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: Despite a confirmation this week by ECB President Christine Lagarde that a June rate cut is very likely coming, as long as the macro data supports it, statements by ECB members have made it more unclear what the path of policy rates may be thereafter. As a result, stock markets in the EU took a dip this week, with indices falling across the board, while the euro depreciated against the pound and the US dollar. This development was also supported by negotiated wage growth figures, which are likely to remain elevated this year according to the ECB, and more positive signs of recovery in the European PMI indices. At the same time, in the UK stocks also pulled back while 10-year government bond yields rose by 14bp as inflation did not decline as much as expected, and retail sales dropped sharply as consumer confidence remained subdued.
– UNITED STATES: As the US stock market seems to be dependent to a large extent on the moves of mega-cap tech companies these days, this week was critical as investors were watching closely what results NVIDIA would report for Q1-24. And it was a blowout: it beat earnings expectations with EPS 15% above analyst estimates and revenues hitting $26bn, a 51% growth vs. the previous 12 months. Price targets were once again lifted as a result and the stock broke through the $1,000 mark. And while the Nasdaq was positive on the week, the NVIDIA performance did not lead to a broadening of optimism across the market, as the S&P 500 remained mostly flat and the Dow Jones declined. This was likely due to an improvement in growth expectations and a dwindling outlook for rate cuts by the Fed.
– ASIA-PACIFIC: The yen continued to hover around the 157 mark supported also by strong US data and a hawkish Fed, which has made the Bank of Japan adopt a more hawkish tone as well. Expectations about the next tightening step and the reduction in the bond purchase program likely contributed to pushing 10-year yields up to 1%. The PMI release showed manufacturing expanded in May, but equities still finished the week lower, with both the Nikkei 225 and the TOPIX index declining slightly. As the PBoC left rates unchanged, investors seemed to be influenced by fears that policy would not be eased enough, which most likely drove the decline in the key stock indices, such as the Shanghai Composite and the CSI 300 this week.
– BITCOIN: Despite the US SEC approval of the Ethereum ETF this week, the price of BTC continued to range between $68,000-69,000, except around the announcement when there was more volatility. US President Biden also announced in a major concession that he would not veto the crypto market structure bill, FIT21. Whether or not these decisions will cause a renewed wave of crypto optimism in the markets remains to be seen. Overall, this week saw a continuation of positive Bitcoin ETF flows, with BlackRock’s IBIT leading the rest of the funds.
policy rate overview
The National Bank of Hungary (NBH) cut its policy rate once more by 50bp to 7.25%. It also lowered the overnight collateralized lending rate and the overnight deposit rate, which serve as an upper and lower limit, respectively, for the base rate corridor. The official statement refers to a pickup in economic growth in Q1 and an expectation that growth will accelerate further in the second half of the year. With respect to inflation, the central bank sees a temporary re-acceleration in the middle of the year due to “backward-looking pricing of market services and base effects” and core inflation remaining in the range of 4.5%-5% until the end of 2024.
The Central Bank of Türkiye kept its key rate unchanged at 50%, referring to lagged effects of previous rate hikes still in the pipeline. April figures confirmed that services inflation, elevated inflation expectations, geopolitical risks, and food prices are sustaining broad inflationary pressures. The central bank reiterated its warning that more hikes are possible if the inflation situation worsens further, but at the moment the expectation is that disinflation will begin in the second half of 2024.
Unsurprisingly, the People’s Bank of China did not cut its loan prime rates (both 1-year and 5-year), as the medium-term lending facility (MLF) rate was also left unchanged the prior week. The government has rolled out stimulus measures and many analysts see the reluctance to make a move on policy rates as a measure to prevent any further weakness of the Chinese yuan or unwillingness to front-run the Fed.
The Bank of Korea also held rates at a restrictive level due to higher growth and inflation expectations: the forecast for real GDP is +2.5% for 2024 and for inflation at 2.6%. The BOK is also monitoring what the Fed will do and is ready to act accordingly to prevent significant moves in the won. Inflation has decelerated but remains above target and analysts now expect a first 50bp cut in Q4.
highlights from Germany
GDP growth breakdown: still no consumer recovery
This week, the German Statistical Office released the final GDP growth figures for Q1-24, together with the breakdown of the major components, which revealed why the stagnation of the German economy persists. At the same time, the Bundesbank sees further brightening in the outlook for economic output going forward, according to the May Monthly Report.
