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 experienced very strong performance this week, likely fuelled by investor optimism about the upcoming rate cuts (as signaled by the ECB and the Bank of England), as well as positive corporate earnings developments. The Swedish central bank cut rates for the first time since 2016 and the BoE indicated that it is more optimistic about inflation, hinting that it may reduce rates more than the market expects. Major stock indices rose in all of the biggest stock markets: UK, Germany, France, Italy and Switzerland. The euro appreciated slightly while the pound depreciated against the US dollar.
– UNITED STATES: US 10-year Treasury yields dipped to a 1-month intraday low on Tuesday, but recovered and remained basically unchanged on the week. But data about the labor market show that it is easing and the economy is likely slowing down further. Nevertheless, the stock market still advanced, with the S&P 500 gaining 1.85%, the Dow Jones 2.16% and the Nasdaq 1.14%. However, these developments happened at relatively low trading volumes. Consumer sentiment (as measured by the index compiled by the University of Michigan) appears to be deteriorating, driven by fears that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.
– ASIA-PACIFIC: The moves in the Japanese stock market were much more modest by comparison. BoJ Governor Ueda stated that the central bank could raise interest rates early if upside inflation risks emerge, given that it may have become more sensitive to the weakness in the yen. The yen depreciated again vs. the USD, even after last week’s intervention by the BoJ. Strong spending during the holidays in China contributed to further gains in the stock market, with the Shanghai Composite rising 1.64% and the CSI 300 rising 1.72%. External trade data showed that overall exports improved, driven by higher exports to Southeast Asia, while shipments to Europe declined.
– BITCOIN: The Grayscale Bitcoin Trust (GBTC) ETF reverted to outflows within a few days due to its ongoing struggles in the highly volatile cryptocurrency market. It has experienced a massive sequence of outflows for 78 days, before returning back to inflows at the start of May. This week, Bitcoin’s 1-year realized volatility slipped below that of top technology stocks, reaching around 44.88% on May 11th. BTC price has fallen since last week, currently hovering around $61.5k.
policy rate overview
The Bank of England left its policy rate unchanged at 5.25%, with a 7-2 MPC vote in favor of holding. The 2 dissenting members voted to cut to 5%. The Monetary Policy Committee (MPC) updated its macroeconomic forecast:
– following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period. A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy;
– CPI inflation is expected to return to close to the 2% target in the near term but to increase slightly in the second half of this year, to around 2.5%, owing to the unwinding of energy-related base effects. Conditioned on market interest rates and reflecting a margin of slack in the economy, CPI inflation is projected to be 1.9% in 2 years’ time and 1.6% in 3 years.
The MPC stated again that monetary policy will need to remain restrictive for sufficiently long to return to the target. Governor Bailey has stated that news about inflation has been encouraging and that he is optimistic that things are going in the right direction. Markets seem to be leaning towards an expectation of a first 25bp rate cut in August, followed by another likely in November or December.
The Swedish Riksbank cut its key interest rate by 25bp to 3.75% and indicated it would probably cut the rate 2 more times in the second half of 2024 if inflationary pressures remain mild. The official statement is that the inflation outlook is still uncertain and that the risks that may cause inflation to rise again are mainly linked to the strong US economy, the geopolitical tensions and the krona exchange rate.
The central banks of Mexico, Poland and Australia all kept their interest rates unchanged. The governor of the Polish National Bank sees no readiness to cut rates further in the course of 2024, as inflation is trending upwards and the preference is to keep restrictive policy bias in the coming months. Banco de Mexico kept its policy rate unchanged at 11%, pausing its cuts, in line with market expectations, as inflation re-accelerated last month. The governor of the Reserve Bank of Australia said on Tuesday that interest rates were at the right level after holding steady for a 6th month, but cautioned that inflation risks were on the upside in a sign policy was unlikely to be eased anytime soon.
Brazil’s central bank cut its policy rate by 25bp to 10.5% as inflation continued to trend down, albeit slightly less than expected in April. It has slowed its easing cycle after 6 straight 50bp cuts. The expectation is that the headline rate will end the year at around 3.5%. The monetary easing cycle will likely continue with additional 25bp cuts, bringing the benchmark rate to 9.25% at the end of 2024.
highlights from Germany
External balance remains positive
Germany’s trade balance ticked up again in March, rising by €0.9bn MoM to €22.3bn, on exports increasing by 0.9% MoM and imports increasing by 0.3% MoM (calendar and seasonally adjusted).
– Trade with EU: exports +0.5% MoM / imports +1.5% MoM
– Trade with US: exports +3.6% MoM / imports +2.7% MoM
– Trade with China: exports +3.7% MoM / imports +14.3% MoM
– Trade with UK: exports +3.8% MoM / imports +10% MoM
No sustained recovery for industrial production
German industrial production rose less than previously reported in February and edged back down in March:
– Mar-24: -0.4% MoM / -3.3% YoY (real)
– Feb-24 (revised down): +1.7% MoM / -5.3% YoY (real)
– Industry excluding energy and construction: -0.4% MoM / -3.4% YoY
– Energy-intensive industries: 0% MoM / +2.3% YoY
– Energy production: -4.2% MoM
– Construction: +1% MoM
– Capital goods production: +0.1% MoM
– Consumer goods production: -1.4% MoM
– Intermediate goods production: -1.6% MoM
Industrial orders keep falling
New orders in manufacturing in Germany declined in March and were revised down for February to negative territory as well:
– Mar-24: -0.4% MoM / -1.9% YoY
– Feb-24 revised: -0.8% MoM / -8.8% YoY
– 3m/3m change: -4.3%
– Excluding large orders Mar-24: +0.1% MoM
– Real turnover: -0.7% MoM
Differences across sectors:
– declines in the manufacture of other transport equipment [aircraft, ships, trains] (-2.3% MoM), manufacture of fabricated metal products (-4.5%) drove the overall decrease;
– offsetting were the increases in the automotive industry (+1.1%) and the manufacture of electrical equipment (+5.9%).
