Markets last week |
The use of Johnson & Johnson’s single-shot COVID-19 vaccine was paused, which added to vaccine hesitancy after the publicised issues with the AstraZeneca jab. Inoculation rollout in the US is going in parallel with the reopening of the country. This varies greatly by state, with Republican states in the West and South more open than Democratic states in the North and East, e.g. Florida and Texas are almost 100% open but New York and Illinois are between 40% and 50%. The emerging COVID-19 variant, B.1.1.7 is growing very fast. Now, roughly 20% of US residents have received both doses of the vaccine (with nearly 60% for the first dose only) and the jab curve is nearly vertical, plus nearly 10% of US people have had the virus as well, so herd immunity is coming, although the reopening is clearly ahead of immunity. Strong US economic numbers (soaring retail sales, high NY and Philadelphia Fed surveys, jobless claims falling to pre-pandemic lows) boosted equities during the week, as consumers felt more optimistic on the reopening of the economy, worrying less about COVID-19 due to the vaccine rollout. Chinese data were also bullish, although the Chinese economy is slowing down from its breakneck recovery speed last year. The US Federal Reserve (Fed) held multiple public communications to make sure its monetary policy is well understood. It remains focused on outcomes (getting unemployment down to the lowest possible level), rather than outlook (whether growth or inflation may rise further). This helped keep markets somewhat less concerned about a surging CPI (consumer price index) in the US, roughly in line with expectations. Against that backdrop, shares were strong for the fourth week in a row with some indices hitting all-time highs and the UK and Europe leading. The less intuitive movement, however, was a drop in government bond yields. It appears that China has been a major buyer of US treasury bonds recently, but there might also have been a pause in the reopening and growth expectations. With the US dollar weakening again, commodities had a very strong week, with oil prices up 6%, copper 3% and gold rebounding from the US$1,700 level. |
The week ahead |
Wednesday: UK CPI (consumer price index), RPI (retail price index) and PPI (producer price index) Our thoughts: inflation scares are in the market mood and the US showed the way last week. Unlike the eurozone, which has structurally low inflation, the UK could be prone to spikes in prices due not only to supply chain issues and year-on-year comparisons, but also to the Brexit trade disruptions. The UK CPI is expected to double from 0.4% to 0.8%, but this is still way below the Bank of England’s 2% target. On the other hand, the PPI input is estimated to soar to 4.3% with the PPI output at 1.7%. Whether these costs feed into the inflation pipeline or not is the question for the next few months. There is upside risk to the price rise expectations and this could rattle markets. Thursday: US jobless claims Our thoughts: last week’s drop in initial jobless claims to a pre-pandemic low was welcome news, but was it a fluke? Week-on-week data can be quite noisy depending on a variety of factors, so it will be important for markets to satisfy themselves that job losses are really pointing downwards. The expectation is for a small increase, with the continuing claims slightly down. What will matter though, is a 3- or 4-week trend. Friday: UK manufacturing and services PMIs Our thoughts: the UK economy has suffered most among developed nations from the COVID-19 year and its recovery is therefore potentially faster. This assumes that businesses are minded to expand and invest, but also that their backlogs and pipelines are healthy. The UK is 80% services with manufacturing a smaller component than in many industrial countries, hence the state of the services PMI will matter more to the UK economy than manufacturing. The manufacturing PMI is expected to be flat at a high level, but the services PMI is anticipated to rise to record levels. This could lend support to market sentiment. |
Markets for the week |
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Central banks/fiscal policy |
Fed overcommunication The Chair of the US Federal Reserve (Fed) Jay Powell and some of his senior colleagues communicated profusely with the markets over the last week. Jay Powell told a virtual panel that his commute home takes him past a ‘substantial tent city’, and that he thought of the millions of Americans who are still trying to get back to work. Senior Fed member Lael Brainard also weighed in, explaining the difference between outcomes and outlook and emphasising that the Fed’s policy will react to outcomes, not outlook, to get closer to the average 2% inflation target. Powell was again heard saying that the Fed will likely scale back its bond purchases before considering raising interest rates. “We will reach the time at which we will taper asset purchases when we’ve made substantial further progress toward our goals from last December, when we announced that guidance. That would in all likelihood be well before the time we consider raising interest rates. When the purchases go to zero, the size of the balance sheet is constant, and when bonds mature you reinvest them, and then another step is to allow bonds to start to run off. And we haven’t decided whether to do that or not.” Powell added that he doesn’t think the Fed would actually sell bonds into the market. “This is going to be outcome based. We’re going to be looking at the labour market indicators and the inflation data as it comes in. Markets focus too much on what we call the economic predictions, and I would focus more on the outcomes that we’ve described.” The gist of these messages is that the Fed will be patient with short-term surges in inflation, given its objectives to bring down not just unemployment, but underemployment to the lower levels in previous cycles. |