Final household consumption did not manage to recover in Q1, as it fell 0.4% QoQ. Final consumption expenditure on food and clothing declined, despite the deceleration of inflation. Government spending was also 0.4% lower than in Q4-23 and contributed negatively to overall GDP growth. Investment rose 1.1% QoQ in Q4, with gross fixed capital formation in construction rising significantly (+2.7% QoQ). At the same time, gross fixed capital formation in machinery and equipment fell slightly (-0.2%). Net exports also contributed positively to Q1 growth figures: total exports of goods and services were up 1.1% QoQ, mainly due to the growth of goods exports, while the growth in imports was less pronounced (+0.6%) – again due to the growth of goods imports. Seasonally and calendar-adjusted gross value added increased by a total of 0.3% QoQ, with the biggest growth reported in construction (+2.5%) and an increase in industrial output for intermediate goods (especially energy-intensive branches). The production of capital goods declined, for instance, in the manufacture of machinery and equipment and the production of motor vehicles, trailers and semi-trailers. On an YoY basis, GDP is still down 0.9% vs. Q1-23 in real terms, with investment down considerably YoY, household consumptions stagnating and government spending up. Foreign trade was also lower vs. Q1-23.
Output is expected to pick up again in Q2, as consumer-related service providers continue to recover and hopefully private consumption starts to increase due to the impact of rising real disposable income. Industry will likely not rebound sufficiently as there is no significant turnaround in orders expected as of the middle of Q2. Demand is also still very weak in construction, and there are no signs of a major rebound yet.
PMIs confirm a recovery is likely starting
The May Purchasing Managers’ Index shows that German business activity rose for the second month in a row, with stronger growth in the service sector and a better situation in manufacturing, although still in contraction territory. Total inflows of new business increased for the first time in over a year, a sign that the demand situation might have bottomed out already. Of course, this was driven by the service sector where there was a solid and accelerated increase in new work, as business from abroad also rose. Manufacturing new orders are still falling, but the rate of decline was the weakest observed for two years as factory export sales came close to stabilizing. Job creation improved in the service sector, but factory jobs continued to decline, partly reflecting spare capacity among goods producers, which recorded another sharp reduction in backlogs of work. Business expectations are finally improving, among both service providers and manufacturers, as optimism is likely taking hold on expectations for lower rates and recovery in investments. Average output prices rose at a modest rate that was the slowest rate for over three years and below the long-run trend. Input cost inflation was at a six-month low in May.
Business investment situation
According to the results of the business survey reported in the latest Bundesbank Monthly Report, more than half of the companies that scaled back their domestic investments in 2023 did so due to the poor macroeconomic environment which depressed their activity. Increased energy costs and high wage costs were also important reasons for the decline in investment for just under half of the companies. Equally relevant for around a third of these companies were the shortage of labor and skilled workers, uncertainty about the regulatory framework and the high tax and duty burden. Other surveys also indicate that the density of regulation is a burden on domestic investment activity.
In some cases, more attractive location conditions abroad attracted German investments. Generally, only a few and rather large manufacturing companies invest abroad. According to the survey, 23% of manufacturing companies invested more abroad in 2023 than in the previous year on a turnover-weighted basis. Just over 80% of these companies stated that investing abroad was more attractive than investing in Germany. Cost savings due to lower wage and energy costs there were the decisive factor for higher foreign investment. Almost half of the industrial companies also cited the possibility of having more labor and skilled workers available as a reason.
The outlook for 2024 is that among industrial companies planning to invest more abroad this year, the domestic investment activity expected for the current year is significantly more subdued than in the previous year. This disproportionately affects energy-intensive companies.
highlights from EUROPE
Recovery except for France
Flash Eurozone May PMIs show that economic activity continued to recover this month, on account of faster increases in business activity, new orders and employment. Business confidence hit a 27-month high. while rates of inflation of both input costs and output prices softened vs. April, but are still above pre-pandemic averages. The expansion continued to be driven by the service sector mainly, with the manufacturing sector still in contraction but nearing stabilization. Germany and the rest of the eurozone are in growth territory, while France is now the odd one out – as output unexpectedly declined in May. According to the report, the German economy is outshining the French one, driven by a robustly growing services sector which is shrinking in France. The manufacturing sector’s development was less severe in France, but as in Germany, the sector has not yet escaped recession. There are good chances for France to catch up eventually in the services sector which would put eurozone growth on a sounder footing.
