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: The performance of European stocks this week was mixed. Comments from the ECB indicated that progress on disinflation may have somewhat stalled, while the rate path forward is still rather uncertain, which likely made investors act more cautiously. While the STOXX 600 advanced a bit, the STOXX 50 declined, accompanied by the German and French benchmark indices. However, the Italian FTSE MIB rose over 2%, and so did the Swiss SMI. The British FTSE finished the week slightly down, as expectations for a rate cut in June remain strong and signs of further loosening in the labor market are increasing. The euro and the pound both appreciated further against the US dollar.
– UNITED STATES: Sentiment in the US markets seemed to improve this week, as inflation (CPI) numbers for April came in better than expected, unlike in previous months. The downside surprise for inflation pushed the 10-year US Treasury yield down to its lowest level in over a month in the middle of the week. Major stock indices rose, with the S&P 500, Dow Jones and the Nasdaq all up week-on-week. New records were also set this week, as the Dow reached 40,000 (up 6.1% YTD) and the S&P 500 exceeded 5,300 (up 11.2% YTD), with growth stocks outperforming. However, a notable occurrence was the meme stock mania returning, as we observed several years ago, with shares like GameStop and AMC experiencing spikes similar to those we saw in 2021.
– ASIA-PACIFIC: Japanese stocks also gained week-on-week, with both the Nikkei 225 and TOPIX indices advancing, although macroeconomic data releases were not encouraging. Q1 GDP declined more than expected (-2% annualized QoQ) as a result of the Noto earthquake impacting certain production activities, as well as weaknesses in capital expenditure and foreign demand. The yen was more stable this week against the USD, remaining around the 155 mark, as expectations remain for the BoJ to continue with policy normalization. The central bank is proceeding with the cut in its bond purchases, which did contribute to the move up of JGB yields this week. In China, the moves in stock prices were more limited this week. The Chinese government introduced a rescue package for the real estate sector in an effort to stabilize it given its recent turmoil. The PBoC made changes to the minimum downpayment ratio for first-time and second-time home purchases, as well as the floor level of mortgage rates, and it announced a re-lending program to support the acquisition of unsold homes.
– BITCOIN: BTC advanced over 10% this week, currently hovering around the $66.5k mark, despite some analysts warning that a potential correction might be coming. Next week there will likely be a vote in the US House of Representatives on legislation to establish a US regulatory regime for digital assets. The new bill should cover the split of supervisory responsibility between the SEC and the CFTC, put in place consumer protections for asset custody and bankruptcies, as well as guardrails for risk-taking.
policy rate overview
On Tuesday, the Central Bank of Argentina cut its policy rate once more by 10pp to 40%. President Milei’s economic team sees this trend continuing as the forecast for inflation has improved significantly, even though in April the annualized rate was still close to 300%. The rate decision came after the IMF signed off on the 8th review of Argentina’s $44bn program, which if approved is expected to give the country some breathing room to honour debt repayments.
As expected, the People’s Bank of China (PBoC) left its key policy rate unchanged when rolling over maturing medium-term lending facility (MLF) loans. Despite low inflation, ongoing credit contraction and slowing money supply growth, as well as weak private sector investment, a key concern that the PBoC is trying to address remains the stability of the yuan. This makes it unlikely that the central bank will undertake rate cuts before its biggest global counterparts in advanced economies.
highlights from Germany
Further improvement in sentiment
Economic sentiment keeps rising in Germany, according to the ZEW indicator, as both domestic growth and signs of recovery appear to pick up, while the situation in international markets, such as China and the Eurozone, has improved compared to previous months. This has caused expectations for domestic consumption, as well as output in the machinery and construction sectors, to become more optimistic. The assessment of the current economic situation also rose but is still stuck in negative territory.
Housing still in a trough
Building permits in Germany keep falling YoY in March: the number of apartments approved was 18,500, down 24.6% YoY. In Q1 overall, 53,500 apartments were approved, which is 22.2% lower compared to Q1-23. The decline was broad-based, across the various home categories:
– Single-family down 35.6% YoY (9,200 in March);
– Two-family down 20% YoY (3,200 in March);
– Multi-family down 22.9% YoY (28,700 in March).
Inflation expectations decline further
The April Consumer Expectations Survey of the Bundesbank shows that inflation expectations, both 12 months ahead and longer-term (3y and 5y), declined further, reaching 2.9%, 3.6% and 3.4%, respectively. Average expectations for real estate price developments over the next 12 months rose slightly to 3.9%, while individual income expectations fell. Expectations for both credit interest rates and savings interest rates slipped further.
highlights from EUROPE
Industrial production with shaky recovery
Euro area and EU industrial production kept rising in March vs. February but declined 1% in both YoY. The monthly increase was driven entirely by the increase in capital goods production. The problem is that the largest increase came from Ireland, where the reliability of the data is currently questionable and under review. Excluding Ireland, the biggest increases were recorded in Belgium and Luxembourg. The largest decreases were observed in Slovenia, Poland and Denmark.
