Markets last week |
The wild speculation driven by the Reddit forum WallStreetBets abated after trying its luck on silver and pushing it to an eight-year high. In politics, after dismal jobs data in the US, President Biden signalled his readiness to move forward on his stimulus plan without Republican support and Vice-President Harris had to break a tie in the Senate on the approval of the budget reconciliation process. This helped markets anticipate a large injection of taxpayers’ money into the US economy. Former European Central Bank President Mario Draghi accepted the job of Italian Prime Minister, which boosted Italian equities and government bonds. More than half of US large companies and a significant percentage of European and Japanese companies have now reported earnings for Q4 2020, with US earnings growth looking much stronger vs. Europe, although the difference is reduced if you take out the under-performing energy sector. 80% of US firms reporting have beaten estimates and, among those, the positive surprise was almost 20%. The pound rose, in particular against the euro, and gilts fell after the Bank of England was unexpectedly more positive on growth than expected and removed its easing bias. Oil prices skyrocketed again, with Brent within sight of US$60/bbl on tight supply. Gold fell briefly below US$1,800/oz. European equities have caught up for the year to date with the UK which was 3-4% ahead a couple of weeks ago, although UK small caps are beating large caps last week and year to date. Government bond yields soared across markets, with the 10-year US treasury up 10 bps and the 10-year gilt rising 16 bps. |
The week ahead |
Tuesday: China CPI and PPI Our thoughts: Chinese inflation has mattered to the rest of the world mostly at the producer level (PPI – producer price index) with China still the largest exporter of manufactured goods in the world. The traditional industrial deflation exported by China to the rest of the world now seems to be behind us, with the latest PPI at -0.4% year-on-year and the expectation for a positive number in January. The extent of that move will have an impact on inflationary expectations in the US and other western countries. The CPI (consumer price index) matters more indirectly. If consumer inflation is indeed subdued (and it might even be expected to be negative this month) then the People’s Bank of China will not need to tighten policy any time soon, which should mean that capital could keep flowing into Chinese government bonds for longer. Friday: UK industrial production, manufacturing production, construction output and index of services for December Our thoughts: the UK economy is still recovering from COVID-19 and the distribution costs related to Brexit. The vaccine drive in the UK is way ahead of most countries in the world and should counter the negatives from these issues. The question is the relative weight of these countervailing factors. In 2020, manufacturing and construction carried the UK economy, with services being massively challenged for obvious reasons. The moves in these components of the economy will matter for markets and risk appetite. UK equities hit the ground running at the beginning of 2021 but seem to have run out of breath compared to other markets. A rebalancing of the UK economy in favour of services could kickstart another UK outperformance spurt. Friday: US University of Michigan consumer sentiment index Our thoughts: US consumers have been buffeted by opposing forces: the large spike in unemployment on the one hand vs. the strong fiscal support on the other hand (US$600 weekly cheques, pandemic unemployment benefits, etc). Most US consumers are now sitting on more savings than before COVID-19, but are they likely to spend them and help the US economy? The University of Michigan consumer sentiment index dropped from 100 to the low 70s post-pandemic and has only recovered gently to about 80. A stronger showing might make the difference between consumers living off the public purse or standing on their own two feet. |
Markets for the week |
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Central banks/fiscal policy |
The Bank of England is more bullish on growth US Treasury Secretary Yellen summoned the US financial regulators to discuss the market volatility (Securities and Exchange Commission, Federal Reserve, Commodity Futures Trading Commission) at the beginning of the week. This is not unusual with Treasury Secretaries but highlighted concerns about the functioning of certain markets given the Reddit-inspired volatility. There were ‘very productive’ meetings between President Biden and Republican Senators, but later on Biden told Congressional Democrats that backing anything less than US$1,400 relief cheques would mean starting his term with a broken promise, although he is open to tighter eligibility requirements. Friday’s disappointing jobs numbers enabled the government to push a tight budget reconciliation vote through both houses of Congress, with Vice President Kamala Harris breaking the tie in the Senate. The Bank of England (BoE) left interest rates and asset purchase amounts unchanged. It commented that the UK economy is heading for a rapid pick-up in light of vaccinations. Despite lowering its outlook for the year, the BoE sounded an optimistic note. Although the BoE agreed that banks should prepare for the possibility of negative interest rates as a contingency, it insisted such policy is not imminent. In addition, the BoE removed its easing bias. This was seen as bullish by markets. Gilt yields surged and sterling rose to €1.14, a nine-month high. |
