemed more cautious this week, as many of the leading equity indices reported weekly declines, likely driven by mixed corporate earnings and policy outlook uncertainty. Of the major indices, the FTSE 100 gained 0.9% WoW. The euro strengthened against the dollar while government bond yields declined, supported by the release of GDP and inflation figures showing that the euro area has grown more than expected in Q1 while core inflation has continued to decelerate. However, based on the data revision, the euro area was in a recession in the second half of 2023. ECB members indicated with more confidence that inflation is on track to fall to target by the end of this year, and therefore a first cut could be expected in June.
– UNITED STATES: This week’s NFP (nonfarm payrolls) release showed that the US labor market is likely cooling, having added fewer jobs than expected in April while monthly wage increases slowed down. This, combined with the statements from Fed chair Powell downplaying stagflation concerns, likely led to higher optimism about inflation, which contributed to the stock rally, as most major indices and the small-cap Russell 2000 gained on the week. There were some positive moves in mega-cap tech stocks, notably Apple’s earnings release and Tesla’s Musk appearance in China on news of the approval of its self-driving technology. Apart from energy and financials, most sectors gained week-on-week. 10-year US Treasury yields declined on the statements from the Fed.
– ASIA-PACIFIC: The yen strengthened to just under 153 against the US dollar this week in a likely reaction to a perceived intervention by the Bank of Japan in the FX market, as indicated by BoJ accounts. The 10-year JGB yields reached a level near the 6-month high of around 0.9% after the US payrolls data release. Japanese stocks advanced during the week most likely helped by the weakness of the yen supporting corporate earnings growth. In China, the Shanghai Composite Index and the CSI 300 ticked up as the Politburo announced it intended to implement prudent monetary and fiscal support to shore up demand and restore growth. The manufacturing PMI was also better than expected in April, while the services PMI disappointed, despite both of them being in expansion territory.
– BITCOIN: This week BTC recovered after its drops in previous weeks, and is currently back to levels above $64,000, as it bounced back up after the US jobs report and the Fed’s more-dovish-than-expected statements. Grayscale’s Bitcoin ETF (GBTC) saw its first daily net inflow ($63m) after months of outflows amounting to billions. BlackRock’s iShares Bitcoin Trust (IBIT) is now challenging GBTC for the title of the biggest Bitcoin ETF: GBTC now has $18.1bn in assets, versus IBIT’s $16.9bn. GBTC has much higher fees, and investors have taken billions of dollars out, with its holdings falling from more than 600k bitcoins to around 290k, according to CoinDesk.
policy rate overview
The Federal Reserve kept its overnight federal funds rate unchanged at the 5.25%-5.5% range for the sixth consecutive FOMC meeting. Fed chairman Powell acknowledged the fact that inflation remained relatively elevated during Q1 and that the economy continues to grow, meaning that it will most probably take longer for the Fed to be confident about the inflation path back to target. The current stance is seen as appropriately restrictive and at the moment rate cuts should not be rushed. The FOMC raised their long-term inflation and growth expectations as a result of the lack of further progress on disinflation in the last several months. The reduction of the balance sheet will be at a slower pace (i.e., the speed at which the Fed withdraws liquidity from the system) starting in June – with a monthly Treasuries redemption cap of $25bn (down from $60bn), while the agency debt and agency MBS monthly redemption cap will remain at $35bn. Powell stated that the path forward remains “uncertain” and will depend on the evolving outlook, the risks and the incoming data. He reiterated the readiness of the Fed to keep the policy rate at high levels for longer if necessary, and that he does not know whether peak rates are reached yet. Asked about possible further hikes, he answered that there would need to be “persuasive evidence that the policy stance is not sufficiently restrictive to bring inflation sustainably down to 2% over time” – which is not the case at the moment. He also does not believe there is a risk of stagflation at the moment.
