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: This week, European stocks took another hit. We had higher-than-expected inflation in the Euro area overall and in Germany, while the ECB kept sending signals that at this point it might be ready to do only 1 rate cut – and then still remain restrictive for the rest of this year. The second largest eurozone economy – France – was hit by a rating downgrade this week, as Standard & Poor’s (S&P) cut their long-term sovereign debt rating to “AA-” from “AA” (outlook remains stable). The rating agency expects higher-than-expected deficits to keep pushing up French debt. As a result, there was some volatility in French 5y CDS spreads on Friday. German 10y government bond yields rose further on re-accelerating inflation. Similarly, UK stocks also fell a bit, while 10y yields went up by 7bp. However, both the pound and the euro changed very little against the US dollar.
– UNITED STATES: US stocks also declined on the week, with small-caps doing better than large-caps. All 3 major indices dropped but the Nasdaq’s fall was the biggest, driven in part by the worse-than-expected Q1 sales performance of Salesforce. For the S&P 500, the tech sector was the biggest underperformed, followed by Industrials and Health Care, while Energy, Real Estate and Utilities gained the most. Demand for 5y and 7y Treasury notes was not particularly strong this week, with concerns in the market that the rising deficit will keep pushing yields up. There were also some comments from the Fed indicating that rate hikes are not yet entirely off the table, despite signs of stabilizing inflation.
– ASIA-PACIFIC: The yen depreciated a bit more this week against the US dollar, with 10y JGB yields rising above 1% as investors keep being driven by uncertainty about the BoJ’s next move and its timing. Stock market performance was, however, mixed, as the Nikkei 225 declined while the TOPIX index gained. In China, the manufacturing PMI appears to have fallen into contraction territory again, with exports and new orders also declining. At the same time, the non-manufacturing PMI came in weaker than expected (due to weaker growth in construction) but still expansionary. Industrial companies’ profits are recovering and forecasts still point to meeting the 5% growth target for the year. The IMF also upgraded its forecast and it now aligns with that target as well. Stocks moved relatively little this week.
– BITCOIN: On Friday, US President Biden vetoed a congressional disapproval of the SEC’s accounting bulletin (SAB 121) on crypto assets. The official statement points to the need for “appropriate guardrails that protect consumers and investors” in order to “harness the potential benefits and opportunities of crypto-asset innovation“. The SAB 121 is an accounting guidance that directs financial institutions holding crypto for customers to keep the assets on their own balance sheets, but it has been criticized as some say it would make it too difficult for financial institutions to work with crypto companies. Bitcoin did decline a little this week, currently around $67.8k, and is still trading in a relatively tight range. Analysts expect that in June most likely macro developments could be the driving factors for the price development of BTC.
policy rate overview
The South African Reserve Bank (SARB) kept its repo rate unchanged at 8.25% on disappointing inflation figures, despite forecasts that they might stabilize around the target rate of 4.5% during Q2. But the monetary policy committee remains concerned that inflation expectations are elevated and this will likely keep inflation at 4.5% for 2 years. Economic activity indicators for Q1 have also been coming in worse than expected. The forecast for 2024 is 1.2% GDP growth, with a balanced growth risk outlook.
Next week, the ECB will most likely cut its policy rate for the euro area by 25bp, a move that is widely anticipated. We will also be expecting the policy decisions in India, Canada, Poland and the Russian Federation.
highlights from Germany
Sentiment continues to climb gradually
The regular survey by the German ifo Institute on business climate shows that expectations are improving somewhat, while the assessment of the current business situation deteriorates again. The current conditions have worsened in the service sector, leading to a decline in the business climate for it. This is disappointing, given that services have been leading the recently observed recovery in sentiment and output. However, expectations and current assessments were better in manufacturing, trade and construction. The cycle clock stays in crisis territory for the time being, and the traffic light indicator declines a bit but is still in the expansionary zone for the third consecutive month. The heatmap shows that almost all industries have a long way to go until they manage to exit crisis mode.
Consumers are becoming more optimistic – and are still not buying
The GfK indicators show that German consumer sentiment continues to improve gradually as income expectations rise moderately and the outlook for the economic situation recovers more substantially. Unfortunately, even as the willingness to save drops this month, the propensity to buy remains depressed. Falling inflation and rising wages have supported the purchasing power recovery for the consumer, but there is still significant uncertainty attributed to the lack of clear future prospects in the country, which undermines planning certainty when making purchases. People will have to regain this certainty before they are willing to invest their growing purchasing power in larger purchases. At the moment, consumers are likely to put financial resources aside for emergencies instead of buying. But people are more positive in their hopes for economic recovery in the country over the next 12 months.