United States |
Friday’s jobs report disappointed despite good surveys and strong industry Surveys: the ISM (Institute for Supply Management) manufacturing PMI, at 58.7, was down from 60.5, probably due to seasonal adjustments. The components were bullish: production is at 60.7, customer inventories at 33.1 (showing how little inventory is in the supply chain), prices moved to 82.1 as prices were previously depressed, export orders at 54.9, imports at 56.8 and the backlog of orders is strong. Comments from manufacturers this month were optimistic: strong demand, finding labour is a challenge. Both the ISM and Markit services PMIs rose (ISM from 57.7. to 58.7 and Markit from 57.5 to 58.3). The ISM index of new orders at services industries rose to 61.8 in January, the strongest since July. Industry: total vehicle sales, as reported by Wards, rose from 16.27 million to 16.63 million in January (annualised), the highest since pre-Covid. The sales number had fluctuated between 16 and 17 million for the period between 2014 to early 2020. Factory orders rose a strong 1.1% in December and durable goods orders 0.5%. Jobs market: employment in the services industries rose by the most in 11 months and 14 out of 18 services industries reported growth during the month, led by real estate, wholesale trade, rental, leasing and construction. Initial jobless claims fell from 812K to 779K whereas continuing claims dropped by 200K from 4785K to 4592K. Non-farm payrolls disappointed, rising only 49K vs. more than 100K expected and with the last two months showing a large negative revision of 159K. Private payrolls and manufacturing payrolls were to blame for the shortfall in new jobs. Unemployment and underemployment both improved quite strongly (from 6.7% to 6.3% and from 11.7% to 11.1%, respectively), but the labour force participation rate slipped from 61.5% to 61.4%. Housing: MBA mortgage applications rose 8.1% for the week ended 29th January. Productivity: non-farm productivity and unit labour costs disappointed. Productivity fell 4.8% during Q4 and unit labour costs soared 6.8%. The combination is quite negative for growth and corporate profits. January payroll data highlighted a significant increase in hourly and weekly earnings, with hourly earnings up 5.4% year-on-year. Trade: the US trade balance improved marginally from a US$69 billion deficit to US$66.6 billion in December. |
United Kingdom |
The house price boom seems to have peaked Surveys: the manufacturing PMI eased to 54.1, a 3-month low but still strong given the supply chain issues post-Brexit. The Markit/CIPS services PMI rose from 38.8 to 39.5, still massively depressed. Housing: UK house prices fell last month for the first time since June as a temporary cut in stamp duty approaches its expiration date. Values fell 0.3% from a month earlier to an average of £229,748, as reported by the Nationwide Building Society. Prices climbed 6.4% from a year earlier, slowing from 7.3% in December. The Chancellor has indicated he is unlikely to extend the tax break when it expires at the end of March. |
Europe |
Surging inflation mostly caused by one-offs Surveys: the eurozone manufacturing PMI was almost unchanged, from 54.7 to 54.8. Manufacturing PMIs in different countries: the Netherlands is at a 28-month high, Italy at a 34-month high and France at a 6-month high. The Eurozone services PMI climbed from 45.0 to 45.4, with Germany almost unchanged at 46.8 and France up from 46.5 to 47.3. The Markit Germany construction PMI fell further from 47.1 to 46.6. Inflation: the eurozone CPI (consumer price index) rose from -0.3% to +0.9% in January with the core CPI soaring from 0.2% to 1.4%. This is the highest jump in over a decade after 5 months of price falls. There was a combination of one-off factors, including the reversal of a temporary reduction in German VAT, supply chain disruptions, soaring container shipping prices and an annual revision of the weightings as more weight was given to items that had been rising in price, such as food and less to products hit by the pandemic, such as packaged holidays. The ECB is likely to look through this increase as temporary, as there are still weak underlying price pressures. Sales: December eurozone retail sales rose 2% after a 5.7% fall the previous month. Industry: German factory orders fell for the first time in 8 months, falling 1.9% in December but still up 6.4% for the year. |
China/India/Japan/Asia |
China starting to slow down, even as most of Asia-Pacific is booming China: the unofficial Caixin services PMI dropped from 56.3 to 52.0, still in expansion territory. Japan: the services PMI rose from 45.7 to 46.1, still contracting. Other countries: South Korean PMI expectations are the highest since 2014 and the PMI highest since 2011. Australia’s PMI is at 55.3 vs. an average 48.6 for all of 2020. |
Oil/Commodities/Emerging Markets |
Oil prices on a tear Crude oil inventories fell by 994,000 barrels, reported the International Energy Agency. Oil prices continued their rise, with the Brent crude gauge nearing US$60/bbl, as OPEC+ said it will keep pushing quickly to clear the surplus left behind by the pandemic. Gold briefly fell below US$1,800/oz last week and then recovered. |
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