Equity markets subdued – weekly update 21 May

A look back over macroeconomic and market events for the week ending 18 May 2018. Equity markets were subdued, whilst there was more activity in the bond and commodity markets. The economic data releases were relatively tame with Japan’s economic contraction disappointing but not a major shock, and the latest developments with the US/China trade tensions taken with a pinch of salt.

Japan’s economy contracted

Japan’s economy contracted in the first quarter according to the first data estimate, contracting at an annualised -0.6%. Whilst this was disappointing, and was worse than the -0.1% annualised figure that was forecast, investors had broadly been expecting the first quarter to be soft, particularly given the generally softer economic tone we’ve seen globally so far this year.

Consumption was flat, but it was a drawdown in inventories that dragged the number down lower, which is generally considered a transitory effect. Inflation for April was also soft, slowing from 1.1% year on year (yoy) to 0.6% (against 0.7% forecast). Despite the poor numbers, it seems unlikely that this is the start of a recession given the tight labour market and strong global economy – this contraction is likely to be seen as blip.

China’s economic indicators show signs of gentle slowdown

China’s economic indicators continue to show signs of a gentle slowdown. Industrial Production accelerated from 6.0% to 7.0% yoy, ahead of the 6.4% forecast. Against that, fixed-asset investment year-to-date slowed from 7.5% to 7.0% from a year earlier (7.4% expected) and Retail Sales growth cooled from 10.1% to 9.4% yoy (10.0% was expected).

China is likely to allow its economic growth to gradually weaken over the next couple of years, but the ‘quality’ of that growth is likely to improve, driven more by consumption and less by government investment, whilst the Central bank has shown a willingness to intervene should signs of stress appear.

Data from major developed regions provided little excitement

Other data points from the major developed regions provided little excitement. In the UK, average weekly earnings growth slipped from 2.8% to 2.6% yoy (as expected), which is still positive in real terms, while unemployment was unchanged at 4.2%.

In the Eurozone, Industrial Production growth rose from a downwardly-revised 2.6% to 3.0% yoy, which was slightly below the 3.6% expected, and Construction Output rose from a downwardly revised 0.2% to 0.8% yoy. In the US, Retail Sales growth cooled from 0.8% to 0.3% month on month (mom) as expected, whilst Industrial Production was unchanged at 0.7% mom ahead of the 0.6% expected.

Last week’s other events

• The US announced it has stopped plans to impose tariffs on China following further discussions between the world’s two largest economies. China has agreed to increase purchases of American agriculture and energy exports as a route to reducing the deficit
• Also in the US, the Empire Manufacturing reading rose from 15.8 to 20.1 (15.0 expected) continuing a broad strengthening trend that started in 2016. The Bloomberg Consumer Comfort index slipped from 55.8 to 54.6, furthering a cooling trend in sentiment that took hold last month
• Japan’s Machine Tool Orders grew at 22.0% in April, down from 28.1%, whilst Core Machine Orders fell -2.4% yoy in March from 2.4% growth previously, defying forecasts for 0.3%
• In the Eurozone, the ZEW expectations survey rose from 1.9 to 2.4, but this remains well below the high 20s/low 30s we saw through most of 2017

The markets

It was a quiet week for equities, but there was more activity in the bond and commodity markets as US 10-year Treasury yields consolidated above 3% and Brent crude oil flirted with the US$80 mark.

Equities

Equity markets drifted sideways last week. Japanese equities led the major regions, with the TOPIX index ticking up 1.1%, while UK equities rose 0.8% (as measured by the MSCI United Kingdom). European equities, excluding the UK, rose 0.2% (MSCI Europe ex-UK), whilst in the US, the S&P 500 dipped -0.5%. The MSCI Emerging Market index fell -1.1%.

Bonds

US 10-year Treasury yields rose 9 basis points (bps) to end the week at 3.1%, driven by rising inflation expectations. UK 10-year gilt yields rose 6 bps to finish at 1.50% and the equivalent German bund yields were 2 bps up to 0.58%.

Commodities

Oil strengthened and briefly broke through the US$80 per barrel mark for Brent crude oil, but dipped to US$78.51 per barrel by the end of the week. Gold was softer to US$1,293 per ounce and copper was also a little weaker, finishing at US$3.05 per lb.

Currencies

The US dollar gained further strength last week, whilst the euro and yen weakened versus the pound. Sterling closed on Friday at US$1.34, €1.14 and ¥149.

Two weeks ahead

With the bank holiday this weekend, there won’t be a note next Monday, so instead we preview the next two weeks here. Global PMI readings will be closely watched, with Wednesday 23rd an especially busy day. Starting with Japanese Manufacturing PMI early morning (UK time), Eurozone PMIs out later in the morning (a slowdown from 55.1 to 55.0 expected on the composite measure), followed by US PMIs from Markit in the afternoon (Services forecast to rise 0.2 to 54.8, Manufacturing expected to slip 0.1 to 56.3). The following week will see China report official PMIs on Thursday 31st and the Caixin measure of Manufacturing PMI out on Friday 1st June, with UK Manufacturing PMI out later in the morning. UK inflation is reported on Wednesday 23rd (no change at 2.5% yoy expected), with UK Retail Sales numbers out on Thursday 24th (0.2% yoy from 1.1% expected). Friday 25th will see US Durable Goods numbers for April released (-1.4% mom from 2.6% forecast). Eurozone CPI is released on the morning of Thursday 31st followed by US PCE in the afternoon, and then on Friday 2nd June, it’s back to US Non-Farm Payrolls. The daily breakdown is as follows:

Monday 21st May: UK house prices from Rightmove are released just after midnight, followed by Japanese trade data, but otherwise it is a quiet start to the week.

Tuesday 22nd May: Public sector net borrowing and CBI order trends are out in the UK in the morning, with the Richmond Manufacturing Index out in the afternoon.

Wednesday 23rd May: There are quite a lot of PMI releases due out, which are covered above, as is UK inflation. Otherwise Japan will be releasing its All Industry Activity Index and store sales, the Eurozone updates the latest Consumer Confidence reading and in the evening the Federal Reserve’s Federal Open Market Committee meeting minutes are released.

Thursday 24th May: Early morning, Japan reports the Leading Index and Coincident Index, ahead of UK Retail Sales. Later in the afternoon, the US reports the latest jobless claims and consumer sentiment before the Federal Reserve Bank of Kansas City reports Manufacturing Activity.

Friday: 25th May: Aside from Durable Goods in the US (covered above), the only other notable release is the US sentiment survey numbers from the University of Michigan to take us into the weekend.

Tuesday 29th May: Early morning Japan reports unemployment data, then in the afternoon the US Conference Board reports on Consumer Confidence and it’s the turn of the Federal Reserve Bank of Dallas to report on Manufacturing Activity.

Wednesday 30th May: Just after midnight, the British Retail Consortium will report on the Shop Price Index followed by Japanese Retail Sales and Consumer Confidence. Later in the morning, the Eurozone reports on economic confidence.

Thursday 31st May: Releases pick up at the end of the week. Just after midnight, GfK updates on Consumer Confidence and Lloyds reports the Business Barometer for the UK, followed by Japanese Industrial Production and the official PMI numbers from China. Eurozone CPI and US PCE are also due out (covered above).

Friday 1st June: As well as the ‘main event’ of the US labour report, Friday will also give us Japanese capital spending, China’s Caixin Manufacturing PMI, UK Manufacturing PMI and the Institute of Supply Management releases for the US manufacturing sector.