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The Week in Global Markets
Financial markets summary:
– EUROPE: We had an intense week politically on the Old Continent – with elections in both France and the UK. As the far-right National Rally failed to secure a majority in the first round in France, the French CAC 40 climbed this week while the 10y government bond yield spread vs. German 10y bonds narrowed to around 67.9bp. Meanwhile, all other major stock indices, including the pan-European Stoxx 600 and Stoxx 50, gained week-on-week. The UK FTSE 100 also advanced, while the 10y government yields declined a bit. Both the euro and the pound appreciated against the US dollar. ECB President Lagarde indicated in a speech that there is still uncertainty about the future path of inflation, especially “in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks“.
– UNITED STATES: The S&P 500, the Dow and the Nasdaq were up this week as mixed macro data showed the economy continues to slow down. In the S&P 500 sectors, the biggest gainers were Consumer Discretionary, Tech and Communication Services stocks, while the biggest losers for the week were Energy and Health Care. Both ISM indices (for manufacturing and services) came in contractionary for June, which was unexpected and likely indicates that the US economy will continue to cool down in the coming quarters. However, it is worth noting that the S&P Global surveys, in contrast, still indicate an expansion in the service sector. The jobs reports also showed continued signs of cooling, as job openings and quits rates softened and the number of unemployed workers per job vacancy fell to 1.2 from about 2.0 during the peak of the labor market tightness in 2022. This could mean a positive sign for inflation pressures in the future, as revealed by the slowing growth in input prices for both services providers and manufacturers in the ISM report.
– ASIA-PACIFIC: As the weak yen helped export-oriented industries, major stock market indices in Japan gained again this week, reaching all-time highs. But the weak yen also appeared to be a drag on consumer spending, which declined in May more than expected. The JGB 10y yield reached a 13-year high at 1.1% during this week. The GDP drop in Q1 was also revised to a much more significant fall than previously estimated. In China, macroeconomic data releases disappointed this week and both the Shanghai Composite and the CSI 300 declined. The manufacturing sector is clearly in contraction, as the PMI indices confirmed.
– BITCOIN: The largest cryptocurrency BTC tanked this week, reaching just under $54k, and slightly recovering during the weekend – currently hovering around $57.9k. Investor behavior was likely influenced by the payout of nearly $9bn to users of the collapsed bitcoin exchange Mt. Gox. According to CoinGecko, the entire cryptocurrency market shed more than $170bn in combined market capitalization in a 24-hour period this week. However, after the 4th July drop, Spot Bitcoin ETFs saw record inflows with $143.1m flowing in, according to CoinTelegraph. Analysts and crypto market experts kept emphasizing this week that this consolidation could represent one of the most a valuable buying opportunities for both new and existing investors.
policy rate overview
The Polish National Bank (NBP) left its primary interest rate unchanged at 5.75% in expectation of higher inflation in the next months. Core inflation in Q2-24 settled at 3.9%, which was lower than the NBP March projection of 4.4%. The updated NBP macro projections showed a single scenario, in which the average annual inflation level for 2024 is 3.6%, slightly higher than in the March baseline scenario. In contrast, the inflation forecast for the next year (5.25%) is as much as 1.7ppt above the previous baseline projection. This points to persistent inflationary pressures in the medium term, supported by increased wage growth dynamics and tightening in the labor market.
highlights from Germany
Inflation back down
According to preliminary June figures, German CPI inflation was lower than expected:
– Headline CPI: +2.2% YoY / +0.1% MoM
– Core CPI: +2.9% YoY
– Harmonized ICP: +2.5% YoY / +0.2% MoM
Final data is coming July 11th but it’s already clear that core services remain stubbornly high with a rate of 3.9% YoY, while goods are slowing down, energy is down to -2.1% YoY and food has rebounded slightly to 1.1% YoY.
