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The Week in Global Markets
Financial markets summary:
– EUROPE: This week, European stocks recovered somewhat, with the benchmark indices gaining in most major countries – the UK, Germany, France, Italy. However, the Swiss SMI index declined in a week marked by the SNB decision to cut its policy rate by another 25bp, while the Bank of England and Norges Bank kept rates unchanged. The euro depreciated further against the USD, and so did the British pound, while yields climbed on the 10y government bonds of Germany and the UK. In the PMI releases it became apparent that economic activity in both the Eurozone and Britain slowed down in June, with Germany experiencing a deepening manufacturing contraction, France suffering from a decline in new orders, and UK seeing a slower pace of expansion in its services sector.
– UNITED STATES: Both the S&P 500 and the Dow advanced week-on-week, with the former reaching another all-time high, while the Nasdaq barely moved. Value stocks outperformed growth stocks and in terms of sectors, in the S&P 500 only utilities and real estate declined, while all other sectors gained on the week. US 10-year yields were declining after the retail data release, however, they did end the week slightly up after the S&P PMI release. Macro data painted a mixed picture: retail sales were not as strong as expected, while the S&P business activity index rose more than expected, driven particularly by the development in the service sector.
– ASIA-PACIFIC: The Nikkei 225 and TOPIX equity indices declined week-on-week, as investors still seemed to be concerned about the future path of the BoJ’s monetary policy. JGB 10-year yields were up on unfavorable inflation data, which prompted Governor Ueda to re-confirm that a July rate hike is still on the table. The yen weakened further against the US dollar and the government indicated that they would be ready to intervene if there is speculative, excessive volatility in the foreign exchange markets. In China, major stock indices, such as the Shanghai Composite and the CSI 300 declined, as data revealed lower-than-expected growth in industrial output and a further sharper drop in new home prices.
– BITCOIN: Despite a spike in price in the middle of this week, BTC keeps fluctuating in a range around $64k. Coindesk reported recently that investor sentiment has now been negative for 4 consecutive weeks on smaller price moves, but that, looking forward, trader fatigue, combined with whale accumulation, could lead to bounces that reward the patient traders. Analysis firm Santiment’s Weighted Sentiment Index measures bitcoin mentions on X and compares the ratio of positive to negative comments and trading volumes to gauge what the crowd is generally feeling about bitcoin. The “extreme” negativity we are observing has been linked to a $1bn in sales from large holders, the relative strength of the US dollar and a strong US technology index market that may be drawing investor money. Outflows from US-listed spot bitcoin ETFs also reached their worst level since late April, reported at $900m on Friday.
policy rate overview
The Monetary Policy Committee of the Bank of England (BoE) kept the bank rate unchanged at 5.25% with a majority vote of 7–2, where 2 members voted to cut by 25bp. This decision came after it was confirmed that headline inflation had hit the 2% target in May. Indicators of short-term inflation expectations have also continued to moderate, particularly for households. CPI inflation is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison. What is still concerning is that services inflation was still high at 5.7% in May, down from 6.0% in March, but somewhat higher than projected in the May Report. The MPC statement acknowledges that the restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labor market, but will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit.
The Swiss National Bank (SNB) surprised markets again with another 25bp rate cut this week, its key rate now set at 1.25%. It pointed to easing price pressures that allowed it to maintain its position as a front-runner in the global policy easing cycle. Swiss inflation was flat in May at 1.4% and according to the SNB projections, should remain around that level on average for the rest of 2024. Economic growth is expected to be about 1% in 2024 and 1.5% in 2025, with slight increases in unemployment and small declines in the utilization of production capacity.
The National Bank of Hungary has cut its base interest rate by a quarter point, down to 7%. Meanwhile, inflation ticked up marginally in April and May (4%) despite a sustained reduction observed throughout the last year. Governor Barnabas Virag already stated last month that there remained “very, very limited” room for further easing.
The People’s Bank of China (PBoC) maintained the 1-year loan prime rate (LPR) at 3.45%, while the 5-year LPR was kept at 3.95%. With new home prices still falling, and other data releases, there is indication that more support is likely needed to shore up an uneven economic recovery. The subdued credit growth data for May shows that any expected recovery is still on very shaky ground.
