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The Week in Global Markets
Financial markets summary:
– EUROPE: European stock markets reacted positively this week to the widely expected first rate cut by the ECB in years, with both pan-European equity indices and national indices advancing. Markets were also likely impacted by the stronger-than-expected US jobs report for May. However, the UK FTSE 100 index slipped, while both the euro and the pound depreciated against the US dollar. In light of the expectations for further cuts by the end of 2024, 10-year government yields declined for both German and UK bonds.
– UNITED STATES: Both the S&P 500 and the Nasdaq indices reached intraday and closing all-time highs this week on Wednesday, as growth stocks outperformed value stocks by a significant margin. Utilities and energy sectors in the S&P 500 suffered declines of over 3%, followed by Materials and Industrials, while the biggest gains this week were recorded in tech, health care and communication services. Macro data releases were mixed this week, as the ISM manufacturing activity indicator showed that the sector is contracting further, while the one for services increased more than expected. Broadly, it seemed that labor market data could also be seen positively, however, on deeper review, it showed that the headline number is hiding a significant decline in full-time employment. US 10-year yields fell a bit, as investors likely perceived the data as a sign of declining inflation pressures.
– ASIA-PACIFIC: While the Nikkei 225 stock index advanced this week, the TOPIX declined by a similar magnitude. The yen gained against the dollar week-on-week and 10y JGB yields fell below 1% once again on expectations that next week the Bank of Japan will likely taper bond purchases, relaxing further its ultra-accommodative monetary policy. The FX market intervention by the government to stabilize yen volatility last month was also confirmed by the Finance Ministry. In China, the Shanghai Composite and the CSI 300 stock indices declined on the week, even as data on new home sales, manufacturing activity and exports were positive. There are hopes that the property market distress might be easing and that the stimulus measures could be showing their effect. However, it still appears, according to analysts, that the real estate sector and domestic demand have a long way to go to recover.
– BITCOIN: This week, BTC moved out of the previous weeks’ range and fluctuated between $70k-$72k, but then fell below the $70k mark again at the end of the week. On Friday, spot Bitcoin ETFs in the US reached a 19th consecutive day of inflows but analysts point to derivative trades as outweighing spot trades at the moment in driving price moves. Additionally, they highlight that for another strong surge to occur, there will most likely need to be another wave of liquidity increase (in the US or globally), alongside less long-term holder selling and more average ETF buying.
policy rate overview
The European Central Bank (ECB) went ahead with a 25bps rate cut (effective June 12th) as expected – the first one in 5 years, despite also raising its inflation projections for both 2024 and 2025 (see below). Thus, the main refinancing rate is now down to 4.25%, the marginal lending rate – to 4.5% and the deposit rate – to 3.75%. The official statement pointed to an updated assessment of the inflation outlook and the dynamics of underlying inflation, as well as the strength of monetary policy transmission. All of this meant that it was now appropriate to moderate the degree of restrictiveness of monetary policy after 9 months of holding rates steady. But there is no commitment about the future path of rates or about when the next cut will follow, although markets are currently still pricing in 2 more rate cuts by the end of 2024. ECB members have commented on whether staying restrictive by the end of this year might not be more prudent as there is a risk of cutting too much too soon, especially given that the Fed maintains “higher-for-longer” at present. Cutting more could also put downward pressure on the euro against the US dollar, risking further upward price pressures on imported goods and services. A reminder that, in the second half of this year, the ECB will also be reducing its PEPP portfolio by €7.5bn per month on average, with the intention to discontinue reinvestments under the PEPP at the end of 2024.
The Bank of Canada (BoC) also cut its policy rate by 25bps to 4.75% in line with expectations and indicated that further easing would be gradual and dependent on the data about the inflation trajectory and whether the economy develops according to the bank’s expectations. Even though markets are still pricing a relatively fair chance of a cut in July, it is not yet certain as BoC governor Macklem admitted that there are limits to how far they can diverge from the Fed. The latest April inflation reading of 2.7% YoY was still above the BoC inflation target of 2%. Some economists expect 4 cuts overall by the BoC this year.
The Danmarks Nationalbank (DNB) cut by the same amount (25bp), which means that its lending rate is now at 3.50%, while the current-account rate, the CD rate and the discount rate are all at 3.35%. This was also no surprise as its moves are aligned with those of ECB as the Danish krone is part of Exchange-Rate Mechanism (ERM) II and pegged to the euro.