Bank profitability likely to decline
According to the May-24 ECB Financial Stability Review, euro area bank profitability has likely peaked, with signs of worsening asset quality and higher funding costs posing headwinds to euro area banks going forward. Losses on CRE loan books that are more sensitive to cyclical downturns have been on the rise. They are the main driver of asset quality deterioration, reflecting both the downturn in euro area CRE markets and spillovers from the ongoing correction in US CRE markets to euro area banks with material exposures. CRE loans are generally modest in size and should not have a systemic impact on the banking sector, but for some individual banks a marked deterioration in CRE asset quality could pose challenges. With regard to retail and corporate loan portfolios, banks may face the risk of higher provisioning costs if risks in the non-financial sectors materialize, not least because collateral values may not be fully reflected in banks’ balance sheets.
Bank funding costs seem set to remain high as maturing liabilities reprice at higher levels and the composition of funding continues moving back towards long-run averages featuring a higher share of term deposits (as depositors shifted, seeking higher yields) and bonds. Hence, overall funding costs might still increase further, even if policy rates start to decline. The recent decrease in interest rate spreads suggests that euro area banks are likely to see their net interest margins decline. Margin compression, together with continued muted lending volumes, could serve to reduce banks’ operating income and compound the challenges stemming from deteriorating asset quality, ultimately weighing on bank profitability.
highlights from THE UNITED STATES
Inflation finally turns in the right direction again
The CPI report for April was better than expected: with an increase of 0.3% MoM (seasonally adjusted) and 3.4% YoY before adjustment. The rise in the indices for gasoline and shelter contributed over 70% to the overall CPI change. Energy rose 1.1% MoM, while the food index was unchanged. Core CPI increased by 0.3% MoM and 3.6% YoY. The Producer Prices Index (PPI) increased 0.5% MoM seasonally adjusted and 2.2% YoY, with about 75% of the move driven by a 0.6% increase in the index for final demand services, while final demand goods moved up 0.4%.
Household debt keeps rising, and so are delinquencies
The Q1 Household Debt and Credit Report showed that total household debt rose by $184bn to reach $17.69tn. Mortgage balances increased by $190bn to $12.44tn, while balances on auto loans climbed $9bn to $1.62tn, continuing their upward trajectory. Credit card balances declined (typical for Q1) by $14bn to $1.12tn. Balances on home equity lines of credit (HELOC) increased by $16bn, the eighth consecutive quarterly increase after Q1-22, and there are now $376bn in aggregate outstanding balances. Aggregate delinquency rates increased in Q1: as of March, 3.2% of outstanding debt was in some stage of delinquency, up by 0.1pp from Q4-23. Delinquency transition rates increased for all product types. Over the last year, approximately 8.9% of credit card balances and 7.9% of auto loan balances transitioned into delinquency. Early delinquency transition rates for mortgages increased by 0.3pp yet remain low by historic standards. About 121k consumers had a bankruptcy notation added to their credit reports in Q1, which was more than in the previous quarter. Approximately 4.8% of consumers have a 3rd party collection account on their credit report.
No major change in retail sales according to advance estimates
US retail and food service sales in April 2024, adjusted for seasonal variation and holiday and trading-day differences, were $705.2bn, i.e. almost exactly the same as in March (after that figure was revised). Retail trade sales were basically the same, with nonstore retail sales up 7.5% YoY and food services/drinking places sales up 5.5% YoY.
highlights from THE UNITED KINGDOM
Unemployment rising, earnings growth slowing
The UK unemployment rate (for people aged 16 years and over) was estimated at 4.3% in January to March 2024, above estimates of a year ago, and increased in the latest quarter. The UK employment rate (for people aged 16 to 64 years) was estimated at 74.5% in January to March 2024, below estimates of a year ago, and decreased in the latest quarter. The UK economic inactivity rate for people aged 16 to 64 years was estimated at 22.1% in January to March 2024, above estimates of a year ago, and increased in the latest quarter. Annual growth in employees’ average regular earnings (excluding bonuses) in Great Britain was 6.0% in January to March 2024, and annual growth in total earnings (including bonuses) was 5.7%. Annual growth in real terms for regular pay was 2.0% in January to March 2024, and for total pay was 1.7%.
A slight increase in labor productivity
In Q1-24, output per hour worked, the headline measure of labor productivity in the UK, was 0.1% higher than Q1-23. Output per hour worked increased because gross value added (GVA) increased by more (0.2%) than hours worked (0.1%) compared with the same quarter a year ago. Output per hour worked was 1.7% above its pre-coronavirus (COVID-19) pandemic levels (2019 average level) in Q1. While the pandemic had a significant short-term effect on the growth rate of productivity, unlike other recessions that show a subsequent fall in productivity (such as the financial crisis in 2008 to 2009), the growth rate bounced back to the trend rate. In more recent quarters, however, it has slowed and begun to diverge from the trend extrapolated from the 2009 to 2019 period. These movements in productivity since the pandemic suggest this underlying weakness in UK productivity growth remains.
Author: Nikolay
Founder of MoneyCraft