International trade surplus rising
In March, the Euro area trade surplus reached €24.1bn, up +26% YoY, with exports down 9.2% YoY and imports down 12% YoY. There was no major change in composition – with the only significant increase being in ‘chemicals’ where the surplus grew by nearly 21% MoM.
On the EU level, the international trade surplus was €21.7bn in March, up +24.7% YoY, with extra-EU exports down by 9.5% YoY and imports down by 12.1% YoY. The surplus increased mainly in the ‘chemicals’ category and declined for ‘machinery and vehicles’.
Construction crawls up but is yet to recover more significantly
The European construction sector has had a rather flat performance for several quarters now and March did not manage to change that substantially. In the Euro area, production was up slightly (+0.1% MoM and YoY), driven mainly by the increase in civil engineering construction, as well as a monthly increase in specialized construction activities. At the EU level, there was a decline in production (-0.1% MoM and -0.7% YoY), driven predominantly by the decrease in the construction of buildings.
highlights from The United States
Strong PMI growth
A jump in PMI indices showed that US business activity growth accelerated significantly in May, with the service sector driving the upturn and manufacturing also growing. The rate of job losses has slowed down, order book intakes are rising and business confidence continues to improve. This is a red flag for the Fed’s next steps: input costs and output prices rose at faster rates, with manufacturing having taken over as the main source of price growth over the past two months. However, the overall rate of selling price inflation remained below the average seen over the past year.
Durable goods: increases but also negative revisions
At first glance, the rise in durable goods orders beat expectations in April, up for the third consecutive month, +$1.9bn or 0.7%. However, since defense orders appear to be such a significant driver of this development, excluding these orders, the new figures were essentially unchanged. However, the March increase which seemed quite material, has been revised downward to a +0.8% MoM change. These downward revisions have now taken place 9 times in the last 14 months.
highlights from The United Kingdom
PMIs show a slowdown in expansion
May Flash PMI indicates that UK private sector activity is still expanding as a resurgence in manufacturing production supplemented a further, albeit slower, upturn in services output. There was another rise in new order volumes and an uptick in export sales, but ongoing hiring challenges meant that the rate of job creation remained only marginal.
However, UK businesses reported the slowest rise in average selling prices for over 3 years in May, partly linked to a slowdown in input cost inflation after April’s steep rise. Survey respondents highlighted a softening of labor cost pressures following the increase in the National Living Wage, with services firms especially seeing a drop in input price inflation.
Inflation declined less than expected
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.0% YoY / 0.5% MoM in April, down from 3.8% YoY / 1.2% MoM in March. The Consumer Prices Index (CPI) rose by 2.3% YoY / 0.3% MoM in April, down from 3.2% YoY / 1.2% MoM in March. Falling gas and electricity prices resulted in the largest downward contributions to the monthly change in both CPIH and CPI annual rates, while the largest, partially offsetting, upward contribution came from motor fuels, with prices rising this year but falling a year ago. Core CPI rose by 3.9% YoY, down from 4.2% YoY in March; the CPI goods annual rate slowed from +0.8% to -0.8%, while the CPI services annual rate eased slightly, from 6.0% to 5.9%. Prices of food and non-alcoholic beverages rose by 2.9% YoY, down from 4.0% YoY in March. The April figure is the lowest annual rate since Nov-21.
Retail sales tumble
UK Retail sales volumes fell by 2.3% MoM/2.7% YoY in April, with March also revised to a decline of 0.2%. Levels are still 3.8% below the pre-pandemic values. This decrease was across most sectors, with clothing retailers, sports equipment, games and toys stores, and furniture stores doing badly as poor weather reduced footfall. Non-food stores sales volumes (the total of department, clothing, household and other non-food stores) fell by 4.1% in April, the largest fall since Jan-21. Automotive fuel sales volumes had their largest monthly fall since October 2021, while food stores sales volumes fell for a 3rd consecutive month, mainly because of supermarkets. Retailers reported the cost of living and the impact of rising fuel prices as key driving factors.
Author: Nikolay
Founder of MoneyCraft