United States |
Blow-out numbers (retail sales, housing starts, low jobless claims) bring higher inflation into focus Surveys: the NFIB small business optimism index rose from 95.8 to 98.2. Behind the headlines though, the report was less cheerful, showing limited hiring plans and firms that are reluctant to pay higher wages lest they cannot pass on the costs. The bellwether Philadelphia Fed Business Outlook Survey was very strong again at 50.2, a 48-year high and way above expectations, although last month’s record high of 51.8 was revised down to 44.5. The Empire State Manufacturing Survey also rose sharply from 17.4 to 26.3. The University of Michigan sentiment index rose to 86.5 from 84.9, missing estimates. Inflation: the long-expected CPI (consumer price index) had a strong rebound month, above estimates. The headline CPI rose to 2.6% and the core to 1.6%. The base effects are expected to last through May and markets are starting to anticipate them. Interestingly, real average earnings fell from 4.1% to 3.9% in March. The headline was boosted by a 9.1% surge in gasoline prices. The core reading had higher numbers in lodging away from home and vehicle insurance, but many other items rose as well relating to transport, healthcare and rent. The import price index rose 1.2% in March (0.9% ex petroleum), bringing the year-on-year increase to 6.9%. The export price index soared 2.1% with the year-on-year at an eye-popping 9.1%. Input costs are definitely rising; the question is how much will go into retail prices. Sales and production: March retail sales jumped 9.8%, well above estimates, with sales ex-autos up 8.4% and the control measure up 6.9%. The stimulus from mid-March onwards, with more than US$400bn of direct payments, obviously had a large impact on the numbers. Industrial production rose 1.4%, with manufacturing production up 2.7%, both below expectations. The recovery from the February storm-hit slump was not sufficient to get back to previous levels. Vehicle production was the big laggard here. Capacity utilisation rose from 73.4% to 74.4%, below estimates and the pre-COVID-19 77% level. Employment: initial jobless claims plunged to 576K from 769K, far below the consensus, 700K. The good news on that front was overshadowed by the continuing claims slightly higher at 3,731K vs. 3,727K. Housing: the headline NAHB housing market index rose to 83 from 82, but demand seems to be weakening, with MBA mortgage applications down 3.7% for yet another week. Housing starts jumped 19.4% and building permits rose 2.7%. |
United Kingdom |
No major direction from data Sales: retail sales jumped to 13.9% year-on-year in March, from 1.0% the previous month, mostly due to the one-year comparison, but also to the timing of Easter this year vs. last. Growth: GDP rose 0.4% in February, but 3-month/3-month growth declined to -1.6%, from -1.4% the previous month. The trade deficit deteriorated to -£7.1bn in February, from -£3.4bn the previous month, much worse than expectations. Housing: the average price of a house in the UK rose by 2.1% in April, according to Rightmove. This is only the second time in 5 years that such a monthly rise is recorded. |
Europe |
Some disappointing numbers Sales and production: retail sales in the eurozone rose 3% in February, up from -5.2% the previous month. Industrial production in the eurozone fell by 1.0% month-to-month in February, better than expected. The year-over-year fell to -1.6% from +0.1% in January, below estimates. Car registrations in the EU 27 soared by 87.3% year-on-year, after a 19.3% decline the previous month. Surveys: in Germany, the headline ZEW expectations index dipped in April, to 70.7 from 76.6 in March, below expectations of a rise. The current situation index jumped to -48.8, from -61.0 in March, above estimates. Inflation: headline inflation in Germany and France rose, but to low levels, 1.7% in Germany, 1.1% in France. In the eurozone, inflation rose to 1.3%, from 0.9% with the core rate down to 0.9%. Europe is not where inflation spikes are likely to take hold. |
China/India/Japan/Asia |
Strong Chinese numbers benefit from year-on-year comparison China: money supply was less buoyant than expected, with M0 up 4.2% year-on-year, unchanged, M1 up 7.1%, down from 7.4%, and M2 up 9.4%, down from 10.1%. The trade surplus in US dollars shrank from US$37.9bn to US$13.8bn as exports rose 30.6% in March but imports rose 38.1%. Q1 GDP soared, climbing a record 18.3% from a year earlier, but on a quarter-on-quarter basis, GDP growth slowed to 0.6% from an upwardly revised 3.2% in the previous three months. Industrial output rose 14.1% in March from a year earlier, below estimates. Retail sales expanded 34.2% in March, above expectations. Fixed-asset investment climbed 25.6% in the first quarter from a year ago. The jobless rate was 5.3% at the end of March. Japan: March machine tool orders rose 65% on a year-on-year basis, up from 36.7% the previous month. Core machine orders fell 8.5% in February, after -4.5% the previous month. Industrial production was down 2% year-on-year in February with capacity utilisation down 2.8%. |
Oil/Commodities/Emerging Markets |
OPEC output discipline was behind a further rise in crude oil prices over the week. Economic data in the US and China also pulled commodities up significantly. Gold bounced back from a US$1,700 bottom, as government bond yields eased. |
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