Markets last week |
An extremely busy week in the markets last week. The UK Chancellor delivered a very supportive Covid budget (although the promise of future tax rises cast a shadow over the party). Economic growth in the US is now forecast at 10% for Q1 by the Atlanta Fed and that’s before Americans get the additional US$1,400 cheque, which they’ll probably receive in April. The more than 19 million individuals who receive benefits will see the pandemic relief benefits extended until August and get an extra US$400 a week. This tells us that manufacturing will pass the baton to the consumer in the next few months. The US$1.9trn fiscal package was passed by the US Senate over the weekend (after some amendments but will be very close to the headline amount in economic relief when it goes back to the House of Representatives). In the US, government bond yields rose further on the back of the enormous fiscal and monetary support and tripped the equity markets, with huge day-to-day volatility, in particular technology and other growth sectors. US Federal Reserve Chair Jay Powell spoke on Thursday but failed to reassure markets. He said that the recent run-up in bond yields “was something notable and caught my attention. I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals. If conditions do change materially, the committee is prepared to use the tools that it has to foster the achievement of its goals.” Fine words butter no parsnips. Markets were disappointed by the lack of specific action. US inflation breakevens rose, in particular the 5-years which is at 2.49% and the 2-years at 2.60% (this is basically the annualised inflation level forecast by the market during that period). The strong PMI numbers in the US, both manufacturing and services, are a harbinger of spikes in inflation in the next few months. At the end of the week, US equities recovered from being the worst market during the week. UK equities were the most resilient, particularly the FTSE 100. US treasury bond yields climbed sharply by 17 basis points for the US 10-year bond. The US dollar was the strongest developed currency and oil prices were surging again, with Brent up 5% but the US gauge WTI rising 7.5%, whereas gold fell to US$1,700/oz. This morning we learned about an attack on Saudi oil facilities which propelled Brent oil to over US$70/bbl. |
The week ahead |
Tuesday: Chinese CPI (consumer price index) and PPI (producer price index) Our thoughts: China continues to have a major industrial impact on the global economy. The PPI indicates the level of manufacturing inflation coming out of Chinese factories and exported to the rest of the world. At a time when US PMIs are pointing to sharp increases in inflation, imported price rises will also matter. China used to export deflation to the rest of the world, but no longer does. The CPI is expected to remain negative, which is great for Chinese consumers, but the PPI is forecast to surge to +1.4% whereas it was negative in previous years. Together with the rise in the Chinese currency, this could be a further shock for short-term inflation expectations in the US. Thursday: European Central Bank (ECB) meeting Our thoughts: the current bond tantrum in the US has been laid at the door of super-expansive monetary policy by the Fed without the Fed Chair providing clear steps to stop the yield hikes. The ECB is not quite in the same predicament. The eurozone is spending on the Covid relief, but proportionately not as much as the US. Monetary policy is extremely loose but has been that way for years without a huge stimulative effect and the ECB is buying more of the issuance of European bonds than the Fed does for Treasury bonds. It is nevertheless a risk that European markets could follow in the footsteps of the US bond market tantrum and derail equities along the way. The impact is expected to be less but needs to be quantified, hence the importance of the ECB’s statement and potential changes to its monetary policy, in particular its quantitative easing programme. Thursday: US JOLTS (Job Openings by Industry Total) Our thoughts: the US employment market needs to come out of intensive care. Jobless claims seem to be stuck at a fairly high level, although they have stopped getting worse. Non-farm payrolls are now adding large numbers of new jobs in the leisure and hospitality sector, in addition to the ongoing manufacturing hires. What needs to happen now is for job openings to match the improving trend. Job openings were above 7 million pre-pandemic and now, with the unemployment rate almost twice as high, they are only expected to be 6.6 million. The US does not have a national lockdown. Different states are reopening in their own time. It should therefore be possible to see a meaningful increase in job openings to foreshadow a stronger jobs market this year. |
Markets for the week |
|
Central banks/fiscal policy |
Positive reception to Chancellor’s budget but Fed Chair thwarted by markets Chancellor Sunak’s total fiscal support of £407bn this year and next is just shy of 20% of the UK economy. Few rabbits out of the hat, given the leaks: an extension in the furlough and the uplift to universal credit until September, an extension in the business rates holiday until June with a taper afterwards to help the reopening of the high street, further support for self-employed people, a mortgage guarantee to help first-time buyers. He announced a 2023 rise in corporate taxes from 19% to 25%, claiming that the rate would still remain the lowest in the G7, but he exempted small companies and tapered the rate upwards, so that only the top 10% of UK companies pay the full 25% (but that’s the bulk of taxes anyway). There is also a politically risky freeze on income tax thresholds. He is managing the Covid crisis well but postponing the fiscal cliff by six months, hoping that the economy will be able to take the end of these measures at that time. The increase in taxes, planned so far ahead, is concerning, given the poor reception for austerity last time. It’s not clear why it is necessary to start planning