Unfortunately, industrial production is not recovering
According to provisional data, there was another slump in German manufacturing output in May:
– MoM -2.5% real drop (season. & calendar adjusted)
– YoY -6.7% real drop (calendar adjusted)
– 0% 3m/3m move for Mar-May vs. Dec-Feb
Sectors with the most significant downturns:
– auto industry: -5.2% MoM
– manufacturing of machinery & equipment: -5.9% MoM
– industry excluding energy & construction: -2.9% MoM
– construction: -3.3%
– capital goods: -4%
– intermediate goods: -2.7%
– consumer goods: -0.2%
Energy production was up 2.6% MoM, and production in energy-intensive industries was up by 0.2%.
Factory Orders Decrease Further
German real manufacturing orders (provisional) dropped further in May, declining -1.6% MoM and -8.6% YoY. The 3m/3m drop was 6.2% for Mar-May. Excluding large orders, the drop was even bigger: -2.2% MoM.
There was a particularly significant drop in the “manufacturing of other transport equipment” sector (aircraft, ships, trains) where new orders were down 19.2% MoM due to a smaller volume of large-scale orders in aircraft construction. The auto industry also contributed with a drop of 2.9%.
Overall, new orders for capital goods declined 4.3% MoM, for intermediate goods increased by 1.4% and for consumer goods increased by 4.9%. Foreign orders declined by 2.8%, with new orders from the non-euro area declining by 4.6% and orders from the euro area falling by 0.1%. Domestic orders rose by 0.5%. Real turnover also declined by -0.7% MoM / -6% YoY.
Slower decline in construction
German construction activity still declining in June, but at a slower pace, according to the HCOB PMI. The PMI report states that the residential construction sector appears to be gradually emerging from its recessionary low, with the June slump being the least severe in the past 13 months. In contrast, the situation in commercial construction and civil engineering remains virtually unchanged compared to the previous month. This indicates that the improvement is not yet widespread, suggesting that a comprehensive recovery of the sector is likely still a long way off. The decline in new orders is moderating somewhat, while layoffs in the sector are becoming less aggressive. The proportion of building firms expecting activity to fall in the coming year (32%) continued to far exceed those anticipating a rise (11%). Supported by a cut in interest rates, however, the sentiment was the least negative since February 2022, with a number of firms reporting hopes that the downturn was nearing its bottom point.
highlights from Europe
Stubborn service inflation
June flash inflation estimates for the euro area (HICP) show that it was likely 2.5% (headline) and 2.9% (core). This means that while headline is once again declining, core remains rather persistent, driven by stubborn services inflation which remains at a level of over 4%. Food inflation is still above 2% and positive on a monthly basis, while energy and non-energy industrial goods are negative MoM and relatively low on an annual basis. This makes it less likely that the ECB will implement a second consecutive rate cut at its next meeting.
EU and Euro area unemployment persistently low
In May, the euro area seasonally-adjusted unemployment rate was 6.4% (unchanged vs. April), while on EU level, the rate was 6.0% and also the same as the prior month. The estimate for the number of unemployed persons in May is 13.2m in the EU and 11.078m in the euro area. That means increases by 13k MoM/163k YoY in the EU, and by 38k MoM/ 3k YoY in the euro area. The unemployment rate for women was 6.3% in the EU vs. 5.8% for men; in the euro area, it was 6.7% for women vs. 6.2% for men.
Retail trade edged up slightly
The volume of retail trade went up by 0.1% MoM in both the euro area and the EU, while it rose by 0.3% YoY in the euro area and 0.6% YoY in the EU. On a monthly basis, there was an increase in the food and automotive fuel categories. Among Member States, the highest monthly increases in the total retail trade volume were recorded in Denmark, Lithuania and Luxembourg. The largest decreases were observed in Slovakia, Ireland, Bulgaria and Malta. On an annual basis, the increase was in food and non-food products, while automotive fuel sales went down. Country-wise, the highest annual increases were in Luxembourg, Croatia and Romania. The largest decreases were observed in Belgium, Estonia and Slovenia.
highlights from The United States
Small uptick in job openings and hires for May
JOLTs data continue to confirm the soft-landing picture the Fed is looking for, given the job openings rate has declined while the layoffs rate has not spiked. Hires remain unusually low relative to the unemployment rate.