The central banks of Norway, Brazil and Australia kept rates at the same levels. Norges Bank stated that growth and inflation have slowed but inflation still remains above target and that the rapid rise in business costs will likely contribute to keeping inflation elevated going forward. If capacity utilization increases or the krone depreciates, wage and price inflation could remain elevated for longer. In that case, there may be a need to raise the policy rate. If unemployment rises more than expected, or price inflation declines more rapidly, the policy rate may be lowered earlier than currently envisaged. Brazil’s inflation has also slowed on an annual basis, but on a monthly basis it has re-accelerated. The index of producer prices has also grown more. Banco Central do Brasil said its inflation projections stand at 4% for 2024 and 3.4% for 2025. The upside risks for inflation expectations include greater persistence of global inflationary pressures and the resilience of services inflation being stronger than expected, the statement said. In Australia, the Reserve Bank stated that there is continuing excess demand in the economy, coupled with elevated domestic cost pressures, for both labor and non-labor inputs. Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth. The pace of CPI decline has slowed in the most recent data, with inflation still some way above the midpoint of the 2–3% target range.
highlights from Germany
Another setback for business activity
German Jun PMI (flash) is not where it was supposed to be: lower than expected for both manufacturing and services. Overall activity is still expanding but only marginally – and the pace has slowed significantly due to a solid and accelerated drop in manufacturing production. Services activity is still solid (albeit slower) in expansion but the contraction in manufacturing is dragging down the composite. The decline in factory new orders was sharp in June and export sales fell at the fastest rate since March – thus offsetting the increase in new business in services. There were faster decreases in backlogs of work in both sectors, much faster for manufacturing.
The ZEW index not climbing anymore
There was no significant improvement in economic sentiment in Germany in June, as the ZEW indicator comes in worse than expected.
While the sentiment balance barely moved, the assessment of the current economic situation deteriorated compared to May, falling back further into the negative zone. This is aligned with a stagnating situation at the eurozone level and a rise in inflation expectations.
Competitiveness keeps declining
Germany keeps slipping further in the international competitiveness rankings: #24 in 2024 (vs. #22 in 2023) according to IMD. The ranking is based on 164 statistical indicators divided into 4 categories: economic performance, infrastructure, and the efficiency of government and companies. It also uses a survey of more than 6,600 executives from all over the world. IMD points to a significant weakness when it comes to reacting to changes and adapting flexibly – where it ranks similar to Venezuela. Small and medium-sized German companies in particular find it difficult to integrate new productivity-enhancing digital technologies into their business.
No bright light for construction
Building permits in Germany keep dropping – in April 17.6k apartments were approved for construction which was 17% fewer than a year earlier and 43.5% fewer than in April 2022. Jan-Apr 2024 there were 71.1 permits approved, 21% less than in Jan-Apr 2023 (includes apartments in new residential and non-residential buildings as well as new apartments in existing buildings). The decline was across all categories: -32.5% for single-family, -18.3% for two-family, -20.2% for multi-family.
Price drop for residential property slows down
Prices of residential real estate are still falling, but a bit slower than in previous quarters (-5.7% Q1-24 vs. Q1-23, -1.1% QoQ). Price declines continued to be recorded in both cities and rural regions. The largest declines compared to the same quarter last year were seen for single- and two-family homes in the top 7 metropolises (Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Stuttgart and Düsseldorf), at -9.5%. The rate of change for the year 2023 compared to the previous year for the nationwide house price index remained unchanged at -8.4%.
highlights from Europe
Disappointing PMI release
Euro area June flash PMI was lower than expected, a drop driven by declines in new orders, softer expansion in business activity and a dip in business confidence. Expansion in the service sector slowed down, while the contraction in manufacturing accelerated. The main contributors were Germany and France, while the rest of the eurozone showed a further expansion in activity. The deepening downturn in the manufacturing sector resulted in more pronounced reductions in purchasing activity and holdings of both purchases and finished goods in June. Most notably, the depletion in post-production inventories was the sharpest in almost three years. Falling demand for inputs meant for spare capacity in supply chains, and lead times on the delivery of purchased items shortened for the fifth consecutive month. The rate of input cost inflation eased for the second month running in June and was the slowest in the year-to-date. Input prices continued to rise sharply, however, with the latest increase still slightly stronger than the pre-pandemic average. Input costs rose across both the manufacturing and service sectors as manufacturers posted a renewed increase in their cost burdens. The pace of output price inflation also eased. Selling prices in the service sector continued to rise solidly, while manufacturers lowered their selling prices slightly.
Eastern Europe: high inflation, high nominal wage growth
Nominal hourly labor costs in Europe Q1-24:
– Euro area: +5.1% YoY; EU: +5.5% YoY
– Hourly wages & salaries: EA +5.3% YoY; EU +5.8% YoY
– Non-wage component: EA +4.5% YoY; EU +4.8% YoY
– Biggest increases in hourly wages: Romania (+16.4%), Bulgaria (+15.8%), Croatia (+15.3%), Poland (+14.1%) and Hungary (+13.7%), Latvia (+12.7%) and Lithuania (+11.1%).