The Central Bank of Argentina cut its policy rate for the third time in 4 weeks down to 50%, referring to a significant easing in price pressures in the last few months. President Javier Milei stated during the weekend that the April inflation figure could be down back into single digits (in MoM terms). He has indicated that he hopes to lift the currency controls in the course of 2024 as an important step in the process of cleaning up the central bank balance sheet, stating that another rate cut is likely coming. His economic team forecasts that inflation could return to 3.8% MoM by September, while analysts see this number to be a little over 6% within that timeframe.
The Bank Board of the Czech National Bank decided unanimously to lower the 2-week repo rate by 50bp to 5.25%, the discount rate by the same amount to 4.25% and the Lombard rate to 6.25%. The baseline scenario of the updated macroeconomic forecast points to further reductions in the policy rates, with a path higher than the one communicated in the winter forecast. Inflation in Czechia has returned back to target, at exactly 2% in February and March, but the CNB sees upside risks ahead and therefore considers it necessary to “persist with tight monetary policy and approach further rate cuts with great caution“. The statement from the central bank indicated that the pace of any further reduction in rates will depend mainly on an evaluation of the persistence of the low-inflation environment, exchange rate developments, the effect of fiscal policy on the economy, an analysis of the tightness in the labor market, the evolution of domestic and external demand, and the actions of key foreign central banks. The forecast is that some rises in fuel prices could push inflation slightly up in the months ahead, but it should stay close to 2% for the rest of this year and beyond: for the full year 2024 2.3% is expected, while 2% is expected in 2025. Core inflation is expected to remain elevated in 2024, averaging 2.6%.
The Norges Bank’s Monetary Policy and Financial Stability Committee kept the policy rate unchanged at 4.5%, with the expectation that it will likely be kept at that level for some time ahead. Price inflation has slowed down but is still above target – and the Committee this level of the policy rate as sufficiently high to reach the target within a reasonable timeframe. The statement indicates that tighter policy might be needed for longer than originally anticipated.
Decisions next week: Bank of England, as well as the central banks of Poland, Sweden, Mexico, Brazil and Australia.
highlights from Germany
Disinflation goes on
Flash CPI inflation rate was less than expected in April: headline CPI was flat at +2.2% YoY and +0.5% MoM (vs. 2.3% / 0.6% expected), while core CPI was +3% YoY (vs. 3.3% in March). However, the Harmonized index (HICP) went up 2.4% YoY and 0.6% MoM. Energy price deflation has slowed down further to -1.2% YoY, while services inflation remained elevated at 3.4%. Food and goods inflation re-accelerated to 0.5% YoY and 1.2% YoY, respectively.
An upside GDP surprise
Flash GDP growth figures for Q1 show that Germany has avoided a recession. Last quarter, real growth was +0.2% QoQ, which was better than expected, thanks to an increase in gross fixed capital formation in construction, and exports, offset partially by a decline in household final consumption expenditure. Final data with a more detailed breakdown will be released on May 24th.
However, all 1 quarters of 2023 were revised: Q1 and Q3 were revised up (to 0.3% and 0.1% growth, respectively), while Q2 and Q4 were both contractions (-0.1% and -0.5%, respectively). As this data is preliminary, there could likely be more revisions going forward – and since the numbers are so close to zero, the final number could end up on either side of that threshold.
But the slowdown in employment growth continues
The growth rate in employment continued to move down in March. The seasonally adjusted MoM rate declined to nearly 0% (i.e., the number of people in employment was up by 8k), while the YoY growth rate declined to +0.2% (the number of people employed was up by 100k). Quarterly employment figures were therefore up 0.1% in Q1-24 vs. Q4-23, after seasonal adjustment, or up by 38k. The number of unemployed people was 1.52m in March, an increase of 18.1% or 223k YoY, for an unemployment rate of 3.4% (vs. 2.9% in Mar-23).