for these tax increases now. The Office for Budget Responsibility (OBR) expects this measure alone will raise £17.2bn a year by 2025/26. The total raised by the mid-2020s will be £30bn, not far from the £37bn in 2010. This will take the total UK tax take to 35% of GDP by 2025/2026, the highest level since the mid-1960s. US Federal Reserve (Fed) Governor Lael Brainard, who is widely seen as a potential replacement to Powell next year, said that bond market volatility could further delay the Fed’s taper on asset purchases, which helped government bonds. Fed Chair Jay Powell spoke on Thursday but failed to reassure markets. He said that the recent run-up in bond yields “was something notable and caught my attention. I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals. If conditions do change materially, the committee is prepared to use the tools that is has to foster the achievement of its goals.” Treasury bonds extended losses and inflation expectations rose. The markets were disappointed with the lack of specific action. |
United States |
Strong payrolls but PMIs forecasting a surge in inflation Surveys: the Markit US manufacturing PMI was almost unchanged at 58.6 from 58.5 but the ISM manufacturing PMI surprised at 60.8, up from 58.7. New orders rose to 64.8, production to 63.2, even employment surged to 54.4 after lagging. Customer inventories at a very low 32.5, which give rooms for future orders. The cost of tight supply chains and booming commodity prices is visible in the prices paid index, which rose to 86, its highest level since July 2008. This index is now pointing to a 2.5% rate of PCE (Personal Consumption Expenditures) inflation over the next few months, which is the Fed’s gauge. The US Markit Services PMI rose from 58.9 to 59.8. The ISM services index fell to 55.3 from 58.7, below the consensus, 58.7. The 7.6-point jump in the prices index left it at a 12-year high, and consistent with core PCE inflation rising to about 2.5% over the next few months. The conclusion from both of these readings is that we may well see inflation surging in the next few months. Industrial orders: US factory orders rose 2.6% in January, ex transportation only up 1.7%, but durable goods orders rose a strong 3.4%, with durable goods orders ex transportation up 1.3%. Auto sector: a fall in vehicle sales in the US, as reported by Wards, from 16.63 million to 15.57 million (annualised). The number had been round 16 million since the pandemic recovery compared to over 17 million pre-Covid. Employment: the trend in layoffs is falling as reopening expands. Initial claims rose to 745K from 736K, marginally below the consensus, 750K. Non-farm payrolls rose to 379K above the 200K estimate. Last month’s payrolls were revised from 49K to 166K. More than 100% of the payrolls increase came from private payrolls, up to 465K from 6K. Some of the increase came from leisure and hospitality, as well as manufacturing. Unemployment fell from 6.3% to 6.2% and underemployment remained at 11.1% with the participation rate at 61.4%. Average hourly earnings were unchanged at 5.3% and average weekly hours down from 34.9 to 34.6. |
United Kingdom |
PMIs improving but retail prices and autos suffer Surveys: the Markit manufacturing PMI rose marginally to 55.1 from 54.9. The Markit/CIPS services PMI increased to 49.5 in February, from 39.5 in January. The jump in the composite output prices index to a 12-month high of 53.9 in February, from 52.1 in January, shows that firms are beginning to feel the strain of rising shipping costs, higher oil prices, and Brexit. The Markit/CIPS construction PMI rose to 53.3 in February, from 49.2 in January, above the consensus, 51.0. Housing: the Nationwide measure of house prices rose by 0.7% in February. Year-on-year growth increased to 6.9%, from 6.4% in January, above the consensus of 5.5%. House purchase mortgage approvals data show that the mini boom in the housing market is deflating, falling from 102.8K to 99K in January, as net consumer credit fell £2.4bn. Retail sales and autos: the BRC shop price index fell 2.4% in February after a 2.2% drop the previous month. Total private new car registrations, including fleet and business sales, fell 35.5% year-over-year in February. |
Europe |
Same as in the UK: PMIs better the sales plunge Surveys: the eurozone manufacturing PMI was higher at 57.9 from 57.7. The Markit eurozone services PMI improved from 44.7 to 45.7 but remains depressed. Sales: retail sales in the eurozone slumped by 5.9% in January, well below the consensus for a 1.4% decline. The year-over-year rate fell sharply, to -6.4% from a revised 0.9% in December, also below the consensus, -1.2%. Retail sales in Germany plunged by 4.5% in January, well below the consensus for a 0.3% increase. Jobs: headline unemployment in the eurozone was unchanged at 8.1% after a downwardly-revised headline in December. German unemployment rose by 9K vs. an estimated drop of 10K. Industry: factory orders in Germany rose by 1.4% month-to-month in January, beating the consensus for a 0.5% increase. |
China/India/Japan/Asia |
‘Modest’ Chinese growth target compared to export surge China: the unofficial Caixin manufacturing PMI fell to 50.9 from 51.5, whilst the official CLFP PMI also fell to 50.6 from 51.3. The Caixin services PMI fell to 51.5 down from 52.0, as expected. China updated its growth target to 6%, below market estimates. Chinese exports rose 60% during the first two months of 2021 from a year ago, with imports up 22%. Japan: the Jibun Japan services PMI rose slightly from 45.8 to 46.3. The Japanese consumer confidence index rose from 29.6 to 33.8. |
Oil/Commodities/Emerging Markets |
OPEC+ decided not to add 1.5 million barrels a day of output, which sent crude prices soaring. Brent crude rose 5%, but the US gauge, WTI, was the star last week with a 7.5% spike. Gold suffered from the rise in government bond yields and briefly fell below US$1,700/oz, going back to levels of spring last year. |
About Author
How can we help you?
If you would like to speak to one of our advisers, please get in touch today.