The central banks of Poland, Russia and India left their policy rates unchanged this week. In Poland, despite progress on disinflation, the central bank is still worried about re-acceleration because of higher food taxes and the potential removal of energy price limits. The Bank of Russia decided to keep the rate at 16% as inflation has effectively stayed elevated as in Q1, signaling that perhaps there could be another hike at the next meeting. In India, the Reserve Bank kept the benchmark rate at 6.5% for the 8th consecutive session, which was expected. The outlook remains for GDP growth of over 7% in both 2024 and 2025, with CPI inflation around 4.5% for the same period.
Next week is Fed and BoJ week.
highlights from Germany
Bundesbank updated forecast is mixed-bag
According to the June projections by the German Central Bank, the German economy will likely grow less than previously expected in 2024 and 2025: the projected real GDP growth rates are +0.3% (revised down from +0.4%) for 2024 and +1.1% (revised down from +1.2%) for 2025. HICP inflation is projected to be higher: 2.8% in 2024 (revised up from 2.7%); and 2.7% in 2025 (revised up from 2.5%); in 2026 unchanged at 2.2%.
Bundesbank expects that the growth trend in services will continue and that industry will also probably grow when export business improves again, likely in H2-24. Consumption and exports are also expected to drive the economic recovery after that, as households start benefiting from the rise in real wages and consumer sentiment picks up, while the export industry takes advantage of rising foreign demand. Private investment is expected to fall initially and not provide any noticeable growth impulses again until 2026.
The government deficit ratio is expected to fall from 2.5% in 2023 to 1.1% in 2026. By 2025, this will be due to the elimination of fiscal crisis aid. The decline in aid is more significant than sharply rising expenditure, for example on pensions, defense and personnel. After that, the burden will be relieved mainly by somewhat more restrained federal spending (including special funds) and a more favorable economic situation. The debt ratio will fall and will be just over 60% in 2026.
Employment is likely to continue to grow at a moderate pace and unemployment will rise slightly before falling again at the end of 2024. After a long period of decline, the hiring plans of the commercial sector are now showing signs of bottoming out. After the core workforce was largely retained over the last 2 years, even in economically difficult times, their working hours should initially recover as the economy slowly improves. Unemployment is expected to rise slightly for a few more months. The forecast is that, as the economic recovery strengthens, unemployment is expected to slowly fall again towards the end of 2024. On average in 2024, the unemployment rate will still be slightly higher than in the previous year, and employment will expand much more weakly in 2024 than in the previous two years.
From 2025 onwards, demographic developments will most probably limit the supply of labor and the tension in the labor market will increase considerably again. The shortage of skilled workers will become more apparent again in the further projection period. At the end of the projection period, employment growth comes to a standstill despite falling unemployment. The rise in employment will slow down in view of the increasing supply bottlenecks and will come to a halt in the course of 2026. Unemployment will fall slightly in 2025 and 2026. However, this will no longer offer much scope for additional employment.
See slides below (use <> arrow controls to switch between slides).
Another decline in industrial output
Provisional numbers show that German industrial production decreased slightly further in April: MoM -0,1% / YoY -3,9% (seasonally and calendar adjusted). Production in the construction industry by 2.1% MoM. In contrast, production in the auto industry had a positive impact, rising by 4.2% MoM. In the energy-intensive industries, production fell by 0.9%. Industrial production (manufacturing excluding energy and construction) increased by 0.2% MoM. Energy production rose by 1.6% MoM Production of both capital goods and consumer goods rose by 0.8%. Production of intermediate goods, however, fell by 0.9%.
Trade surplus slightly down
German Trade surplus dipped slightly in April, as the growth in imports outpaced the growth of exports a bit:
– Net balance: -€0.2bn/-0.9% MoM / +€3.4bn/+18% YoY to €22.1bn
– EU trade: exports +1.2% MoM / +0.1% YoY, imports +4.3% MoM / +1.6% YoY
– Euro area: exports +1.8% MoM / -0.5% YoY, imports +4.4% MoM / +1.7% YoY
– Non-EA: exports -0.1% MoM / +1.4% YoY, imports +3.9% MoM / +1.4% YoY
– United States: exports -1.2% MoM / +7.4% YoY, imports -1% MoM / -5.7% YoY
– China: exports +0.8% MoM / -0.6% YoY, imports -7.8% MoM / -3.8% YoY
– United Kingdom: exports +15.4% MoM / +20.3% YoY, imports +8.8% MoM / +1.2% YoY
– Switzerland: exports +8.1% MoM / +14.9% YoY, imports -4.5% MoM / +7.5% YoY
– Türkiye: exports -4.2% MoM / -12.3% YoY, imports -2.7% MoM / -6.1% YoY.