A rebound in retail sales
Preliminary data show that German retail sales bounced back in March: +0.3% (real) and +2.1% (nominal) YoY; +1.8% (real) and +2.2% (nominal) MoM. This was mainly driven by the increase in food retail sales, especially in super- & hypermarkets: +3.6% MoM and +4.1% YoY. This result was likely impacted by the record of the Easter-season sales which took place at the end of March. In contrast, non-food retail sales dropped 0.2% MoM and 1.7% YoY, while internet and mail-order sales declined 1.3% YoY and rose 3.3% MoM.
highlights from EUROPE
Disinflation progress stalls
Euro area inflation remained steady in April, in line with expectations, according to the Flash figures. Headline HICP was flat at +2.4% YoY / +0.6% MoM. At the same time, core inflation finally declined after months of no progress, with HICP at +2.7% YoY / +0.7% MoM. Services inflation decelerated to 3.7% YoY. Food inflation, however, re-accelerated to 2.8% YoY, mainly due to unprocessed food returning to positive territory. Energy disinflation is also slowing, moving closer to zero.
Positive growth in Q1
Both EU and Euro area GDP increased by 0.3% QoQ in Q1-24 in real terms, according to the preliminary flash estimate. This was the eurozone’s strongest performance since Q3-2022. There are multiple indicators that activity is recovering more broadly, but that recovery is still uneven across countries. The highest quarterly increases were in Ireland (+1.1%), as well as Latvia, Lithuania and Hungary (all +0.8%). The smallest increases: Germany, Austria, and France (+0.2%). The only quarterly contraction reported so far was in Sweden (-0.1%).
Low unemployment persists
In March 2024, the euro area seasonally-adjusted unemployment rate was 6.5%, stable compared with February 2024 and down from 6.6% in March 2023. The EU unemployment rate was 6.0% in March 2024, down from 6.1% in February 2024 and stable compared with March 2023. In March 2024, the youth unemployment rate was 14.6% in the EU, down from 14.7% in February 2024, and 14.1% in the euro area, down from 14.4% in the previous month. The overall unemployment rate did, however, increase in several countries: Czechia, Denmark, Estonia, Ireland and Austria.
Despite Q1 growth, sentiment moves slightly lower
Confidence has declined slightly in industry and services, while retail trade, construction and consumer confidence remained broadly stable. The sentiment indicator deteriorated significantly in France (-4.8) and more moderately in Italy (-1.3), while it improved markedly in Spain (+2.3), Germany (+1.5) and Poland (+1.5) and remained broadly stable in the Netherlands. The decline in industry confidence was driven by managers’ assessment of the current level of overall order books which deteriorated strongly, while their production expectations and assessments of the stocks of finished products remained broadly stable. Managers’ assessment of developments in past production and of export order books deteriorated markedly.
Services confidence decreased slightly, resulting from managers’ worsened assessments of past and expected demand, which was partly offset by an improved assessment of the past business situation. Consumer confidence remained almost unchanged, as the improvement of consumers’ views on their household’s past financial situation and intentions to make major purchases was counterbalanced by markedly lower expectations about the general economic situation in their country.
Construction confidence was practically unchanged as more optimistic expectations of employment were offset by a decrease in builders’ assessment of their order books. The percentage of construction managers indicating insufficient demand or material/equipment shortages as a factor limiting construction activity declined, while the percentage indicating labor shortages or financial constraints as limiting factors increased.
The Employment Expectations Indicator edged down due to lower employment plans among industry and retail trade managers, counterbalanced by more optimistic plans in the construction sector. In services, managers’ employment plans remained broadly unchanged. Consumers’ unemployment expectations worsened somewhat. Selling price expectations declined in services and retail trade and remained stable in industry and construction; selling price expectations score below their long-term average only in industry, while they remain elevated by historical standards in services; consumers’ price expectations for the next 12 months decreased slightly in April.
