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The Week in Global Markets
Financial markets summary:
– EUROPE: Following the results of the elections for the European Parliament last Sunday and the resulting political turmoil (especially in France), European stocks got hammered this week across the board. Not only did pan-European and major country indices (such as the DAX, CAC 40 and FTSE MIB) decline, but so did the Swiss and UK equity indices, as political uncertainty seems to be contagious. This was further amplified by more hawkish comments from ECB President Lagarde that restrictive policy has not yet ended and that further rate cuts may not come anytime soon, and by the more hawkish tone seen in the Fed’s updated economic projections and rate cut plans, as well as what was communicated by Fed chair Powell. And while German bond yields fell on the week, other EU government bonds sold off relatively sharply, with spreads on 10y bonds widening significantly against German securities for French, Spanish and Italian bonds. Macro data was also mixed, with euro area industrial production edging down. Additionally, in the UK, the economy seems to have stagnated in April. UK 10y government yields also declined week-on-week. The euro and the pound both depreciated against the US dollar.
– UNITED STATES: Both the S&P 500 and the Nasdaq rose week-on-week, while the Dow was down. But the gains in the former two were also narrow, mainly driven by tech and growth stocks. Positive inflation data and falling interest rates were likely contributing factors, too, as CPI momentum – both headline and core – has clearly slowed down further (see US section below) and producer prices also came in with a downside surprise. The yield on 10y US Treasury notes fell on these inflation surprises and the Fed economic projections and policy communication mid-week. Instead of 3 rate cuts, the Fed now expects that there will be only 1 cut this year, keeping rates higher for longer.
– ASIA-PACIFIC: The performance of Japanese stocks was rather mixed this week, with the Nikkei 225 stock index advancing 0.34%, while the TOPIX index declined by about the same magnitude. 10y JGB yields continued their decline this week, while the yen weakened again against the US dollar to over 157. These developments reflected the dovish tone of the Bank of Japan policy decisions, as rates were kept unchanged and a scale-back of JGB purchases was announced, albeit later than expected. Macro data showed that Q1 GDP contraction was less than expected, while producer prices rose more than expected in May. The Chinese stock market was down this week, with major indices such as the Shanghai Composite and the CSI 300 declining. CPI data showed that inflation is rising slowlier than expected, while producer prices kept declining further in May.
– BITCOIN: As bitcoin price in USD declined this week, there were some interesting projections published for its future price development. Global asset management firm Alliance Bernstein’s analysts predict that BTC could rise very significantly in price by 2033 (potentially even reaching $1m), as they see major potential for demand increase unlocked by the introduction of the US spot ETFs earlier this year. At the same time, in the short term, technical analysts see further downside pressures due to current market uncertainty.
policy rate overview
The Federal Reserve kept the fed funds unchanged at the 5.25-5.5% range with very few changes in the official policy statement. However, the devil was once again in the details – as the updated economic projections had a more hawkish story to tell. While the March pack showed 3 rate cuts in 2024 (75bps in total), the June revision indicates only a single 25bp cut this year. While growth projections stayed the same, there was an upward revision in the unemployment rate (higher in 2025 at 4.2%, 2026 at 4.1% and long-term at 4.2%) and PCE inflation (headline: higher for 2024 at 2.6% and 2025 at 2.3%; core: higher for 2024 at 2.8% and 2025 at 2.3%). Powell characterized the projections as “kind of conservative” and hinted that “the door was open for a September cut” if inflation continues to weaken. He reiterated that the FOMC needs to see “more good data” so that they have sufficient confidence that inflation is indeed returning to target, so they can cut rates. But if there were an unexpected development, e.g. in the labor market, then according to Powell, the Fed would stand ready to react accordingly.
The Bank of Japan (BoJ) also kept its policy rate unchanged but announced that it is ready to begin trimming its bond purchases in order to allow long-term rates to take a more natural course. The BoJ would still retain some flexibility so that it can ensure stability in the bond market, as the reductions in bond buying concern rather “considerable” volumes. The framework for this policy change is yet to be published and the reductions will start after the next policy meeting. At the press conference, it was also indicated that if the price outlook is revised up or if upside risks heighten, then rates could also be increased further.
Next week: policy decisions in the UK, Switzerland, Norway, Hungary, Brazil, Australia, and China.
highlights from Germany
The decline in wholesale prices has lost momentum
Wholesale trade selling prices were down 0.7% YoY in May but increased 0.1% MoM. The main driver was the lower prices reported for chemical products. Other wholesale categories in which prices declined include: iron, steel and ferrous semi-finished metal products, Grain, unmanufactured tobacco, seeds and animal feeds, and milk, milk products, eggs, edible fats and oils. In contrast, the prices for non-ferrous ores, non-ferrous metals and non-ferrous semi-finished metal products, coffee, tea, cocoa and spices, sugar, confectionery and bakery products, as well as fruit, vegetables & potatoes and tobacco products were all higher compared to May 2023.