Over the month, both the number of hires and total separations were little changed at 5.8m and 5.4m, respectively. Within separations, quits (3.5m) and layoffs and discharges (1.7m) changed little. The number of job openings was 8.1m in May, also no significant change.
While Friday’s NFP report showed a solid 206k jobs added in June (which was less than expected), prior months were revised down by 111k. Health Services continues to impress, adding 82k jobs, in line with the 3m, 6m, and 12m run-rate. The unemployment rate edged up again to 4.1%.
ISM Manufacturing still in contraction
The ISM Manufacturing index came in at 48.5 for June(expected 49.1, last 48.6), with a mixed result in the sub-components. New orders were up compared to last month and better than expected for June, but the Employment and Price Paid indices were down and lower than expected. According to regional surveys, activity remains volatile. US manufacturing has now been contracting for the last 19 out of 20 months, the longest streak since the Financial Crisis. US ISM services PMI plummeted unexpectedly to 48.8 from 53.8, the lowest level since May 2020. New orders have been a particularly soft spot in the ISM Services in recent months and are one of the key factors plunging below the typical recession level in June. One positive development from the ISM Services report is again the prices component, which has been trending roughly in-line with the pre-COVID norm since last summer.
highlights from The United Kingdom
Lower mortgage lending, higher consumer lending
Net borrowing of mortgage debt by individuals decreased from £2.2bn in April to £1.2bn in May. The annual growth rate for net mortgage lending rose to 0.3% in May. Net mortgage approvals (net of cancellations), an indicator of future borrowing, amounted to 60k in May, less compared to April. Net consumer credit borrowing bounced back in May to £1.5bn, from £0.8bn in April. Net borrowing through credit cards rose from £0.2bn in April to £0.6bn in May, while net borrowing through other forms of consumer credit (such as car dealership finance and personal loans) increased from £0.6bn to £0.9bn over the same period. The annual growth rate for all consumer credit was 8.3%. The effective interest rates on interest-charging overdrafts fell by 18 basis points, to 22.58% in May, while the effective rate on new personal loans to individuals decreased by 8 basis points and now sits at 8.93%.
During May, UK non-financial businesses (PNFCs and public corporations) repaid, on net, £0.5bn of bank and building society loans (including overdrafts). Net borrowing by large non-financial businesses increased to £0.3bn in May, while net repayments by small and medium-sized non-financial businesses (SMEs) were unchanged between April and May, at £0.8bn. The annual growth rate of borrowing by large businesses fell for the third consecutive month, from -0.3% in April to -0.4% in May. By contrast, the annual growth rate of borrowing by SMEs increased slightly to -4.6% in May, from -4.7% in the previous month. Private non-financial corporations (PNFCs) raised, on net, £3.9bn of finance in May, following net repayments of £3.1 billion in April. This was driven by £4.9bn of net equity issuance in May, the first positive net equity issuance since September 2021 (£0.9bn) and the highest since June 2009 (£9.6bn).
The net flow of sterling money (known as M4ex) amounted to £2.6bn in May, down from £9.3bn in April. The net flow of M4ex was largely driven by households’ holdings of money, which saw an increase of £5.3bn in May, compared to an £8.4bn increase in April. PNFCs also increased their holdings of money by £0.5bn in May, while non-intermediate other financial corporations (NIOFCs) decreased their holdings of money by £3.2bn over the same period.
House price growth decelerated in June
The Nationwide statistics on UK house prices show that they increased by 1.5% YoY in June. Northern Ireland was the best-performing region, with prices up 4.1% in Q2. Housing market activity has been broadly flat over the last year, with the total number of transactions down by around 15% compared with 2019 levels. Transactions involving a mortgage are down even more (nearly 25%), reflecting the impact of higher borrowing costs. By contrast, the volume of cash transactions is actually around 5% above pre-pandemic levels.
Author: Nikolay
Founder of MoneyCraft