Estimated capacity utilization in EU industry declined to 78.7%, further below the long-term average of 80.6%; in services, capacity utilization rose to 90.3%, still above the long-term average.
highlights from THE UNITED STATES
A cooling labor market
The March JOLTS report was disappointing: job openings for private industry declined by 364k, including a 182k decrease in openings in construction, indicating that hiring has essentially broken down. The hiring rate fell to 3.5% while the quits rate fell to 2.1%, the lowest since August 2020. This has prompted some analysts to predict that the long-expected recession is still upcoming. The report shows that layoffs have also declined significantly. Nonfarm payrolls for April increased less than expected by 175k, which is also the lowest increase in 6 months, while March and February results were revised down. Average hourly earnings for all employees on private nonfarm payrolls increased by 7 cents to $34.75 in April, a 0.2% increase. The unemployment rate rose to 3.9%. These data likely support the notion that at least one of the mandates of the Fed is moving in a direction that confirms Powell’s more dovish remarks.
Factory orders in line with expectations
The increase in March was 1.6% MoM, as the February increase was revised downward by 0.2pp. Orders excluding transportation rose by 0.5% vs. 1.1% in the prior month. Shipments, also up two consecutive months, increased $1.5bn or 0.3%. Unfilled orders, rose by $6.1bn or 0.4% and the unfilled orders-to-shipments ratio was 7.19, up from 7.10 in February. Inventories increased a mere $0.4bn or virtually unchanged to $857.7bn. The inventories-to-shipments ratio was 1.47, unchanged from February.
Consumer confidence deteriorates further
The Conference Board Consumer Confidence Index deteriorated for the third consecutive month in April. The consumers’ assessment of current business and labor market conditions worsened slightly as did their short-term expectations. In fact, the expectations index is now at 66.4, with readings below the 80-point mark often signaling an upcoming recession. This is the lowest level of the CB Consumer Confidence Index since July 2022 as consumers have become less positive about the labor market situation and more concerned about future business conditions, job availability, and income. Elevated price levels, especially for food and gas, dominated consumer concerns, with politics and global conflicts as distant runners-up.
highlights from THE UNITED KINGDOM
Lending is recovering as interest rates are falling
Net mortgage approvals for house purchases, which is an indicator of future borrowing, rose from 60,500 in February to 61,300 in March, the highest number of net approvals since September 2022. However, the annual growth rate for net mortgage lending remained slightly negative at -0.1% in March. The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages decreased by 17bp, to 4.73% in March. The rate on the outstanding stock of mortgages increased by 2bp, to 3.50% in March.
Net consumer credit borrowing increased to £1.6bn in March, from £1.4bn in February, driven by net borrowing through credit cards. However, the annual growth rate for all consumer credit remained unchanged when compared to February, at 8.8%.
In March, UK non-financial businesses repaid, on net, £1.1bn of loans from banks and building societies (including overdrafts), of which large non-financial businesses repaid £0.7bn while small and medium-sized non-financial businesses (SMEs) made net repayments of £0.4bn. The annual growth rate of borrowing by large businesses was 0.5% in March, down from 1.4% in February. The growth rate of lending to SMEs remained broadly unchanged, at -4.7% in March.
In March, private non-financial corporations raised, on net, £10.2bn of finance. This is the largest amount of net finance raised since May 2020, driven by £8.0bn of net bond issuance.
The net flow of sterling money (M4ex) continued to increase in March. M4ex rose by £12.1bn, compared to an increase of £8.9bn in February. This was mainly driven by households’ holdings of money, which increased by £8.5bn in March, up from a £7.0bn increase in February, this marked the highest flow since October 2022.
Annual house price growth slowed down in April
UK house prices fell 0.4% MoM in April, while the annual rate slowed to 0.6%, most likely due to persistent affordability pressures caused by the rise in long-term interest rates in recent months. House prices are currently 4% below the all-time highs of mid-2022. Nationwide survey shows that about half of the respondents have delayed their house purchase, with the most common reasons for this being too high prices or too high mortgage costs. 55% of respondents expressed a willingness to purchase a property in another part of the country if house prices were more affordable, or in another less expensive area as a compromise.
Author: Nikolay
Founder of MoneyCraft