New orders for capital goods and intermediate goods were down 0.4% compared with the previous month. The consumer goods sector, however, reported an increase of 0.7%. Foreign orders rose by 2.0%, with new orders from the euro area increasing by 10.6%. By contrast, orders from the non-euro area dropped by 2.9%. Domestic orders declined by 3.6%.
Insolvencies keep climbing
The increase in regular corporate insolvencies goes on, with the final data for Feb-24 showing and increase of 31.1% YoY (1,785 filings, creditor claims at €4.1bn), while the preliminary indicator for April 2024 points to an increase of 28.5% YoY. The sectors with the highest frequency were transport and warehousing, manufacturing, construction and other economic services. Consumer bankruptcies went up 12.3% compared to Feb-2023 (5,795 filings in Feb-24).
highlights from Europe
Producer prices continue to slow down
Industrial producer prices declined by 0.4% MoM in the euro area and by 0.5% MoM in the EU in March. Respectively, the declines year-on-year were 7.8% and 7.6%. This development was mainly driven by the fact that PPI for energy dropped more significantly than the slight increases in the other categories (durable and non-durable consumer goods, intermediate and capital goods). The biggest declines on a monthly basis were recorded in Bulgaria, Denmark, Greece and Spain.
Retail trade is recovering, albeit slowly
The volume of retail trade is up by 0.8% in the euro area and by 1.2% in the EU MoM, respectively up 0.7% and 2% YoY. There were increases in 2 categories: food, drinks, tobacco, and automotive fuel in specialized stores. Non-food store trade increased in the EU, but remained stable in the eurozone. The biggest increases were recorded in Poland, Cyprus and Hungary, while the biggest decreases were in Sweden, Malta and Austria.
Construction activity is still in decline
European April Construction PMI shows that activity in the sector dropped sharply again on declining orders, with falls across Germany, France and Italy. There was retrenchment of employment and purchasing and companies are pessimistic regarding the year-ahead outlook. This contraction was broad-based across the three monitored categories, with housing posting the sharpest decline, and the fall in the commercial sector accelerating, while civil engineering had the softest drop. According to the report: “The most forward-looking indicator of new orders in April is almost as dire as it has been over the past five months. New orders are plummeting rapidly, with Germany leading the downward trend, followed by France and Italy. This trend does not augur well for the near future, indicating that the construction sector’s recession will persist in Germany and France, while beginning to take hold in Italy.”
highlights from the united states
Willingness to lend – less negative but standards tightened
The April 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) shows that, regarding commercial and industrial (C&I) loans to firms of all sizes, standards were tighter and demand was weaker during Q1. Similarly, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories. For all CRE loan categories, banks tightened all queried lending policies, including the spread of loan rates over the cost of funds, maximum loan sizes, loan-to-value ratios, debt service coverage ratios, and interest-only payment periods. For loans to households, banks reported that lending standards tightened across some categories of residential real estate (RRE) loans while remaining unchanged for others on balance. However, demand weakened for all RRE loan categories. Banks also reported tighter standards and weaker demand for home equity lines of credit (HELOCs). For credit card, auto, and other consumer loans, standards reportedly tightened and demand weakened. Overall, the share of banks tightening was lower.
highlights from the united kingdom
UK returns to growth in Q1
Gross domestic product (GDP) is estimated to have increased by 0.6% in the first quarter of 2024. In output terms, services grew by 0.7% on the quarter with widespread growth across the sector; elsewhere the production sector grew by 0.8% while the construction sector fell by 0.9%. In expenditure terms, there were increases in the volume of net trade, household spending and government spending, partially offset by falls in gross capital formation. Compared with the same quarter a year ago, the implied GDP deflator rose by 4.0%.
Within household consumption, the largest contributions to the growth were from housing, water and fuels, recreation and culture, restaurants and hotels, and household goods and services. Net tourism contributed negatively to growth in the latest quarter. Excluding net tourism, domestic consumption increased by 0.6% in the latest quarter, in line with consumer-facing services in the output approach. Real government consumption expenditure increased by 0.3%, mainly due to higher activity in health and transport, which was partially offset by falls in public administration and defence, and education. Gross fixed capital formation (GFCF) is estimated to have increased by 1.4%, driven by increases in dwellings and other buildings. Within gross fixed capital formation, business investment is estimated to have increased by 0.9%.
Export volumes fell by 1.0% in the latest quarter, the fifth consecutive quarterly fall. The decline in the latest quarter was driven by a 3.4% fall in goods exports, which offset a 1.0% increase in services exports. The decline in goods exports was mainly driven by large movements in non-monetary gold, however, this series also appears within gross capital formation (GCF) as valuables and so the effect is GDP neutral. Import volumes fell by 2.3%, driven by a 2.9% fall in goods and 1.3% in services. The fall in goods imports was driven by declines in machinery and transport equipment, in particular in imports of cars and mechanical power generators. The fall in services imports was mainly because of declines in insurance and pensions, and intellectual property services.
Author: Nikolay
Founder of MoneyCraft