No pause for insolvencies
Regular insolvencies in Germany keep rising persistently. Preliminary data for May show that corporate insolvencies were up 25.9% YoY, while final data for April indicated an increase of 28.5% YoY. Overall for Q1, 5,209 corporate insolvency filings were reported, i.e., 26.5% more than Q1-23 and 11.2% more than Q1-20 (pre-COVID). That corresponds to creditor claims of €11.3bn, about 69% more than in Q1-23. The highest frequency is still in the transport and storage sector. Consumer insolvencies were up 4.8% in Q1-24 vs. Q1-23.
highlights from Europe
Industrial production numbers likely influenced by unreliable data
Eurostat reported that industrial production was down 0.1% MoM / 3% YoY in the euro area, and up 0.5% MoM / down 2% YoY in the EU in April. However, this is once again being affected by the swings in the Irish data, for which the Irish statistical office is conducting a review of the seasonal adjustment methodology.
The monthly decline was mainly driven by a decline in the production of intermediate goods both in the EA and EU, with the biggest declines recorded for Latvia, Luxembourg and Ireland. The YoY drops, however, were much more broad-based, encompassing intermediate goods, energy, capital goods and durable consumer goods. The only category where production increased YoY was non-durable consumer goods. The countries with the largest annual declines were Ireland, Latvia and Finland.
International goods trade balance in surplus
The first estimate of euro area balance for April was a surplus of €15bn in goods trade with the rest of the world compared with a deficit of €11.1bn a year ago. Exports of goods to the rest of the world were €247.6 billion (+14% YoY), while imports from the rest of the world stood at €232.5 bn (+1.8% YoY). Compared to March, the surplus declined due to an increase in the deficit of the energy sector and a decrease of surplus for ‘chemicals’. On EU level, there was a €13.9bn surplus in trade in goods with the rest of the world in April 2024, compared with a deficit of €14.2bn in April 2023. EU exports to the rest of the world went up by 14.9% YoY, while imports were only up 0.3% YoY. However, the EU surplus also declined compared to March, driven by the same drivers as the EA – the combined effect of an increased deficit in the energy sector and a decreased surplus in the chemicals sector.
highlights from The United States
First monthly decline in supercore CPI since Sep-21
The Consumer Prices Index (CPI) was unchanged in May on a seasonally adjusted basis and rose 3.3% over the last 12 months. The decline in gasoline prices was offset by an 0.4% increase in the index for shelter and a 0.1% increase in the index for food on a monthly basis. Other monthly increases were reported in medical care, used cars and trucks and education. Core CPI rose 3.4% YoY and the energy index alone rose 3.7% YoY. The food index was up 2.1% YoY. Owner’s equivalent rent continues to be a sticky component at 5.7% YoY, but it is trending lower.
Producer prices came in lower than expected
US PPI signals further disinflation ahead. The final demand index declined 0.2% MoM in May, seasonally adjusted, and was up 2.2% YoY. The main driver was a 0.8% decline in the index for final demand goods, while prices for final demand services were unchanged. The May decrease was primarily caused by a decline in the index for final demand energy which dropped 4.8%. Prices for final demand foods edged down 0.1%. In contrast, the index for final demand goods less foods and energy gained 0.3%. In services, the indices for final demand trade services and for final demand services less trade, transportation, and warehousing rose 0.2% and 0.1%, respectively, while prices for final demand transportation and warehousing services fell 1.4%.
highlights from The United Kingdom
Zero monthly growth
According to the ONS GDP estimate, the UK real GDP growth was likely around 0% MoM in April. 3m/3m real growth is estimated to have been 0.7% in Feb-Apr. Services output grew by 0.2% in April 2024, its fourth consecutive monthly growth, and also grew by 0.9% in the three months to April 2024. However, the output in production fell by 0.9% in April 2024 but still increased by 0.7% in the 3 months to April 2024. In the construction sector, output fell by 1.4% in April 2024, its third consecutive monthly fall, and fell by 2.2% in the 3 months to April 2024.
Cooling in the labor market continues
Payrolled employees in the UK decreased by 36k (0.1%) between March and April 2024 but rose by 201k (0.7%) between April 2023 and April 2024. The UK employment rate (for people aged 16-64) was estimated at 74.3% in February to April 2024, below estimates of a year ago, and decreased in the latest quarter. The unemployment rate (for those aged 16 years and over) was estimated at 4.4% in February to April 2024, above estimates of a year ago, and increased in the latest quarter. In March to May 2024, the estimated number of vacancies in the UK decreased by 12k on the quarter to 904k. The economic inactivity rate was estimated at 22.3% in Feb-Apr 2024, above estimates of a year ago, and higher compared to the previous quarter. Annual nominal earnings growth in employees’ average regular earnings (excluding bonuses) was 6.0% in Feb-Apr 2024 and for total earnings (including bonuses) it was 5.9%. Real annual growth for regular pay was 2.3% in Feb-Apr 2024, and for total pay was 2.2%.
Author: Nikolay
Founder of MoneyCraft
