Markets largely ignored the main releases – weekly update 14 May

A look back over macroeconomic and market events for the week ending 11 May 2018. Markets largely ignored the main releases which were mostly in line with expectations. Instead, the main focus was on geopolitical and trade tensions emanating from the US. It’s a quiet week ahead, with only a few mid-ranking data releases expected.

Bank of England left interest rates unchanged

The Bank of England (BoE) left interest rates unchanged with downgrades to economic forecasts. The Monetary Policy Committee voted 7-2 in favour of leaving rates unchanged, with the two ‘usual suspect’ dissenters (McCafferty and Saunders) favouring a hike.

After being a near-certainty at the start of April, subsequent weak GDP and inflation numbers meant the probability of a move was just 13% going into the meeting, so there was no real surprise. Indeed, Mark Carney’s comments in the press conference were somewhat more upbeat, stressing that the likelihood of interest rates rising this year are still very much alive. As at the close on Friday, markets are pricing in a September hike.

The latest GDP growth forecast for the second quarter has been cut by 0.4% to 1.4% compared to a year earlier. The forecasts for 2019 and 2020 are unchanged at 1.7%, which the BoE optimistically puts down to a blip caused by the poor weather at the start of this year. Inflation forecasts were also trimmed as the Bank sees the transitory effects of Brexit-related currency deprecation passing through more quickly than it did in February. The Bank now expects the second quarter of 2018 to have an inflation rate of 2.4% (from 2.7% previously), 2.1% in 2019 (from 2.2%) and 2.0% in 2020 (from 2.1%). We continue to see headwinds facing the UK economy and wage growth. Wage growth is now back to being positive in real terms and remains a key watch point.

US inflation and labour market reports were uneventful

US inflation and labour market reports passed largely uneventfully, allowing the Federal Reserve to have a quiet May meeting. The Federal Reserve’s preferred measure of inflation – the Personal Consumption Expenditure (PCE) index – increased from 1.7% year on year (yoy), revised down from 1.8% to 2.0%, in line with expectations. This was also in line with the Federal Reserve’s target, while the core measure increased from 1.6% to 1.9% yoy as expected.

The CPI measure increased from 2.4% to 2.5% yoy as expected. The jobs report was slightly softer than expected, but not dramatically so. 164,000 jobs were added in April, somewhat below the 193,000 expected, but came with upward revisions of 30,000 to the previous months. Average hourly earnings grew at 2.6% yoy, unchanged from a month earlier and just below the 2.7% expected, whilst unemployment dipped from 4.1% to 3.9%, slightly below the 4.0% forecast, but largely explained by the participation rate falling from 62.9% to 62.8% (63.0% was expected).

With few major surprises in the economic data, the Federal Reserve left interest rates unchanged and there was no press conference to add much detail. The statement did highlight the symmetrical nature of the 2% target, signalling some tolerance for above-target inflation for a period of time.

Geopolitical and trade tensions were raised again

Geopolitical and trade tensions were raised again last week as President Trump took a hard line with Iran, pulling out of the 2015 nuclear deal and moving to rapidly re-impose sanctions. This strained diplomatic ties with European allies who had been lobbying hard to save the deal, and could now face secondary sanctions from the US if they choose to stick with the deal.

Middle Eastern tempers also flared with Israel responding to a missile attack from Syria with air strikes against suspected Iranian military sites in Syria. The trade stand-off with China also continued with further posturing.

Tensions escalated for most of the fortnight, with the US reportedly doubled-down on its demand by insisting the trade deficit needed to be cut by $200 billion (rather than the mere $100 billion previously), whilst Chinese officials have been delaying the processing of US imports into the country. However, over the weekend there was an apparent softening of stance as President Trump announced plans to end the effective embargo on the major Chinese phone manufacturer ZTE, which has had to cease trading.