Construction ticks down
Production in construction ticked down by 1.1% YoY / 0.2% MoM in the euro area and up by 0.9% YoY / 0.2% MoM in the EU. In the EA, the decline was mainly driven by the drop in civil engineering construction, while in the EU, it was due to the decline in building construction. Among Member States for which data are available, the highest monthly increases in production in construction were recorded in Hungary (+11.1%), Romania (+8.0%) and Slovakia (+7.7%). The largest decreases were observed in Belgium (-3.7%), Slovenia (-2.7%) and Germany (-2.1%). Among Member States for which data are available, the largest annual decreases in production in construction were recorded in Belgium (-9.3%), Poland (-6.0%) and Slovenia (-5.3%). The highest increases were observed in Hungary (+15.6%), Romania (+13.2%) and Portugal (+6.8%).
highlights from The United States
Business activity growth accelerates
US business activity growth accelerated to its fastest for 26 months in June, signaling a strong end to Q2. The service sector led the upturn with additional support from manufacturing, albeit with the latter’s recent revival losing some momentum. Improved business confidence for the year ahead, notably in the service sector, as well as renewed pressure on operating capacity from rising demand, meanwhile encouraged firms to boost payroll numbers for the first time in three months. Selling price inflation cooled to a five-month low in June, though continued to run above pre-pandemic ten-year averages in both manufacturing and services to point to some stubbornness of price pressures.
May retail sales up 2.3% YoY in May, below expectations
Retail Sales increased 2% over the last year but after adjusting for higher prices they were down 1.2%. Nominal growth has certainly been softening but remains healthy for now. Stripping out the volatility, the trend in sales growth has been slowing also as banks are tightening access to credit against the backdrop of lower-income borrowers increasingly struggling to keep up with their loan payments. Savings have also been whittled down. Still, the pace of spending is likely sufficient to sustain the economic expansion.
Industrial production rebounds, rising 0.9% in May
Manufacturing output posted a similar gain of 0.9 percent after declining in the previous two months. The index for mining increased 0.3% in May, and the index for utilities advanced 1.6%. At 103.3% of its 2017 average, total industrial production in May was 0.4% higher than its year-earlier level. Capacity utilization moved up to 78.7% in May, a rate that is 0.9pp below its long-run (1972–2023) average. There was a 2.3% increase in machinery orders and a 1.6% increase in utilities, a 0.9% increase in motor vehicles & parts and a 0.8% increase in computers & electronics.
highlights from The United Kingdom
Activity growth easing
UK private sector business activity expanded in June at its slowest rate since last November, as a slowing of service sector growth offset a stronger performance in manufacturing. Output at goods producers rose to the greatest degree since April 2022, driven by improved order book intakes and strong business confidence. At the same time, services activity grew at its softest pace for seven months, although survey evidence indicated that the slowdown was partly driven by a pause in client spending decisions during the election period. UK firms also faced a quickening of input cost inflation in June, as severe global shipping constraints led to higher transport costs. The rise fed through to quicker increases in output charges among both manufacturing and services companies, with producers notably raising their prices at the sharpest rate since May 2023.
Retail sales rebound
The increase in May was higher than expected (+2.9%), as volumes rose MoM across all main categories. In particular, non-store retail sales, textile clothing and footwear store sales and household goods store sales saw the biggest rise MoM. 3m/3m increase was 1%, but volumes were still 0.2% lower than the 3m sales recorded for Mar-May 2023. Non-food stores sales volumes (the total of department, clothing, household, and other non-food stores) rose by 3.5%, the largest monthly rise since Apr-21. Within non-food stores, there was strong monthly growth for clothing and footwear retailers, furniture stores, and sports equipment, games and toys stores, likely as a result of promotions, better weather and declines in the prices of furniture and household goods by 1.8% YoY. Non-store retailers, which are predominantly online retailers, rose by 5.9% MoM – the largest monthly increase since Apr-22. After revision, the drop in April was actually lower than previously reported at 1.8% (vs. 2.3%).
Headline inflation back down to target
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.8% YoY in May, while the CPI excluding OOH was 2% YoY. On a monthly basis, CPIH rose by 0.4% and the CPI rose by 0.3%. The largest downward contribution to the monthly change in both CPIH and CPI annual rates came from food, with prices falling this year but rising a year ago; the largest upward contribution came from motor fuels, with prices rising slightly this year but falling a year ago. Core CPIH rose by 4.2% YoY, while core CPI rose by 3.5% YoY. The OOH component of CPIH rose by 6.7% YoY in May up from 6.6% YoY in April.
Consumer confidence rising but still negative
British consumer sentiment rose to a 2.5-year high this month, as households’ improved assessment of the broader economy outweighed greater concerns about their personal finances. Morale has steadily recovered, but most households are still worse off than before the inflation surge. As the GfK director pointed out, the headline score remains negative owing to the difficulties so many have experienced as the unrelenting cost-of-living crisis batters household budgets.
Author: Nikolay
Founder of MoneyCraft