New orders in manufacturing are not recovering
German manufacturing orders disappointed again in April:
– Total real volume: -0.2% MoM / -5.4% 3m-3m / -1.6% YoY
– Real turnover: -0.9% MoM / -3.2% YoY
– March revised to a bigger decrease
Excluding large orders, however, new core orders were actually up +2.9% MoM but still down -1.4% 3m/3m. The sectors affected by a significant large-scale order drop in April were: manufacturing of other transport equipment (aircraft, ships, trains) -15.4% MoM; manufacturing of computer, electronic and optical products -5.1% MoM; manufacturing of electrical equipment -4.1% MoM; manufacturing of machinery and equipment -1.5% MoM.
New orders were up MoM in both the capital goods sector (+0.5%) and the consumer goods sector (+0.7%). There was a drop of 1.7% in the intermediate goods sector, however. Foreign orders fell by 0.1%. New orders from the euro area declined by 1.4%. By contrast, new orders from the non-euro area increased by 0.6%. Domestic orders declined by 0.3%.
highlights from EUROPE
Composite borrowing costs show interest rates likely peaked
Borrowing costs in the euro area and Germany were largely unchanged in April. The composite cost-of-borrowing indicator for new loans to corporations and new loans to households for house purchase stayed at 5.18% and 3.80%, respectively. The composite interest rate for new term deposits from corporations remained broadly unchanged at 3.65%; the interest rate for overnight deposits from corporations was also broadly unchanged at 0.91%. The composite interest rate for new term deposits from households decreased by 5bp to 3.11%, driven by both interest rate and weight effects; the interest rate for overnight deposits from households stayed unchanged at 0.39%.
The European consumer is not back yet
The volume of retail trade declined by 0.5% MoM (0% YoY) in the euro area and by 0.6% MoM / 0.1% YoY in the EU. On a monthly basis, the decrease was driven by the drop in sales volumes for automotive fuel in specialized stores and food, drinks, and tobacco, while the annual change was entirely driven by the latter. The biggest monthly drops were recorded in Latvia, Cyprus, and Denmark, while the biggest annual declines were in Poland, Belgium and Estonia.
highlights from The United States
Job openings falling, unemployment rising
The US unemployment rate rose to 4% in May, while labor force participation declined. The headline number for job creation paints a rosier picture than what the details reveal. While overall the US economy added 272k jobs in May, full-time employment declined by -625k and part-time employment rose by 286k. These indicators clearly point to further weakening in the labor market.
In addition to that, the rise in average hourly earnings to 4.1% is hardly good news for the Fed as it may fuel further strength in consumer demand and increase inflationary pressures.
Important to note that there continues to be a big disconnect between the establishment survey (+272k jobs) and the household survey which indicates a significant drop in the employment numbers (-408k jobs).
Manufacturing slumps further
The ISM manufacturing index for May declined further into contraction territory to 48.7, which was worse than expected. New orders declined further, alongside declines in production and prices paid. However, employment increased and is in expansion territory. The downturn in new orders was particularly sharp and the new-orders-to-inventory spread, which is often used to forecast the manufacturing cycle, has declined notably over the previous 4 months. This is giving some concerning signals about the growth prospects ahead for the US economy and needs to be monitored quite carefully.
highlights from The United Kingdom
PMI surveys continue to show positive signs for the UK economy
Composite PMI indices point to more strength in the UK economic recovery, as economic activity rises solidly in May, while inflationary pressures subside. Higher output was broad-based, with both manufacturing and services registering an expansion on the month. New orders rose as well and the rate of jobs growth accelerated across the UK private sector. Services companies attributed gains in output levels to stronger sales performances – greater new orders, successful marketing campaigns, greater client confidence, new customer wins and a boost to the general number of inquiries. The UK manufacturing sector returned to growth in May, as output expanded at the fastest pace in over 2 years on the back of improved intakes of new work. Sentiment and expectations have also picked up, alongside the improvement in current market conditions. Similarly, construction activity rose at the quickest pace in 2 years, driven by a further rise in new orders and improvements in supply-chain conditions.
Author: Nikolay
Founder of MoneyCraft