Last week’s other events

• UK Manufacturing PMI slipped further than expected, from 55.1 to 53.9 (54.8 expected) in April, though Construction PMI strongly recovered from 47.0 to 52.5 (50.5 was expected). Services also recovered, rising from 51.7 to 52.8, though this fell short of the 53.7 expected. Industrial Production accelerated from 2.2% to 2.9% yoy, but fell short of the 3.1% forecast
• In China the PMI readings remained relatively steady. Official Non-Manufacturing PMI rose from 54.6 to 54.8 (a fall to 54.5 was expected), which aligned with the private Caixin Services PMI reading which rose from 52.3 to 52.9 (no change was expected). For manufacturing, the official Manufacturing PMI slipped from 51.5 to 51.4 (51.3 was expected), with the equivalent reading from Caixin rising from 51.0 to 51.1 (50.9 was expected). Exports rebounded in April, increasing 12.9% yoy (from -2.7% in March) whilst Imports rose 21.5% yoy (from 14.4%), all in US dollar terms. Inflation was also cooler, falling from 2.1% to 1.8% yoy (1.9% expected)
• Eurozone CPI inflation fell 0.1% to 1.2% yoy against forecasts for no change, with core CPI slipping from 1.0% to 0.7% yoy (0.9% expected). Retail sales were also a disappointment, growing at 0.8% yoy in March from 1.8% (an acceleration to 1.9% had been expected)
• Japan’s wage growth picked up to 2.1% yoy in March, from a downwardly-revised 1.0% and ahead of expectations for no change, meaning a positive real wage rise (i.e. after inflation)

The markets

Equity markets continued to move higher, with UK equities in particular benefiting from the weaker currency, while oil strengthened again on the back of fresh tensions in the Middle East.

Equities

Equity markets have generally been stronger, with the MSCI United Kingdom up 3.8% helped by the weaker currency. In the US the S&P 500 gained 2.2% and continental Europe (MSCI Europe ex-UK) was up 1.8%. In Japan, the TOPIX returned 1.0% whilst the MSCI Emerging Markets Index returned 0.7%.

Bonds

US 10-year Treasuries yields rose 1 basis point (bp) to 2.97%, UK 10-year gilt yields were barely changed at 1.44% (down 1 bp on a rounding error) and the equivalent German bunds yields were down 1 bp to 0.56%.

Commodities

Oil remained relatively strong amidst the ongoing geopolitical tensions, with Brent crude oil rising through the fortnight to US$77.18 per barrel. Gold was only slightly off, down to US $1,319.30 per ounce whist copper rose to US$3.09 per lb.

Currencies

Sterling fell across the board, down most heavily against the US dollar (falling -1.7%). The euro also experienced some weakness, but still managed to gain 0.2% against the pound. Sterling closed on Friday at US$1.35, €1.13 and ¥148.

The week ahead

It’s a much quieter week next week in terms of scheduled data. The main highlights will be the regular batch of data from China on Tuesday morning, including Retail Sales, Industrial Production and Fixed Asset Investment, UK wage data on Tuesday morning (2.6% from 2.8% yoy expected for average weekly earnings) and US Retail Sales on Tuesday afternoon (0.3% from 0.6% month on month expected). The daily breakdown is as follows:

Monday: Japan releases PPI (2.0% yoy from 2.1% expected) and Machine Tool Orders, but little else of note is due out on Monday.

Tuesday: The Chinese data release will include Retail Sales (10.0% yoy from 10.1% expected), Industrial Production (6.4% yoy from 6.0% expected) and Fixed Asset Investment (7.4% yoy from 7.5% expected). As well as UK employment and US Retail Sales, we will also have Eurozone Industrial Production to look forward to (3.7% yoy from 2.9% expected).

Wednesday: Early morning (UK time) Japan will release the first estimate of first-quarter GDP, forecast to have contracted -0.1% on an annualised basis. In the afternoon, the US reports Industrial Production (0.6% month on month expected from 0.5%).

Thursday: Japanese Core Machine Orders are out early in the morning, with Eurozone Construction Output released later in the morning. In the afternoon, the US will report the latest Bloomberg consumer comfort reading as well as the initial and continuing jobless claims.

Friday: Japanese CPI is reported a little after midnight (0.7% yoy from 1.1% expected) and is the only release of note to see the week out.