Inflation bounces back
Preliminary German Inflation figures show a re-acceleration in May due to a rebound in the rate of price increase for services:
– Headline CPI: +2.4% YoY / +0.1% MoM
– Core CPI: +3% YoY
– HICP: +2.8% YoY / +0.2% MoM
Along with the development in euro area inflation in May, this will likely put a big question mark on the ECB’s planned rate cuts. Most probably we will see only one rate cut (next week), followed by at least one (if not two) quarters of no cuts.
Real wages are yet to get back to 2019 levels
Real wages in Germany have risen persistently over the last 4 quarters thanks to the deceleration of inflation and the increase in nominal remuneration. However, they still remain below pre-pandemic levels. The increase in nominal earnings was driven by the inflation compensation premiums, one-off payments and the rise in negotiated wages. In Q1-24, nominal wages were 6.4% higher than Q1-23, while real wages were 3.8% higher than Q1-23. Above-average increases in wages was observed in the public administration/defense/social insurance sector (+9.1%) and the education & teaching sector (+8.0%), where the large majority of employees are paid according to a collective agreement for the public service.
Retail sales are back in decline after positive Easter effects in March
German retail sales declined again in April, mainly driven by the decline in sales in the retail food sector:
– Real sales overall: -1.2% MoM / -0.6% YoY
– Nominal sales: -1.4% MoM / +1.0% YoY
– Food sales: -3.7% MoM / -1.5% YoY
– Non-food sales: +0.2% MoM / -0.6% YoY
– Internet/mail order sales: +2.9% MoM / -0.3% YoY
highlights from EUROPE
Inflation picked up in May
Euro area inflation rose to 2.6% YoY in May, according to the flash estimate provided by Eurostat – with services rebounding to over 4%, unprocessed food re-accelerating, and energy exhausting its base annual effects and turning positive. This is higher than the April 2.4% figure, nevertheless, markets are still fully pricing in the June rate cut by the ECB. However, this reading does perhaps confirm what ECB economists have been highlighting for a while now – that the path after the first cut must remain cautious and restrictive.
Money supply gradually expanding
According to the ECB release on the monetary developments in April, M1 (currency & overnight deposits) growth was -6% annually, short-term deposits other than overnight deposits (M2 excluding M1) grew at +15.7% annually, and marketable instruments (M3 excluding M2) saw their annual grow rate go up to +22.6%. That means M3 in total (broad money) had an annual growth rate of +1.3%, higher than in March. Household deposits had their annual growth rate go up to +1.4%, deposits by non-financial corporations (NFCs) grew at +0.7%, while investment fund deposits (ex-MMF) grew at a less negative -4.1% rate. The annual growth rate of adjusted loans to households was unchanged at +0.2%, loans to NFCs grew at a smaller annual rate of +0.3%.
Sentiment recovers less than expected
The European Economic Sentiment Indicator ticked up for May for both the EU and the euro area but the increase was less than expected. This increase was driven by improved confidence in services and among consumers, which were slightly offset by declining confidence in retail trade and construction. Industry remained broadly stable. More significant increases were reported for France and the Netherlands, moderate improvements for Germany and Italy, and deteriorations for Spain and Poland.
– Industry: managers’ production expectations deteriorated significantly but were counterbalanced by improved assessments of the current level of overall order books. Managers assessed developments in past production to have more than recovered from April’s slump, while export order books improved more moderately.
– Services: managers’ assessments of past and expected demand improved, while their assessment of the past business situation was unchanged.
– Consumers: there was an improvement in the outlook on the general economic situation and, to a lesser extent, slightly more optimistic intentions to make major purchases.
– Retail trade: deterioration due to considerably worse assessment of retailers’ past business situation that was partly offset by a moderate increase in their business expectations for the next 3 months.
– Construction: confidence declined due to a significant decline in builders’ assessment of their order books.
– Employment: continued to decline as a result of lower employment plans among industry managers. For other sectors, employment plans were broadly unchanged.
– Prices: selling price expectations increased in industry and construction, while they declined in services and remained broadly stable in retail trade. Consumer price expectations for the next 12 months picked up in May, while consumers’ perceived price developments over the past 12 months declined further, but remained at a very high level.
