Further positive data from China drove a fresh risk-on rally, despite mixed data from the US and the UK. There is a lot of activity this week focused on Wednesday, where we have the latest European Central Bank (ECB) meeting, an emergency EU summit on Brexit, US inflation numbers, UK industrial production data and the latest Federal Reserve minutes all due.
US economic data continued to give with one hand and take with the other
US economic data continued to give with one hand and take with the other. Starting with non-farm payrolls and the volatile headline number recovered from last month’s extreme low of 33,000 jobs added (though this was revised up from 20,000) to a robust 196,000 and ahead of the forecast for 177,000. However, wages were a bit of a disappointment, as growth in average hourly earnings dipped from 3.4% to 3.2% year on year (yoy) (no change had been expected).
Other data also fit this pattern, as Manufacturing PMI from the Institute for Supply Management rose from 54.2 to 55.3 (54.5 was expected), but Non-Manufacturing fell more than expected from 59.7 to 56.1 (58.0 was expected). Durable Goods orders contracted -1.6% month on month (mom), which was a fall from the 0.1% seen previously but was ahead of the -1.8% expected, and Retail Sales contracted -0.2% mom, disappointing forecasts for 0.2% growth, but this came with a significant upward revision of the previous reading from 0.2% to 0.7% growth, so potentially evening out.
The data may sound like the Katy Perry song ‘Hot N Cold’ but in general the absolute levels appear consistent with an economy that continues to exhibit steady growth, even if some of the momentum may be cooling.
The Purchasing Manager Indices picked up in China
The forward-looking Purchasing Manager Indices picked up in China but signs of strain remained in the UK. We highlighted the strong Caixin China Manufacturing reading (50.8 from 49.9) in last week’s note, and during the week we also has a strong showing from the Caixin Services PMI reading, which picked up from 51.1 to 54.4, well ahead of the 52.3 forecast. While it remains to be seen whether these data reflect a sustained recovery or are an artefact of the lunar year, it nevertheless helped buoy markets last week. Conversely, what looked like a great Manufacturing PMI reading from the UK was quickly seen to be an illusion. The Manufacturing PMI reading surged from 52.1 to 55.1, almost four full points ahead of the 51.2 forecast – but in the details it transpired this reading was driven by an acceleration of Brexit-related stockpiling by clients, with the input purchases and stocks of finished goods measures at the highest level since the indices were created 27 years ago. The unwinding of this stockpiling is likely to act as a drag going forward. The Services PMI was perhaps a fairer reflection of the underlying state of the economy, dipping into contractionary territory, with a reading of 48.9 (from 51.3, 50.9 was expected).
Eurozone inflation dipped
As Eurozone inflation dipped, the latest minutes from the ECB showed the Central bank had discussed the possibility of tiering its negative interest rate policy. CPI inflation slowed from 1.5% to 1.4% yoy (no change was expected), while the Core CPI measure, which strips out volatile elements such as fuel and food, slowed more than expected from 1.0% to 0.8% (0.9% was forecast). Against that backdrop, the minutes from the latest ECB meeting showed that the Council had discussed potentially extending forward guidance – effectively a period when they indicate they won’t raise rates – even further and had some early stage discussions about tiering its negative interest rate policy, so that banks are penalised less on the reserves they hold with the Central bank (it is effectively a penalty as the banks struggle to pass negative interest rates on to retail depositors). These developments should help make the ECB meeting this week an event worth paying attention to.
Last week’s other events
- Japan’s Services PMI cooled marginally from 52.3 to 52.0, which helped nudge the Composite reading from 50.7 to 50.4. Labour Cash Earnings contracted in February, down -0.8% yoy (well below the 0.9% growth forecast,) and the previous reading was substantially revised down from 1.2% to -0.6%. The divergence is being put down to a change in sample, suggesting these data may therefore be anomalous
- In the UK, the fourth quarter Unit Labour Costs picked up from 2.9% to 3.1%, while Halifax showed house prices rising 2.6% yoy (based on the last 3 months compared to a year earlier)
- In the US, as well as the headline labour market data above, we also saw the unemployment rate remain unchanged at 3.8% as expected, while the participation rate ticked down from 63.2% to 63.0%. Underemployment was unchanged at 7.3%
- Eurozone unemployment was unchanged at 7.8%
Positive PMI data from China helped drive a risk-on rally with equities driven up and core sovereign bond yields selling off.
The strong gains were broadly spread across major bourses, and Continental Europe led the way, returning 2.7% over the week. The UK wasn’t far behind, up 2.3% followed by Japan up 2.2% and the US up 2.1%. The Emerging Markets index also participated, rising 2.3% (all indices MSCI measures, in total return, local currency terms).
Bond yields shifted higher on the week. 10-year US Treasury yields rose 9 basis points (bps) to close at 2.50% on Friday, while 10-year gilt yields were 12 bps higher to close at 1.12% and the equivalent German Bund yields rose 8 bps to reach the heady heights of 1 bp.
Oil continued to tick up with Brent Crude rising through US$70 to close at US$70.34 per barrel on Friday. Gold range traded in quite a narrow band, closing at US$1,292 per ounce and copper was softer at $2.89 per lb by the end of the week.
The Japanese yen was broadly weaker during the course of the week, while sterling was marginally stronger. Sterling closed on Friday at US$1.30, €1.16 and ¥146.
The week ahead
There’s further economic data to look forward to next week with the majority of the action focused on Wednesday, where we have the ECB monetary policy meeting concluding, the emergency EU summit where a further delay to Brexit will be discussed, UK industrial production, US CPI and the latest Federal Reserve minutes to look forward to. The forecasts for the data releases are below. In terms of the ECB meeting, no change is expected to policy, but following the discussion in the recent minutes above, the press conference is likely to see a lot of questioning around forward guidance and potential interest rate tiering as well as any further information on the TLTRO package. The daily breakdown is as follows:
Monday: Japan reports Consumer Confidence and the Eco Watchers Survey results are first thing with Eurozone Investor Confidence reported later in the morning.
Tuesday: A minute after midnight, the British Retail Consortium reports Like-for-Like Sales, and then it is quiet until the afternoon when the US gives us the NFIB Small Business Optimism reading and the latest JOLTS Job Openings numbers.
Wednesday: By far the busiest day, we start with Machine Orders and Bank Lending in Japan shortly after midnight. Later in the morning, the UK reports Industrial Production (no change at -0.9% yoy expected) and then at lunchtime we have the output from the ECB meeting, including the press conference. In the afternoon, US CPI inflation is expected to have picked up from 1.5% to 1.8% yoy, while the Core CPI reading is expected to remain unchanged at 2.1%. The evening offers up the minutes from the latest Federal Open Market Committee meeting and throughout the day the emergency EU summit is likely to be closely watched to see what comes back from the UK’s request for an extension.
Thursday: It’s a fairly quiet day after the activity from Wednesday, with only Chinese CPI of note (2.3% from 1.5% expected).
Friday: The morning will see Eurozone Industrial Production numbers, expected to show an improvement from -1.1% to -0.9% yoy. In the afternoon, the US updates its latest import and export prices data and the University of Michigan reports on its latest sentiment survey results.
This article was previously published on Tilney prior to the launch of Evelyn Partners.