Improvement in consumer expectations
The ECB April Survey of Consumer Expectations (CES) shows that median expectations for inflation over the next 12 months edged down to 2.9%, and median expectations for inflation 3 years ahead are down to 2.4%. Expectations for nominal income growth remained stable at 1.3%. Expectations for nominal spending growth over the next 12 months remained stable at 3.6%. Economic growth expectations for the next 12m were less negative (-0.8%) but the expectations for the unemployment rate 12 months ahead rose to 10.9%. Unemployed respondents reported a decrease in their expected probability of finding a job over the next three months. At the same time, the expected probability of job loss over the next three months increased to 10.6%. The rate of expected house price increases has gone up, while the expected mortgage rates remained unchanged at 5%.
highlights from THE United States
Even more slowdown
The second preliminary estimate of US GDP growth this week showed that real GDP likely increased at an annual rate of 1.3% in Q1, which is lower than the first estimate of 1.6%, confirming that the economy is slowing down. This was mainly driven by a downward revision in consumer spending. Growth was driven by increases in consumer expenditures, fixed investment and government consumption & investment, while net exports and private inventories declined.
Profits tick down
Based on the BEA data release, US corporate profits fell by 0.6% in Q1-24. This is the first decline in a year but it is relatively very mild in historical context. Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $21.1bn in Q1, in contrast to an increase of $133.5bn in Q4-23. Profits of domestic financial corporations increased $73.7bn, while profits of domestic nonfinancial corporations decreased $114.1bn. Rest-of-the-world profits increased $19.3bn. Receipts increased $29.8bn, and payments increased $10.5bn.
Core PCE in line with expectations
This week, the headline PCE and core PCE indices came in broadly at expectations on a monthly and annual basis:
– Headline PCE 2.7% YoY, Core PCE 2.8% YoY
– Headline PCE 0.3% MoM, Core PCE 0.2% MoM
The annualized 6-month rate is 3.5%, while the 3-month annualized rate is 3.2%, still above Fed target, but it is declining compared to Q1. For now, this likely indicates that the Fed will not be commencing rate cuts soon.
highlights from THE United Kingdom
Money Supply growing slower than expected
Net mortgage approvals for house purchases were almost unchanged at 61.1k in April, but lending increased: individuals borrowed, on net, £2.4bn of mortgage debt (vs. £0.5bn in March). The annual growth rate for net mortgage lending rose for the first time since Oct-22. The effective interest rate on newly drawn mortgages increased slightly by 1bp, to 4.74%, while the rate on the outstanding stock of mortgages increased by 7bps, to 3.57%.
Net consumer credit borrowing decreased from £1.4bn in March to £0.7bn in April, driven by lower net borrowing through credit cards and lower net borrowing through other forms of consumer credit (such as car dealership finance and personal loans). The annual growth rate for all consumer credit decreased from 8.7% to 8.1% in April. The annual growth rate for credit cards fell from 11.9% to 10.8% in April. Other forms of consumer credit also decreased, from 7.3% to 6.9% over the same period. The effective interest rate on interest-charging overdrafts and interest-bearing credit cards increased by 55bps and 20bps, to 22.76% and 21.46%, respectively. The effective rate on new personal loans to individuals rose by 62bps, to 9.01%.
UK non-financial businesses repaid, on net, £1.1bn of loans, slightly more than in March. Large non-financial businesses repaid £0.4bn, while small and medium-sized non-financial businesses (SMEs) made net repayments of £0.8bn. The average cost of new borrowing from banks by UK PNFCs rose by 2bps to 6.97%, and the effective interest rate on new loans to SMEs rose by 10bps to 7.59% in April.
The net flow of sterling money (known as M4ex) was £10.3bn in April, compared to £11.6bn in March, mainly driven by households’ holdings of money, which increased by £8.4bn in April, up from an £8.3bn increase in March. PNFCs increased their holdings of money by £5.2bn. The flow of sterling net lending to private sector companies and households (M4Lex) decreased from £10.0bn in March to £1.2bn in April, driven by the flow of net lending to non-intermediate other financial corporations (NIOFCs), which decreased from £9.8bn in March, to -£1.0bn in April.
House prices with a modest increase
UK Nationwide house price index shows a modest rebound in May:
– Prices rose 0.4% MoM and 1.3% YoY in May, both higher than in April.
– The average price reached £264,249 vs. £261,961 in April.
This reflects higher consumer confidence as a result of increases in wages and deceleration of inflation.
Author: Nikolay
Founder of MoneyCraft
